KVH Industries, Inc. (KVHI) Q3 2025 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Q3 2025 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 call over to your first speaker today, Chief Financial Officer, Anthony Pike. Please go ahead.

Thank you, Dana. Good morning, everyone, and thank you for joining us today for KVH Industries' third quarter results, which are included in the earnings release we published earlier this morning. 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. And if you are listening via the web, please 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 most recently filed 10-Q. 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 third quarter, I'll turn the call over to Brent.

Thank you, Anthony, and good morning, everyone. The positive momentum that we reported in the second quarter has continued into the third quarter. On our last call, we talked about an inflection point that -- in this quarter, we have reinforced that inflection point. This is due to our strategic focus on LEO airtime revenue and subscriber growth, which have yielded positive results. Highlights for the quarter include a new record for vessel subscriber growth, record quarterly shipments of satellite communication terminals, sequential and year-over-year service revenue growth, closing the sale of our Middletown, Rhode Island facility and the acquisition of customer and vendor agreements, along with other assets from a satellite service provider operating in the Asia Pacific region. At the same time, we maintained our commitment to strong cost control with flat OpEx and reduced CapEx compared to the second quarter of 2025. Service revenue for Q3 was $25.4 million, a 10% increase from the prior quarter and a 4% increase from Q3 2024. The increase in year-over-year revenue is particularly encouraging as the prior year included a significant amount of U.S. Coast Guard revenue, which has drastically decreased since the third quarter of last year. Equally encouraging, our subscriber growth continued in the third quarter. Our total subscribing vessel count increased by 11% to approximately 9,000 compared to the second quarter. And as a result, our subscribing vessel count is up 26% year-to-date. This growth is being driven by the ongoing demand for the Starlink and OneWeb LEO services we provide. During Q3, we shipped roughly 1,600 terminals, a new record. There continues to be strong demand for both stand-alone LEO services and hybrid installations, which represent a combined service utilizing a LEO service in tandem with our legacy VSAT offering. Our Starlink subscriber growth also helped us to stay on target to consume the bulk data pool we purchased in July of 2024, before the end of this year. We're in the final stages of negotiations with Starlink to purchase an additional data pool. We expect the new purchase commitment will scale to reflect the significant growth trajectory of Starlink airtime as a portion of our business, enable us to retain flexibility to create custom competitive data plans to meet our subscribers' needs and allow us to sustain solid airtime margins. In addition, we continue to pursue strategic growth opportunities. In Q3, we completed the acquisition of the maritime communications customer base of a service provider operating in the Asia Pacific region. This acquisition is expected to bring on board more than 800 vessels that are currently utilizing satellite communication services, approximately 300 of which receive our VSAT service, more than 4,400 land-based subscribers who use Inmarsat and Iridium handheld services and a corresponding increase in annual top line revenue. This strategic move represents an essential milestone in our evolution as it is intended to expand our customer base, broaden our product and service portfolio and significantly increase our land connectivity subscriber base. This step is representative of our commitment to investing in KVH and strengthening our market position. And finally, we successfully closed the sale of our facility in Rhode Island, which generated approximately $8 million in net proceeds. Now I will turn the call back to Anthony to discuss the numbers. Anthony?

Sorry about that. Thank you, Brent. As a reminder, I would like to note that similar to our call for Q2, I will not restate data that is in the earnings release or 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 third quarter financial results, airtime gross margin was 31.9%, which is down by 3.9% compared to the prior-quarter gross margin of 35.8%. This decrease was driven by the reduction in GEO airtime margins as a result of declining revenue set against a relatively fixed cost base. That said, GEO revenue decline continues to be in line with expectations and is not significantly accelerating. We expect this trend on GEO airtime margin to continue in the fourth quarter. However, from January 2026, our minimum commitments for GEO bandwidth declined considerably by around 1/3, which we expect will reduce pressure on margins. Our LEO airtime margin was consistent with the prior quarter. Total subscribing vessels at the end of Q3 were just below 9,000, which, as Brent mentioned, is 11% up from the prior quarter and 26% up from the beginning of the year. Reported Q3 product gross profit was negative $6.8 million compared to a product gross profit of positive $0.3 million in the prior quarter. This quarter's negative product gross profit included a $5.5 million write-down of our VSAT inventory based upon reduced demand and pricing. The remaining reduction in profitability of $1.6 million this quarter was driven by price reductions on Starlink and our H-Series VSAT antennas. We expect product margins to improve in the fourth quarter from the third quarter of this year, but product margins will remain relatively modest, and we believe the real value of our mobile connectivity hardware shipments is the recurring airtime revenue they generate in the future. The Q3 operating expenses of $9.5 million were flat compared to the prior quarter. And our adjusted EBITDA for the quarter was $1.4 million, and our earnings release has a numerical reconciliation of that. Capital expenditure for the quarter was $1.6 million. This compares to adjusted EBITDA of $2.7 million and capital expenditure of $2.4 million in the second quarter of 2025. Our ending cash balance of $72.8 million was up approximately $16.9 million from the beginning of the quarter. And as Brent mentioned, net proceeds from the sale of our property at Middletown, Rhode Island was $7.8 million. So overall, we are pleased with the third quarter performance, which shows our strategy to focus on our recurring revenue service business is proving successful with double-digit sequential growth on both service revenue and subscribed vessels in the quarter, although we cannot assure that growth will continue at this rate. Our LEO margins remain strong, and we are managing the global decline in GEO well. The sale of our manufacturing facility and the first acquisition we have completed in several years evidences our strategic intent moving forward, and we are optimistic for the future. This now concludes our prepared remarks. I will turn the call over to the operator to open the line for the Q&A portion of this morning's call. Operator?

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

I wanted to dial in a little bit to the growth in the LEO business. I think you said 1,600 terminals shipped in the quarter. And historically, you were adding 600 a year on the GEO side. Where are you seeing the demand come from or the nature of the demand to see the levels climb that quickly?

Yes. The demand is really pretty evenly spread between all regions and all types of vessels. So there's not anything specific that's driving the demand, Chris. We did scale back a bit on leisure marine in the third quarter just due to the time of year, right? That's a very -- fourth quarter, first quarter, we'll see a lot more activity there as the boats are moving south. But it's just not really any significant concentration.

And how about -- I mean, are you seeing these as competitive wins? Or are these new installs? Or is that mix changing?

It's a bit of both. It's definitely some competitive wins, on the new installs also because we're going further downstream, and that trend has continued with the service plans that we offer and the price per bit delivered, it's opened up the market quite a bit to the lower end.

Got you. And I think I received my first Starlink e-mail yesterday, offering me free equipment on the consumer side. But apparently, you're also seeing that on the maritime enterprise side. How are you managing the hardware inventory and pricing with what's been a pretty dynamic pricing environment?

Yes. Well, and as Anthony alluded to, they've reduced price. We're not necessarily offering -- we're not offering free equipment for maritime unless you know something I don't. But they have reduced price. It's caused a bit -- it's difficult. You have to manage it because when you're buying inventory, you have it at a higher price and then they're selling it lower, and you need to drop your price. It did impact our margins to a degree. On a go-forward basis, we have an understanding of Starlink, of how to handle this a bit better. And if, in fact, they have further price concessions, we would anticipate that any stock that we're holding, we would get a corresponding reduction and/or credit for the difference between previous sale purchase price and the new purchase price.

Got you. And can you contrast that with your OneWeb terminal sales where I think you mentioned a lot of those are being sold under AgilePlan where you're capitalizing the cost there. Is the differential -- price differential or CapEx requirements on your part causing a shift in terms of how customers are looking at the One service versus the other?

Price definitely has an impact. It's -- we've shipped quite a few more Starlinks and OneWebs. There are alternatives to using a OneWeb and not necessarily just on a stand-alone basis. We talk about our hybrid service offering, which is primarily concentrating on a LEO service with VSAT, but it doesn't -- we also have some customers that have provided two different LEO services on board to ensure diversity.

Understand. On the GEO side, is it fair to assume the Coast Guard headwind going into the fourth quarter is probably like less than $1 million?

You mean as far as the amount of revenue we recognized in the fourth quarter of last year?

Yes.

When you say headwinds. We had a significant amount of revenue in the third quarter, but the contract was expired at the end of September of '24. And we've retained a small amount of Coast Guard revenue, so it's not completely gone, but that small amount was representative in 2024, in 4Q '24, and it will be in 4Q '25. So it's really not going to be a factor in a year-over-year comparison in the fourth quarter, if that's your question.

Yes, that was it. And aside from the Coast Guard, what are you seeing in the trends on the GEO ARPUs?

Yes. I'll defer to Anthony on that question.

Yes. So the GEO ARPUs this year have been fairly static. The first to the second quarter, they dropped a little bit. But since then, they've been very static. So we're very pleased with the third quarter's ARPUs on our GEO side. They seem to be remaining.

Great. And you guys didn't talk about CommBox much in the quarter. Was there any significant movement in customer adoption or -- you had the new cybersecurity feature coming...

Yes. Well, the cybersecurity feature is being well received. There's not necessarily new news on that. It's being well received. We shipped, I don't have the exact number, but hundreds of CommBoxes, and we activated hundreds of services and it's being well received in the market. But we didn't really see a need to call it out specifically this quarter. It was -- and shipments were up sequentially in the third quarter versus the second.

Yes. I mean if I just jump in there, Brent. I mean, revenue was up about mid-30%, I think 36% quarter-on-quarter, which just shows we're getting some successful growth and the growth from -- that we discussed in prior quarters continued both in terms of shipments and activations.

Great. And sorry, I'm all over the map. I should have organized my questions. But Anthony, did you mention how many LEO terminals were activated in the quarter?

No, I did not know. No. I'm not sure, Brent, do we...

Yes. So basically, we talked about our growth, which went -- was approximately 1,000, from 8,000 to 9,000. A significant portion, majority of those would be LEO. As far as the vessels that we have out there, 9,000, more than half are receiving Starlink services. But we'd like to just keep it at that level and know that our overall subscribing vessels are significant, and they've had significant growth in the quarter, which we hope -- we anticipate, or we hope will continue. There's no guarantees. And as we move forward, a larger and larger portion of our installed base will be receiving LEO services and for the current time period, in particular, Starlink.

Great. Are you starting to hear whispers from the Amazon guys coming to market?

Yes, there's all kinds of -- there's not whispers. I think they're shouting from the mountaintop. So...

Right. And does that look like it will be a competitive service based upon what you're seeing in terms of...

Yes. I mean on paper, yes, the proof is in the pudding. So let's -- once we are able to test it and see what the cost of the equipment is, the data speeds, the ability to maintain link and the overall quality of the service, we'll -- when that all comes to fruition and we're able to do significant testing, we'll be able to answer that question a bit more concisely. But on paper, it looks like it will be compelling.

Great. With the acquisition, I think you mentioned 800 vessels that obviously didn't show up in the numbers for this quarter. Will we see kind of a onetime jump of 800 vessels that happens in Q4?

Yes. Let's just be clear, yes, but over 500 vessels, right? So we -- 300 of those vessels were already receiving our service. We'll be able to achieve higher margin on those vessels because we were selling it to the service provider and the service provider was charging their end customer a higher price. But those will be reflected in our fourth quarter. That net 500 will be reflected in our fourth quarter numbers.

Got you. You had previously talked about primarily Latin American land growth, but it sounds like there's an element of that with this acquisition. And I think you specifically called out the sat phone part of their business. Is that a focus? Or is it more around, again, traditional land terminals in Asia...

Well, a bit of both. In this particular case, it was opportunistic because that's what they provided. So we're taking it on. We do have -- we think it would make sense to go into an adjacent market outside of maritime and provide land services since we have the infrastructure to support it. And we're looking into that to do more.

Got you. And is that expanding products or services? Is this all SATCOM-related services? Or do you move into other adjacent communication services?

It primarily will be SATCOM. The handhelds are very high volume, low ARPU type business. So it's -- you need to get a lot of them out there to make any type of significant revenue.

And final question just because I don't pay as close attention to the maritime market. Any notable trends due to tariffs or global geopolitical situations that you're watching in terms of the demand and uptake on the maritime side?

Yes. Well, of course, we watch it, and we pay attention to what's going on, but we're not seeing any significant impact from tariffs or the geopolitical environment.

I'm showing no further questions at this time. Thank you for your participation in today's conference call. This does conclude the program. You may now disconnect.