KVH Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Unless otherwise noted, figures are in millions of dollars. KVH designs and sells mobile connectivity products and services, primarily for marine and land markets. Following its 2022 sale of the inertial navigation business, results are reported as one continuing operating segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $33.689 | $33.151 |
| Product sales | $4.949 | $6.563 |
| Service sales | $28.740 | $26.588 |
| Operating loss | $(0.548) | $(4.248) |
| Net loss from continuing operations | $(0.012) | $(4.267) |
| Net loss, including discontinued operations | $(0.012) | $(4.692) |
| Cash used in operating activities | $(6.779) | $(3.513) |
- Net sales rose 2% year over year. Product sales fell 25%, while service sales increased 8%.
- Operating margin improved to a 1.6% loss from a 12.7% loss. Total costs of sales increased to $21.310 million, or 63% of sales, from $20.344 million, or 61% of sales. Product costs exceeded product revenue: product cost of sales was 106% of product sales, versus 83% a year earlier.
- Operating expenses declined: R&D was $2.565 million, sales, marketing and support $5.712 million, and G&A $4.650 million. Lower spending reflected the 2022 workforce reduction and, for G&A, a $0.527 million reimbursement under the transition services agreement with EMCORE.
- Interest income increased to $0.778 million from $0.208 million, largely reflecting higher returns on cash and investments. Other expense was $0.224 million, primarily foreign-exchange losses. Income tax expense was $0.018 million; the effective tax rate was unusually high at 300% because of the small pretax income and tax valuation allowance and jurisdictional effects.
- Cash and cash equivalents were $12.375 million and marketable securities $56.280 million at quarter-end, totaling $68.655 million. Management reported working capital of $95.6 million and expects available funds to cover operating needs, capital expenditures and contractual obligations for at least 12 months after filing, subject to assumptions about revenue and expenses.
- Cash fell $8.681 million during the quarter. Operating cash use was $6.779 million; investing cash use was $2.703 million, including $2.103 million of capital expenditures and net purchases of marketable securities. Financing provided $0.761 million.
- Total liabilities were $32.874 million and stockholders’ equity $157.792 million. The balance sheet reports no conventional borrowings; operating lease liabilities totaled $1.769 million. The filing does not provide a separate debt-balance figure.
Material changes and notable items
- VSAT broadband product sales declined $1.5 million, primarily on lower unit sales, particularly 37cm leisure units; KVH cited heightened competition from newer low-Earth-orbit providers. VSAT airtime sales increased $3.0 million, supporting service revenue growth.
- Product costs included a $0.6 million inventory write-down and $0.3 million of purchase-price variance. Increased airtime service costs reflected capacity added for subscriber growth.
- Operating cash use increased by $3.3 million year over year, primarily because accounts payable cash outflows increased by $15.1 million; accrued compensation, warranty and other liabilities partly offset the effect.
- The 2022 comparison includes a $0.425 million discontinued-operations loss from the inertial navigation business. KVH sold that business in August 2022 for $54.9 million in net proceeds, subject to specified deductions; it had no related assets or liabilities at March 31, 2023.
- Product sales were 15% of revenue and VSAT broadband airtime service was 80%. International customers generated 64% of sales; Singapore alone represented 18%. One customer accounted for 17% of accounts receivable at quarter-end.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects cellular airtime service to continue supplementing satellite-only airtime following the KVH ONE hybrid network and TracNet H-series launch.
- Management reported continued delays in raw-material availability and delivery, manufacturing and shipping delays, and higher raw-material costs expected to continue through 2023. Certain product components are sourced from single suppliers, creating potential interruption risk.
- Marine leisure demand is seasonal: product revenue has historically been strongest in the first half, while service suspensions tend to rise in the third and fourth quarters. Results may also be affected by large-customer timing, international exposure and competition.
- KVH plans continued investment in its global satellite network, including capacity, equipment, regulatory approvals, product development and personnel. Management cautioned that weaker-than-expected operating results could require additional financing, which may not be available on acceptable terms and could dilute shareholders.
- Management said no pending legal matter was likely to materially harm the company. Disclosure controls were assessed as effective at March 31, 2023, and no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether airtime-service growth can continue and offset declining hardware sales amid LEO competition.
- Whether product margins recover after the inventory write-down and purchase-price variances, and whether higher airtime capacity costs yield profitable subscriber growth.
- Drivers and timing of operating cash use, particularly accounts-payable payments, and the company’s liquidity and investment needs.
- Progress in resolving supply delays and cost pressures, and exposure to single-source suppliers and international markets.
- Assumptions supporting management’s at-least-12-month liquidity outlook and planned satellite-network investment.