KVH Industries ($KVHI): A Turnaround Story in Maritime Connectivity, Fueled by Starlink and Activist Support

Contrary to market perception, Starlink will be a tailwind for KVHI

KVH Industries (KVHI), historically a technology company specializing in mobile connectivity and inertial navigation systems, has undergone significant transformation. In August 2022, the company sold its Fiber Optic Gyroscope (FOG) and Inertial Navigation Systems (INS) businesses to Emcore for $55 million, enabling a sharpened focus on its core offering: connectivity services, particularly for the maritime sector. However, this core business is now facing unprecedented disruption with the emergence of Starlink’s Low-Earth Orbit (LEO) satellite services.

Industry Context: Disruption from Starlink

KVH's primary business—maritime connectivity—is being upended by the introduction of Starlink’s LEO-based satellite service. Maritime customers are flocking to Starlink for its lower latency, faster speeds, and reduced costs compared to traditional Geostationary Earth Orbit (GEO) satellite services like KVH’s legacy systems. Historically, KVH leased satellite bandwidth from providers such as Intelsat and SES to offer GEO connectivity. Starlink’s LEO constellation, however, is proving to be a game changer for maritime communications, offering superior connectivity at a lower price point, mirroring its disruptive impact in the residential broadband sector.

Despite this, KVH has managed to pivot quickly. Rather than competing head-to-head with Starlink, KVH has embraced a partnership model, reselling Starlink services while bundling them with their own value-added offerings, such as installation, customer support, and hybrid connectivity solutions.

KVH's Strategic Position: A Hybrid Solution in a Changing Market

While Starlink has captivated the market, many maritime customers—especially large vessels—still require hybrid connectivity solutions that combine both GEO and LEO services. There are several reasons for this:

1. Coverage Redundancy: Starlink’s coverage, while expanding, is not yet global. Hybrid solutions ensure uninterrupted service in remote regions or during temporary outages.

2. Reliability: Different satellite systems offer varying service reliability. Vessels rely on multiple providers to guarantee connectivity, particularly in extreme weather conditions or harsh environments.

3. Bandwidth and Cost Efficiency: Hybrid systems allow ships to balance bandwidth demands and costs by switching between different networks based on region and usage. KVH’s CommBox also includes cellular and WiFi integration.

4. Regulatory Compliance and Security: Some regions mandate the use of specific satellite services, and hybrid systems provide flexibility to navigate complex regulations and enhance communication security.

This hybrid approach allows KVH to remain relevant and indispensable to maritime customers by offering a comprehensive, resilient solution that leverages the strengths of both GEO and LEO systems.

Customers choose to purchase Starlink through KVH for integrated services, cost, customer support, service management, tailored billing and contracts, and industry specific expertise.

Recent Business Performance and Operational Shifts

KVH’s response to the disruption is already showing results. In February 2024, the company announced the closure of its TracVision TV antenna and TracPhone VSAT product lines, shifting entirely to third-party VSAT antennas. This move came after eight straight quarters of revenue declines and five consecutive quarters of negative product margins, with Starlink identified as the primary disruptor. With the shutdown, KVH laid off 20% of its workforce, trimming overhead costs and refocusing on its services business.

Despite this operational streamlining, KVH remains committed to serving its existing 7,000-vessel strong customer base. Recent upgrades to its VSAT network, utilizing Ku-band capacity from Intelsat and SKY Perfect JSAT, reflect KVH's ongoing commitment to delivering high-quality service. KVHI’s equipment is on 7,000 of the 36,000 VSAT connected vessels worldwide. The TAM of potentially connected vessels is 190,000 and the introduction of Starlink is accelerating these connections. Since introducing Starlink, the company has installed 1,000 Starlink terminals, the fastest install rate of any product in the company’s history.

Financial Outlook and Valuation

KVH projects 2024 revenue between $117 million and $127 million, with EBITDA in the range of $6 million to $12 million. In 2023, KVH generated $132 million in revenue, with the majority—$115 million—coming from services. Margins, however, have been a challenge, particularly for hardware, where the company saw negative gross margins of 63%. Services, by contrast, have maintained healthier margins of 43%, though these have compressed slightly in recent quarters.

The company’s decision to exit its product lines should mitigate the product losses, and the 20% reduction in headcount is expected to drive EBITDA margins higher. By Q2 2024, EBITDA margins had reached 9%, and we  anticipate this figure could rise to 15% in 2025.

With a modest revenue growth forecast to $130 million in 2025 and a 15% EBITDA margin, KVH could deliver ~$20 million in EBITDA. Applying a 10x EBITDA multiple, which is in line with peers such as VSAT, Iridium (IRDM), and IFC reseller GOGO, this would imply a valuation of approximately $12.50 per share—a 150% premium to the current share price.

The company has $50m of cash on its balance sheet and recently purchased $17 million of Starlink service in bulk. Including this cash, the company has 70% of its market cap in cash.

Activist Interest

KVH’s market valuation currently assumes a dying business under the pressure of Starlink. However, three activist investors have taken notice of the potential for value creation. JEC Associates (5.45%), Bradley Louis Radoff (11.79%), and Black Diamond Capital (16.76%) have all accumulated significant positions. Their presence could drive management toward shareholder-friendly actions, such as dividend distributions, share buybacks, sale, or strategic acquisitions. Notably, Radoff’s 13G filing suggests confidence in the current management’s approach, indicating that activists see promise in the company's recent strategic pivots.

Conclusion

KVH is at an inflection point. The company has responded pragmatically to the disruption brought by Starlink, pivoting to a hybrid model that enhances its value proposition. While the market seems to be pricing in a decline, we believe the fundamentals suggest a different story—one of adaptation and potential growth. With a refocused business, improved cost structure, and alignment with Starlink’s disruptive force, KVH is positioned to surprise the market. As the industry adjusts to the new satellite paradigm, KVH’s role as a key player in hybrid maritime connectivity could drive a significant rerating of its stock.

Catalysts

The upcoming quarter will be the first quarter since KVH entered the new bulk reselling contract with Starlink. Positive results could renew investor’s interest in the stock.

Activist investors could push for a return of capital to shareholders or a sale of the company.