KVH Industries (KVHI) Q4 2021 Earnings Call Transcript

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KVH Industries (NASDAQ:KVHI)
Q4 2021 Earnings Call
Mar 07, 2022, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the KVH Industries, Inc. Q4 2021 year-end earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Roger Kuebel.

Please go ahead.

Roger KuebelChief Financial Officer

Thank you, Christine. Good morning, everyone, and thank you for joining us today for our KVH Industries’ fourth quarter results, which are included in the earnings release we published this morning. Before I introduce the others on the call, a couple of quick announcements. First, if you would like a copy of the earnings release is available on our website and from our investor relations team.

If you would like to listen to a recording of today’s call, it will be available on our website. If you’re listening via the web, feel free to submit questions to [email protected] Finally, 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 certain non-GAAP financial measures, and you’ll find definitions of these measures in our press release, as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading risk factors in our third quarter Form 10-Q filed on November 4, 2021, and our 2021 Form 10-K, which we expect to file tomorrow. The company’s other SEC filings are available directly from the Investor Information section of our website. Joining me on the call are the company’s interim chief executive officer, Brent Bruun; chief technology officer, Bob Balog; and the newly appointed chairman of the board of directors, Cathy Martine was going to say a few words now.

Cathy?

Cathy MartineChairman of the Board of Directors

Thank you, Roger. Good morning, everyone. As Roger said, I’m Cathy Martine. I would like to thank everyone who has dialed in this morning.

Before we get to the results for the quarter, I wanted to share an update from the KVH board of directors. As you may have seen in our press release this morning, we announced a leadership transition. After more than 40 years at the company, most recently as our president, CEO, and chairman, Martin Kits van Heyningen is retiring from his executive and board roles to make way for the next generation of leadership at KVH. We want to thank Martin for his service to the company and all that he has accomplished.

The board believes that KVH has a tremendous opportunity to create value. In order to capitalize on that opportunity. We believe that KVH needs to focus on its core businesses and drive toward profitability. In addition to Martin’s retirement today, we announced an organizational restructuring that aims to achieve this, we believe these actions would result in increased shareholder value.

The board has also engaged a nationally recognized executive search firm to help identify a new CEO. Our current COO, Brent Bruun, will assume the role of interim chief executive officer. Brent has been with KVH for almost 14 years, and he has a deep understanding of our businesses and our customers. The board has full confidence in Brent and looks forward to working more closely with him.

And with that, I will turn it over to him to walk through the highlights from the quarter. Brent?

Brent BruunNew Chief Executive Officer

Thank you, Cathy. Good morning, everyone. Thanks for joining us. Before we discuss the quarter in the year, I’d like to thank Martin for his contributions to KVH, which are too many to name here.

He has built an exceptional company and I want to personally wish him all the best in his future endeavors. I’d also like to address workforce reduction. This was an incredibly difficult but necessary decision. As Cathy mentioned, in order for KVH to become a profitable growing company, we need to have a focused strategy built around the businesses where we are a leader, particularly VSAT products, AgilePlans, and our fiber optic gyro.

All three of which grew in the fourth quarter. We also need to reduce costs and better align our expenses with our expected revenue from these businesses. The restructuring of our operations and associated headcount reduction is critical to achieving our goal. However, I know this doesn’t make the news today any easier for our colleagues who are impacted.

I want to thank all of them for their dedication to KVH and ensuring everyone we are committed to doing everything we can to assist during this transition. Turning to the fourth quarter and fiscal year results. While we achieved overall expectations, the quarter and the year proved that delivering profitability will require new initiatives, including becoming more focused. Our Mobile Connectivity segment continues to drive strong revenue.

This was largely offset by a decline in our Inertial business due to a large part to supply chain issues, limiting our ability to fulfill orders in the fourth quarter and lumpiness in demand for our TACNAV products. I will address TACNAV and more detail shortly. I’m going to run through some of the results before talking a bit more about our go-forward strategy. And then I’ll turn it over to Roger, who will walk through the numbers in more detail.

Revenue for the quarter was $43 million, which reflects a decline of $1 million from Q4 of last year. We increased our full year revenue by $13 million to $171.7 million. Our fourth quarter EBITDA was a loss of roughly $100,000, while EBITDA for fiscal 2021 was $4 million. Mobile Connectivity 4Q revenue was $35.2 million, up from $29.9 million in the fourth quarter of last year.

Our Mobile Connectivity revenue was $134 million for the full year, up to $14.5 million versus fiscal 2020. Our new air time subscribers were up 12% in Q4, which included a number of our legacy network subscribers. While we said airtime revenues rose 18% for the quarter and 14% for all of 2021. We completed the wind-down of our legacy satellite network in Q4.

As a result, all of our VSAT subscribers are now on our Global HTS network. We eliminated the legacy network operating costs. And we’re seeing an increase in airtime ARPU for those customers on the HTS network in comparison to our legacy networks. As anticipated, we have some legacy customers who we expect will migrate to the HTS network in conjunction with the leisure boating season this spring.

Thanks to a mix of new and migrating customers, it was a strong quarter for VSAT terminals. Shipments of our satellite TV systems were also solid but delayed by supply chain challenges which held us back from additional transmission shipments. However, we entered 2022 with a strong VSAT and television antenna order backlog that we are working to fulfill. In the commercial market, we successfully expanded our satellite connectivity service that permits vessels to use KVH antennas and the HTS network while operating in Indian territorial waters.

In addition, we can now offer satellite connectivity services to Indian flagged vessels. This region is a critical area for the global shipping trade. We are also seeing continued strong demand across all markets for our ultra-compact TracPhone V30 VSAT system. While shipments in airtime revenues continue to grow, we have also focused on improving our Mobile Connectivity gross margins.

In order to boost revenue and improve margins. We increased price points on our hardware, our AgilePlan subscriptions, and our leisure airtime rate plans. We will regularly evaluate prices for all products and services throughout 2022 and beyond and adjust as necessary based on market demand, our expense structure, and our margin targets. We recently renegotiated our HTS network costs to help improve our air time margins, and we implemented new cost controls.

These include changing our shipping terms for AgilePlans. The changes enable us to continue to offer standard shipping as far as part of the subscription cost but shift excessive and expedited expenses to our customers in light of increased global shipping rates. In our Inertial Navigation business, our Q4 fiber optic gyro revenue was $7.4 million, up $6.1 million Q4 — up from 6.1 million in Q4 2020. Total Inertial in military revenue for the quarter declined 14.43% due to a substantial reduction in TACNAV shipments year over year.

For the full year, we grew FOG revenue 12% to $27.9 million, while overall FOG and TACNAV revenues were roughly flat at $36.9 million, again due to a decline in TACNAV sales versus the prior year. As we did with our Mobile Connectivity products, we recently raised Inertial Navigation product prices to increase revenue and address higher component costs resulting from the ongoing supply chain challenges. Longer lead times for key Inertial sensors sensor components are also limited what we could ship in Q4. We anticipate that these challenges will continue through Q1 and Q2 of this year.

Overall, we are positioned well as we enter 2022 with an Inertial product backlog above $20 million. On the military side of our business, we received modest revenue from sustaining TACNAV support, parts, and service. As you know TACNAV is a high-margin product. However, we ceased including TACNAV in our in some time ago during the uneven nature of the market and order timing.

We anticipate receiving a significant new order for US military vehicles, but it has been delayed. We now expect to receive it at the end of 2022 or more likely early ’23 is not including our base revenue forecast for 2022. So now I’d like to talk about our path forward. As I mentioned earlier, our focus is on achieving sustained profitability.

To summarize, we will continue to invest in businesses where we are a market leader and where we win, primarily VSAT products, AgilePlans, and FOGs. Ensuring we are maximizing margins by increasing prices and doing a better job of managing costs where we can and these products are also critical. We’re going to exercise more discipline around investments in our new product initiatives. This also means moving away from products or services that do not make strategic and financial sense for the company.

For example, we’re currently in discussions to sell the in-store radio assets of our KVH Media Group. We anticipate finalizing the sale within the next month. We believe that the internet of things is important for the long-term of commercial maritime operators. We have built our KVH Watch Solution using world-class software and dedicated KVH terminals to meet that need.

However, the market demand has not matured at the speed we initially expected. As a result, we are eliminating the requirement and expensive dedicated terminals. We are instead integrating our flow and remote expert support capabilities into AgilePlans, our other deployed VSAT terminals, and future connectivity systems. In addition, we plan to offer our unique Cloud Connect service as a subscription feature in our next-generation terminals at some point after product launch.

In keeping with our current conservative outlook, we’re not including any revenue for IoT services in our 2022 forecast. We’re continuing to look for opportunities to reduce costs. Clearly, organizational restructuring and workforce reduction was a significant step. We’re going to be aggressive in finding additional ways to improve margins.

We’ll share more information here as it makes sense. We’re going to stay focused on increasing shareholder value. I have confidence in the strength of the business and believe we can execute the initiatives we have discussed today. Roger will walk through our guidance for 2022, which will see as a very achievable target.

Now we turn I turn the call back over to Roger for the numbers.

Roger KuebelChief Financial Officer

Thanks, Brent. As Brent mentioned earlier, our fourth quarter revenue came in at $43.1 million, compared to $44.1 million recorded in the fourth quarter of 2020. Our consolidated gross profit margin was 32% for the fourth quarter, as compared with 39% in the fourth quarter of last year. Revenue from our Mobile Connectivity segment increased by $5.3 million, with gross margin decreasing slightly from 33.8% to 33.2%.

Revenue from our Inertial Navigation segment decreased $6.3 million year over year, with gross margin decreasing from 49% to 24%. Service revenue for the fourth quarter was $27.2 million, an increase of $4 million, or 17%, from $23.2 million in the fourth quarter of last year. By segment, service revenue in Mobile Connectivity increased by $4.4 million or 19%. This increase was primarily due to a $3.6 million increase and mini-VSAT broadband airtime revenue.

Airtime revenue grew to $23.9 million, or approximately 18% over the fourth quarter of last year, and the related gross margin was 35%. As Brent mentioned, we shut down our legacy ArcLight network. That happened at midnight on December 31st. Virtually all costs associated with that network have ceased, and while we will have additional costs on our HTS network to service the customers who have migrated, we expect to see a margin improvement in our mini-VSAT services.

We are continuing the migration and transition of legacy network customers who did not migrate by December 31st. The monthly recurring charge associated with those customers was approximately $330,000 during January and February, we resigned over 100 of these customers for just over $100,000 of recurring monthly charges. We expect to continue reassigning former legacy network customers throughout 2022 particularly in the spring as seasonal leisure customers commission their vessels for the summer. However, I should note that we are not expecting to resign from all of them.

Product revenue for the fourth quarter was $15.9 million, a decrease of $5 million or 24% from $20.9 million in the fourth quarter of the prior year. By segment, our mobile connectivity product sales increased by $0.9 million or 12% primarily due to an increase in TracPhone product sales. As Brent mentioned, a significant number of those VSAT product sales were from migrating customers. So we’re being cautious in terms of expecting that trend to continue.

Inertial Navigation product revenue decreased approximately $5.9 million or 43%. This decline was due to lower sales of our tactical navigation product line, which decreased by $7 million this quarter compared to last year’s fourth quarter, in which we had a very large order. Within the FOG and OEM product lines of Inertial Nav revenues increased by $1.2 million despite supply chain issues, which constrained sales. We estimate that in the fourth quarter, we could have sold $1 million to $2 million more without those constraints.

Service revenue within the Inertial Navigation segment decreased $0.4 million compared to the fourth quarter of last year. The gross margin for the quarter was down $3.5 million. This is primarily due to the lower TACNAV sales, which have strong gross margins. Mobile phone activity gross margin was up $1.6 million or 15%.

Operating expenses for the quarter were $18.9 million down $9.5 million from the fourth quarter of last year. However, this drop is a result of the impairment charges for our KVH Media business unit of $10.5 million in the fourth quarter of 2020. If you adjust for the impairment charge, opex was up about $1 million, primarily due to higher salary expense and lower funded R&D. At the operating income level, these changes in revenue margins and operating expenses resulted in a loss from operations of $5.3 million, which was an improvement of $6.0 million compared with the $11.3 million loss reported in the fourth quarter of 2021.

Again, last year’s loss was primarily driven by the impairment charge. Our Mobile Connectivity segment generated an operating profit of $1.0 million, compared with an operating loss of $10.6 million last year due to the impairment charge. While our Inertial Navigation segment had an operating loss of $1.4 million for the quarter, compared with an operating profit of $4.1 million last year. Our unallocated loss was $4.9 million compared to last year’s $4.8 million.

For the fourth quarter, our net loss was $4.1 million compared with a net loss of $11.6 million recorded in the same quarter last year. On a non-GAAP basis which excludes impairment charges, amortization of intangibles, stock-based compensation, obsolete inventory recovery, and other non-recurring costs such as unusual non-operating fees, foreign exchange transaction gains and losses, income from loan forgiveness, related tax effects, and changes in our valuation allowance, and other tax adjustments after those adjustments, we had a net loss of $3.1 million compared with a net gain of $1.3 million last year. EPS for the fourth quarter was a net loss of $0.22 per share, compared with a net loss of $0.65 per share in the same period last year. Non-GAAP EPS loss for the fourth quarter was $0.17 per share, compared to a non-GAAP EPS profit of $0.7 per share last year.

Our adjusted EBITDA for the quarter was a negative $0.1 million, compared with a positive $3.5 million in the fourth quarter of last year. For a complete reconciliation of our non-GAAP measures, please refer to the earnings release that was published earlier this morning. The total backlog at the end of the fourth quarter was $23.9 million, of which approximately $16.3 million are scheduled to be delivered during 2022. The backlog for our Inertial Navigation products and services at the end of December was approximately $20.3 million, of which approximately $12.7 million is scheduled to be delivered during 2022 and includes about $11.6 million for FOG products alone.

Net cash provided by operations was $1 million, compared to $0.2 million used in operations for the fourth quarter of last year. Capital expenditures for the quarter were $3.5 million. The majority of which was driven by AgilePlan shipments. Cash provided by financing activities was less than $0.1 million resulting in an ending cash balance of approximately $24.5 million.

To give some additional color on the 2022 guidance we provided in our earnings release, we anticipate solid subscriber growth in our Mobile Connectivity segment, as well as strong demand for our fiber optic gyro product line within our Inertial Navigation segment. While we continue to see good prospects for our TACNAV product line over the long term. It appears that 2022 may not have any large orders and as a result, we will not include orders for large programs in our outlook for the year. Compared to 2021, Mobile Connectivity product revenue will likely be flat or slightly down due to the high volume of migration hardware sold in 2021, as well as a continuing shift to AgilePlans.

For mobile connectivity services, our year-over-year growth rate will be suppressed by the stranded legacy network customers who don’t resign, even though we expect to add more new customers to the network in 2022 than we did in 2021. As we said in our earnings release, when taken all together, we expect consolidated annual revenue growth between 2% and 5% and adjusted EBITDA to be between $11 million and $15 million. Importantly, we are targeting positive operating income for the second half of the year. However, please keep in mind that these estimates assume that the impact on our business at the current macro supply chain problems don’t worsen in 2022.

This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this morning’s call. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] We’ll take our first question from Ric Prentiss with Raymond James.

Ric PrentissRaymond James — Analyst

Nice. Good morning, everyone.

Brent BruunNew Chief Executive Officer

Hey, Ric.

Roger KuebelChief Financial Officer

Hey, Ric.

Ric PrentissRaymond James — Analyst

Hey. A couple of questions. First, any thoughts on the midterm guidance you gave recently on kind of where two to three-year targets could be? Is that something still within the planning horizon? Obviously, you’re looking for the new CEO, but just wondering, is that still something you feel you can deliver on?

Brent BruunNew Chief Executive Officer

I think we need to go back and sort of relook. We’ve been through a lot to sort of work through this exercise that we’ve just concluded and sort of the next thing we need to turn to is relooking at the long-term plan. I wouldn’t be at all surprised if we wind up sort of reaffirming that, but I think at the moment, we’d like to go back and sort of do a look and then get come back on probably a subsequent call to sort of kind of let people know where we think we are.

Ric PrentissRaymond James — Analyst

OK. So not reaffirming today going to take a look at it might still be able to pull it off?

Brent BruunNew Chief Executive Officer

Yes.

Ric PrentissRaymond James — Analyst

OK, the second question. Is there any value in the IP that you’ve created with all the autonomous vehicle projects and stuff you did with prototypes, etc?

Brent BruunNew Chief Executive Officer

I think we believe that there is. There’s a lot of value in it, but we think that as far as when we sort of continue to sort of push it forward, it’s something that we need to revisit and look at in terms of when the demand is going to be there. I think we don’t want to get out in front of the demand in terms of what we develop and perhaps wind up with something that isn’t what the market wants when demand actually evolves. But there is definitely a lot of value in the IP we’ve developed and maybe, Bob Balog can comment a little bit on that.

Bob BalogChief Technology Officer

Yeah. Not just value. And we filed, from intellectual property patents, things like that. But also value to the regular product line the standard products as well not just the autonomous applications.

So, yeah, extremely valuable to the company.

Ric PrentissRaymond James — Analyst

And still thinking that that would get put into all the product lines and improve margins on the product side. And what kind of margins would you think putting that into the real product line can achieve?

Brent BruunNew Chief Executive Officer

Yeah, we can’t really get into that level of specifics right now, but as we have solid margins as it is and we would hope they would improve from there.

Ric PrentissRaymond James — Analyst

Yeah. OK. And the last one for me is what kind of timeframe are you expecting the CEO process search to take? Is there kind of a date timeline that you’re trying to get as you do a nationwide search?

Cathy MartineChairman of the Board of Directors

I’ll take that question. As I said, we’ve engaged the search firm. We’re looking for candidates to come into the process, but we’re hoping to do that within 60 to 90 days.

Ric PrentissRaymond James — Analyst

That helps. And what are the key skill sets, attributes, specialties that you think are the top say, two to five skills that you really want to see this new CEO bring in?

Cathy MartineChairman of the Board of Directors

Well, clearly, global leadership and experience in global markets are number one. Having experience in technology and telecommunications would be helpful as well. Working through transitions of companies and making sure that the organization can be stabilized as a result of this transition. So we are looking at global experience number one in telecom and technology skill sets as number two.

Ric PrentissRaymond James — Analyst

Great. Appreciate it. Thanks for taking my call today.

Brent BruunNew Chief Executive Officer

OK, Ric, thank you.

Operator

[Operator instructions] We’ll take our next question from Chris Quilty with Quilty Analytics.

Chris QuiltyQuilty Analytics — Analyst

Well clearly —

Brent BruunNew Chief Executive Officer

Hey, Chris.

Chris QuiltyQuilty Analytics — Analyst

Ric is in a category four CEO. So I want to follow up a little bit on the issue of the customer transition, and I don’t know whether you can tell us how many people failed to upgrade. I mean, should we expect a discreet drop off from Q4 to Q1 based upon the loss of certain subs, which may or may not come back on when winter’s done and they realize they need to turn on service again?

Brent BruunNew Chief Executive Officer

Yeah, Roger talked about the financial impact. So I mean, we’re not going to go into the specific numbers, but many of the subjects who remained were utilizing our V3 project, the 37-centimeter and their ARPU is relatively low. And especially in December, they might have been suspended because these are more seasonal types of users. And a significant portion of the remaining subs was seasonal of that nature and that’s what we anticipate and we have seen many of them coming back to the HTS network.

Chris QuiltyQuilty Analytics — Analyst

Understand, and when we — you talk about the network savings cost, which I think was $5 million to $7 million net as you go into 2022. How does that play out in terms of where you expect margins? Are we still looking at migration toward the upper 30s? Or is it possible to get up into the 40s over the longer term?

Brent BruunNew Chief Executive Officer

We’ve got over — over the longer term I never — that’s definitely possible. In the shorter term, it will be in the mid to high 30s range.

Chris QuiltyQuilty Analytics — Analyst

Understand, and you often give some statistics or highlights around AgilePlan shipments in percent of the overall mix, and I know last quarter I think you had record shipments and was just wondering whether there were any notables to call out here in Q4.

Roger KuebelChief Financial Officer

So they remain a very high percentage, sort of, over 70% of commercial shipments. So it does remain a very high part. The — we had record shipments of VSAT products in Q4, as I think Brent mentioned, some of those were migration, but we also obviously had a lot of new customers as well. So there’s no change in terms of — I would say, in terms of the trajectory and the success of that initiative.

Chris QuiltyQuilty Analytics — Analyst

And you still do expect a certain percentage of customers to purchase the hardware outright, primarily on the higher-end models, the V11 and V7.

Roger KuebelChief Financial Officer

Yes, and these are marine in particular.

Chris QuiltyQuilty Analytics — Analyst

OK. Shifting over to the Inertial Navigation, I guess it’s been what about a year since you’ve moved into PIC production? Can you just give us a recap of where you sit there in terms of the cost, the transition, and production volume?

Roger KuebelChief Financial Officer

So the transition as I think you’re aware, the old-style product we were drawing our own fiber. We just at the beginning of this year finally shut down that fiber tower. So Q4 and Q1 are still sorts of transition periods from a cost perspective in terms of that we still had the fiber tower that we’re drawing. There are still sort of cut-over issues with respect to that or cost, let’s say, not issues the cost with respect to that.

So I think, we will start really seeing the benefit of that in Q2. But at this point — but we are now sort of through that transition and we expect to start seeing that as we now have got all the — I think actually there’s one product where we still need to sort of getting the PIC in, but all the other products have it.

Chris QuiltyQuilty Analytics — Analyst

Great and, I don’t know whether you’ve made announcements internally around the headcount reduction, but should we think about that being across the board, across both business segments, or is it more heavily skewed toward one side than the other?

Roger KuebelChief Financial Officer

Well, the number of people is more heavily skewed toward Mobile Connectivity. But in terms of proportion, it’s sort of proportionately I would say, equal across the entire company. Although there are certain areas and yeah let Brent clarify that.

Brent BruunNew Chief Executive Officer

The answer is it’s proportionate. We have a lot of shared resources, in particular with engineering, finance, marketing. And when you look at the segment reporting, those costs are allocated, so all departments were impacted. So the answer is — the short answer is yes, it’s pretty proportionate.

Chris QuiltyQuilty Analytics — Analyst

Great and the TACNAV product line, obviously, it’s the nature of it tends to be lumpy, as we’ve seen over the years. Are there any plans to look at in any way migrating that portfolio to try to make it more broadly acceptable across non-major programs? In other words, cost reduction efforts, maybe using a PIC or other technology to try to mainline it instead of shooting after a number of different elephant programs that have been problematic over the years?

Brent BruunNew Chief Executive Officer

It’s not out of the question in the future, but right now our focus is on the existing TACNAV product, and separate from that our photonic integrated chip technology going into the gyros and there might be a crossover point in the future, but we’re not there right now.

Roger KuebelChief Financial Officer

Yeah, and my view on it is it’s only problematic if you’re relying on it. And we’re just going to operate going forward that we’re not relying on and if it happens it’s all upside, which is great because it’s good margin and when we get — if we get it, we’ll take it.

Chris QuiltyQuilty Analytics — Analyst

How about a different tact of, more directly partnering with a prime contractor that has the ability to drive sales into programs through political maneuvering or program management?

Roger KuebelChief Financial Officer

We’re already aligned with a number of clients as it is. So I’m not sure there’s further alignment to be had in the short term.

Chris QuiltyQuilty Analytics — Analyst

OK. The KVH Watch Program, if you can explain, I was under the impression that if someone already had a V3, V7 antenna that they could enable to service and I think what I heard you say is the way the program was run, you would have to buy a separate dedicated antenna?

Brent BruunNew Chief Executive Officer

That was the original premise. And now we’re changing the offering to be included in our existing products. So what you — were originally — what you originally thought is what we’re doing now.

Chris QuiltyQuilty Analytics — Analyst

And is there any — is that just simply software, firmware upgrades that need to be done to enable that? Or are there any hardware changes they would need to happen to the existing install base to enable it?

Bob BalogChief Technology Officer

Yeah, really, the two pieces, the flow, which is really the data transport of the IoT can run right now over the existing terminals with the existing software. With the remote intervention, the remote expert will be able to call in and use the high-speed channel will function perfectly fine on our existing terminals. The piece that’s going to get migrated software-wise will be the Cloud Connect, which at the current time was running on the dedicated terminal with some additional server hardware. That server hardware will be incorporated into the new products as a VM so that it runs within the product structure itself without the additional hardware cost.

Chris QuiltyQuilty Analytics — Analyst

Understand it, I think, was the original concept built around using a dedicated antenna, and it’s a dedicated operational land on the ship, so it was separate from sort of ship’s traffic. And that companies would want to have that protected network and turned out that that was not a major requirement?

Brent BruunNew Chief Executive Officer

That’s based on the feedback that we’ve got from the market.

Bob BalogChief Technology Officer

Yeah, and I think we’ve got so much security designed into these products now that I don’t feel comfortable, we can come up with a solution that’ll satisfy any security concerns. We’re doing that.

Chris QuiltyQuilty Analytics — Analyst

Great. And final question, just given some of the headcount reductions. How should we think about capex, sorry, opex spending going into 2022?

Roger KuebelChief Financial Officer

Opex?

Chris QuiltyQuilty Analytics — Analyst

Yeah, overall opex, I mean, I’m assuming R&D spending continues on its current trajectory, but overall reductions, are they primarily going to benefit on the cost of the product, cost the service side, or are they more focused on the opex side?

Roger KuebelChief Financial Officer

It is not in opex and it’s in all categories, SG&A as well as R&D.

Chris QuiltyQuilty Analytics — Analyst

Gotcha. OK. Great. Thanks, guys.

Brent BruunNew Chief Executive Officer

OK. Thanks, Chris.

Operator

We will take our next question from Ryan Koontz with Needham.

Ryan KoontzNeedham and Company — Analyst

Hi. Good morning. Thanks for the question. Sounds like your ARPU is up reasonably well on AgilePlans.

Could you comment at all on the types of contracts you’re able to set up there, you haven’t had any changes there in terms of duration? And also comment on some of these customers that didn’t migrate over, I assume they were — a lot of them were not active contracts?

Brent BruunNew Chief Executive Officer

Yeah, well, first of all, the concept of contracts for AgilePlans is something that we don’t have. It’s actually, it’s a month-to-month service and that was part of what we anticipated. It could have been a risk, to begin with, that we can let someone out. The fact of the matter is it’s made the product more acceptable in the market.

And then if you sell your vessel or it’s laid off, you can deinstall the equipment and ship it back to us, and cancel your subscription at any time. So we’re continuing on that path as it relates to Agile and there’s nothing really that’s changed other than we are focused on increasing ARPU and we have had an increase in our ARPU, in particular on the HTS network, in comparison to our legacy ArcLight network.

Ryan KoontzNeedham and Company — Analyst

Got it. Thank you.

Brent BruunNew Chief Executive Officer

And your second question was?

Ryan KoontzNeedham and Company — Analyst

The second question was about —

Brent BruunNew Chief Executive Officer

Just trying to — go-ahead.

Ryan KoontzNeedham and Company — Analyst

No, go ahead.

Brent BruunNew Chief Executive Officer

As far as the strategy, we’re not going through the exact numbers. As I told Chris and Roger talked about in his numbers, it’s not an overly material number, right. We had approximately stranded subs, which represented $300,000 of the revenue. And we’ve already gotten back about half of that.

Roger KuebelChief Financial Officer

Well $100,000.

Brent BruunNew Chief Executive Officer

A third of that. And we anticipated getting more back. Many of them were leisure customers, many of them were used our V3 are 37-centimeter terminal. The V3 typically has lower ARPU and in the case of many of them, they were suspended where they weren’t paying us anything.

And they just were a customer at the end of the year, but with a suspended service. So it shouldn’t really — it’s not really your focus, we did a great job, if I do say so myself over the last three years, migrating the customer base, we had an ArcLight and preserve their revenue line as it relates to airtime and the stragglers that were left at the end. We’re continuing to focus on them, and still try to get as many over as we can.

Ryan KoontzNeedham and Company — Analyst

Got it. And just a quick follow-up on supply chain, if you don’t mind, just can you kind of characterize what sorts of issues we’re running into there in terms of the most semiconductors? Or is it just cut across the board, freight shipping still impacting things? Thanks.

Brent BruunNew Chief Executive Officer

It’s a bit of everything but yes. I mean, conductors are the biggest issue. Right, Bob?

Bob BalogChief Technology Officer

Yeah. When we were taking active involvement from the engineering side with procurement and evaluating substitute components in some cases were undergoing minor redesigns to incorporate chips that are available. We’re trying to stay as flexible as we can right now.

Ryan KoontzNeedham and Company — Analyst

All right. OK.

Bob BalogChief Technology Officer

[Inaudible] some of the hardware and in part procurement as well.

Ryan KoontzNeedham and Company — Analyst

Got it. Thanks so much.

Roger KuebelChief Financial Officer

OK.

Brent BruunNew Chief Executive Officer

Thank you, Ryan.

Operator

It appears there are no further questions at this time. Mr. Kuebel, I’ll turn the call back to you.

Roger KuebelChief Financial Officer

Well, thank you, operator. I think I appreciate everyone joining the call this morning. Obviously, our press releases are out there. As I mentioned, the 10-K we expect to file tomorrow.

There’s obviously a lot of detail in that and we look forward to moving ahead and creating a lot of shareholder value here. Operator, I think you can discontinue the call.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Roger KuebelChief Financial Officer

Cathy MartineChairman of the Board of Directors

Brent BruunNew Chief Executive Officer

Ric PrentissRaymond James — Analyst

Bob BalogChief Technology Officer

Chris QuiltyQuilty Analytics — Analyst

Ryan KoontzNeedham and Company — Analyst

More KVHI analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


https://www.fool.com/earnings/call-transcripts/2022/03/07/kvh-industries-kvhi-q4-2021-earnings-call-transcri/

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