KVH Industries, Inc. Q3 FY2025 earnings call

• Positive momentum from second quarter continued into third quarter, with strategic focus on LEO airtime revenue and subscriber growth yielding results. • Highlights include new record for vessel subscriber growth, record quarterly shipments of satellite communication terminals, sequential and year-over-year service revenue growth. • Closed sale of Middletown, Rhode Island facility and acquired customer and vendor agreements along with other assets from Asia Pacific satellite service provider. • Maintained strong cost control with flat OpEx and reduced CapEx compared to second quarter of 2025. • Subscriber growth driven by ongoing demand for Starlink and OneWeb LEO services. • Expect LEO airtime margin to remain consistent, and GEO airtime margin trend to continue in fourth quarter with minimum commitments for GEO bandwidth declining significantly from January 2026.

Service revenue for Q3 was $25.4 million, a 10% increase from the prior quarter and a 4% increase from Q3 2024. Airtime gross margin was 31.9%, down from 35.8% in the prior quarter, driven by reduction in GEO airtime margins due to declining revenue against fixed cost base. Reported Q3 product gross profit was negative $6.8 million compared to positive $0.3 million in prior quarter, with $5.5 million write-down of VSAT inventory and price reductions on Starlink and H-Series VSAT antennas. Total subscribing vessel count increased by 11% to approx 9,000 in Q3, up 26% year-to-date. Q3 operating expenses were $9.5 million, flat with prior quarter. Adjusted EBITDA for the quarter was $1.4 million. Capital expenditure was $1.6 million. Ending cash balance was $72.8 million, up ~$16.9 million from start of quarter. Net proceeds from sale of Middletown, Rhode Island facility were ~$8 million.

• Expect GEO airtime margin trend to continue in fourth quarter, but from January 2026, minimum commitments for GEO bandwidth decline considerably by around 1/3, expected to reduce pressure on margins. • Expect product margins to improve in fourth quarter from third quarter but remain relatively modest. • Optimistic about future due to strategic focus and recent acquisitions, but cannot assure growth will continue at current rate. • Acquisition's impact will be reflected in fourth quarter numbers.

• Forward-looking statements subject to numerous assumptions and uncertainties that may cause actual results to differ materially. • GEO revenue decline continuing to impact margins. • Starlink price reductions impacting hardware inventory and pricing. • Geopolitical situations and tariffs may potentially impact maritime demand, though no significant impact seen currently.

Q: 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?

A: 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.

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

A: 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.

Q: 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?

A: 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.

Q: 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?

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

Q: And aside from the Coast Guard, what are you seeing in the trends on the GEO ARPUs?

A: 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.

Q: 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...

A: 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.

Q: 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?

A: 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.

Q: Are you starting to hear whispers from the Amazon guys coming to market?

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

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

A: 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.

Q: 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?

A: 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.

Q: 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...

A: 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.

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

A: 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.

Q: 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?

A: 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.