Good day, and thank you for standing by. Welcome to Quarter 1 2024 KVH Industries, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anthony Pike, Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for KVH Industries' first quarter results, which are included in the earnings release we published earlier this afternoon. Joining me on the call is the company's Chief Executive Officer, Brent Bruun. Before I get into the numbers, a few standard statements. Firstly, if you would like a copy of the earnings release or if you would like to listen to a recording of today's call, both will be available on our website. If you are listening via the web, feel free to submit questions to ir@kvh.com. Further, this conference call will contain certain forward-looking statements that are subject to numerous 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 of these statements. We will also discuss adjusted EBITDA, which is a non-GAAP financial measure. You will find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our 2023 Form 10-K, which was filed on March 15. The company's other SEC filings are available directly from the Investor Information Section of our website. Now to walk you through the highlights of our first quarter, I'll turn the call over to Brent.

Thank you, Anthony, and hello, everyone. Let me start out by providing a high-level overview of our results. Q1 airtime revenue was $23.6 million, down $3.5 million from Q1 2023. Airtime gross margins remained steady compared to Q1 2023 and total revenue for Q1 was $29.3 million, roughly a 14% decrease from Q1 2023 due to the continuing decline in our product sales and an approximate 4% reduction in our vessel base. We believe that the changes we are making within our business will reverse the contraction in revenue that we have experienced. We've had a very productive 2 months since our Q4 2023 earnings call. We made substantial progress on our reorganization effort, which was initiated in February. This effort enables us to focus on our commitment to deliver integrated services using our multi-orbit multichannel network strategy and to accelerate our evolution from a capital-intensive, hardware-focused business into a more nimble integrated solutions-oriented organization. KVH's maritime VSAT and television antennas continues to be a valuable component of our portfolio. However, the changing product mix driven by new LEO services did not warrant a continuing operation of a dedicated manufacturing facility. We are in the midst of buying components to complete our final build plan. All component purchases and a substantial portion of the VSAT and TVRO terminals will be completed by the end of June, at which time we will significantly reduce the number of employees in the facility. The remaining reduced staff will focus on repairs, refurbishments and will continue to slowly build antennas for the remainder of this year and next year. We will have sufficient TracNet and TracVision terminals to meet anticipated demand through 2025 and possibly a portion of 2026. We anticipate that our reorganization efforts will result in annualized savings of approximately $9 million…

Thank you, Brent. As a reminder, I would like to note that similar to our call for Q4, I will not restate data that is in the earnings release are clearly described in our 10-Q. I will focus my comments on information that either elaborates on or clarifies the published data. So with respect to our first quarter financial results, airtime gross margin, which is not reported in our earnings release, was 41.8%, essentially flat compared to prior year gross margin of 42.0%. As noted during prior calls, we do expect airtime margins to compress slightly as LEO services become a larger percentage of our total airtime revenue. As Brent noted, total subscribing vessels at the end of Q1 were just over 6,600, which is approximately 4% down from Q1 of last year. Compared to year-end 2023, total vessels were lower by approximately 2%. Reported Q1 product gross profit of negative $1.1 million including $0.4 million of employee severance charges related to the reorganization and manufacturing wind down. Excluding the manufacturing restructuring charges, product gross profit was a negative $0.7 million as compared to a positive $0.1 million in Q1 of last year. Once we have completed our manufacturing wind-down initiatives and have built sufficient inventory levels to satisfy demand for the foreseeable future, we expect product gross profit to return to positive territory. The Q1 operating expenses of $13.7 million include $1.7 million of employee severance charges relating to the restructuring initiatives and manufacturing wind-down announced on February 13. Overall, we expect to incur further employee severance charges of $1.1 million in Q2, but these changes will generate $9.1 million of annualized savings in employee costs. Around $3.7 million of this will benefit product gross profit and around $5.4 million will reduce operating expenses. Our adjusted EBITDA for the…

[Operator Instructions] Our first question comes from the line of Chris Quilty from Quilty Space.

Question for you. The gross margins here in the first quarter were a little bit better than I was expecting. Were there some one-offs there. And I think you did indicate we should expect more towards mid-30s gross margin on the airtime?

Yes. As we've been reporting for a while, Chris, we anticipate new margins to contract somewhat. We had some good pickup in the quarter, in particular on the Starlink side, not only on the base Starlink, but more for the services that we're combining with Starlink. Do you have anything to add to that?

No, other than just to say that, of course, the vast majority of our airtime is still driven from our GEO network, which still has a higher margin. So I think we still anticipate a slight reduction in our margin on airtime as Starlink becomes a bigger proportion of our overall revenue.

Got you. And I mean, I know you can't go into too much detail, but the contract that you have with Intelsat or capacity up and a year ago, you were sort of scaling up the amount of capacity and agreements there. What are the provisions for that contract as we're seeing demand for GEO capacity going down? Do you get stuck with some percentage of fixed costs associated with that...

I'm sorry, I cut you off. But anyway -- basically, our contract with Intelsat really mirrors what we anticipate going on within the market as far as reduction in bandwidth. As you said, I can't really go into a lot of details on that, but we feel comfortable with how we structured our renewed arrangement with them, which we renewed last year and we commenced at the beginning of this year.

Got you. And how about OneWeb. How is that capacity arrangement? Is that where you're sort of paying by the drink or do you anticipate entering into some sort of a long-term agreement there?

Well, we've already signed an agreement with OneWeb last year. They're just building out their [ RADAR ] stations. We've made arrangements to secure terminals. It's basically a multiyear arrangement where we're going to buy wholesale from them and create our own unique airtime plans.

Got you. And presumably, that capability is already layered into the CommBox Edge?

Yes.

Great. And did you -- I heard you mentioned that you have already begun shipping the Edge? Or is that a product that starts to...

From the Edge, yes. The CommBox Edge, we shipped the services launched. We have 2 variants of the belowdeck unit, one with 6 ports, one with 2. It's been very well received, and we've done a tremendous amount of work as far as getting the word out, if you will, through both training sessions with our airtime service providers, our employees, our dealer network, and we've done it all. And we provided these streaming sessions all around the world and through web-based and/or team-based overviews.

Got you. And to be clear, is that product mostly targeted on a commercial user? Or is there a government and/or leisure marine component there?

Well, absolutely commercial. With leisure marine, it's definitely but more at the higher end of leisure marine, where you'll have more than one communication path on onboard the vessel or both government, it would be an attractive solution as well. And we're focusing on all 3.

Great. And just finally, just circling back to Starlink. Do you see them -- their penetration of the market? Is it fairly steady? Do you see things accelerating? And I think you did mention that some of the customers who are signing up are nontraditional customers that you wouldn't have seen before. Are there opportunities to sell them other services that they might not have?

Yes, absolutely. We are seeing an acceleration, as I said on the call, we shipped choice as many terminals in the first quarter as we did in the fourth, but only half of those have been activated. So we should see the tail effect from an airtime taking hold. And we're selling that both as a standalone solution as well as a bundled solution with our VSAT service.

Got you. And can you share the split between those 2 solutions?

Pretty close to 50-50. I can look into it and get back to you, but it's very close to half.

That's good. I mean it's better than I would have expected. Okay. Great...

Sorry, go ahead, Chris.

No, no, that's good. I appreciate all the feedback and good luck here.

Thank you. At this time, I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.