Gilat Records Fourth Consecutive Quarter of Rising Revenue

PARIS — Satellite communications terminal manufacturer Gilat Satellite Networks Ltd. said its strategy of concentrating on corporate markets and on government-backed rural telecommunications projects appears to be paying off.

The Petah Tikva, Israel-based company, after having spent several years in financial difficulty, reported its fourth consecutive quarter of rising revenue and net income. Revenue, at $63.8 million, was up 4.5 percent from the previous quarter and 30 percent compared to a year ago, Gilat reported Nov. 6. Gross profit margins were stable at 35 percent.

The decision by York Capital Management LLC of New York to convert $72.4 million in loans to Gilat — and related interest — into stock also has strengthened the company’s financial position and demonstrated the continued backing of its biggest shareholder. The Sept. 27 transaction increased York Capital’s ownership stake in Gilat to 33 percent.

In a Nov. 6 conference call with financial analysts, Gilat Chief Executive Amiram Levinberg said the focus of Gilat’s VSAT, or very small aperture terminal, business on corporate customers instead of the consumer market for two-way satellite broadband terminals is working.

He said the company’s recent performance compares favorably with that of Hughes Network Systems (HNS) of Germantown, Md., which continues to lead the market for VSAT sales, according to the annual assessment of that market performed by Comsys of England. It also compares favorably with the VSAT division of ViaSat Inc. of Carlsbad, Calif., which reported that its recent VSAT sales have been flat.

Both ViaSat and Hughes have invested heavily in the consumer and small business end of the market for small rooftop satellite terminals providing their customers with broadband communications links using respectively the WildBlue Inc. broadband business and the HughesNet product line.

Gilat’s other business focus is providing rural communities, many in developing nations, with telephone and broadband services as part of government-sponsored programs promising universal service to their populations. Gilat has won several large contracts to deploy terminals and after-sales service in Latin America, Africa and Russia.

Levinberg said that business continues to grow, with the equipment-sales side growing slightly faster than the services business. He said the company also would be investing in non-satellite technologies, such as Wi-Max, that provide last-mile links to rural and remote areas from a satellite transceiver located nearby.

While continuing to dominate the market for VSAT sales, HNS is preparing a major modification to its business with the launch, now scheduled for early 2007, of the Spaceway 3 Ka-band broadband satellite, a bigger version of the WildBlue-1 satellite set for launch in December.

HNS currently leases standard Ku-band satellites from different satellite-fleet operators. Once Spaceway 3 is in orbit, HNS customers will need different antennas and other gear to communicate with Spaceway 3.

While the switch to its own satellite will entail an investment in new customer hardware, it will permit HNS to gradually reduce the amount of satellite capacity it leases. In an Oct. 27 filing to the U.S. Securities and Exchange Commission (SEC), HNS said its current payment obligations to satellite operators total $409.6 million. But these payments will drop from $136.6 million in 2006 to $93.8 million in 2007, and continue dropping as Spaceway 3 comes into service.

Spaceway 3 will be operated from the 95 degree west orbital position, a slot that HNS has had trouble securing because two Australian companies — one partially owned by the same Apollo Management L.P. of New York — had reserved the slot before HNS laid claim to it through U.S. and British regulatory filings.

HNS said in its SEC filing that, to ensure its ability to use Spaceway 3 from the 95-degree slot, it has agreed to pay the Australian rights holders a total of $9.3 million between 2006 and 2016.

Hughes also said it expects it will need to spend $102.9 million more to complete payment for the launch aboard a Sea Launch LLC rocket and to ensure the satellite.

HNS at one point had contemplated not fully insuring Spaceway 3. But the company, which is issuing $450 million in debt, has committed to its creditors that it will fully insure Spaceway 3, according to the SEC filing.