So, I thought it might be of value to provide some perspective on the impact of HTS over the next year. HTS Revenues, so far, on a sequential basis, are tracking at $700k-800k. I’m expecting this to grow to approximately $1.5m sequentially. This number is factoring in seasonal changes, churn and what I believe was a reduction of v3-ip sales into the channel, in Q3. This will result in $6m or 30%+ yoy airtime comps in q4 2019. The reasons for these expectation are many. First, I expect churn to go down significantly, now that the V3-HTS is available. Churn has been significant over the last 3 years. It started to slow in the 2nd half of 2017 and stepped down again, with the introduction of V7-HTS. This product didn’t eliminate churn, however. The reason is competition was still strong below $25k/unit. V3-HTS has changed that in a very significant way and expanded the market opportunity because of cheaper data rates and expanded coverage. It appears V7-HTS unit sales were slightly below 350 for the quarter. I believe sales for this product will drop to slightly below 300 in Q4 and eventually stabilize in the 250 to 350 range per quarter. I think worst case scenario is 200 per quarter in a recessionary environment. My thoughts on these numbers are considering the overall performance of the non-HTS market, over the years, at approximately 2k units a year and factoring in the bump up when FX came on-line. All indications are that the numbers for FX leaned to the 1-meter category, in terms of sales volume. This pushed sales between 3-4K total vsat units a year. KVH’s share of that dropped below 800 units in 2017 and I believe V3-ip was not selling well because of pressures coming from both high and low ends of the pricing spectrum. I believe V3-HTS is now in a position to take away significant share of FBB as well as low end vsat competition brought on by Intellian. Up until this point Inmarsat was able to leverage pricing power to minimize the v3-ip, as a competitive threat. V3-HTS is a significant shift in terms of price(per mb), performance(5/2mb), size(in terms of the whole package compared to other vsat options as a L-band replacement) and geographic footprint(comparable to L-band and FX for 99% of users). It’s clear V3-ip fell short of user needs, in one or more of these categories because FBB sales continued to grow for the 1st few years after the release of the v3. This is no longer the case. Reducing the price per mb isn’t going to solve the obvious trade offs with FBB. It’s just too inferior as a product, now. It’s likely KVH will capture significant market share. I’m modeling quarterly sales in the 300 unit/quarter range but I believe it could be double that. Consider for a moment that before HTS products started showing up, FBB was selling 8k-10k units a year and 2k vsat units were sold annually, providing less than 4/1mb and mostly 1-meter+. In size Data rates were significantly higher. And the potential pie is bigger, now that costs have come down, while speeds and footprint have improved.
So, modeling 200 V7-HTS’ and 300 V3-HTS’ per quarter, little churn and an ARPU of $1k/unit/month, minivsat revenues will increase $1.5m sequentially, eventually exceeding $6m per quarter, on a year over year basis. It will take 5 quarters to get to this run rate but the absolute sequential numbers should be above $1m in q4(offset by approximately $1m in seasonal idling) and start accelerating significantly, in each quarter, beginning q1.
Given the fact that V3-HTS sales are unit sales, we can expect solid double digit sales of SatCom hardware, in each of the next 4 quarters. At this point, it’s difficult to discern the impact of LTE-1 hardware but I’m modeling this to offset any sales decline in other SatCom TV and FBB hardware. I would not be surprised to see KVH reduce its footprint in these categories while growing LTE-1.
Content is still a question mark. Vsat unit sales growth, combined with recent training initiatives should turn things around in content. I strongly believe the big uptick comes with improved entertainment options. Until that point, I think it’s best to assume this category will flatten out and grow only slightly, beginning q1 next year.
There are very big tea leaves in Inertial Navigation. KVH didn’t bring on a second shift for fulfilling the existing backlog. They are clearly getting indications that demand is picking up, in a sustainable way. Commercial FOGs are already tracking for 20% sales growth next year. TacNav has contracted to negligible levels so, negativity in this category is unlikely next year. Any military FOG Contract above $5m will likely bring about positive growth next year for Inertial Navigation. Of course, this category continues to be difficult to figure out. And then there is the likely introduction of better cheaper gyros. Even if auto level scalability is more than a year away, the new products are likely to move the needle, in material ways.
There’s a reality in KVHs numbers. They are still difficult to predict because of content and TacNav. But the trend is clearly going in the right direction and these two categories are at or near bottom. When this happens, revenue growth will be rapid and earnings will follow. Revenue growth will be above 10% in q4, even with negative to flat content and TacNav. This will be the first of many double digit growth quarters. KVH is way underpriced give, the very early stage of it’s turn around.
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