KVH: Transitioning to Subscription Model, with Growth Ahead

John Barr of Needham Funds presented his in-depth investment thesis on KVH Industries (US: KVHI) at Best Ideas 2020.

Thesis summary:

KVH Industries provides communications services and content for the maritime industry, with an extra bonus of supplying a key part of the navigation system for self-driving cars. The company’s AgilePlan Connectivity-as-a-Service offering, could serve 50,000 vessels up from 1,500 today with $25 million of revenue in 2020. KVH Watch, an IoT solution for remote monitoring by maritime equipment manufacturers could be as large an opportunity as AgilePlans. KVH’s new photonic-integrated chip fiber-optic gyroscope (FOG) for self-driving cars, could be a multi-hundred million dollar opportunity. KVH’s TACNAV could be part of the Army’s A-PNT (assured positioning and navigation) program with a $150-750 million multi-year opportunity. At $250 million of revenue, KVH could earn $1.50-$2.00 per share. Risk exists with regard to new products and their effect on revenue and earnings.

At $11.25 per share, KVHI has a market cap of $200 million, $55 million of cash and $160 million of revenue. Even without the growth opportunities, KVH could be valued at $13-14 per share based on 1.1x enterprise value/ revenue. Downside protection could come from a recently enacted one million share buyback. Additionally, Vintage Capital, has a 9.4% stake in KVH. Should the company fail to execute, Vintage might push for structural change or a sale.

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Portfolio holdings subject to change. Needham Funds’ ownership as percentage of net assets in KVHI as of 9/30/19: NEEGX: 5.33%; NEAGX: 8.44%; NESGX: 3.16%.

The information presented in this commentary is not intended as personalized investment advice and does not constitute a recommendation to buy or sell a particular security or other investments. This commentary is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund and the Needham Small Cap Growth Fund. Shares are sold only through the currently effective prospectus, which must precede or accompany this report.

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About the instructor:

John Barr is a Co-Manager of the Needham Growth Fund (NEEGX). He has been its Co-Manager since January 2010. He also manages the Needham Aggressive Growth Fund (NEAGX). John started on Wall Street in 1995 with Needham as a sell-side analyst following technical software companies, including electronic design automation (EDA) companies. John rejoined Needham in 2009 because of the culture, which lives and breathes growth companies and long-term investing.

From 2000 – 2002, John was a managing director and senior analyst at Robertson Stephens, following semiconductor technology companies. He was an Institutional Investor All-Star and was ranked by Reuters as leader of one of the top software teams. In 2002 John moved to the buy-side and joined Buckingham Capital Management where he served as a portfolio manager and analyst for their diversified industry long/short domestic equity hedge fund.

John’s first career was outside of Wall Street, where he spent 14 years in sales, marketing and management, primarily in the EDA industry. Working in these small companies makes him think like an owner and to look for that trait in his investments. John loves the challenge of identifying businesses with compounding characteristics and getting to know the companies over the course of years. From his industry experience, he looks to invest in companies that he would have liked to have been part of.