Technology StocksKVH Industries, Inc.

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To: Sector Investor who wrote (404)4/21/2000 11:27:00 AM
From: Sector Investor
   of 7024
The Briar Patch link didn't work. Here it is again.

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To: rascalbythesea who wrote (402)4/21/2000 1:00:00 PM
From: akmike
   of 7024

Hi, Rascal

I am also a shareholder in GSTRF and would like to clarify your post. GSTRF is the general partner of a limited partnership which has invested 5 Bil. GSTRF has invested a little over 1 Bil. The limited partnership is owned by Loral,QCOM et al. Soros formerly owned 10% of GSTRF; he bailed recently.
None of the above means that there isn't significant upside from here in GSTRF as the gateways are brought in service and subscribers sign up.

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To: akmike who wrote (406)4/21/2000 3:54:00 PM
From: Sector Investor
   of 7024
OK. Let's try a little crystal ball peering into the future
here. KVH has finally provided enough details to attempt

They said:

1) Communication revenues will continue increasing
significantly each quarter
2) Military revenues are on the rebound starting with Q2.
3) FOG sales are just now beginning
4) backlog is $4.3 million, spread equally across the 3
5) GMs have been depressed by lagging Military and FOG
sales, but can rise to the low 40%s as these revs increase.
6) additional military orders are imminent.
7) R&D should begin to decline in absolute dollars.
8) S&M will continue to rise in absolute dollars, but
decline as a percent of revenues.
9) Administrative expenses will remain about flat.
10) Return to profitability in the 2nd half.
11) Good chance of full year profitability.
12) Communications sales alone should cover profitability in

From these, we can make some judgement calls, pop the data
into a spreadsheet and see what happens.

Here are my assumptions, which I tried to fit to the CC
comments, but stay conservative.

1) A smaller loss in Q2.
2) Communication revenues to grow 25% Q-Q.
3) I jumped military (nav) revs by 50% in Q2 (1/2 the
backlog) and 20% each quarter after that for the rest of
2000. I think they can see that far anyway.
4) I started FOG sales at 1/2 the backlog in Q2 and grew 20%
each quarter after that. This is the weakest of the
5) I raised GMs to 35% in Q2, and increased them 2% each
quarter after that.
6) I reduced R&D by 2% each quarter.
7) I grew S&M by 3% each quarter.
8) I left Admin and Other Income/(expense) constant
9) I didn't try to estimate the effect of taxes, as there is
no data to support this.

Keep in mind that these are just numbers that I made up
based on the statements in the CC. The future is never
certain. This does show that once break even is reached,
profitability can increase dramatically going forward.

As an acid test. I tried Q4 2000 and Q1 2001 using only the
projected Communications revenues. I get a small loss in Q4
and a small profit in Q1 2001, so I think these growth
numbers are reasonable.

I hope everyone realizes that this is just an honest attempt
to project out what was said in the conference call, and I
am not trying to hype the stock in any way. I do this kind
of thing for myself anyway as part of my ongoing DD, but
this time I will share it.

Comments appreciated.

Q4 1999 Q1 2000 Q2 2000 Q3 2000 Q4 2000 PCT
(000) omitted est est est chng
Net Sales 5.54 5.70 8.35 10.28 12.67
Communications 2.90 4.20 5.25 6.56 8.20 1.25
Navigation 2.54 1.60 2.40 2.88 3.46 1.20
FOG 0.70 0.84 1.01 1.20
Cost of Sales 3.69 3.82 5.43 6.48 7.73
Gross Profit 1.86 1.88 2.92 3.80 4.94
Gross Margin 34% 33% 35% 37% 39%
R&D exp 1.13 1.07 1.05 1.03 1.01 0.98
S&M exp 1.69 1.42 1.46 1.50 1.55 1.03
Admin exp 0.54 0.53 0.53 0.53 0.53 1.00
Inc/(Loss) (1.50) (1.14) (0.12) 0.74 1.85
from ops
Other Income (0.01) (0.21) (0.21) (0.21) (0.21)
before Taxes (1.51) (1.35) (0.33) 0.53 1.64

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To: Sector Investor who wrote (407)4/21/2000 4:27:00 PM
From: akmike
   of 7024
I don't have time right now to review fully, but I will get to it later. According to the 10-K released today the projected tax rate is 38%. The 10-K also disclosed that KVHI has had some difficulty integrating the fiber-optic
technology acquired in l997 and that the fixed fiber-optic manufacturing costs haven't yet been absorbed by revenues.
This would indicate to me that your model is too conservative for gross margin assumptions.(IF the revenue materializes) I believe the GM range stated in the cc was 42-45%.

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To: akmike who wrote (408)4/21/2000 5:22:00 PM
From: Sector Investor
   of 7024
Yikes, I didn't have KVHI in my watch list.

I will review the 10K and see if I need to change anything. Thanks for mentioning it.

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To: akmike who wrote (406)4/21/2000 5:23:00 PM
From: rascalbythesea
   of 7024
Hi Mike: Glad to see I have some familiar company in GSTRF.

My understanding is Soros and his group did sell some but supposedly they still have 10%.

While Soros was reducing, the C.O.B. Bernie Schwartz was accumulating another 375 thousand shares around the Sep-Oct period. I think that gives him about 1 Million now. Schwartz has not been a seller as of now. His faith is unshakeable. This may not be a fast trade but as they build subscriber base and make some positive announcements, this stock could fly. It did run from under 10 this year to 53 3/4 and ran back down to 35 to accommodate the 8 million share secondary at 35. It has since slid back to 10 due to market conditions and the failure of Iridium. They should be picking up Iridiums 55,000 subscribers which should be a great beginning.

Good luck on KVHI, MRVC and now GSTRF


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To: Sector Investor who wrote (409)4/21/2000 7:59:00 PM
From: Sector Investor
   of 7024
Here is a second attempt after reading through the 10Q for
Q1 2000.

I made a few adjustments.

1) I lowered the growth in S&M from 3% to 2%.

2) The new revolving line of credit they have looks like it
costs 0.5% even if they don't use it. That amounts to $6,250
per quarter. I'll make the assumption that they don't use it
in 2000, and I added the $6,250 to their interest expense.
With rounding, this still looks the same on the spreadsheet,
but does alter following numbers a bit.

3) The GM discussion confused me. First they referred to it
as "Gross Profit as a percentage of sales", then just Gross
Profit instead of Gross Margin.

Then, in the CC they indicated if encumbrances were absent
they would be comfortable with 42%-45% margins, but the 10Q
indicated "flat or increase slightly when higher margin
navigation products rebound". They did say Communications
margins were getting better as direct costs were reduced 4%.

Looking back to 1997 (when Communications sales were much
lower), I see GMs in the mid-upper 40%s. I decided to leave
my GM estimates alone for now, which rise to 41% by Q1 2001.

4) I changed my third revenue sub category title from "FOG"
to "Sensor" as FOGs appear to be embedded in the other two
categories. This category is for the new Power Industry
sensors or other new sensor products. If anything, the 20%
growth I set may be too conservative, as the market is large
and growth rates for new products can be much higher than
that for a while. But I left it alone in the interests of a
conservative estimate.

5) I dropped Q4 1999 and added Q1 2001. I don't want to go
too far out because of the lumpy military sales, but the
growth rates, if they can be sustained begin to have
dramatic effect here, so I kept the column in.

6) I still leave off taxes even though they state a 38% rate
in the 10Q, because I don't know how to treat tax loss carry
forwards. I'll let others extend this down to bottom line

The resulting numbers look even a bit stronger than I
originally posted.

Still just a best effort attempt here. Do you own DD.

Comments are appreciated.

Q1 2000 Q2 2000 Q3 2000 Q4 2000 Q1 2001 PCT
(000) omitted est est est est chng
Net Sales 5.70 8.35 10.28 12.67 15.61
Communications 4.20 5.25 6.56 8.20 10.25 1.25
Navigation 1.60 2.40 2.88 3.46 4.15 1.20
Sensors 0.70 0.84 1.01 1.21 1.20
Cost of Sales 3.82 5.43 6.48 7.73 9.21
Gross Profit 1.88 2.92 3.80 4.94 6.40
Gross Margin 33% 35% 37% 39% 41%
R&D exp 1.07 1.05 1.03 1.01 0.99 0.98
S&M exp 1.42 1.45 1.48 1.51 1.54 1.02
Admin exp 0.53 0.53 0.53 0.53 0.53 1.00
from Ops (1.14) (0.10) 0.77 1.90 3.35
Other Income (0.21) (0.21) (0.21) (0.21) (0.21)
before Taxes (1.35) (0.32) 0.56 1.68 3.13

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To: Sector Investor who wrote (411)4/21/2000 9:50:00 PM
From: akmike
   of 7024
These comments as I can study it a little more:
1. The revenue ramp is aggressive IMO. The historical communications revenue growth (from a very low base) has been around 70%/annum. This rate could accelerate, but not likely to double.
2. If revenues do grow at this rate, they will certainly have to draw on the line of credit to finance inventory and receivables. Nice problem to have, but not in your model.
3. Military (Navigation) won't show such even, linear growth. (But I don't anything better than your assumption)
4. If your revenue targets are attained the gross margin will be in low 40's by Q4 and mid-40's by Q1-01.
5. Even a reduction of the revenue ramp will show a company generating nice profits in 01.
6. If either the 2-way wireless broadband mobile unit takes off or the electrical current sensor on top of what you are projecting in your model, then we will have a large winner on our hands.
7. In the meantime, the downside is "acceptable"

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To: akmike who wrote (412)4/21/2000 10:17:00 PM
From: Sector Investor
   of 7024
Thanks, Mike.

I agree that the Communications revenue seems aggressive. I had it toned down, but then their statement that Communications revenue alone would cover profitability in 2001 didn't prove out. I would have had to raise GMs faster to reach that with lower projected growth - and, until I see firmer reasons to do this, (coupled with the more conservative 10Q wording), I decided to be more conservative on the GMs and aggressive on the Communications growth.

The spreadsheet is just a tool to visualize a moderate success. I say moderate, because the current sensor and other future sensor products could change all this.

Think about this. The market there is $500 million a year. KVH's product is smaller, faster, cheaper, safer, digital, etc. AND is likely to be first to market here.

Look at this, just for the current sensor:

5% of market = $25 million per year or over $6 million per quarter, - overwhelming the military sales.

20% of market (why not? who else? how long to reach?) = $100 million a year in revenues - more than 4 times all of KVH's 1999 revenue, just for this one product and market.

These Yahoo! posts talk less about projecting ahead and more about understanding the Big picture.

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To: Sector Investor who wrote (413)4/22/2000 2:17:00 AM
From: akmike
   of 7024
Your model does a good job of showing the potential if the execution happens. I have been in another company (VARL) which cut its teeth as a military component contractor and has learned how to successfully transfer the technology to the commercial sector. It can be very stimulating for management and very profitable for stockholders when they realize that good products and marketing combined with manufacturing expertise will yield much more explosive returns than defense contracting. VARL went into the wireless basestation component market from a standing start 4 years ago and today has captured an 85% share and has a customer list that is a who's who of wireless communications.Nokia,Motorola,Ericsson, Lucent, Alcatel (Newbridge-Stanford Telecom) Netro, Adaptive Broadband.
Best of all they have generated 55% gross margins and brought 15% to the bottom line, all the while preparing to get into the 3G handset business. Take a listen to their cc on Monday afternoon and you will get a feel for what KVHI could do with their developing product lines as the satellite technology catches up with technology they've developed.
On a different subject:
Wouldn't KVHI's 2-way broadband mobile product be a great application for commercial aircraft? You would just need a pipe to the seat along with a plug-in for the traveller's laptop. As close as they put the seats today it wouldn't take much fiber to pipe the plane from the antenna to the seat.

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