KVHI

KVH Industries, Inc. (KVHI)

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KVH Industries, Inc. (KVHI)

Q2 2010 Earnings Call Transcript

July 26, 2010 10:30 am ET

Executives

Patrick Spratt – CFO

Martin Kits Van Heyningen – Chairman, President and CEO

Analysts

Rich Valera – Needham & Company

Hamed Khorsand – BWS Financial

Chris Quilty – Raymond James

John Bright – Avondale Partners

Rich Valera – Needham & Company

Presentation

Operator

Thank you for standing by everyone, welcome to the KVH Industries second quarter 2010 conference call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer, Mr. Patrick Spratt. Please go ahead sir.

Patrick Spratt

Good morning. I am Pat Spratt, Chief Financial Officer of KVH Industries and with me is; Martin Kits Van Heyningen, Chief Executive Officer.

This call will address the second quarter earnings release that we issued earlier today. Copies of the release are available on our website and also from our Investor Relations department. This call is being simulcast on the internet, and will be archived on our website for future reference.

If you are listening via the web, feel free to submit questions at IR@KVH.com and we’ll answer them following this call.

This conference call will contain certain forward-looking statements that involve risks and uncertainties. For example, statements regarding financial and product development goals are forward-looking. The company’s future results may differ materially from the projections described in today’s discussion.

Factors that might cause these differences include, but are not limited to, those mentioned in today’s call and the risk factors described in our quarterly report on Form 10-Q filed with the SEC on May 4, 2010. The company’s SEC filings are directly available from us, from the SEC, or from the investor information section of our website.

Now, I’d like to turn the call over to Martin for today’s discussion of results. Martin?

Martin Kits van Heyningen

Thanks Pat, and thank you all for joining us today. Well, it is another outstanding quarter for KVH, quarterly revenue was at a record high again, and we had a solid bottom line. In terms of overall performance, we are ahead of where we expected to be when we started the year. First of all, we recorded $29.5 million in sales, making this our second consecutive record quarter on the top line. Year-over-year that is 35% increase in revenue.

In addition, we recorded net income of $5.3 million or $0.36 per share, also record results. Now we will discuss income tax benefits that bolstered our bottom line, but even without that tax benefit our operating profit was quite strong. For the first six months of the year, revenue was $57.5 million. That is a 43% increase over the same period last year with net profit of $7.4 million or $0.50 per share.

Our trailing 12 month revenues were $106 million, passing the $100 million mark for the first time ever. Our strategic initiatives in fiber optic gyros and global satellite communications have consistently been the engines of our record-setting growth in recent quarters. During Q2, we even began to see some signs of growth in our consumer markets that had been stressed due to the recession.

Overall, things were on track in each of our markets, and we feel comfortable with our market position overall. In our guidance and stabilization revenue was up 38% from the second quarter of 2009. We enjoyed another record-setting quarter for fiber optic gyros sales, which at $10.6 million were up 49% from Q2 of last year. We received orders for more than $9 million in FOGS for remote weapon stations recently, including $7.1 million order from (inaudible) and a $2 million order from Rafael Advanced Defense Systems.

The Rafael order is significant in a couple of ways. First, it is for our recently updated dual-axis DSP-4000, and secondly it means that we are now the approved FOG provider for yet another leading remote weapon station manufacturer. This is particularly important as the US Army’s CROWS 3 initiative continues to move ahead. The Army issued another request for information just a few weeks ago, and this time expanded the potential contract size from 19,500 remote weapon stations to more than 25,000.

Based on the current 3 FOG persist configuration, this would equate to over a $200 million opportunity for fiber optic gyros. Obviously, we’re hopeful that one of our current weapon station customers wins the CROWS 3 contract, and that we will be their sole gyro supplier. However, we are preparing for an aggressive competition to win this business. As part of that effort, we are designing a new fiber optic gyro that we believe will strengthen our existing position as the performance and cost leader in the remote weapon station market.

While remote weapon stations and other military programs represent a significant portion of our FOG revenue, our FOGS are doing quite well in the commercial market as well. The key products driving this are CNS 5000 inertial navigation system, and our new CG 5100 IMU Unit, Inertial Measurement Unit. Together, these products equip KVH with a portfolio of compact, versatile and affordable three-axis inertial nav systems that offer significant competitive advantages based on their combination of outstanding performance and competitive pricing.

Sales of these commercial IMUs are on track to be over $5 million this year, making them one of the most successful new FOG product launches in our history. The expansion of our commercial FOG sales has the added benefit of continuing to diversify and increase our gyro revenue stream, while reducing the percentage of sales derived from defense applications. The revitalization of our tactical navigation business has taken a significant step forward.

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