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To: Roy F who wrote (1160)5/17/2002 11:32:40 AM
From: Sector Investor
   of 6935
 
Hi Roy,

This patent P/R today sparked some research that I posted on Yahoo!

The Patent:

messages.yahoo.com

Extraction and emphasis of the key section of the P/R

messages.yahoo.com

Primer on DSP technology. Their new DSP capability provides the ability to process the signals coming out of the optical circuit of the gyro in a way that is dramatically more accurate than their current processing techniques. It is this signal accuracy improvement that allows them to compete in the smart munitions, drones and UAV military markets, which, as Martin said at Needham is a new $2.7 Billion market opportunity for them.

messages.yahoo.com

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To: Sector Investor who wrote (1161)5/17/2002 12:20:28 PM
From: Sector Investor
   of 6935
 
Today's P/R included this line:

<<FOGs provide extremely precise rotational rate information by measuring the phase difference between two paths of light traveling in opposite directions through an optical fiber.>>

I think it is important for a KVHI investor to understand more about this, as it is the CRUX of their technology, and also the key to understanding their future prospects.

Today's precision gyros are mechanical in nature. They cost more, can be subject to vibration, and have life spans that are measured in hours. KVH gyros are optical in nature, and have no moving parts and much longer life spans. They are not only cheaper to make, but last longer and are not significantly affected by vibration and acceleration. Understanding this difference provides an investor with the basic knowledge needed to understand the truly significant post 9/11 opportunity in front of them. This paper by KVH scientists explains the technology of a Fiber Optic Gyro (FOG).

robotics.org

KVH uses "open-loop" processing techniques, which minimize gyro complexity and cost. The other approach, "Closed-loop" gyro processing is much more complex and expensive.

As I understand it, in the past the digital signal processing components that would be needed for the
open-loop approach had previously consumed too much power, and did not have the required processing capacity. However the DSP requirements in the wireless communications and consumer electronics markets have recently changed this, so that KVH can now apply the technology to their FOGs. The cost of DSP components is continuing to drop too, allowing the possibility of further reductions in cost

The result is a dramatic improvement in performance and accuracy of their existing FOGs, elevating their technology so that suddenly it competes with the older more expensive precision gyros for some large key military needs. The new DSP FOGs appear to have both cost AND precision/performance advantages over the older gyros.

This happens to come just as our military is starting to ramp up, is actively seeking new high tech weapons, and in particular, is looking for a way to speed up production of smart munitions. It is only when we delve into this that we begin to truly understand the opportunity here.

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To: Sector Investor who wrote (1162)5/17/2002 6:08:56 PM
From: akmike
   of 6935
 
Hello Sector,

I would like to check my numbers and confirm the tremendous upside leverage that is in this military potential. Somewhere I have an estimated price of 2500-3000 per fiber optic gyroscope. There are 3 of these required in an Inertial Measurement Unit and such IMU is required for each smart bomb or munition.
The Dept. of Defense has published an appetite for over 2500 such units per month for the next several years for just the JDAM which is supplied by Boeing. According to the published reports, Honeywell supplies mechanical gyros currently for this weapon. The IMU from Honeywell costs around 10,000 per unit. Therefore, the JDAM alone is a 300 mil. annual market. (or an order of magnitude of KVH's 2001 total annual revenues)
Do you agree with my math here? If this is anything close to ballpark we can see just how huge the overall market is. While this is getting some attention now due to the Crusader funding issue in Congress, I believe that military "smart weapons" initiatives will proceed independent of the Crusader flap.

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To: akmike who wrote (1163)5/17/2002 6:34:16 PM
From: geoffrey Wren
   of 6935
 
Isn't this the type of math that leads to a takeover bid? There must be some big companies thinking hard about adding KVHI's product to their list of products. What concerns me is that sometimes these big companies just copy the product and then say: "So, sue me." The little company is in a bad position then. It seems to me that one scenario or another is rather likely.

GTW

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To: geoffrey Wren who wrote (1164)5/17/2002 6:57:40 PM
From: akmike
   of 6935
 
Hello Geoffrey,

I would not presume to comment on something like a take-over bid but relative to:

**What concerns me is that sometimes these big companies just copy the product and then say: "So, sue me." The little company is in a bad position then. It seems to me that one scenario or another is rather likely.**

What you say may go on frequently in consumer products, but to my knowledge, it is virtually unheard of in military procurement circles. (for obvious reasons)

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To: geoffrey Wren who wrote (1164)5/17/2002 7:23:50 PM
From: Sector Investor
   of 6935
 
Geoffrey,

Even if they wanted to and thought they could get away with it, how do you copy a product that requires KVH's proprietary "D" optical fiber that only KVH makes, and only inhous, and doesn't sell to anyone? That fiber and it's entire process is covered by many patents and represents well over a decade of research. The FOGs require proprietary Polarity Maintaining (PM) fiber. If you somehow avoided all the patents, bought some lower quality PM fiber somewhere and built a product, it would take a long time to do, cost more and have inferior technical specs.

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To: Sector Investor who wrote (1166)5/17/2002 8:03:37 PM
From: geoffrey Wren
   of 6935
 
Well, as to copying, I have experience in one of the companies I own stock in. POWI. They make chips that convert ac power to dc power, significantly reducing the size of the "bricks" that plug into the wall for your cell phone charger, etc.

They have a lot of patents. They have a unique product. They sold their product to Motorola. Motorola then decided to make their own product. POWI had to sue them, and did, and won, but it was a great distraction of resources and time for POWI. Then, they gave up the damages awarded to get MOT to agree not to do it again.

It may be different in the military procurement department as was suggested, but I worry about the big gorillas of the world. Let's not forget how long the cigarette companies held off responsibility by overwhelming their opponents with legal costs.

Well, that's all. Hope my concerns are unfounded as you suggest.

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To: geoffrey Wren who wrote (1167)5/17/2002 9:05:51 PM
From: akmike
   of 6935
 
Geoffrey

It is good to see you back here. This little company looks to be entering a period of hyper-growth. The military business is projected to be up 100% this year from last year's depressed level and that is not counting this DSP 500 opportunity that appears to have cropped up very recently.
The two major new product initiatives are showing progress and could be solid contributors in the future.

Best regards,

Mike

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To: akmike who wrote (1168)5/18/2002 12:01:30 AM
From: Sector Investor
   of 6935
 
<<The military business is projected to be up 100% this year from last year's depressed level>>

And Q1 already is in with an actual 102% increase in military sales over last year's Q1.

The last CC was really an excellent one, and I made a full transcript for future reference, which is in two earlier posts on this thread. I've provided links before, so I might as well do it again. The audio for this CC and the previous 4 CCs are stored on their website.

Message 17396999

Message 17397004

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To: akmike who wrote (1163)5/18/2002 12:44:12 AM
From: Sector Investor
   of 6935
 
<<Do you agree with my math here?>>

Well, the market opportunity you outlined is for the IMU portion of the JDAM guidance system. The IMU is just one component in the system, but the most expensive one.

The CC transcript that I just posted confirms your $3,000 retail number, but that is for a single axis DSP FOG, and I think for small quantities. As you said, an IMU needs three FOGs (also 3 accelerometers), but only one set of electronics, case and connectors, so it is reasonable to expect that their costs would be lower than a straight 3X multiple. Also, at these volumes, there should be economies of scale.

As far as the current competitor gyro being $10,000, I did find a link from 2001 that seemed to indicate that price, but I don't know what the current price might be.

But your basic premise is correct. This is a new product which is not yet announced, so it obviously is not contributing to current revenue. However, while the future opportunity may be large, the near term opportunity seems to be for a second source vendor, not the whole enchilada. Even so, the immediate opportunity is probably in the hundreds of units per month. The military expended over 1/3 of their inventory in Afghanistan, and there appears to be some urgency to increase production to restore the inventory, hence the opportunity to second source.

Still, at those numbers, even 100 units per QUARTER would about match their current revenue from all other sources, so this is indeed a great opportunity. And of course Needham's current projections do not include ANY IMU revenue in either 2002 or 2003, so they would have to revise their projections after any kind of significant win in this area.

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