KVHI

KVH Industries, Inc. (KVHI)

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KVH Industries (KVHI)

Q3 2010 Earnings Call

October 25, 2010 10:30 a.m. ET

Executives

Patrick Spratt – CFO

Martin Kits Van Heyningen – Chairman, President and CEO

Analysts

Hamed Khorsand – BWS Financial

Rich Valera – Needham & Company

John Bright – Avondale Partners

Jim McIlree – Merriman

Chris Quilty – Raymond James

Jason Nelson – Roumell Asset Management

Steve Kruger – Foresight Investing

Chris McDonald – Kennedy Capital

Presentation

Operator

Good day, and welcome to the KVH Industries third quarter 2010 conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Patrick Spratt, chief financial officer. Please go ahead.

Patrick Spratt

Thank you and 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 third 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 will answer them following this call.

This conference call will contain certain forward-looking statements that involve risk and uncertainty. 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 risk factors described in our quarterly report on Form 10-Q filed with the SEC on August 6, 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. The third quarter was another very solid one for us at KVH, with revenue growth coming in right on plan and earnings coming in ahead of our expectations. We achieved some major advances for our global mini-VSAT broadband network, and we won major new contracts that will result in significant financial benefit starting in 2011.

First of all, we recorded $27.8 million in sales for the quarter. That's a 23% increase over the third quarter of last year, and adjusted net income was $1.6 million, or $0.11 per share. During the same period last year we reported net income of $0.03 per share on revenues of $22.6 million.

For the first nine months of the year revenue was $85.3 million. That's a 36% increase over the same period last year, with a net profit of $8 million or $0.54 per share. Comparing adjusted net income to last year, EPS was a plus $0.34 compared to a loss of $0.14 in 2009.

Global satellite communications and fiber optic gyros continued to drive our overall growth during the third quarter. During the quarter we also received both the largest TracPhone V7 and the largest TACNAV orders in the company's history.

Now I'll touch on some of the highlights. In our guidance and stabilization business, revenue from fiber optic gyro sales was $10.5 million. That's a 33% increase year-over-year and just below the revenue record we set last quarter.

While sales of our tactical navigation products were down somewhat during the quarter, our military sales team landed our largest-ever TACNAV order for products during Q3. We'll begin to ship this $13 million order for TACNAV systems in early 2011, and we'll continue into 2012. Follow-on orders for this program are expected in the next few quarters.

On the fiber optic gyro side of the business, we elected to buy the facility in Tinley Park, Illinois that is home to our fiber optic gyro and defense manufacturing plant. The total facility is approximately 100,000 square feet, and this gives us the additional space we need for further expansion of our FOG manufacturing capacity. We incurred no debt in this transaction and our operating costs will actually be the same or less than we were paying to rent less than half the facility.

As you know, remote weapons systems have played a prominent role in the growth of our FOG business, and we believe they will continue to play a major role in the future. Nevertheless, we also recognize that it's vital to the health of our business that we not rely solely on remote weapons systems for the fiber optic gyro revenue stream.

This will be especially important in Q4 as we expect a much smaller volume from our primary remote weapon system customer as they work down inventory levels in November and December. We do expect orders for continuing productions starting again in January under the existing CROWS 2 contracts. However, we still don't have any visibility on a CROWS 3 procurement.

That's why the broad base of business we've worked so hard for our fiber optic gyro business products is so valuable right now. In Q4 last year, FOGs for CROWS remote weapons systems represented over 75% of our total FOG revenue. In Q4 this year, we expect that percentage to be down to around 15%, but we still anticipate that total FOG revenues will be around $9 million for the quarter, which is what they were last year.

We've diversified and tripled sales for new products and new applications. Just this morning, we announced a new, $1.1 million order to provide FOGs for use in the Javelin Basic Skills Trainer, which is used by the U.S. Army to train soldiers to operate the Javelin anti-tank missile system.

And our new high-precision inertial navigation systems have rapidly become a significant new source of FOG revenue. These IMUs are an ideal solution for the real-time navigation and positioning required for things like dynamic mapping.

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