Financial Reporting: KVH Industries – Q3 of 2011

…The company's fiber optic gyro (FOG) solutions, TACNAV(R) military navigation systems, and related services was $7.7 million in the third quarter of 2011, down 38% on a year-over-year basis…

October 26, 2011 – KVH Industries, Inc., reported financial results for the third quarter ended September 30, 2011. Revenue for the third quarter of 2011 was $25.6 million, down 8% from the quarter ended September 30, 2010. Diluted earnings per share for the quarter totaled $0.04 on net income of $0.6 million. During the same period last year the company reported net income of $0.6 million or $0.04 per diluted share on revenues of $27.8 million. Excluding transaction costs associated with the acquisition of Virtek Communication, and a change to the deferred income tax valuation allowance, 2010 quarterly adjusted net income was $1.6 million, and adjusted diluted EPS was $0.11.

For the nine months ended September 30, 2011, revenue was $80.6 million, down 5% compared to $85.2 million for the nine months ended September 30, 2010. KVH reported a net loss of $0.7 million or $0.05 on a per share basis for the first nine months of 2011. During the same period last year, the company reported net income of $8.0 million or $0.54 on a per diluted share basis. Excluding transaction costs associated with the acquisition of Virtek Communication and changes to the deferred income tax valuation allowance, 2010 nine months year to date adjusted net income was $5.0 million, and adjusted diluted EPS was $0.34.

"Although total revenue for the third quarter was lower than expected, we saw continued strong growth in our mini-VSAT Broadband business, which increased 51% year over year," said Martin Kits van Heyningen, KVH's chief executive officer. "Unit sales of our mini-VSAT Broadband TracPhone(R) systems were up 77% compared to the same quarter last year. Revenue from our fiber optic gyro (FOG) solutions was well below our expectations, due primarily to delays in customer programs."

In the third quarter of 2011, mobile communications revenue was $17.9 million, a 17% increase on a year-over-year basis.

KVH's guidance and stabilization revenue from the company's fiber optic gyro (FOG) solutions, TACNAV(R) military navigation systems, and related services was $7.7 million in the third quarter of 2011, down 38% on a year-over-year basis.

"Clearly the weak economy and continued uncertainty impacted our results in the third quarter," explained Mr. Kits van Heyningen. "Going forward, we are assuming that decision cycles for some commercial and government projects will take longer in the current economic environment and we are planning accordingly. However, we are entering the fourth quarter with a stronger order backlog that gives us better visibility than we had in the third quarter.

Our FOG and TACNAV businesses continue to have excellent potential. Our new DSP-1750 fiber optic gyro is generating a good deal of interest and KVH FOGs are being designed into important new programs. Our TACNAV business continues to show signs of resurgence, and we anticipate significant follow-on orders during the coming quarters. Although we had no product revenue from our aeronautical business in the third quarter, we entered into a three year service and support agreement with LiveTV and began to see service revenue from this agreement in September."

Addressing the company's financial results, Patrick Spratt, KVH's chief financial officer, said, "For the quarter, gross margin of 40.6% was better than expected and showed an improvement of 140 basis points over the second quarter. This was, in part, the result of the growth of our mini-VSAT Broadband airtime services and the associated positive leverage of our network infrastructure, improved manufacturing efficiencies and some favorable overall product mixes.

The sequential improvement in our mini-VSAT Broadband airtime service gross margin was quite positive. Compared to the second quarter of this year, gross profit from our VSAT airtime services approximately doubled, and the gross margin percentage improved by about 800 basis points. We also slowed some of our operating spending plans as we saw signs that revenue for the quarter might be below our expectations.

The third quarter EPS included the benefit that resulted from reaching agreement with LiveTV relative to the termination of our original antenna development and production agreement. This benefit was approximately $840,000 and was recorded as Other Income. During the quarter we repurchased approximately 282,000 shares of our common stock. The repurchase program has continued in the fourth quarter."

Looking ahead to the fourth quarter, Mr. Spratt said, "We expect to see continuing strong year-over-year growth in our mini-VSAT Broadband business, with both total revenue and unit sales exceeding the growth rates we reported for the third quarter. We also have a substantial backlog for fourth quarter delivery of our TACNAV military navigation products. On the other hand, we have lowered our expectations for near-term revenue from the CROWS II program because the visibility to demand is currently very limited. With these factors as the basis, fourth quarter revenue is projected to be in the range of $31 to $34 million, and the bottom line earnings are projected to be in the range of $0.08 to $0.14 per share. Our effective tax rate for the year is projected to be modestly negative. We expect that our strategic growth businesses, along with anticipated new orders for our TACNAV products, will drive solid top line growth and improved margins in 2012. The recurring nature of our airtime services revenue stream provides a solid base of business for the future. If the worldwide economies show any signs of improvement, we believe we are positioned to leverage that to our benefit as well."

Mr. Kits van Heyningen concluded, "We are fully confident in the development of our strategic businesses. Our products and services are being broadly adopted in the markets in which we compete, and we continue to increase our market share. We fully expect to see continuing strong long-term growth in each of our strategic markets."

Recent Operational Highlights:

• On October 20, 2011, KVH Industries Pte Ltd., opened their new Asia-Pacific headquarters office, which features a showroom, test center, and training center for partners and customers in this key region.
• On September 21, 2011, KVH announced that MOL (LNG), subsidiary of leading Japanese multi-modal transport company MOL, chose KVH's TracPhone V7 and global SATCOM service to enhance business and crew communications aboard its tankers.
• On September 14, 2011, KVH introduced the 1-meter TracVision HD11, the world's most sophisticated marine satellite TV system, which allows boaters to enjoy HDTV programming from services around the world using an exclusive, digitally programmable multi-beam Universal World LNB.
• On September 6, 2011, KVH announced that mini-VSAT Broadband service was live and available in South America, completing the global rollout plan and making mini-VSAT Broadband the world's largest marine Ku-band network.
• On August 22, 2011, KVH produced its 50,000th fiber optic gyro, reinforcing its reputation as a key provider of guidance and stabilization solutions for military and commercial applications.