Ladies and gentlemen, good day, and welcome to the KVH Industries Incorporated First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CFO, Don Reilly. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' first quarter results and our guidance for the 2019 second quarter and full year, all of which is included in the earnings release we published this morning. With me on this call is Martin Kits van Heyningen, the company's Chief Executive Officer; and Brent Bruun, the company's Chief Operating Officer. The earnings release is available on our website and also in our Investors Relations department. If you would like to listen to a recording of today's call, you can access a webcast replay on our website. If you are listening via the web, feel free to submit questions to IR at kvh.com. This conference call will contain certain forward-looking statements that are subject to many assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any forward-looking statements. We will also discuss certain non-GAAP financial measures and you will find definitions of these measures in our press release, as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our 2018 Form 10-K which was filed on March 1, and the company's other SEC filings which are available directly from the Investor Information section of our website. This time, I'll turn the call over to Martin.

Thanks, Don, and good morning, everyone. Thanks for joining us. The overall Q1 revenue remain relatively flat at $40 million compared to $40.1 million in the first quarter of last year. Our fiber optic gyro sales, which had been up double digits for 8 quarters in a row, came in over $2 million below our forecast. Given our strong backlog in our FOG group though, we don't expect this to continue either in Q2 or for the rest of the year. Nevertheless, this caused our results to be outside of our guidance range. From a strategic perspective, we made substantial progress during the quarter on all of our goals for 2019. Among these are to accelerate our subscriber growth on our HTS network, go through a new customer acquisition and the migration of existing ArcLight network customers, push into the maritime IoT market with a new subscription service, maintain their momentum in the pursuit of the military Assured Position, Navigation and Timing or A-PNT programs, and commercialize our photonic chip-based fiber optic gyros by the end of this year. So now I'll go into some details both on the goals and the Q1 results. In our Mobile Connectivity business, we are seeing very positive progress. We shipped our 9,000th VSAT system this quarter, and our airtime revenue grew 11% or $1.8 million compared to Q1 of 2018. This was driven by a 14% increase in total subscribers by the end of the quarter. AgilePlans and HTS continue to lead the way in our maritime business. We're now starting to see the positive financial impact from this growth as well. AgilePlans revenue increased 14% sequentially over the fourth quarter of 2018 and more than 500% from a year earlier, reflecting the benefits of compounding AgilePlans subscriptions. We remain on track for…

Thank you, Martin. As Martin mentioned earlier, our first quarter revenue was $40 million, about the same as our 2018 first quarter of $40.1 million. We sum up all our guidance range primarily due to lower than expected FOG sales during the quarter. Revenue from Mobile Connectivity segment decreased slightly and our Inertial Navigation revenue increased slightly from the prior year first quarter. Product revenue for the first quarter was just about $13 million, a decrease of about $1 million or 8% from the $14 million in the first quarter of the prior year. By segment, product revenues and our Mobile Connectivity segment decreased $800,000 or 11%, while product revenues on our Inertial Navigation segment decreased about $300,000 or 4%. Within our Inertial Navigation segment, our FOG business decreased $300,000 or about 6% this quarter compared to the first quarter of last year, while our TACNAV sales remain essentially flat compared to the prior year. In our Mobile Connectivity segment, the decline in product sales was driven by the decrease in marine mobile connectivity product revenues by $800,000 or 11% compared to the prior first quarter. But with respect to the Agile program, as Martin mentioned, shipments increased 28% compared to the first quarter of 2018 with 60% of our total unit shipments this quarter and 77% of our commercial shipments. Service revenue for the first quarter increased about $1 million or 4% to just over $27 million from just over $26 million in the first quarter of last year. In our Mobile Connectivity segment, mini-VSAT broadband airtime revenue increased $1.8 million or 11% compared to the prior year first quarter due to a 14% increase in airtime subscribers. That's partially the result of the introduction of our AgilePlans and cost of ramp up of our HTS network. This increase…

[Operator Instructions] Our first question comes from Ric Prentiss with Raymond James.

First question I've got is certainly around the guidance. For the 1Q guidance, obviously you came in a little late, but you gave it on March 1. So wondering with 2 months under your belt, was it really the, maybe that military drone order you're referring that you've received the order but it didn't ship, that was one of the bigger kind of slip backers?

Yes. Yes, that was the vast majority of it.

Okay. And then you say scheduled to later this year, but when I look at the 2Q guide, it sure seems like maybe 3Q, 4Q. Is it going to be a stage shipping?

Yes. Yes, it's Q3 and Q4. So the orders in here, it's a firm PO, so it's, it has firm delivery dates now.

Okay. That's what I was going to get at is the visibility that you've got because if we look at first half '19 between the actual and the revenue guide, you run rate that and you'd be below the annual. So wondering how should we think about the range for the annual revenues? What would it take to hit the low end versus to hit the high end of those ranges?

Well, as you know, there is, there are a lot of moving parts in our business. For a company our size, it's fairly complicated. So just to compartmentalize the AgilePlans and the VSAT is pretty predictable because you've got a solid subscriber base that's growing. The hardware sales, for example, like our TracVision products and the leisure marine side can be a little bit difficult to predict. There is, it's a retail type business in spring weather, stuff like that impacts it. On the FOG side, it's generally pretty predictable because you've got some backlog, but then these orders, the larger orders that come in on top of that can be a little bit more difficult to predict. And then lastly, the TACNAV I'd say is the most difficult to forecast because it's, they tend to be very large contracts, sort of single point and binary outcome. So you put all that mixed together, that's why we end up with a, probably a fairly wide range on the top line in terms of where we think we'll be. But given that that order did materialize, it just didn't ship, that we're pretty confident we will ship this year. So…

So let me just add a little more editorial. So as Martin said, we had 8 consecutive quarters of double digit growth and at the beginning of every quarter, hard to say how much of that revenue each quarter was in backlog. But a lot of it just materialized over the course of the quarter. So it's pretty hard to predict. Sometimes it comes in without too much notice and fortunately we have enough inventory and enough capacity that we can meet the orders when they come in. So we had every reason to believe that that rate of growth would continue in the first quarter. In fact that came in a little bit soft, partially due to this 1 order. But overall, they were, the trend that we had been seeing stagnated a little bit in the first quarter. However, we still have very strong backlog at the end of the first quarter, as I mentioned on my, in my remarks. For FOG alone, it's $9 million to ship this year, which is a very strong backlog. So we are confident that FOG growth will return in the second quarter, and certainly more so in the second half of the year. But as Martin also said, a lot of it is, we have some visibility into, but it's hard to predict. It's kind of trends and conversations with customers and our sales people that be on the ground. Like every other company, you use, we take all the information that you have available to you and look at trends and look at the conversations and closely about the forecast.

And total Inertial Navigation backlog…

Is over $12 million.

Yes, so…

To ship now this year.

Okay. Yes, great. Okay. Second question, obviously, you've had a lot of success with the AgilePlan. What are you seeing as far as the typical plan of usage that people are subscribing to? And what kind of ARPUs are you seeing in that and any competitive response from Inmarsat who reported yesterday?

Inmarsat has announced some new like crew calling, the crew-based solution that they think is an answer to AgilePlans which we don't think is, they seem to think that our AgilePlan customers are not using it for business purposes, which is completely wrong. So I'm not sure that that's going to work for them. We're seeing that the ARPUs are slightly above our typical ARPUs. So they are, AgilePlan ARPUs are actually higher. Our ARPUs year-over-year are up slightly. So we haven't seen pressure yet on the monthly ARPUs on an annual basis. So I think we're in pretty good shape there.

Okay. And the typical plan, are they signing up for like a 20 gig plan or what type plan are you seeing as the most popular?

Well, it's a little bit more complicated now with the, with our HTS Agile we're offering because they get 2 channels. You get a fixed channel. So even if you sign up for say the 5 gigabyte channel plan, you also get the unlimited use channel. So total consumption is higher. So your average ARPUs are in the $1,200 to $1,300 range.

Okay, great. And last one from me is, obviously Intelsat's failure had some effects. We were on that call yesterday or the day before. And can you help us to understand a little bit about you mentioned how you've gone on to some other satellites, Intelsat is working with you. But any change to your revenue streams or your cost streams given the propellant issue they had there?

No, no. I think that we had really, I think we were very lucky as well as being well positioned. But we had some satellites that were planned to come online in a couple of weeks. So they were, we just accelerated that. So we had that in the pipeline already. So we don't foresee any change in cost or revenue as a result of this now.

Great. And is that new satellites that came on, was that Intelsat satellite or was that an alternate provider?

It was a Intelsat. It was another Epic satellite. So we have North America. If it had to happen, North America is the place where we have the most coverage. We have 5 satellites over the U.S. and Caribbean, for example, so…

There is actually more than 1 Epic satellite.

Yes, you're right. There's 2. That's Brent Bruun, our COO, adding that we have 2 different satellites that, 2 additional Epic satellites that came in. And as I mentioned, every single customer except for 4 immediately switched over and those 4 were well up the Amazon in the middle of Brazil. But we're able to upload some maps for those guys even though they were offline using, we have a, all of our products have a built-in cell connection as well in LTE, so we're able to upload some maps by dialing into them and got them back online as well. So it was a, all-in-all, it was a pretty smooth disaster recovery.

That's obviously a job well done. That was a very quick move to something that spun out of control quickly. So hats off to your ground guys who did that.

Yes, a lot of sleepless nights.

Our next question comes from Chris Quilty with Quilty Analytics.

Martin, just wanted to clarify, I think you said just a moment ago that the initial backlog was over $12 million. I thought the number was, was it $14.7 million?

Yes, that's the full number. You're right. It is $14.7 million. But that the, some of that is not for shipment this year. So normally we identify backlog as shippable. This year, the $9 million for FOG is all shippable this year.

Yes, so Chris, the numbers are $14.7 million total. $12.2 million to ship in the rest of this year, of which $9 million is FOG.

The rest is TACNAVs. So…

TACNAV, yes.

Speaking of TACNAV, I mean I know we don't put these large orders in the forecast here, but you feeling marginally better or less better about the prospects of landing one of those this year?

Well, we got our first decent international order for TACNAV 3D which is our FOG-based product. So that's sort of the, we, and that was not a huge orders, it's like million, $0.53 million, something like that, so that we're optimistic that that's a, the beginning of a trend. I also mentioned in my prepared remarks that the army testing it, formal trials is underway. That is also a good sign. And as far as these big international orders, we've been in the process of delivering revised quotes to all the bidders and they've submitted their proposals to the government. And we'll, so there continues to be progress on that front. But as you know, we don't have it in our guidance.

Understand. And in terms of other U.S. government TACNAV programs, I think you had like JLTV and AMPV and some others that are sort of longer term. Are any of those meaningfully there this year or next in terms of volume?

Yes. Yes. The AMPV is going to be a big program for us. That's one that we have one we're designed in 3 years ago. They've just finished their initial testing and vehicle acceptance, and that's going into production. And that's actually being pulled into 2019. So we were seeing a little pickup there. We expect to see a pickup in Q4 for that program. And that's round numbers, going to be like a $30 million program for us.

So that becomes meaningful in 2020?

In 2019 Q4, it'll be not.

Okay, I'm pushing it out to 2020.

That's good.

Fair enough.

And how about the JLTV?

That doesn't have a formal NAV requirement. But that could be part of this new U.S. army program where they're trying to find a solution that'll work on all vehicles.

Okay. Shifting gears. I just I missed the name of the vendor that is deploying you said in Columbus and coming to Rhode Island. Was that Waymo?

It's a company called May Mobility, M-a-y.

May Mobility.

Yes, okay. Got it. And on the mini-VSAT, the numbers as you gave them in terms of year-over-year growth in percentage and dollar didn't calculate for me. What was the exact mini-VSAT revenues? And also if you can give the gross margins in the quarter, I think they were supposed to be down but I think you said trending up towards 40 percentage at the end of the year?

Correct. So VSAT airtime was just over $18 million. Our margins were just under 29%, roughly the same as the fourth quarter of 2018. But as Martin said, we, there are lots of reasons why we expect that margin too. So that didn't surprise as much as kind of what we expected for the first quarter, but we also continue to expect airtime margins to increase over the course of the year. As Martin said, we should be ending the year around 40%. Airtime around $18.3 million.

$18.3 million, got it. And you said they were, you had no incremental cost that you were associated with the 2019 turnover?

That's correct. I mean we did have some biggest during the initial event when we moved everybody to adjacent satellite, there was some congestion. So as a courtesy, we gave some customers like a week's credit, but it was a de minimis.

And given that that was a fairly important satellite in Intelsat's fleet in terms of its coverage pattern, I know it's been covered extensively in the trade press. Is that, for you the ability to handle that turnover, is that an opportunity perhaps in looking at some of your competitors that are on sort of single string networks to emphasize your ability to have a multilayer redundance network?

Yes. In fact, we've launch some marketing material and some blogs just to throw stones at our competitors, but just to point out the advantages of our approach. And even with the V11 with C-band, you have this fully redundant global overlay, so it's a, it really is a better way to do it. So I just feel that for the people who had fixed issues.

Yes. So another question just on the end markets in the maritime segment. Is there any puts and takes you can provide on where the energy market stands today or mining or commercial shipping, and what's happening at freight rates and what is that all portend for the balance of the year?

That's a lot of questions there, Chris. The segments that we are in, we haven't seen any really change in the distribution. So if you look at like in our investor presentation, you see sort of a pie chart in there and that's been pretty steady. We're seeing a little I think uptick in leisure with some of these new products because they really like the new speeds. I think oil and gas is still pretty dead as far as offshore. We see some new interest in fishing fleets, especially with the V3 HTS because it's smaller and cheaper. So I wouldn't say there has been any change in the composition of the markets. I think the customer freight rate still seem to be reasonable. So overall, it's pretty steady as she goes in terms of the market.

Okay. And final clarification. The discussion around the IoT services and you've got a pending announcement with the partner. Can you clarify for us, because people describe IoT as many different things, the exact type of services that you're thinking about in terms of is this more of a Skada type solution? Is it a narrowband solution? Who is the customer? What's the application?

Yes. So that's what we'll be announcing at Nor-Shipping in the beginning of June. So it's a commercial maritime. It involves high speeds as well as sort of triple flow data off ships. So it's going to be an interesting take on the market and I think might be sort of unique product offering there.

Okay, I guess we'll have to wait until June.

[Operator Instructions] Our next question comes from Jim McIlree with Chardan Capital Market.

Martin, you talked about the variability in the annual guidance coming I think primarily from leisure marine and TACNAV. Leisure marine I believe has some significant seasonality to it. Can you just remind me when the big quarters are for leisure marine on a seasonable basis?

Well, Q2 is usually one of the bigger quarters. And it sort of March or April are the peak and it kind of depends on the weather. So this year, it's been a cold wet spring. So it works. So it was a little soft in Q1, so we think some of that will be pushed into Q2. So we don't, that's really in our track vision side on the television products, not so much for the VSAT products because we sell large numbers of the TracVision products 2x, 3x what we sell for VSAT. It's a very popular lower price consumer type product sold through West Marine and stores like that.

Got it, okay. And then the operating expense ticked up both from Q4 and from the year ago quarter. Don, is that a new run rate or is there something special that we should be aware of?

No. I think, I'm not, I don't think it will any higher than that throughout the rest of the year, okay. So as the new run rate, it's probably indicative of the new run rate, but it's not as though, and I don't think it will be higher than that for the rest of the year. And part of it, I know, some of the part of the increase is the investment that we're making in our customer service function. Part of it is ongoing engineering cost and the multiple things we're investing in. So I suppose it is somewhat indicative of the new run rate, yes, but I don't think it's going to be much higher than it was in the first quarter.

Okay. And can you tell us what gross margin assumption you have built into your guidance?

Well, as Martin said, we expect our airtime margins to grow throughout the year, and we expect down the year with around 40%. Otherwise, the margins that we're seeing on product sales should be about the same. We don't expect significant changes there. And our airtime, our margins on our content media business are pretty stable, very high margins in the high 60%, but not, the only real change that we're expecting but it drives our overall margins quite a lot is with respect to the airtime.

Okay. And then lastly the CapEx for the year, does that include any significant amounts for the photonic chipset or would that be something that takes place next year?

Yes. There's not a lot of CapEx required this year for that. So there may be some incremental R&D expenses we go through the year to work out some of this packaging stuff that I mentioned. And that will have CapEx requirements, but if it happens, it probably will be, end up being in next year end.

At this time, we have no other questioners in the queue. So I'll turn it back to our presenters for closing comments.

Great. Thanks again for listening and as always, we're reachable after the call. Thank you.

Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us today.