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To: Roy F who wrote (1005)1/9/2002 11:42:39 AM
From: Roadkill
   of 6947
 
Hi, Roy. With this well-timed press release regarding FY 2002 revenue growth, KVH actually adjusted expectations for FY 2002 downward a tad. The only analyst covering the stock was estimating $48 MM in revenue for FY 2002. By my calculation, the new expectations put FY revenue at about $45 MM. There was a time about 6-9 months ago that the notion of 50% revenue growth was bandied about which, on top of the $40 MM expected at the time for FY 2001, would put FY 2002 at $60 MM.

In any event, this PR does serve to reinforce that FY 2002 looks fine, and also show that profitability will return soon, perhaps much sooner and stronger than many thought. The estimate for FY 2002 is about .13 a share. Assuming we lose .10 a share in the first two Qs, to make this estimate, we would have to post .23 a share the last 2 Qs of FY 2002. That's basically a .50/share annual run-rate. No complaints there. If KVH can bring its photonic and flat antenna products to the market successfully, it will be rewarded with a high multiple off this .50 run-rate.

IMHO, the military orders are nice, and give the coffers a boost, but are frankly too lumpy to by themselves ever permit this stock to maintain a high multiple. If military orders back off in FY 2003, KVH's other orders must pick up substantially simply to maintain static revenue. We are all well aware of the potential for many of the products coming out, but that creates risk. FOG orders have been growing tremendously well for the past few years, but the stock price really hasn't moved. Could we see the same thing if flat antenna or photonic products (I won't even mention the current sensor!) grow at high rates off a small base, but are basically offset by a multi-million dollar decline in high-margin military orders? There might be a painful transition at some point.

Since I'm on a bearish rant, I want to raise another point. I'm not entirely convinced that KVH will benefit to the extent many of us hope from the government's new focus on defense spending. The government will not be buying a lot of tanks or personnel carriers that require FOGs. Of course, there are probably other defense uses for KVH's fiber optic technology that MKVH cannot (and should not!) discuss with us for national security reasons until the appropriate time. If that is the case, we could see long-term, sustained military order growth, and all of the above should be ignored.

Perhaps this entire post should be ignored. Anyway, as you know, I'm not a bear, and have owned KVHI for longer than I care to admit. I just like to examine the potential risks with you folks so we can maintain some perspective. Do you or Bob or Sector or anybody else have any thoughts about these points?

All the best.

RK

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To: Roadkill who wrote (1017)1/9/2002 11:59:14 AM
From: Sector Investor
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<<IMHO, the military orders are nice, and give the coffers a boost, but are frankly too lumpy to by themselves ever permit this stock to maintain a high multiple. If military orders back off in FY 2003, KVH's other orders must pick up substantially simply to maintain static revenue.>>

<<Since I'm on a bearish rant, I want to raise another point. I'm not entirely convinced that KVH will benefit to the extent many of us hope from the government's new focus on defense spending. The government will not be buying a lot of tanks or personnel carriers that require FOGs.>>

I disagree. Martin says the increased Military sales are not just a spike. They have barely scratched the TACNAV market - plus they have a whole new range of military need they can now fill with FOGs, and orders are being accelerated. Also, don't forget Rhode Island has both a Senator and a Representative on their respective appropriations committees. That will help.

I posted on Yahoo! about Military

messages.yahoo.com

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To: Roadkill who wrote (1017)1/9/2002 12:13:20 PM
From: Roy F
   of 6947
 
Hi RK,

Nice to hear from another old timer. gg

I don't think your concerns are out of line. I would point out that the revenue projections are likely to be easily attainable (conservative) in the eyes of KVH, so the previous estimate may not be that far off.

Although I'm not thrilled with some of the delays on product announcements, the promise of KVH is still looking pretty darned good. It's always a game of patience and awareness. Since I'm not aware of anything bad... other than maybe a delay here or there, I'm hangin' with the people at KVH.. and I'll consider my current state of mind a patient one.... regardless of reality.

Regards,

Roy

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To: Roy F who wrote (1019)1/9/2002 12:26:42 PM
From: Sector Investor
   of 6947
 
<<Since I'm not aware of anything bad... other than maybe a delay here or there>>

Hi Roy,

Yes, the delay on the Current Sensor is frustrating, but KVH is not in control. Their partner is one of the "top 3" in the electrical equipment industry, and the current sensor must be just a tiny part of things for them, and it represents a new generation of technology - meaning the old generation's inventory and factories must be disposed of first.

To us it's important - but hardly critical, as it represents NEW revenue. That 30% - 40% growth for 2002 doesn't include it.

I'm also pretty sure that it doesn't include revenue from the modulator or the low profile antenna, because they don't have sales agreements yet - even though Martin says both products should contribute in 2002 (antenna by mid-2002 and modulator near the end of 2002).

So I think there is lots of upside buffer in Martin's estimates.

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To: Roadkill who wrote (1017)1/9/2002 12:55:57 PM
From: akmike
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Hi RK,

I don't have the Needham report on this computer but my memory is that the analyst projected 46.3 mil. for 2002. His report was done in Q2 of last year. Martin yesterday projected a range of 42.9 to 46.2. I doubt that his projection included any revenues from the two new product initiatives or even the current sensor knowing how much slippage can occur when you are trying to push product to early adopters. I am sure that he was highly confident of his projection that the military business would double next year as he already has that amount in shippable backlog. That would account for a little over half of the projected increase. It would not take anything more than for communications to return to trend and FOG to maintain trend to achieve the projected increase. I think he is very confident about each of these. On communications, he elaborated on the very favorable (for KVH) take rate on onboard TV's in the SUV and minivan markets. We know from the prior conference call that FOG production capacity was planned to be increased by 50%. There isn't a lot of certainty in the world right now and anything can happen, but I believe that it would be valid to label the projection conservative.
As to Needham, they made a decent first effort at modeling KVH but were woefully high on the expense side which has allowed KVH to significantly beat their bottom line numbers even though the toplines were not in line.

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To: akmike who wrote (1021)1/9/2002 1:30:57 PM
From: Sector Investor
   of 6947
 
<<I don't have the Needham report on this computer but my memory is that the analyst projected 46.3 mil. for 2002.>>

Needham's report from last June projected revenue of $48.5 million for 2002. But that was 36% growth on a base of $35.8 million for 2001 (20% growth), which KVH didn't reach in a difficult 2001.

They projected a loss of $0.14 for Q4 2001, and Martin has told us it will be much less with revenue of just $9.0 million. Martin's projections for 2002 mean they have to have all double digit million revenue quarters (or at least the last 3). They projected 2002 quarters as (0.04), 0.02, 0.05, and 0.10 respectively.

But they projected SG&A at $14 million for 2002 (vs $11.8 for 2001 and $8.5 for 2000), and I think that is high. The doubling of military and the high growth of FOGs should improve their GMs above Needham's estimates too. I think they will beat Needham's earning projects even if revenue comes in lower.

And like I say there is a substantial upside potential buffer to those numbers.

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To: Sector Investor who wrote (1020)1/9/2002 1:31:11 PM
From: Roy F
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<<To us it's important - but hardly critical, as it represents NEW revenue. That 30% - 40% growth for 2002 doesn't include it.>>

Hi Sector,

Interesting that the revenue projection would not include the new initiatives. Conservative to say the least.

Regards,

Roy

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To: Roy F who wrote (1023)1/9/2002 1:41:58 PM
From: Sector Investor
   of 6947
 
<<Interesting that the revenue projection would not include the new initiatives. Conservative to say the least.>>

Roy, how could it?

They have no commitments yet for the flat antenna or the modulator. Heck, the antenna isn't really even announced yet. How can they project sales before they have customers and orders? And, although they have product introduction schedules, there is no way of figuring the ramp ups.

No, those can't be in their estimates. That growth is all core businesses. Needham didn't figure any modulator revenue in either for 2002, but it looks like they included the Current Sensor as 1H 2002, and they mention the low profile antenna but don't say how they projected the revenue.

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To: Sector Investor who wrote (1024)1/9/2002 2:08:55 PM
From: Sector Investor
   of 6947
 
Roy,

On Slide #32, KVH breaks down the Q4 2001 revenue. They say "$9 million" and show a pie chart with percentages.

Based on that, here is what Q4 looks like

Revenue $9.0 million
Communications 52% = $4.68 million
Sensors 15% = $1.35 million
Military 33% = $2.97 million

Using that $2.97 million in my spreadsheet, I get $11.24 million in Military and Navigation for 2001.

If that doubles in 2002, figure $22.5 million in revenue.

Subracting that out from the $43-$46 million projections, we get $20.5 - $23.5 for communications and Sensors.

That is FLAT or NEGATIVE growth in the other two segments, which totaled $21.5 million in 2001. Now, from what I can see, that isn't going to happen, with RV sales rebounding, new products, TRACNET fee revenue, STAGPARKWAY adding many new dealers and FOG sales ramping off a >50% capacity increase, against a back drop of a recovering economy.

Although Martin mentions military "could" double, I don't think their projected numbers reflect a double. That's why I think these 2002 numbers are very conservative, not reflecting Current Sensor, flat antenna or modulator sales, and can be revised upward as we move though 2002.

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To: Sector Investor who wrote (1025)1/9/2002 2:43:41 PM
From: Roy F
   of 6947
 
Point taken. Thanks, Sector. eom

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