|Shares Out. (in M):||18||P/E||0||0|
|Market Cap (in $M):||175||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
KVH Industries, Inc. is a leading manufacturer of solutions that provide global high-speed Internet, TV and voice services via satellite to mobile users at sea and on land. KVHI is also a premier manufacturer of high-performance navigational sensors and integrated inertial systems for defense and commercial applications. KVHI’s reporting segments are: mobile connectivity segment and inertial navigation segment.
KVHI currently has an enterprise value of less than $110MM after selling their Videotel business in May 2019 to Oakley Capital for $90MM which was part of the mobile connectivity segment. KVHI is currently transforming, albeit slowly into a shift from a product sale to service sales company which will ultimately become a higher margin and higher growth company. However, KVHI is not known for being shareholder friendly and has an extremely flippant attitude with regards to shareholder concerns.
Mobile Connectivity Segment
KVHI’s mobile connectivity products enable customers to receive voice services, Internet services and live digital television via satellite services in marine vessels, recreational vehicles, buses and automobiles. KVHI’s CommBox offers a range of tools designed to increase communication efficiency, reduce costs and manage network operations. KVHI sells and leases its mobile connectivity products through an extensive international network of dealers and distributors.
KVHI’s mobile connectivity service sales primarily represent sales earned from satellite voice and Internet airtime services. KVHI provides, for monthly fixed and usage fees, satellite connectivity services, including broadband Internet data and VoIP services to its TracPhone V-series customers. In April 2017 KVHI announced the rollout of “AgilePlans” by KVH, its all-inclusive Connectivity as a Service (CassS) offering for the maritime industry. For a single monthly fee, AgilePlans by KVH brings an advanced satellite communications solution onboard without a costly capital expenditure or long-term commitment. AgilePlans transformed KVHI to a subscription-based model. In Q2 2019 for the second consecutive quarter, airtime revenue grew by double digits, growing 10% year-over-year for the second quarter, an increase of $1.8MM and this was attributed to a 13% increase in total subscribers. AgilePlans revenue increased more than 200% from Q2 2018 is on track to be cash flow positive in the second half of 2019 with airtime gross margins just under 35%.
Inertial Navigation Segment
KVHI’s inertial navigation products offer precision fiber optic gyro (FOG)-based systems that enable platform and optical stabilization, navigation, pointing and guidance. KVHI’s inertial navigation products also include tactical navigation systems that provide uninterrupted access to navigation and pointing information in a variety of military vehicles. In addition, KVHI’s inertial navigation technology is used in numerous commercial products, such as navigation and positioning systems for various applications precision mapping, train location control, industrial robotics but the autonomous vehicle opportunities are KVHI’s main focus with their FOG products. KVHI’s FOG devices are highly proprietary and have distinct advantages in reliability and precision over MEMS-based gyros. KVHI is now field testing its FOG-based1725 IMU on autonomous vehicles.
Corporate Governance Issues
The KVH in the company’s name comes from the founder Robert Kits Van Heyningen last name and his brother, current Chairman, CEO and President Martin Kits Van Heyningen. Martin has held this position for 12 years and has accumulated almost ~5% of the shares outstanding from very generous equity grants and under his reign of power shareholders have accumulated a negative -0.01% TRA (percent total return annualized).
· 2105: $1.2MM
· 2016: $1.04MM
· 2017: $1.2MM
· 6 board members with an annual tenure of 13.5 years
o Stanly Honey: 22.6 years, TRA 0.67%, 2017 board compensation $147.9K
o Charles Trimble: 20.6 years, TRA 10.1%, 2017 board compensation $150,000
o Mark Ain: 7.6MM, TRA 1.95%, 2017 board compensation $151.1K
o Bruce Ryan 16.1 years, TRA -4.5%, 2017 board compensation $153.6K
o James Dodez: 2.6 years, TRA -9.6%, 2017 board compensation $129.1K
· 2017 total board compensation $731.8K; a hefty price to pay for negative shareholder returns. A cost of pre-tax $0.08 EPS
· We were unable to find a single “insider buy” by a single director in the last 6 years!
· It looks like status quo is not only acceptable but required; in June 2007 Roumell Asset Management filed a 13D (all but one current board member was on the board at the time of the filing)
o At the time of the filing Roumell owned ~8.3% of the shares outstanding or 1.246MM shares; imploring the board to repurchase shares in the open market
Needless to say, KVHI is in the business of highly complex products and end markets, but employing 15 executives for Q2 2019 revenue of $39MM is excessive by any metric.
At the current enterprise value of less than $110MM investors get a solid mobile connectivity business and the opportunity to participate in the upside optionality of the autonomous vehicle business and the reoccurring, high margin AgilePlans business. And believe after all the science experiments wane KVHI could easily do $15MM to $20MM in EBITDA.
However, we believe a large and vocal shareholder is needed for this tone-deaf board of directors and management team. And until then the shareholder fatigue will be alive and well.
Potential for Activist Shareholder?