The New America

Thursday, June 26, 2003

Live, From The Comfort Of Your Car Seat, It's Satellite Television

BY MARILYN ALVA

INVESTOR'S BUSINESS DAILY

It's a round antenna that lies flat on a vehicle roof rack and measures just five inches high. For satellite TV antennas, that's small.

But when it goes on the market soon, the impact on the company that makes it could be anything but small.

The antenna, called TracVision A5, will let SUVs and minivans receive live satellite TV programming for the first time.

"Think of it like a set-top box," said J.P. Mark, analyst with Farmhouse Equities Securities.

The company that makes it, KVH Industries Inc., (KVHI) stands to get a big financial lift if the A5 hits a nerve with the public.

KVH's 2002 revenue totaled less than $50 million. It sells products ranging from digital compasses and military navigation parts to satellite antennas for yachts and motor homes.

If it sells only 20,000 A5s a year, the top line would expand by about $40 million, Mark estimates.

"They don't have to sell a million products next year for this to be a huge success," he said.

KVH's first foray into the auto market will target SUVs and minivans — especially those with onboard entertainment systems. About 5.2 million SUVs and minivans come off the assembly lines each year. Nearly a third of them are equipped with the entertainment gear, industry sources estimate.

The problem with current systems is that they offer only taped entertainment from DVDs. At most, autos might have satellite radio.

The A5 would bring live satellite TV programs and, eventually, Internet access.

"We're going to be selling into a very large market that has already adopted video entertainment," said Pat Spratt, KVH's chief financial officer.

KVH plans to sell its TracVision A5 antennas to auto resellers and distributors in a rollout that will start later this month and ramp up in the third and fourth quarters.

Close to 1,000 locations should have them in stock by year-end, Spratt says.

KVH has already lined up Tweeter Home Entertainment Group Inc. (TWTR) and other electronics chains. Some auto dealers have also showed interest.

"We're marketing to and selling to the early adopters, the types of people who are attracted to high-end electronics equipment," Spratt said. "They are not as price-sensitive as the mass market, which we would expect to go to over time."

Military Precision

The A5, which comes with an integrated receiver that can decode satellite signals while in motion, will sell for about $3,000. KVH expects to net about $2,000 per system. It might get additional fees from satellite providers Direct TV and Dish Network, analysts say.

KVH has spent years developing the product. It invested nearly $20 million over the last couple of years alone, Mark says. That's largely why the company lost money each year between 1998 and 2002.

Its engineers essentially formatted phased-array technology — which is normally used in military applications — for commercial use, making the devices less costly and small enough to fit unobtrusively on the roof rack of a van or SUV.

"We began with a base of knowledge that gave us a good jump start," Spratt said.

That base began more than 20 years ago with another first: a digital compass. In 1999, KVH branched into the recreational vehicle market.

It currently counts 11 RV manufacturers as customers. They combine for about half of the company's total satellite revenue, which makes up about half of the company total. The defense side makes up most of the rest.

Those businesses combined for $13.1 million in first-quarter sales, up 36% from the prior year. Earnings came in at 2 cents a share, the third straight quarter of black ink.

Analysts polled by First Call expect full-year earnings to hit 26 cents a share, then rise 181% to 73 cents in 2004.

The RV business will help drive future growth. It remains robust due to the aging population and the growing popularity of drive-to vacations.

The defense business holds similar promise. In a recent report, analyst Chris Quilty of Raymond James & Associates predicted strong growth for KVH's precision-location components for military land vehicles.

The firm landed its largest defense order, for $10 million, prior to the war in Iraq. It recently won its first order for a new line of navigation parts for smart weapons — one of the defense industry's fastest growth areas, Quilty writes.

A partnership with defense supplier L-3 Communications Holdings Inc. (LLL) on future projects also holds promise.

Drawing A Crowd

Still, TracVision A5 could quickly become the company's leading product category. KVH officials say they're unaware of any other firm that has or plans to have a similar product on the market soon.

If the A5 becomes a hit, KVH might have to share the business with rivals, however. Analysts say competition would likely heat up, perhaps from suppliers with deeper pockets and closer ties with auto-industry players.

"As far as I know, no one is even close to developing this," Mark said. "(KVH) would have at least a two-year lead on any competitor."