Good day, and welcome to the KVH Industries First Quarter 2020 Earnings Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Don Reilly, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning everyone. Thanks for joining us today to discuss KVH Industries' first quarter results, which are included in the earnings release we published this morning. With me on this call is Martin Kits van Heyningen, company's Chief Executive Officer; and Brent Bruun, our Chief Operating Officer.The earnings release is available on our website and also from our Investor 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@kvh.comThis conference call will contain certain forward-looking statements that are subject to many assumptions and uncertainties and 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 update certain non-GAAP financial measures. 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 typically those under the heading Risk Factors in our 2019 Form 10-K, which was filed on February 28 and our 10-Q, which is expected to be filed this afternoon and the company's other SEC filings, which are available directly from the Investor Relations -- excuse me, the Invest Information section of our website.At this time, I would like to turn the call over to Martin. Martin?

Thanks Don and good morning everyone. Thank you for joining us today. Let's get started. Despite the impact of the pandemic on the global economy during the quarter, we're pleased to have delivered fourth quarter results in line with our guidance. Total revenue was up 1% to $36.6 million with a GAAP net loss of $0.35 per share, compared to a net loss of $0.37 per share in the first quarter of last year. We also made good progress on all of our key strategic initiatives this quarter.While we began the year strong, our business like almost every business in the world now faces unprecedented challenges and uncertainty as a result of the current health crisis. However, our core business model, the diversification of our company and the underlying long-term demand fundamentals are assets for KVH. When COVID-19 was declared a pandemic, KVH already had action plans in place. As a global technology company, we have the infrastructure in place already for most of our workforce to work from home enabling us to continue providing 24/7 service support.As an essential business for both telecommunication services and defense navigation products, we've maintained full operations at both of our factories, of course, with modifications for social distancing, extra cleaning, protective masks and gloves for worker safety. On today's call, we'll provide more details on how we're faring with our diverse operations, discuss the recent ongoing impact of the COVID economic situation and provide details on how we're managing our business to weather this pandemic.In the maritime market, airtime revenue for the quarter was up 5% or $900,000 compared to the first quarter of last year. Total VSAT shipments were up 12% versus the same period last year, and we increased our subscriber base by 10% over the same period. Given everything that…

Thank you, Martin. As Martin mentioned earlier, we were off to a good start in the first quarter. Our results were generally in line with our expectations and we made good progress on the key -- on the execution of the key initiatives that we believe will be the source of meaningful revenue and earnings growth in the future.We did start to see and feel the impact of the COVID-19 global pandemic before the end of the quarter, Bluewater's marine products began to slow as the orders for our Inertial Navigation products. Our installation rate for Agile products slowed down due to the difficulty experienced by installation crews trying to get to vessels. I'll talk more about the impact of the pandemic on our business in just a minute.But first allow me to summarize our results for the quarter. As, you know. we concluded the Videotel disposition in the second quarter of 2019 met the criteria of a discontinued operation and we've reflected it that way in our earnings release and in our 10-Q, which we'll file here today.Our first quarter revenue was $36.6 million, a slight increase from our 2019 first quarter, which is $36.4 million and was within our guidance range. Revenue from our Mobile Connectivity segment remained flat year-over-year, while our Inertial Navigation revenue increased slightly from the prior year's first quarter.Product revenue for the first quarter was $13.1 million, about even with the first quarter of the prior year. By segment, product revenues in our mobile connectivity segment decreased by $800,000 or 11%, while product revenues in inertial navigation segment increased about $700,000 or 12%. And within our inertial navigation segment, our FOG business increased about $400,000 or 9% compared to last year. And our TACNAV sales also increased about $400,000 or 46%.In our mobile connectivity…

Thank you. [Operator Instructions] We'll take our first question from Ric Prentiss from Raymond James. Please go ahead.

Thanks. Good morning.

Good morning, Ric.

Hope you and your family and employees are safe, safe through this difficult and crazy time. First, did you guys apply for and get any of the PPP money that was offered out there?

We applied early on in the first round before the money ran out and we did not get any money.

Second question. As you think about the trends that you saw in January, February and then into March and April, any further detail you can lay out for us as far as what you've seen in April as far as AgilePlans subscriptions, termination? Any change in kind of how the ARPU flows through on that side?

Yes. So the AgilePlans has been a continuing bright spot. So we still see daily bookings that are – I feel look very good. The quarter was better than the year earlier quarter. So the daily bookings for Agile look good. ARPUs are the same or slightly better. No increase in terminations or suspensions for Agile compared to prior years. So that part of the business is subscription-based.And what we've been monitoring very closely is to see if there's any uptick in terminations in the subscription business or increased churn with agile and that hasn't happened.So – so far so good there. And as I mentioned on the call, the challenge is actually we've got good demand. The challenge is getting the ships into port and a lot of companies don't let people who aren't crew members on board, nobody comes on or off the ship right now. So that's been a challenge.

And Don, you mentioned that you're not seeing cash collection decline in the first quarter. Is that across all the different segments Agile, other services product revenue? I assume most of the auditors out there this quarter are having people look in particular about any reserves that might need to be taken?

That's correct. The auditors are. They did a much deeper dive than you might normally expect for a quarterly review. But no, Rick we haven't seen any real significant change in the trend of collections or a deterioration in our receivables in either of our segments at this point.A couple of customers have reached out to us for accommodations, which we've granted but no real trend, significant trend or a negative trend in our receivables collections or the quality of our receivables at this point.

Okay. I assume that you're talking about like payment plan sounds like in payment over time?

Exactly. Yes. And really it's smaller customers and not large amounts.

And Martin, you talked a little bit in the beginning, obviously looking at all your costs out there. How should we think about the variability versus fixed nature of the cost, if we think of the services business, the product, hardware business and then kind of your corporate SG&A product development et cetera?

Well, I'd say the majority of our costs are fixed, especially now because cost – we're – might have had some variability to them we've cut back on – we cut back on them early. Our service – our airtime service business as you know has a substantial fixed component to it, which is – that's the idea of the model so that we can benefit from airtime revenue growth directly at the margin line. So a lot – not entirely fix the cost but a large fixed component there.Our overall G&A is fixed within ranges. As Martin mentioned, we implemented across the Board salary reductions recently. So clearly it's not fixed if – you can do that but so to the extent that we can reduce those fixed costs we have.R&D cost is a significant – one of our most significant operating costs. And you can think about those as a variable, if you like, but where we cut back in R&D, it's likely a long-term negative impact associated with that. So we've tried not to do that and we'll continue to try not it to impact R&D.Sales and marketing costs have a fixed and a variable component. The variable component is commissions and travel and other sales-type costs but there's also a fairly – from maybe half or three quarters our sales costs are fixed in nature.

So if we think about the -- go ahead.

No, so I was asking if that answered your question?

It does. Just trying to also think from a high level and not with guidance obviously since there isn't any, but how much burn rate do you think the business might come under as we look out over the next coming quarters as we try to find what the depth and duration that the pandemic is?

Well, we've as we've said a couple of times now we've taken whatever steps we can take at this point or a lot of steps anyways there's probably more we can do, but to lower the burn rate. So I certainly expect the burn rate in the second quarter will be a lot less than the burn rate in the first quarter likewise through third and the fourth quarter. So we should end the year -- and without giving guidance we should the end of the year with a enough cash to enter 2021 with a lot of momentum and continue some of the investments that we need to make to hit the revenue and earnings growth targets that we're all excited about.

Yes. I think at a high level we've taken the steps that we need to take that we feel comfortably get us through the years. In other words, we don't feel that there's more to be done. We feel that we don't have perfect visibility beyond what we've seen today. But based on what we see today, we feel comfortable that the steps that we've taken will be more than adequate.

It makes sense nice that you have that pool of cash in there.

Yes.

Yes.

Good luck. And again, best wishes to you, your family, employees, as we all navigate through this.

Thanks. [indiscernible]. Appreciate that.

Thanks very much.

We will take our next question from Christopher Van Horn from B. Riley FBR. Please go ahead. Your line is….

Good morning everyone. Thanks for taking my question.

Good morning.

Good morning.

I just wondered if you could talk about the competitive environment and if you're seeing some market share opportunities as some other -- some of your competitors maybe struggle in these times?

Yes. We've definitely seen that we've been approached by some mid to large fleets who were with some of our competitors and no longer feel comfortable with those companies. So we definitely see that as a short-term opportunity. So we're being very accommodating there to try and bring those fleets on board. So one of the things we're actually looking at is whether we can quickly move people who aren't using KVH antennas on board. So that's an area that we're exploring. So people who have a need -- urgent need to switch to us and we can't get on their vessels quickly to put new KVH antennas on. We're looking at reusing repurposing the equipment that's already there and we've done some tests on that it seems to work. So that might be a way to rapidly migrate some of those customers.

Okay. Got it. And then sort of on that front, it seems like the adoption of AgilePlans is going well. Is it the competitive factors that you've cited in the past, or is there something else at play more recently that's driving that?

No, I think it's just a continuation. And if anything it may be that I think -- when you look at the ripple down effects of everything that happens, it happens to our suppliers happens to us; what happens to our customers which happens to their customers. So it could be simply that shipping companies are looking at their own cash flow and think geez I don't really want to invest in these expensive products today that AgilePlans sure looks pretty good. And if I lose a charter or something, I could just send it back and this seems like a better move. So if you notice that our percentage of units that went out in the commercial market, I believe it was up to 78% was Agile this quarter. So I think it may be that this business model is even more attractive right now.

Got it. Okay. And then on the FOG opportunity set both from a government and commercial perspective. Talking to OEMs on the automotive side as well as defense contractors, there's talks of things are going in terms of the pipeline for autonomous or the spending on defense hardware. Things are going maybe a little bit shift to the right, but still happening. Those conversations are still happening and others are saying that things are deferred even longer than that. Could you just maybe update us on the pipeline for FOG and TACNAV?

So as I said in the prepared remarks, the FOG has been a real area of bright spot. So we've seen very strong bookings. We've got an $11 million backlog for FOG products. So that's actually gone pretty well. So we're very happy with that. And if that momentum can continue through the second quarter, then as we recover -- as the economy recovers, I think we'll be in good shape. On the defense side, we haven't seen any programs slipping to the right. Their budgets aren't impacted. We have seen a few programs where they had some field trials testing that they wanted to do that were postponed because they didn't want to have people gathering to do a test, but I think that's temporary. But we see no push out in any of our defense programs.As far as the autonomous stuff goes, I think, that's really on a time scale that I think won't be impacted by this, meaning that if you think this pandemic last till even until the end of the year, that's not long enough to impact the time scales for mass adoption of autonomous vehicles. So I think that's not going to have an impact there. And then, the whole idea of peopleless driving in vehicles is probably going to be more attractive in the future as opposed to less.

Great. Thank you so much for the time and stay safe.

Sure. Thanks.

Thanks, Chris.

We will take our next question from Chris Quilty from Quilty Analytics. Please go ahead. Your line…

Chris? Can't hear you. You might be on mute.

Yes, there we go. There's been a phone problem. So just a follow-up on Rick's question earlier about SG&A and hard to know when things pick up, but if you assume maybe on a full year basis we finish out at 70% of -- or 60% of where we thought we would be, things get moving in the fall.You had talked about, Don, about a $10 million year-over-year planned increase in SG&A spending. Is it fair to assume that a significant portion of that increase, things like marketing and trade shows that were planned, will get cut back? And so you could -- sure it's not a dollar for dollar, but a significant portion of that could be scaled back?

It's a fair assumption, absolutely. Yes.

Yes. I think, it's fair to say that we're doing everything we can to bring that increase as close to zero as possible.

And I want to correct myself a little bit, when Rick asked the question earlier about cash burn in the second quarter. I should have been more specific, our operating expense cash burn in the second quarter will be less than the first quarter. However, all cash balance will probably decline. It's probably in the neighborhood -- somewhere in the neighborhood of what we saw in the first quarter and then hopefully stabilize after that.

Okay. So coming back to the marketing spend and you already mentioned that you see some competitive opportunities. Where might you opportunistically choose to spend more money? Is it simply AgilePlans, the fact that you're subsidizing the CapEx outlay for the customer, is that probably the single biggest area where you think you can use your balance sheet, which is an advantage relative to many of your competitors?

Yes. I think that's true. And I think it's probably too early to say. But, right now, my theory is, that's why we're seeing the increased demand in Agile, is that our customers are becoming more risk-averse and just hedging their bets with short-term contracts or no contract with Agile. And as we recall from 2008, 2009, sort of everybody assumed that they were going to lose their job and everything -- the assumption was that everything would be horrible.And I think for shipping companies today, they may be assuming the same thing they're going to lose all of their charters, but they won't. And if they lose 5% or 10%, that's built into our model. So, I think we've got a really attractive offering here that offloads the risk and it doesn't really mean a lot of incremental risk for us. So, we're really comfortable with where we are with that product offering.

Great. Switching gears over to the TACNAV side of the business. I think you had previously talked about four to five big orders and it sounds like the Middle East is probably a no go given the current environment. How many of those four or five were specific to the Middle East?

Two. Two. And the one that we're closest to right now is in North America. So --

Got you. And likewise on the FOG business, you seem to indicate that going well. And I think you had previously talked about mid to high single-digit growth for the business. Is it -- are you hoping to maintain that guidance based upon what you're currently seeing?

Well, I wouldn't call it guidance, but we did increase, I believe, the figure was 9% in Q1. So we are optimistic that the FOG business will continue to do well, but doing well in this economy -- I mean in the last -- with in the last six weeks has a different definition than it did in January. So I think doing well now is generating millions of dollars of revenue, not necessarily solid growth every quarter so --

And our backlog, Chris, is still pretty strong. It's almost $12 million, $11.8 million of shipment this year for FOG products. So that's a good number given the environment.

Okay. And, Don, maybe I missed it. Did you give the entire -- not just for FOG but for inertial nav?

I did. But I'm going to give it again. Our total backlog was $22.6 million, just under $17 million of that scheduled to be delivered this year. Inertial -- our backlog for navigation -- inertial navigation was $20.3 million and about $14.6 million of that is scheduled to be delivered this year. And again $11.8 million of that is FOG.

Okay. And while we're at it the -- can you give us the mini VSAT airtime revenues and margin in the quarter?

Sure. The revenues were about $19.2 million. Volume was just over 32%.

And at one point in the past you had been targeting gross margins pushing up towards 40%. Is there still a prospect given the current situation of that still being a target sometime within the next 6 months to 12 months?

In that time table, yes, but not sooner.

And again because building off the earlier comment is that a lot of those costs are fixed. So part of that answer depends on revenue growth. So if the revenues continue to grow they were up 5% this quarter which is good but not fantastic. So -- but as the revenues continue to grow and compound and the cost stay relatively fixed and those margins will continue to improve. And I think we're probably optimistically, but we do expect margins to improve here in Q2 for the airtime business.

Got it. And final question. I know it's still early days with the KVH Watch deployments and testing and whatnot. But it just seems like if you had launched that product a year earlier the demand for it now would just be overwhelming in terms of the ability for these equipment providers to remotely access equipment that they can't get to now.

Yes.

Are there efforts underway to accelerate that, or is it just not possible given the normal testing that you need to do and the restrictions on your -- your internal ability to work with customers in testing in the field?

Well, we're doing two things. One is that we haven't cut back our development efforts for that product at all. So we're still pedal to the metal, working on the KVH Watch product and service and family of services. We're also looking at whether we can perhaps accelerate some of those features and deploy them to our existing customer base who have V7-HTS antennas on board. So then those would not necessarily be for equipment manufacturers which is the target for the Watch product, but we're still seeing that there's a lot of demand for just remote expert and intervention for our existing custom set. So that I think might be the nearer-term opportunity as well because you don't need to visit the vessel to deploy it.

Okay. Good start. Well, thank you, gentlemen.

Thanks, Chris.

We will now take our next question from Rich Valera from Needham. Your line is open.

Thank you. Good morning, gentlemen.

Good morning.

So Martin as you've drilled down into each one of these businesses it actually sounds like things are either largely on track like I say in inertial or maybe stabilizing at the margin may be getting better if I think about the mini VSAT business. So just trying to reconcile that with the pulling of guidance and trying to understand maybe what you're seeing in the last month that makes you think things could maybe get worse? And which parts of the business are you most concerned about possibly getting worse? Can you give any color on that? Thanks.

Sure. Yes. So just to be clear, I'm answering specific questions about specific product lines and models. So -- but you're right there was a disconnect between those answers and the general risk to the business and risk to the overall performance of the company. So, for example, the leisure marine market we actually had some bookings stays that were literally zero and that's never happened in the history of the company. I mean like $0 and $0.00. So all the marine stores are closed, the dealers are closed, the boat builders in Europe -- all the Italians, big Italian boat builders were closed. U.S. Boat builders were closed. So that's an Epic disaster and that's gone on now for 5 weeks or 6 weeks.Now we see that boat builders are starting to open and retail shops are starting to come back. So those parts of our business as it relates to like product hardware we're very, very, very impacted. Now going forward is it going to get worse? We don't think so. We think it will get better, but we don't know how fast. People going to run out and buy boats the way they did before? We hope so. Is that going to continue until the end of the year? We don't know. So -- but the beauty of our business is that we have this diversification.A lot of people over the years have asked why are you still in the NAV business? Why do you have military business? That doesn't seem to go with it. Thank god that we do because we have a business that's very resilient and it's diversified. So parts of the business are doing pretty good. But not all of the business. But the parts that are doing poorly we expect the poorness to be transient. So there's – obviously, we're not selling products to boat builders that aren't building boats. Now those guys are coming back online and we expect to start shipping again.

Got it. That's helpful.

I hope that answers your question but...

Yes, yes. No that's definitely helpful color. I think yes the leisure marine business is one that would stand out as likely being very, very hard hit here. Just drilling into the mini-VSAT business, I'm just wondering, if you can give any more color on what you saw in the month of April relative to you had a really solid quarter right for the month – I'm sorry, for the March quarter. And I'm guessing that, the trajectory there was sort of some deterioration at least as you went into March and into April. And just trying to think about, if you were to take the month of April and kind of times it by three, is there any kind of rough estimate you could give us on what that quarter would look like in terms of kind of nets of adds, or the number you gave us where you actually had a I guess 10% growth in units year-over-year. If there's any way you can give us a sense of what that might look like if we kind of took the month of April and multiply that by three?

Yeah. Well, we don't – we're optimistic that that won't be the answer is April times three. But if that were then, we would have flat to declining business, which hopefully won't happen. Hopefully, may will be better than April and June will be better than May. But again, we don't know that for a fact. So if things don't improve then we could forecast that subscribers wouldn't grow. And you can imagine a worst-case scenario where subscribers shrink, which would be really bad. But so far, we haven't seen shrinking subscriber base.

Got it. That's very helpful. Thank you. And I know going back, this is quite a few years ago, but you had pretty meaningful exposure to oil and gas. And I think that's kind of been mitigated over the subsequent years. But can you give us a sense of what your exposure is today to oil and gas? And what you've seen with that part of your – the fleet?

Right. We have very little exposure to oil and gas. We don't do any business on oil rigs or platforms. We have the few odd customers who use our products on land or – but very, very minimal exposure there now. I mean the collapse in oil prices for our satcom business is probably, if anything a slightly net positive. So, reduction in offshore vessels, but all of the commercial shipping companies are making a lot more money, because of lower fuel cost.Fuel cost them $40,000 a day, if that gets cut in half, that's a huge saving for them. Then on the tanker business those guys are absolutely printing money, because those – because of lack of storage. People are using tankers for contango, where they store the oil on the tankers and they're charging $240,000 a day. So they're absolutely minting money. So that's where it really hurts us as it's already been pointed out is in the Middle East potential defense sales. So the price of oil there is, I imagine a major factor that drives our defense budget. So we're very pessimistic about that business right now.

Got it. And then is my final question. You mentioned coming into this quarter you had the kind of four to five TACNAV programs out there, and it sounds like we're taking kind of two of those off the table, but you've still got, three large ones one which sounds like you're pretty close on or getting closer on. So just wondering how you're thinking about the overall outlook for the inertial business for this year versus where it was coming into the year? So it sounds like you still have some of that upside optionality from one or more of those large program signing?

We still have I'd say two, that have decent probability one, I would say has very high probability. But the one with a very high probability it's unclear how much of that will deliver in 2020. So, major program more than $10 million, but how much delivery is going to be in 2020 is would be the concern with that. The other one is U.S. military base that could be we don't think that would be impacted by everything that's going on, but that one isn't as large as the others so.

Okay. Very helpful. Thanks for taking all the question.

It appears there are no further questions.

That's great. Well...

I'd like to…

Go ahead. I was just going to say thanks for listening in the questions and we'll – as always we'll be available for via e-mail or direct calls to answer further questions. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.