KVH Industries (KVHI) – VSAT Record Order Flow
KVH Industries is a leading manufacturer of solutions that provide global high-speed Internet, television and voice services via satellite to mobile users at sea, on land, and in the air. KVH is also a premier manufacturer of high-performance sensors and integrated inertial systems for defense and commercial guidance and stabilization applications.
This past Tuesday, there was an unusual buyer of 1,000 July 10 Puts for $0.90, a $90,000 bearish bet. This is a name that never appears on our radar as it rarely trades options. With these options, they will cover the company’s Q4 and Q1 earnings reports, with Q4 historically taking place in early March.
Since this is our first time covering this stock, let’s go back and re-visit the company’s Q3 results:
Satellite & Content Services
While total company revenues increased 8% Y/Y, management said a major factor from these positive results was a “third quarter record for VSAT shipments, which grew more than 125% Y/Y. In fact, VSAT shipments through the first 9 months of the year had already surpassed their shipments for all of 2017 by more than 40%.”
The company’s AgilePlans Connectivity as a Service Program was a significant driver of this growth, but traditional sales of their VSAT product increased almost 45% as well. Looking more specifically at AgilePlans, KVHI entered the quarter with more orders that they could fill in a timely fashion. Management noted most fleets are selecting the TracPhone V7-HTS, which they introduced 1 year ago today. “This was and remains a revolutionary product for maritime VSAT. It delivers download speeds as fast as 10 megabits per second worldwide, a level of performance that’s never been possible in a 60-centimeter antenna.”
Management commented that since they began shipping the V7-HTS in December last year, they’ve seen positive responses, both commercial and the leisure markets, which is reflected in quarterly VSAT results. “Now we’ve applied that same innovation to an ultra-compact system, the TracPhone V3-HTS, announced this morning, is scheduled to be unveiled at the Fort Lauderdale Boat Show in just over an hour.”
Needham analyst Richard Valera maintained his Buy Rating and $14 PT following earnings and commented that KVH saw record mini-VSAT unit shipments (125% Y/Y), while also seeing the strongest ever 3Q order levels, “which suggests another strong Q of shipments in 4Q18.” Needham added that KVHI made progress on increasing its fulfillment capacity in Q2, but noted it still remained somewhat capacity-constrained as it entered Q3. Mini-VSAT service gross margins improved Q/Q to 32.5%, and is expected to improve to mid-to-upper 30%s in C2019 as the costs of the HTS network are fully absorbed.
Fiber Optic Gyros
Also known as “FOG,” Fiber Optic Gyros are used for a broad spectrum of military applications, including guidance, optical and weapon stabilization, and precision pointing.
In Q3, the company said Fiber Optic Gyro sales rose over 50% Y/Y, marking the 7th consecutive quarter of double-digit growth in this market.
CEO Martin Kits van Heyningen would say that they’re continuing their efforts to expand capacity to match the high demand and they’ve recently fully staffed a second shift at their facility in Illinois. The jump in demand was a result of customer requirements for high performance at lower costs and applications like airborne autonomous platforms, image stabilization, mobile mapping and the general move towards autonomous everything.
A couple other notable mentions on the conference call regarding this segment include:
• They’ve recently received a $2 million order from a stabilized weapon supplier.
• At the time of the Q3 call, management said the development of its photonic chip technology and integration into compact FOGs and inertial systems is proceeding very well. They remained on pace to deliver samples of these systems to a few automotive customers before the end of the year.
• The company continues to make progress toward its goal to align with a strategic partner in the automotive space so they can take full advantage of the possibilities of this new technology.
Besides the company’s quarterly earnings announcements, KVH Industries will be at the following shows over the next couple months:
-New York Boat Show on January 23rd – 27th
-Minneapolis Boat Show on January 24th – 27th
-Seattle Boat Show on January 25th – February 2nd
-New England Boat Show on February 9th – 17th
-Miami International Boat Show on February 14th – 18th