|For those who haven't yet listened to the KVHI Conference Call, here is a full transcript. I haven't finished proofing against the audio yet, so it may not be 100% accurate, but it is very close. |
Wow! I never knew SI had a size limit on posts before, because I never hit it, but I just did. I will break up the transcript into two parts and post the Q&A as the second part.
Q1 2002 Earnings Conference Call
Richard Forsyth: CFO
Standard forward-looking statements disclaimer.
Martin Kits van Heyningen, CEO
Our last conference call was just two months ago. Since then we have made significant progress in our strategic goals. I'm also happy to report that we are starting to see more tangible results in terms of increasing revenues and new product introductions. KVH had an excellent first quarter with record revenues of $9.6 million, which is a 19% increase over Q1 2001. Our operating loss was almost cut in half from last year's 18 cents to this quarters 10 cents, and we are on track to meet our goals of achieving solid growth and returning to profitability this year. The revenue growth in Q1 was driven by a 29% increase in our satellite communications sales, as well as 100% growth in our military sales over the same period last year. Our Fiber Optic sales were actually down by about $500,000 as a result of a delayed shipment. However, that order is expected to ship this quarter and fiber optic production should be back on track. We finished the first quarter with a total backlog of roughly $7 million, which will be shippable in Q2, and we expect to see continued growth in the current quarter.
Now I'll go into each of our key markets in a bit more detail, starting with our Communications group.
Probably the most significant event of the quarter was the sudden surge in our satellite business. Last year, given the state of the economy, we were pleased to record a 9% growth. Now this quarter the satellite communications group had a very strong first quarter with 5.9 million in revenues, which is a 29% increase over the first quarter of 2001. This is due mostly to the rapid growth in our land mobile market. In the first quarter unit shipments of our TracVision mobile satellite TV antennas to the land mobile market were up 60% over last year. During the first quarter, we also signed our first OEM agreement to have TracVision antennas sold as standard equipment on RVs produced by a major US manufacturer. We'll be issuing a formal announcement in June when our customer introduces their 2003 model year vehicles. While we've been part of an option with several major players this will really be the first time that our TracVision is sold as standard equipment by a major RV company. We hope that this will be the catalyst for many of the major players in the industry to follow suit.
With the land mobile market growing rapidly, we are also starting to see signs that the Marine market is beginning to stabilize - sales in Europe, which were down in Q4, have recovered and were up significantly over last year. Overall our Marine satellite sales in terms of units have held even with the same period last year and growth is coming from new product introductions. As we announced in February, we signed an agreement with Thrane and Thrane, one of the world's largest manufacturers of Inmarsat satellite communication systems. We are now the prime US distributor of their Marine satellite communication products. In addition, KVH and Thrane & Thrane will work together to introduce new products geared towards supporting high-speed two-way data communications. Now the first of these products, the new TracPhone F77, delivers worldwide high-speed access to the Internet, E-Mail, and voice communications. Shipments of that product began this month.
Our mobile broadband project also achieved a milestone as we ship the first of our TracNet mobile systems this month. Now this product, introduced late in 2001, offers the only high-speed mobile Internet access for vehicles or vessels throughout North America. We currently have a solid order backlog, and volume shipments for this product will begin the 1st week of May. Together with the Tracphone F77, KVH has the products to provide high-speed Internet access throughout North America and around the globe.
The product development of our low-profile satellite TV antenna also continues to make excellent progress, and this is the new antenna that is suitable for use aboard sport utility vehicles and minivans, which we have talked about in previous conference calls, and will be a tremendous new market for KVH. We are now preparing to carry out live driving demonstrations for key potential customers and technology partners in the next few months, and we remain on track to launch this exciting new product in the second half of this year.
Our Fiber Optic group took a major technological step forward with the introduction of our new DSP-5000 Fiber Optic Gyros. Thanks to it's integrated Digital Signal Processing, the DSP-5000 offers tactical grade accuracy, which is in the 1-10 degree per hour range, and this new gyro is ideal for use in drone and unmanned vehicle navigation as well as land vehicle navigation in a variety of commercial applications. More importantly, it's available for a fraction of the cost of competing precision gyros. Smart munition guidance and drone navigation are two applications that are receiving increasing priority in defense budgets. And with our DSP technology, we are able to participate in these programs. In fact, we recently received a development contract to design a low-cost precision Inertial Measurement Unit or IMU, specifically for use in smart bomb guidance systems. Demonstration tests of a DSP gyro based IMU prototype were conducted just a few days ago. We are extremely pleased with the performance of our DSP gyro, and we are optimistic about the opportunities that are now open to us. I believe that this technology will allow our Fiber Optic Group to participate in these very large Defense programs.
Speaking of Defense, our military sales for our TacNav tactical navigation system for vehicles were also way up for the first quarter. Revenues were up 102% to $2.2 million, compared to the first quarter of 2001. Now there were some delays in other military programs that prevented the increase from being even larger. And we are hopeful that those orders will add to our already substantial military backlog in the near future. Defense related sales continue to expand, and we are still on course to double our military revenues over our 2001 total results. And we entered the second quarter with more than $3 million in backlog for the current quarter, and we are actively pursuing a number of new contracts.
Looking ahead to the second quarter, and the year as a whole, I continue to believe that 2002 will be a breakthrough year for KVH. We still have a solid military backlog in military and Fiber Optic markets, and our satellite business continues to accelerate. The development of both our mobile broadband and ActiveFiber fiber optic projects are still on track, and we are investing about $1.5 million per quarter on these two projects along with our TracNet technology, and clearly, because of this, I mean our base business is now solidly profitable, because without this incremental R&D investment, KVH would have been profitable on a net basis in Q1. We should begin to see a decline in our R&D expenses as these projects wind down towards the end of the year. A reduction of R&D, the introduction of new products and service revenues, and continued growth in our core business, should bring us to profitability and solid growth this year.
Now I would like to turn the call over to Dick to go over the financial details.
09:50 Richard Forsyth, CFO
Net sales for Q1 2002 $9.6 million, a 19% increase from last year's first quarter sales of $8.1 million.
Q1 defense sales doubled from the prior year to $2.2 million despite delays in the placement of defense orders. We are very encouraged by the demand for our Defense products and Q2 defense backlog rose to roughly $3 million.
Q1 Communication sales increased to $5.9 million, a 29% increase from last year's sales of $4.6 million. This growth in communication sales resulted from broader distribution of products from our national distributors and increased OEM sales to RV manufacturers. We anticipate continued growth for our communications products throughout the remainder of the year, as we introduce new products, benefit from stronger distribution networks and strengthen our role as an OEM supplier to RV manufacturers. Positive gains in defense and communications sales were offset by a delay in shipping a FOG order. The shipping delay was caused by a customer's revision of a product specification late in the first quarter. As a result, our first quarter FOG revenues decreased to $500,000 from last year's $1 million. Our FOG manufacturing group has since implemented the revised product specification, and the delayed order will ship later this quarter.
Overall, our sales projections remain positive, and we continue to forecast annual revenue growth of 30%-40% above last year's results.
Q1 Gross profit as a percentage of net sales increased to 44% up from last year's 38% of sales. This improvement resulted from a doubling of higher margin defense shipments, reductions in product direct costs, and decreased manufacturing overhead spending. Improved manufacturing methods and other cost savings lowered our Manufacturing Overhead rate to 13% of sales, a significant reduction from last year's 17%.
We anticipate that Gross Margins will remain at current levels throughout the year, as we make more efficient use of our manufacturing facilities, and continue to reduce product costs.
Q1 R&D expense increased to $2.33 million, a 34% increase from last year's spending of $1.7 million. This R&D increase resulted from ongoing investments in PhotonicFiber and low-profile antenna technology, which represented $1.1million, or 48% of total Q1 R&D expense. We estimate that PhotonicFiber and Mobile Broadband spending will continue at current spending levels in the second quarter, but begin to decline thereafter. Factors that will reduce R&D expense include decreased use of outside consultants and increased customer funding. Our goal is to reduce R&D to 16% of sales by year-end.
Q1 S&M expense increased to $2.3 million, a 3% increase from last year's first quarter spending of $2.2 million. Spending increases were primarily related to increased outside sales commissions that resulted from a doubling of Defense sales and a 29% increase in Communication revenues. We anticipate that marketing and sales expense will increase at a slower rate than sales, and decline to roughly 23% of sales by year-end.
Q1 G&A expense increased to $700,000, a 13% increase from last year's spending of $600,000. Spending growth is primarily due to increased wages and travel costs.
Administrative expenses are expected to remain relatively stable at roughly 7% of sales for the remainder of the year.
Consistent with our accounting treatment for the prior year, we fully reserved the tax benefit associated with our quarterly operating loss. Reserving the Income Tax benefit increased our quarterly loss by roughly $400,000 and our net loss per share by 4 cents. Although this accounting treatment increased our net loss, I would like to point out that we have not lost the positive tax savings associated with the current tax benefit. As soon as we are profitable, we can recover the Income Tax benefit directly against income tax expense, which will increase earnings per share in that period.
Quarterly asset management resulted in DSO of 49 days, unchanged from year-end, and 4.3 Inventory turns, down from 5 turns at year-end. Manufacturing inventory growth represented a buildup of Defense related finished goods in anticipation of orders forecast to ship in the 2nd and 3rd quarters of this year. Our quarter end cash balance was $9.1 million. Our forecast cash burn rate will increase this quarter, but steadily decrease as we return to profitability in the second half of this year. We believe our cash balances and bank line of credit are sufficient to complete our new product initiatives and fund planned operating and capital requirements. In summary, we're very encouraged by our current sales outlook. We look forward to renewed growth and a return to profitability in the second half of the year
Now we'd like to take our Questions and Answers. Operator, please open the call