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To: Sector Investor who wrote (1332)7/22/2002 8:47:28 AM
From: Roy F
   of 6947
 
"...Product Development Agreement with the ABB High Voltage Business Area to cooperate in the development of a new fiber optic current sensor. The agreement follows a series of joint research projects during which the companies explored the feasibility of using fiber optics to measure current in high-voltage power lines." <smip>

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To: Roy F who wrote (1331)7/22/2002 1:19:51 PM
From: robert b furman
   of 6947
 
Hi Roy,

This is great.

I CAN'T BELIEVE IT

Been waiting so long I just didn't think it would happen.

Wonder when sales start being generated.

Lets get that growing market share of a 500 million annual market.


YYYEEEEEEHHHAAAWWWWW !!!!!


Bob

P.S. I love the environmental twist - very professional to include in that market/sector.

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To: robert b furman who wrote (1334)7/22/2002 2:51:33 PM
From: Sector Investor
   of 6947
 
Robert,

A LOT of discussion is going on over on Yahoo! today. I hope people here remember to check the Yahoo! thread, as it is the main discussion thread for KVHI.

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To: Sector Investor who wrote (1335)7/23/2002 10:20:12 AM
From: Sector Investor
   of 6947
 
Here is part one of the full Q2 2002 Conference Call transcript. I proofed it for accuracy and it seems to be correct, although some words were unclear and some callers names and firms are best guesses. This is my own effort and is posted on a best effort basis, but it is no substitute for listening to the actual CC.

KVH Industries

Q2 2002 Earnings Conference Call

Dick Forsyth, VP of Finance

Standard forward-looking statements disclaimer.

Martin Kits van Heyningen, CEO

We have a lot to talk about today, including some new product announcements as well as some positive financial news. As you can see from our earnings announcement this morning we have enjoyed tremendous growth so far this year and we have a number of exciting new initiatives running in parallel.

In order to keep our operations running smoothly, and to prepare ourselves for even more growth in the future, we have made several management changes in addition to those over the last year, including two in the second quarter, bringing on a VP of Engineering, Dr. Kalyan Ganesan in May, and as you have seen in today's release, Pat Spratt has joined KVH as our new Chief Financial Officer Pat has an outstanding track record in the technology industry, and his leadership in Finance, Investor Relations and Business Planning will enhance the expertise of our entire team.

I'm very happy that Dick Forsyth will continue to be a member of KVH's executive management in the position of VP of Finance, where he can continue to focus on the successful management of the company's resources, and we've now got a very strong team together.

We're delighted to have Pat with us today. Pat, welcome aboard

01:09 B.O.

Pat Spratt:

Thank you very much Martin. Today I will keep my comments especially brief. Being new to KVH, I am now at the initial stage of a steep learning curve. And given that, my ability to add value to your understanding of the financial results is somewhat limited. So, for this conference call, I have asked Dick Forsyth to handle the review of our financials, as he has capably done for so many years. In the short time that I have known Dick, I have already grown to appreciate his valuable contributions to KVH, and I am very pleased that we will be working together.

I do have a couple of additional comments that I would like to make. First, I was attracted to KVH because it has a wealth of outstanding potential, and a wealth of strength as well. But the most impressive factor for me is the passion - for customer satisfaction, for using leadership in technology to develop the best product, and the passion for always striving to improve, in every dimension of the business. KVH provides an environment in which everyone is challenged to contribute and to grow. Having this kind of passion is fundamental to long-term success - in product and service offerings, as well as in financial performance.

And that leads to my second comment. My immediate priorities are squarely focused on our financial performance. We WILL adjust our cost structure to yield profits in the near term, and sustain profitable growth in the longer term. We will also improve asset utilization to strengthen cash flow, and provide for additional tactical and strategic investment flexibility. And I intend to provide the finance management, leadership and support, that will drive the company to achieve best in class performance over the longer term. I am very excited to have this opportunity to contribute to the growth of KVH, and I am equally committed to rewarding your confidence in us, as represented by your investment in the company. Thank you. At this point I will turn it back to Martin, and to Dick. Martin?

03:24 B.O.

Martin Kits van Heyningen, CEO

Thanks Pat. Now, let's get started.

KVH had another excellent quarter with record revenues of $12.6 million, which is a 61% increase over the second quarter of 2001, and a 31% increase from the first quarter of this year. We reduced our operating loss by 66% from last year's second quarter, and we are on track to return to profitability during the second half of this year. Our revenue growth was driven by a 51% increase in our satellite communications sales, a 7% increase in our Fiber Optic sales, and an almost 5-fold increase in our military sales over the same period last year. During the quarter we increased gross margins by 600 basis points over the second quarter of 2001, and we also continued to invest in research and development for our new products. R&D expenditures in the quarter rose slightly in actual dollars, but decreased as a percentage of sales to 19% from 24% in the first quarter of this year.

Now looking ahead to the third quarter and the year as a whole, KVH is well positioned to achieve its goals of solid revenue growth and a return to profitability.

I'd like to go through an overview of each of our markets, beginning with our Satellite Communications Group.

Sales of our satellite systems in N. America were up 74% from the same period last year and our overall satellite communication sales totaled $7.9 million, which is a 51% increase over the last year's quarter. The ongoing recovery of the domestic land mobile market place has been the primary driver in the continued growth of our satellite communications revenue, more than offsetting a small decline in our European Marine sales for the satellite segment.

Now our land mobile sales achieved a significant milestone this quarter, when three major OEM RV and coach manufacturers, Fleetwood, Featherlite and Rexhall, all selected our TracVision satellite TV systems, as either standard or optional equipment on their 2003 model year vehicles. Now to earn this business, we specifically designed and launched two new TracVision antennas, specifically designed for OEM integration and easy factory installations. The rapid development and production of these two new designs allowed up to ship the first units in June. Together, these OEM customers represent the potential sales of several thousand additional units over the next 12 months. The growing demand for KVH's satellite communication systems as standard or optional equipment solidifies our position as the number one manufacturer of satellite solutions for the land mobile industry. Now we anticipate sales of RVs in general to continue to be strong, and we expect to continue to gain momentum with our products targeting this market and expect additional major customer wins in the near future.

Now, unlike the land mobile market, we believe that the overall Marine market will remain relatively flat for new boat sales for the time being, which is depending on the pace of the general economic recovery. However, the sales from our new products and services are helping to compensate for the moderate sales of existing products in the Marine marketplace.

Our new Marine TracNet Internet system rollout was extremely successful, and the product is selling very well. In addition, we also saw positive results in the distribution of our Inmarsat satellite communication equipment, our new TracPhone F77 from Thane & Thrane, so TracNet and our expanded family of Inmarsat products represent more than just hardware sales. To support each of these product lines, KVH is now actively selling and supporting airtime services for mobile DirecPC and Inmarsat, creating a new, recurring revenue stream for the company. As an Inmarsat service provider, we now offer airtime service subscriptions to all of our new and existing TracPhone customers, as well as non-KVH Inmarsat users.

We invested significant resources in Q2, to get this up and running, which is now complete, and now our satellite services group is already beginning to realize new subscription driven revenues.

We also continue to make good progress in the development of our new low profile satellite TV and Internet antenna for the automotive market. During the second quarter we increased our R&D spending to increase the probability that we meet our development schedule as well as our performance and manufacturing cost target, we are pushing hard in this breakthrough technology and we remain on track to introduce the product this year.

While our Fiber optic group made significant technical progress during the second quarter, we are working hard to establish this business in the market place as a consistent revenue generator. With approximately $900,000 in sales for the quarter, they were up 7% over the same period last year, but this is less growth than we were expecting. Now despite the slower than expected shipments in the fiber optic area during Q2, we booked several major gyro orders for military antenna stabilization and missile training simulators which should be delivered starting in Q3.

Now during last quarter's conference call, I mentioned that we were focusing on guided munitions as a key new opportunity for our fiber optic gyros. I am pleased to report that we are now working with L-3 Communications on a funded project to develop a low cost IMU unit using our new DSP based fiber optic gyros. This is for use in smart bomb guidance systems. These smart munitions guidance and drone navigation are two applications that are receiving lots of attention and funding from the military, and we are optimistic that our new FOG based guidance package will allow KVH to participate in this large, critical and growing defense area.

In the photonics arena, our program to develop Active Fiber technology and a new class of high-speed in-fiber optical components remains on track. However, due to a slowdown within the Telecommunications industry, we reduced our R&D expenditures on Active Fiber by about 10% from the first to second quarter this year, and directed additional resources to our Mobile Broadband effort. Now despite this short-term uncertainty within the industry, we have a high degree of confidence in our Active Fiber approach, and in the eventual need for this technology in the market place. We are proceeding with the development efforts, while pacing the rate of investment in the technology to match the rate of recovery in the Optical Telecom networking industry, and the arrival of the 40-gigabit networks.

Now going into this year, we set a goal to double our defense related revenues for the year. During the second quarter, our Defense related sales rose almost 500% to $2.7 million, up from only $461,000 during the same period in 2001. Year to date our defense related sales total $4.9 million, which is more than a 200% increase from last year. We continue to book new and follow-on military business, and we are pursuing a number of significant opportunities.

As I have indicated in previous calls, we are expecting to win a number of large orders from the US military for our TacNav vehicle navigation products, and our confidence remains VERY high that we will book these orders in the second half of this year, so that our growth in defense will continue.

I'm very proud to report that our TacNav systems are playing a major role in our military's counter terrorism efforts abroad, aboard vehicles currently operating in Afghanistan and elsewhere. We have recently learned that our TavNav systems aboard Canadian light armored vehicles participating \in Operation Anaconda performed flawlessly during direct combat with enemy forces. Now, position guided munitions, uh, smart bombs, generally require the type of precise far target location capabilities, which is a key capability of TacNav, so not only are we developing a guidance package for the munitions itself, we are providing the Nav system for the vehicles that provide the target locations.

Our TacNav FOG system, which incorporates our Fiber Optic gyros, was also used in the Afghanistan theater. As you may recall, KVH was awarded a $4 million contract with the US military last November for TacNav FOG navigation systems. Now these systems were installed aboard the recently unveiled ground Prophet vehicle, which is an advanced signal intelligence and autonic warfare system.

Our product provides the precision bearing and position data, which allows the system to intercept and track enemy communication signals. And based on the system's performance to date and it's value to the military, we expect this program to be accelerated, which could result in substantial follow-on orders for our TacNav FOG nav systems in the near future.

So as you can see, KVH is well positioned to improve upon first half sales growth of our TacNav military systems and our fiber optic gyro products into the military. In the first half of 2002, the sales increases for the business developed, and in most cases booked, were prior to the tragic events of 9-11. So, our continuing field successes, the growing recognition of the value of TacNav, and the release of additional funding for defense, should all benefit KVH, starting in the second half of this year.

Looking ahead, KVH is in a very strong position as we enter the third quarter. We are on pace for record yearly revenues, and we are seeing growth across the board. New products and services are expanding our customer and revenue base, and we continue to pursue significant opportunities in all of our target markets. Even so, we are working hard to improved our financial performance, and our near term objectives are to return to profitability in the second half, and to post 30%-40% revenue growth over last year.

Now I would like to turn the call over to Dick to take you through the numbers. Dick?

Dick Forsyth, VP Finance.

Thanks, Martin. Let's begin with the top line.

Second quarter sales increased 61% from last year, to $12.6 million as a result of strong communication and defense sales.

Q2 Communication sales increased to $7.9 million, a 51% increase from last year's sales of $5.2 million. Year to date communications shipments rose to $13.8 million, a 41% increase over the prior year. Communication sales growth resulted from wider distribution through national distributors, and increasing orders from RV manufacturers.

Q2 defense revenues grew to $2.7 million, a 5-fold increase from the prior year. While year to date defense shipments were $4.9 million, more than double last year's volume. Foreign defense sales accounted for the strong first half performance, while domestic defense orders have been slow to close, reflecting delays in the defense administrative funding process, which makes it difficult to forecast the timing of orders. Continued slowness in the defense funding process could delay an order that is currently shipped to forecast in the 3rd quarter, potentially having an adverse affect on expected third quarter performance. However we do anticipate that we will ship the order no later than the fourth quarter.

Defense backlog rose to roughly $4.3 million at the end of the second quarter, with $1.7 million scheduled to ship in the current quarter.

Fiber Optic sales increased to $900,000, up 7% for the quarter, but down on a year to date basis. FOG sales will increase this quarter, as we begin to ship from existing backlogs.

Looking ahead, we anticipate continued strong revenue growth throughout the remainder of the year, as we benefit from positive trends in all sales categories.

Q2 Gross profit as a percentage of net sales increased to 42%, up from last year's 36% of sales, while year to date gross profit was 43% of sales, up from 37% in 2001. The year to date gross profit improvement resulted from a favorable mix of higher margin defense shipments, reductions in direct product costs, and a 4-point reduction in our manufacturing overhead rate. Improved methods, increased manufacturing volumes, and stronger cost management all contributed to reduce year to date manufacturing overhead to 13% of sales. Looking ahead, we anticipate Gross Profit will continue to improve sequentially over the new two quarters, as we make more efficient use of our manufacturing facilities, and continue to reduce product costs.

Q2 R&D expense increased to $2.4 million, an 8% increase from last year's spending of $2.3 million. R&D spending included significant PhotonicFiber and low profile [antenna] research costs, which are forecast to slow in the second half as we complete the product development stage, and begin the transition to sustaining engineering. R&D expense is forecast to decrease for the remainder of the year, as project spending begins to decline, and increased customer funded engineering begins to offset internal spending.

Q2 S&M expense increased by $800,00 to $2.8 million, up 40% from last year, while year to date spending rose to $5.1 million, a 21% increase from the prior year. The majority of the spending increase resulted from variable sales commissions, which increased $600,000 in response to 61% quarterly sales growth. Outside sales commissions were unusually high in the quarter, due to a non-recurring $350,000 commission related to a large defense shipment. We expect marketing and sales expense will decrease as a percentage of sales over the next two quarters, as commission expense normalizes.

Q2 G&A expense increased $170,000 to $800,000, a 27% increase from last year's spending, while year to date spending rose by $250,000 to $1.5 million, a 20% increase over the prior year. Spending growth was due to non-recurring recruiting fees and professional services. Administrative expenses should remain relatively flat for the remainder of the year

Consistent with our accounting treatment for the prior year, we fully reserved the tax benefit associated with the quarterly and year to date operating losses. Reserving the income tax benefit increased the quarterly net loss by roughly $300,000 and the net loss per share by 3 cents, while year to date net loss increased by roughly $800,000, or 7 cents per share. 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 will net the reserved income tax benefit directly against income tax expense, increasing earnings in that period.

Positive quarterly asset management resulted in DSO of 42 days, down from 49 days at year end, while Inventory turns increased to 5.7, up from 5 turns at year end, despite a buildup of defense related inventory, which was staged in anticipation of orders forecast to ship this quarter.

Cash closed at $6.5 million, down $2.6 [million] from the first quarter's cash balance of $9.1 million. The operating components of the decrease were a cash operating loss of $400,000, increased receivables of $700,000, Accounts Payable and customer deposit decreases totaling $1.2 million, combined with capital expenditures of roughly $300,000.

Cash flow from operations is forecast to improve significantly for the remainder of the year, in response to improved operating results, turning positive this quarter, and continuing positive for the remainder of the year. However, positive cash flow from operations will be offset by second half capital expenditures, resulting in an estimated decrease in our current cash balance of roughly $500,000 by year-end. Based upon our current operating forecast, our cash balances and bank line of credit are sufficient to fully fund planned operating and capital requirements going forward.

In closing, we're very encouraged by our current sales outlook, we look forward to continued growth and our return to profitability.

Now we'd like to take our Questions. Operator, please open the call.

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To: Sector Investor who wrote (1336)7/23/2002 10:23:25 AM
From: Sector Investor
   of 6947
 
Part 2:

Q&A

Pierre Maccagno, Needham & Co.

Q. Good morning. What is your depreciation for the quarter?
A. A little better than $400,000. That includes depreciation and amortization of our intangibles.

Q. OK. I notice here that the cash is down $2.5 million, down to $6.5 million.
A. Right.

Q. Do you envision that you might have to raise some capital in the near term, or what is your vision here?
A. No. When we look at even our worst-case cash flow, we are cash flow positive at the operating line, so that we will be seeing cash provided by operations for the next two quarters. Now that's going to be offset by some Capital expenditures, so, when we net the Capital expenditures out of that positive result, by year-end we will be down by approximately one half million dollars. Obviously that's a range and this is an estimate, but we feel pretty comfortable with that number, and, contingent upon any other kind of acquisition or expansion, that we don't see happening right now, I think we have plenty of cash.

Q. So your total cash flow for the quarter was positive?
A. No. Operating cash flow was negative.

Q. OK.
A. But that is going to turn around in the third quarter, and continue in the 4th quarter as well.

Q. So that's what you expect for cash flow for the next two quarters
A. Positive cash flow from operations, that's the line just before Capex, so from an operating point of view we will be cash positive this quarter, and next quarter as well.

Q. OK.
A. And we expect that to continue going forward.

Q. On a total cash basis, when do you expect it to be positive?
A. It could be as early as the 4th quarter.

Q. Fourth quarter? OK. In terms of the breakdown of revenues, you give the Defense revenue - normally the way I put it here in my model is TacNav revenues. Do you have the total for that?
A. Defense, excluding engineering was about 21% of total revenue.

Q. So, what would be the number for TacNav then?
A. That class of sales is referred to as TacNav, is that entire family of products that we sell to the military? It was roughly $2.6 million.

Q. The way you have it here is, TacNav includes Defense, true?
A. That's correct. Yeah, that category we refer to as Defense, so, when you heard me speak on the call and referred to Defense, that's what I'm really talking about. The TacNav products make up our suite of Defense products.

Q. And that came out to $2.6 million?
A. Yes. Rounded it's about $2.7, Martin is changing us a little bit.

Q. $2.7 million? OK. And the fiber, which includes uh, TacNav correct? Would be how much?
A. No. The fiber does not include TacNav. The Fiber Optic sales were approximately $900,000 last quarter.

Q. OK. In the past, the way that we would report these fiber revenues, they would include those shipments of TacNav products that would include, uh, the fiber products.
A. If I can clarify that, Pierre, what you are saying is correct, and what Martin is saying is correct as well. What we do is we isolate the optical circuit that becomes a part of a Tactical system, what we refer to as TacNav FOG, and THAT sale is included as a Fiber Optic sale, but the remainder of the system, which is probably 80% of the total sales value, is recorded as a Defense sale. For purposes of this discussion, I think we should keep it at a little bit higher level. The Fiber Optic gyro sales were approximately $900,000, and the military TacNav sales were approximately $2.7 million. And the majority of the balance was the satellite communications sales for the quarter.

Q.OK. What is your total backlog for the quarter?
A. Total backlog is about $7.4 million, and that is at the end of the quarter.
Q. OK. And do you have a breakdown for that? I mean, how much is military or defense?
A. I'll just give you some rough percentages, about 2/3 is Military, maybe 20% fiber optic OEM kinds of orders, and the remainder are these large OEM manufacturers that Martin referred to in his script, like

Q. For the satellite?
A. Fleetwoods … Yes. Normally the satellite communication products are shipped from inventory, so we don't build a backlog in those products. Those orders are delivered as they are received.

Q. OK. And how much in revenues are you expecting from the service?
A. We don't have a good handle on that yet, Pierre, because this is a brand new business for us, so we don't have any historical data. We are starting to get activations, uh, June was really the first month we recorded any revenue from it, and we are doing our first billing cycle. I would like to point out that this was one of the many things that we did in the second quarter, that we accomplished, you know a complete billing system, an online database for customer subscriptions - customers can now check their bills online and pay via credit card online. So we have a very nice system in place. We did that in Q2, and we incurred some expense to get that started, but we expect our service revenue business to be profitable, starting in Q3. So we should see a very rapid return on that investment, and we don't anticipate incurring any additional startup expenses in Q3 So that's behind us now.

Q. Ok. And in terms of some guidance, can you give us some color for next quarter, I mean, do you see satellite growing? How is the fiber and how is the Defense - you know the different breakdowns of totals. How do you see those developing for next quarter?
A. Well I think we've given the top line guidance that we are comfortable with, which is 30%-40% growth. I think that you can see from the trajectory that we are on that we are heading rapidly towards crossing the line into profitability, and when that happens, whether that is in Q3 or Q4, I think really depends on what's going on in the economy, consumer spending and all that. But, it's very clear that things are developing, really, exactly as we had forecast early in the year. We are really pleased with the progress we are making, and, in terms of overall guidance, you know in this economy, that's about as much guidance as we feel comfortable in giving, in terms of general top line revenue growth. We expect to see a rebound in our Fiber Optic sales, significantly, based on the backlogs, the military sales should continue to grow, and the satellite communications has grown every single quarter for the last five years, so we are expecting continued solid growth in that area.

Q. OK. And finally, your Low profile antenna, when are you expecting that to reach the markets?
A. We don't expect revenue from that product this year, but we do expect to introduce it this year. It's not currently baked into the 30%-40% revenue growth that we are talking about. I think that as we get closer to product launch, we will probably say less about it, just so we can - you know, because it becomes a competitive situation now as opposed to a long range R&D project. We are now in the final stages of engineering development

Q. How are your conversations with auto manufacturers, I mean, how do you expect to introduce this product?
A. Well, our strategy on that is unchanged. We continue to anticipate that the early adopters will be high-end audio, video, after market stores. Simultaneously, we are planning on doing continued demonstrations for the car makers, as well as the tier one suppliers, eventually moving into the mass merchandisers in the after market, so I think that this product will take a fairly well charted course from automotive after market premium product to dealer add-on to eventually an OEM standard product. That's a progression that will take time. In order to bring revenue to KVH as fast as possible we are starting in the after market.

Q. Any comments from the car OEMs? What are they saying about this product?
A. Well, it's early on. It's a product that I think, you know, we've received extremely positive feedback. It's a product that everybody wants, and I think the general consensus is they would really like to see the product, because they find it difficult to believe that this can actually be done. So, I think it's up to us to show them.

Q. OK. And the fiber optic modulator - I guess you're pushing that out further?
A. What we're doing is we don't want to compromise profitability and rush a product to market, for a market that has been slow in developing. The whole 40-gigabit optical networking market has been delayed, and we want to make sure that our pace of development matches the pace of market development. We have so many things on our plate right now, it's really just a question of balancing our resources and reaching profitability at the same time. So, we are continuing to fully staff that project. We're not talking about any reduction in headcount. Everything is proceeding, we're just trying to, perhaps, slow some of the outside funding work that we are doing with universities and things like that, to bring the costs back in line with our planned spending.

Q. Are you still planning to introduce a 10-gigabit product or no?
A. Well the product we are developing is the 40, and that's still what we are working on.

Q. OK. And, OK I think that's about it. Thank you very much.
A. Thank you Pierre.

13:05 Q&A
Richard Cabot, Amertech Capital

Q. Good morning. I have a couple of questions. The first question that I have is could you elaborate and give us a little bit of an update on what's going on with the Current Sensor?
A. We are making very good progress in that area. As I said in previous calls I don't want to talk about it until we have it, because it's taken longer. But I expect that we'll have an announcement in that area very shortly.

Q. OK. The second question I have is on the service business with the Inmarsat satellites. Could you elaborate a little bit of what your financial model is, in terms of what number of subscriptions will bring you to break even, and what kind of margins this business should have for you?
A. Well the way we structured it is, it's designed to be a very, very low overhead operation, so that we expect to be above break-even almost immediately. In other words, what we are doing is that we are buying and reselling as we build subscribers, so in effect, we are not committed to buying either transponder space in the case of the Internet product, and we are not committed to buying millions of minutes in the Inmarsat side, so we are really, basically buying and reselling as we incur the expenses. So, the advantage is that we should really be profitable almost from day one, which is Q3, as we sign up subscribers and sell the service.

Q. OK. So you really don't have a risk in this business, that if you don't reach a certain level you have to make penalty payments or anything like that?
A. That's exactly right. Yes. So the way that all the agreements are structured, we're simply buying and reselling.

Q. OK. And on the announcement with L-3, could you give a little color - I know you don't want to obviously compromise defense secrets, but could you give me some idea, is this going to be on the joint venture with L-3 to bid on contracts? Are you going to be an OEM supplier?
A. Right. Our goal is to become an OEM supplier of the Fiber Optic Gyro, which is the largest value added component in the IMU in the guidance package. There currently isn't a fiber optic gyro product that meets the cost, size, weight, performance objectives on the market, so we are working with L-3 on about a million dollar funded project to develop such a product. And it would be mated with their technology, and they would be selling the final product. So, it's somewhat similar to other arrangements we have with OEMs, where we provide a critical component, but they provide the actual systems sale.

Q. Do they already have contracts with the Defense department in the smart bombs area?
A. You would have to speak with them. I'm not at liberty to say what their particular contract status is. It would be inappropriate for me.

Q. OK. That's really all for me today

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To: Sector Investor who wrote (1337)7/23/2002 10:24:50 AM
From: Sector Investor
   of 6947
 
Part 3 - final.

16:35 Q&A

Greg Weaver, Kern Capital

Q. Hi. Just a follow-up on that last question. On the smart bomb thing, are you competing with a quartz or a silicon gyro there?
A. No. The current technology is based on Ring-Laser Gyros. The Quartz and silicon technologies are really in a lower performance class than what's required for this particular application.

Q. So, how much of a ASP reduction is required to make this feasible relative to normal fiber optic gyro pricing?
A. That's a good question. I think that our technology is inherently less expensive, so we are talking about system sales which are approximately in the same ballpark as our current products, so it's not something where we have to design a product for half the price from where we are today.

Q. So the Ring-Laser costs about the same then?
A. Ring-Laser is more expensive than our current technology.

Q. Umm. OK. Just a series of other questions. Just in a general sense, on the revenue guidance, if I'm doing the math right, you're implying that your revenue will be sequentially down from this quarter. Is that correct?
A. Yeah. The third quarter is historically less than Q2, you know, when we give guidance we are talking about growth over last year, so the guidance we gave for 30%-40% growth was for the Year over year figure, not 40% growth sequentially quarter to quarter.

Q. Oh, no, no, I understand, but I just did the math for the whole year. I didn't realize you were saying by quarter. I figured you were saying for the whole year right? I mean you did $33 [million] last year? Multiply that by 35% right?
A. Right.

Q. So that's gets you about $45 [million], so I backed into the last two quarters and that is about $11 million a quarter, assuming they were equivalent?
A. I think that's a reasonable assumption. I think that what we are trying to say is that we are not forecasting 61% growth going forward indefinitely.

Q. All right. I guess what I'm after then is where is it falling off?
A. We have a normal third quarter seasonal dip, and then it should pick up again in the fourth quarter, and we're giving you a range, when we discuss the forecasts, and we could certainly exceed that range. There are a lot of very positive things out there right now that could allow us to do that.

Q. OK. And a little more color. You had a great number on the satellite side. What is it, you are up about a third sequentially here. What portion of that satellite sales from Q1 to Q2 is attributable to that OEM deals, and is there any kind of channel fill going on there?
A. No there isn't. We watch that very closely, and actually a very small percentage, uh, we just, in the month of June we just began on the OEM products, so I would say it is less than 5%-10%.

Q. Of the total satellite revenue?
A. Correct. Less than 5 [percent] I would guess. The real importance there, uh, we had a question earlier on backlog, and for the first time we've got a fairly substantial backlog, and it's all attributable to that OEM business. So we see real momentum there, and a source for some real growth. When you combine that with the positive impact that those volumes have on our overhead, - I had mentioned a 4-point swing year to date in bringing that overhead down. In the quarter it was actually 5% improvement, and that was strictly due to volume. So it has a very positive impact on us going forward.

Q. So, if you just did what you have in backlog, - I assume that satellite backlog from the OEMs is shippable in the current quarter, right?
A. Well some of that's - we also get some visibility out quarter, because it is based on annual production rates. But those aren't always commitments for a specific delivery. Some of that is we are committing to do just-in-time deliveries as they build vehicles.

Q. So that 15% of your $7.4 million backlog attributable to those guys isn't necessarily third quarter stuff?
A. I would say that's true, but I have to check that with Dick. In other words, we might have backlog that's in there that would be for out quarters as well. The point is that that's unusual. Normally we don't get any visibility on satellite sales, until the order comes in and it gets shipped that day. About 10% is attributable to the current quarter.

Q. Two thirds of it?
A. Correct.

Q. OK. So that applies, you know, you are doubling or so sequentially, - I mean, that makes sense if you've only been shipping for one month and you get three months now, at the same production rate? You should at least double? So, something else has fallen off there on the satellite side?
A. Well traditionally, the Marine market is seasonal. If you look at the company's historic revenue numbers, and typically Q3 is one of the lowest, is somewhat lower than Q1 for example or Q4, so, but it's not dramatic, the Marine market isn't a huge percentage of the total revenue. Obviously defense isn't seasonal, so …

Q. What's it, the satellite between the Marine and land?
A. The majority of the units are on the land, although the Marine products tend to be more expensive, so my guess is that approximately that 30%-40% of the revenue number is coming from Marine, and that's the component that is seasonal, uh, Q3 being slower.

Q. OK. Gotcha. What's your plans for Capex for the rest of the year in terms of dollars?
A. About $1.2 million.

Q. And what's that being spent on mainly?
A. New product tooling. We have some building improvements, but those are really the two large categories.

Q. So that implies you are doing positive $700K of operating cash flow for the rest of the year?
A. Pretty good.

Q. Yeah. OK. And on the Gross Margin front, what's the model or target gross margin? I guess, you know, in a year or two?
A. I think longer term we can see our way through to about 45% on the Gross Margin line. It could be much higher, but you know, we are selling consumer electronics, and you don't get the same kind of pricing with those products as you do with some other kinds of products.

Q. OK. And on the Defense side, you talk about new funding right, but, I mean my sense is that there is a long lead-time on a lot of this stuff? So, is this just …
A. Well that's what I was trying to point out with the uh, you know the fact that the growth we've seen in defense now, most of those orders, all of those sales, and most of the actual orders were booked prior to 9/11, so , right, because of the long lead time you don't get the rapid buildup that you would expect, so, that doesn't mean it doesn't happen. So, what we are saying is that starting, really now and going into the next two quarters and going into next year, we should start to see the type of buildup that you would expect to see for the types of products that we make, which, as I pointed out are exactly the type of products they need. And these products are being used right now for the Counter terrorism activities that the military is being funded to do.

Q. So, seeing an order increase in the back half of the year isn't surprising, but I guess maybe I'm more surprised by - unless I misinterpreted your comments you expect the back half of the year for revenues to improve for defense. Is that correct?
A. Yeah, and one of the uh, if you look at our cash position and our orders that we are expecting, we've ordered some long lead materials in advance of the orders, and we did that really to help out our military customers, and US military with their requirements. But we've taken some careful steps, but never the less we incurred some risk in buying this inventory, but we are confident that we are going to ship this order in the second half of the year.

Q. OK. And I guess this lastly relative to the models on the street, um, on your Op-ex side of your income statement, the numbers came in higher than expected. I mean, that's something you guys can't control, - most companies are struggling with a good top line, so I guess I'm trying to understand, why do you suppose that is the case? Is there some surprise, or is it just some mis-communication with the street, or …
A. Well, I think we have to be careful in talking about the street, we only have currently one analyst, so I don't want to speak specifically to a specific model, but I think that Dick has addressed, you know, we had some one time expenses we had visibility on, and perhaps people who are not inside the company didn't have as good visibility. Dick, you may want to talk just a little bit about the magnitude of, you know, expenses that were incurred in Q2 that we don't expect to recur.
Right. In my call, in some of the sections, I talked about one-time expenses. If you were to sum those together, they made up about $640,000. Now, because they were one time expenses that were unusual in nature, certainly not recurring, Pierre Maccagno really didn't have any visibility to those, but if we were to net that out of our net loss, we'd be looking at something on the order of $200,000, - just about a penny, so we had about 6 cents of non recurring items, between commissions and recruiting fees and things like that, that will help us going forward. Without those things, we came very close to breaking even for the quarter.

Q. So, it is safe to assume then that your Opex is declining by at least $650,000 sequentially? I mean because you are talking about other cuts too.
A. Well, I think that's a reasonable estimate. You know our goal is to reduce our spending and get closer to breaking even, and I think that's about as much guidance as we are willing to give at this stage.

28:29

David Lorens?, Advantis? Capital

Q. Good morning. When can we expect the roll out of the low profile antenna?
A. What we've talked about is we are probably launching that product in the back half of this year, and we don't have any significant revenues in the plan for it this year. But it will be a marketing launch based around trade shows, and when the right time is to introduce the product. But it will be this year.

Q. OK. And, in regards to the DOD certification process, where are you in regards to that?
A. Uh, certification for what?

Q. DSP-5000 - ongoing discussions with the department of Defense.
A. The DSP-5000 is a non-military product, so it's already good to go as far as that product is concerned.

Q. Then that - there was a certification process in regards to, uh, For your FOG.
A. Right. You might be talking about the Smart bomb effort?

Q. Yes.
A. And that would be something that our prime would be tasked with. In other words we make a sub-component, and they would qualify the entire sub-system. And then the Prime would be responsible for qualifying the entire program. I'm not sure if that answers the question.

Q. Are there any of your products in process for that type of certification currently?
A. No. All the products that we manufacture now are already quality approved for their intended use.

Q. OK.
A. Everything we are making today is ready to be sold, and all our defense products are not awaiting any certification that would impact revenues in Q3 or Q4. If that answers your question?

Q. Yes. And in regards to back log going forward you said $7.4 billion [sic] at Q2 end? Has that increased since then?
A. It was million, not billion. No, the backlog is where it is. We are only a few weeks away from the quarter end. We certainly hope it grows, and we have every expectation that it will.
Q. Great. Thank you

James Pugh? Dolphin(?) Asset management

Q. I'm still a little bit confusing on the revenue breakdown. The commercial revenue is $7.9 [million], fiber optic is $900,000, and Defense is $2.6-$2.7. There is a million missing here.
A. What you have there is we generally group our products in that fashion, but we have other products that are legacy kinds of products, OEM products, Marine products, things like that, and we group all that into a category we describe as Navigation.

Q. And that's roughly a million?
A. Yes.

Q. OK. So that's a fourth category, or is just commercial?
A. We don't want to break it out as a fourth category. Most of the revenues for those products are in the Marine area - our older Marine navigation products, so generally we don't break it out

Q. What has been the trend in the past few quarters for this particular line of product?
A. They're declining. They are legacy products. If it's under a million a year we generally don't break it out as a separate category.

Q. Well, it's a million a quarter, right?
A. I was talking about the Marine navigation products, which are on the order of a million dollars per year, not per quarter. We also have some OEM products which are digital compass based and they are on the order of $500,000 per quarter. We have funded engineering work, which is also a revenue item.

Q. OK. So we can expect about a million going forward on this particular category, where you can't really credit to any of those three categories?
A. Yes. Right.

Q. That's about the number? A million a quarter?
A. Right. And what we do is we typically will aggregate the sales into one of the other categories, when we consolidate, in terms of when we give a breakdown, like in our 10-Q, all the revenue will be aggregated into one of the larger categories. So we've actually given you more detail here. Which is the sub component that's just satellite sales. And the reason we do that is that these are the new products, and this is really the part of the company that's been the engine for growth, and that's the part of our business that's been growing so rapidly. So not only is it the majority of our sales, it's also the part of our business that's growing the fastest.

Q. OK. And also, I know you haven't broken down the Gross Margins for different products? I mean, commercial, defense, fiber optic? Can you talk about that? The rough range of margins?
A. We generally don't do that for competitive reasons, but I will say that the highest gross margins tend to be military and fiber optic products themselves are large gross margin products, but we have a dedicated factory, which is currently underutilized, and the net margin on those products is low. On our communications products, the average margin is sort of in the middle between those

Q. OK. So going forward the margin improvement which you anticipated, will largely come from fiber optic and defense?
A. Well, I think that, yes, increasing the margin on the fiber optic gyro business is related primarily to increasing the volume, so that the fixed overhead is spread. The military margins are very stable and don't change, and the satellite products, the margin is improving in terms of the cost, but offsetting that you've got some new OEM customers that have some pricing that's not very different from retail pricing. So again it's difficult to make general statement about the margins when each category has a host of different products within it that have a pretty wide margin range.

Q. The contract with the three major OEM customers, uh, I understand that you are delivering it now and next quarter.
A. Yes.

Q. Do you expect any sort of ?egalization on the retail side because of these contracts?
A. No we don't, because these are replacing competitive products so in other words these vehicles were already, uh, a lot of them had optional equipment that was installed which wasn't ours in the past so

Q. Oh I see.
A. So, these are new sales for us and sales losses for our competitors, and in the case of some of these vehicles we are really reaching down into a class of vehicle that currently was not our primary target customer. So, while conceivably what you are suggesting is possible, we've looked at it very carefully and we don't think that's going to happen at all.

Q. Ok. The other question is what is the initial order size like and also what should we expect in terms of the timeline going forward in terms of the increasing volumes from these OEM customers?
A. Well, the increase in sales will be starting in Q3, and it will help drive the growth of the land mobile communications satellite line. I don't have an exact number for you in terms of what that will represent in dollars, but we are hoping that this will help continue - you know, we recorded 50% growth in the communications line in Q2. These types of awards are necessary to keep that kind of growth rate going and going forward.

Q. OK One more question on the R&D side. You expect R&D to go down the next two quarters. Do you have a better picture in terms of how low they could go in the next two quarters, and what will be the sustaining level going into "03?
A. We generally don't forecast that kind of information, but we do see a decrease in the two factors that contribute to that. One, we have in our backlog right now, orders that will fund some of the engineering activities. So that we will be transferring costs from internal costs to customer-funded costs. At the same time Martin talked about how we are managing our PhotonicFiber project, and also talked about the nearness to completion on the low profile antenna. Those two events will tend to push back on spending, so, we'll see a convergence of reduced new product initiative spending, coupled with customer funding and that should give us some decreases over the next two quarters.

Q. OK. The backlog was $7.8 million?
A. $7.4 million.

Q. OK. So what was the backlog last quarter?
A. $8.2 [million].

Q. OK. So why the decline?
A. We shipped this quarter $2.2 million in military revenues, and as I discussed earlier, that's the majority of that backlog.

Q. OK. All right. Well, thank you.
A. You're welcome. Thank you.

Closing remarks.

Very good. I understand there was a problem with our web cast which may delay it being available, but it should be back online shortly, so, if you have anybody who had a problem, let them know. Other than that we'll talk to you soon. Thanks.

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To: Sector Investor who wrote (1338)7/23/2002 10:37:39 AM
From: Sector Investor
   of 6947
 
Updated Consolidated Links

Date: July 23, 2002 10:37 AM

KVH Industries, Inc., based in Middletown, Rhode Island, is an international leader in developing and manufacturing innovative, mobile, high-bandwidth satellite communications systems, tactical navigation products, and fiber optic products.

Company Overview --- kvh.com

Earnings and CC related links

Q2 1997 EPS release - Message 1813680
Q2 1997 CC Notes ----- Message 1816064
Q3 1997 downgrade --- Message 2269984
Q3 1997 EPS release -http://www.siliconinvestor.com/readmsg.aspx?msgid=2534856
Q4 1997 warning -------- Message 3187118
Q2 1998 CC analysis --http://www.siliconinvestor.com/readmsg.aspx?msgid=5387249
Q2 1998 CC notes1 ---- Message 5389093
Q2 1998 CC notes2 ---- Message 5512880
Q4 1998 EPS release - Message 8034473
Q4 1998 CC notes ----- Message 8303464
Q1 1999 EPS rel ------- Message 9085267
Q2 1999 EPS rel ------- Message 10705163
Q3 1999 EPS rel ------- Message 11659825
Q4 1999 EPS rel ------- Message 12862196
Q1 2000 EPS rel ------- Message 13470540
Q1 2000 CC notes ----- Message 13474450
Q1 2000 Analysts ------ Message 13476701
Q2 2000 EPS rel ------- Message 14077309
Q3 2000 EPS rel ------- Message 14615735
Q4 2000 EPS rel ------- Message 15318557
Q1 2001 EPS rel ------- Message 15686350
Q2 2001 EPS rel ------- Message 16098259
Q3 2001 EPS rel ------- Message 16543116
Q4 2001 EPS pre ------- Message 16876175
Q4 2001 EPS rel ------- Message 17091602
Q1 2002 Update -------- Message 17273314
Q1 2002 EPS rel ------- Message 17380588
Q1 2002 CC notes1 --- Message 17396999
Q1 2002 CC notes2 --- Message 17397004
Q2 2002 EPS rel ------- Message 17755541
Q2 2002 Fin Tables --- Message 17755543
Q2 2002 CC transcript1 - Message 17779637
Q2 2002 CC transcript2 - Message 17779657
Q2 2002 CC transcript3 - Message 17779670



Contract, Service or partnering announcements

1997 Swedish military --------------- Message 1818477
1998 US Army ------------------------- Message 5154917
1998 US Marines --------------------- Message 6641124
1999 River Park teams -------------- Message 11041324
1999 UK Army order ----------------- Message 11652006
1999 Delfin Contract ----------------- Message 11791701
1999 Marathon Coach --------------- Message 12170187
2000 $1.4M Repeat order ---------- Message 13215646
2000 $1.2 million FOG -------------- Message 13460763
2000 Entertain Coaches ------------ Message 13566973
2000 $17M US Army ----------------- Message 13904501
2000 $1M Crossbow partnership - Message 13997834
2000 Sportvision cameras ---------- Message 14021855
2000 First in Europe ------------------ Message 14078705
2000 $1.5 M Javelin Simulator ---- Message 14734776
2000 $4.7M Asian Military ---------- Message 15001558
2001 $3.2M Australian Army ------- Message 15141200
2001 $1.75M golfcart sensor ------- Message 15454327
2001 Russian market entry --------- Message 15471918
2001 UK selects Gyrotrac ---------- Message 15472306
2001 $2.7M French Army ----------- Message 15786386
2001 StagParkway -------------------- Message 15889621
2001 $1.5M New Zealand Military Message 16091879
2001 Swedish Navy ------------------- Message 16506811
2001 Bell ExpressVu ----------------- Message 16537495
2001 $3.9M FOG order -------------- Message 16632688
2002 Thane & Thrane ---------------- Message 17054427
2002 Lockheed-Martin Train system Message 17486946
2002 US Weapons simulators ------ Message 17464265
2002 $700K FOGs -turret stabilization - Message 17538721
2002 Optional equip on Fleetwood RVs - Message 17580267
2002 KVH becomes Inmarsat Global ISP- Message 17596838
……. Inmarsat Information -------------- Message 17597008
……. Comparison of Sat Networks ------- remotesatellite.com
2002 Std equip on Featherlite Coaches -- Message 17661922
……. About Featherlite ----------------- featherlitecoaches.com
…..... KVH TracVision L3 ------------- kvh.com
……. KVH Tracphone 252 ------------ kvh.com
……. KVH TracNet ---------------------- kvh.com
2002 Rexhall selects KVH antennas ----- Message 17677523
…….. US Class A Motorhome market -- Message 17677556
2002 $1M DSP IMU dev from L-3 Comm- Message 17715075
2002 ABB partners on Current Sensor -- Message 17772501





Product announcements

1997 Trac Phone 50 ------------ Message 2147224
1998 Trac Phone 25 ------------ Message 3404697
1998 Trac Vision 45 ------------ Message 5200344
1999 Trac Vision LM ----------- Message 7402304
1999 KVH hits the road -------- Message 7402304
1999 Trac Vision Cruiser ------ Message 10653331
2000 Trac Vision G4 ------------ Message 12843047
2000 Trac Vision SA ------------ Message 13016180
2000 TracVison G6 DVB ------ Message 14616651
2000 TracVision L3 -------------- Message 14955234
2000 TracVision C3 ------------- Message 15040053
2001 Multilingual TacNav ------ Message 15471658
2001 Trac Vision L3 Truck ---- Message 15471899
2001 Trac Vision L3 vehicle -- Message 15472075
2001 ActiveFiber Technology - Message 15525677
2001 E-Core PM Fiber ---------- Message 15526177
2001 TracNet Server-Marine -- Message 16549100
2001 DirecPC -R Satellite ------ Message 16549104
2001 Tracphone 252 ------------- Message 16555352
2001 TracVision S3 -------------- Message 16677874
2001 TracNet Server-land ------ Message 16706826
2002 TracPhone F77 ------------ Message 17060078
2002 DSP-5000 FOG ----------- Message 17336044

Management or I/R comments posted

1998 Tacnav related -- ------- Message 5191881
1998 general -------- ----------- Message 5678484
1999 mobile internet --------- Message 7177546
2000 Power sensing --------- Message 11697383
2000 CEO Interview ---------- Message 13647777
2002 CEO at Needham ------ Message 16876175
2002 Needham transcript ----- Message 16892251

Facility Tour posts

2000 Home Office Tour -------- Message 13483638
2000 FOG Sensors Tour ------ Message 13742694

KVH major customer list

From the 2001 Mission brochure -- Message 17489301

A few of the US patents

Under KVH Industries ---- patft.uspto.gov.
Under Dyott ------------------ patft.uspto.gov.
Dyott applications --------- appft1.uspto.gov.

Significant Personnel additions

1999 Charles Trimble joins BOD ------- Message 9802059
2000 Larry Dalton on Advisory Bd ----- Message 14592383
2000 John Seavey on Advisory Bd ----- Message 15085660
2001 new COO Joe Bookataub -------- Message 16238135
2002 Steve Buckingham joins KVH ------ Message 17486936
2002 New VP Eng. Dr. Kalyan Ganesan - Message 17553371
2002 New CFO Patrick J. Spratt -------- Message 17755516



Awards and Certifications

1998 Best in category awards ---------- Message 6624271
1999 ISO 9001 standards ---------------- Message 10052445
1999 US Army "Outstanding partner"---- Message 10063051
1999 Camping World award ------------ Message 11465314
1999 NMEA "Best" awards ------------- Message 11717969
2000 NMEA "Best" 3rd yr in row ------- Message 14659699
2001 NMEA "Best" 4th yr in row --------- Message 16596940
2002 StagParkway Peach Award -------- Message 17026775
2002 DOD Outstanding Quality Award -- Message 17611817



General/Miscellaneous


1999 Article on Trac vision II ------------ Message 8383221
1999 Briar Patch Invest Opinion ------- Message 8638735
2000 Datron Patent Lawsuit ------------ Message 12864170
2000 Datron response on lawsuit ------ Message 12941582
2000 Patent involved in the suit -------- patft.uspto.gov.
2000 GPS use poised to take off ------ Message 13600523
2000 Datron lawsuit terminated -------- Message 14139395
2001 $5M private placement ------------ Message 15107364
2001 Featherlite TracVision L3 std ----- Message 15581572
2001 $10M Private Placement ---------- Message 15678840
2001 Completion of financing ----------- Message 15875422
2001 KVH featured in Navy SBIR ------ Message 17487085
2001 Gyrotrac helps Playstation set record - Message 17487087
2002 TracNet Hits the Road w Internet -- Message 17450037
2002 Patent-reduced configuration Gyro Message 17480877
2002 First customers praise new F77 --- Message 17494877
2002 KVH Antenna During Tornados -- Message 17563489

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To: Sector Investor who wrote (1339)7/23/2002 12:18:10 PM
From: robert b furman
   of 6947
 
Hi Sector,

Great effort on the transcript -I've listened to the call twice now.

With regard to the most recent sensor announcement.Over on the Yahoo thread it was referenced that Martin said revenue would be 6-9 months out after announcement.

I suspect that electrical engineering blueprints design in the sensors.This will probably be a phase in which includes new construction and perhaps rebuilds.

In that is is less expensive to do vs the old technology it will provide better capabilities and cost savings.That should get it into the mainstream way of doing things quickly but yet an engineering lag.

ABB would certainly be the right spot to begin widespread implementation on a global basis.

As I recall Martin said the electrical industry has very accurate sales data and the replacement market for the old technology was well known ( I thought he said 500 million).


If as in the antennae business the aftermarket is the first place to wins sales - I wonder if the replacement of damaged transformers wouldn't yield the first actual sales?

If there was a retro kit that saved money by installing the sensor vs replacing transformers - we might see revenue before year end.

I'm guessing that is a question the FOG facility could best answer.

Great news none the less.

03 is shaping up to be a very cash flow rich year.

Past growth accelerating with RV antennaes. PLUS new products for low profile antennae and current sensor a reality .

Now to get in the black - a major milestone - that just an order or two from defense will push us over.gg

Bob

Thanks for all your hard work.

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To: robert b furman who wrote (1340)7/25/2002 2:25:19 AM
From: Henry D
   of 6947
 
Bob,

what do u think of KVHI valuations? r u using price to sales, PEG, etc??? i am not sure how to put a fair price on this puppy. r u getting a divergence on the TA on KVHI MACD? lower hi on the MACD with higher stock prices??? maybe its a liquidity issue.

Henry

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To: Henry D who wrote (1341)7/25/2002 5:31:51 PM
From: robert b furman
   of 6947
 
Hi Henry,

Last year KVHI raised 20 million selling stock at 6.50.That is the best marker.It has dipped to 6 on insider options selling before the quarter.

Institutional support seems to be giving good support.

In this market anything goes - but future potential is good.

Not many tech companies grow 61% yoy quarterly basis.

Bob

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