Gilat Takes $31.9M Wavestream Hit in Face of Pentagon Uncertainty

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PARIS — Satellite broadband ground equipment manufacturer Gilat said it will take an impairment charge of $31.9 million on its Wavestream division to account for possible revenue declines as the U.S. Defense Department reduces spending.

The charge, which had not been foreseen, caused Petah Tikva, Israel-based Gilat Satellite Networks to report a company-wide loss of $22.3 million for 2012 on revenue of $348.4 million, compared with a loss of $5.9 million for 2011.

Gilat’s stock, traded on the U.S. Nasdaq exchange, had risen the day before the company’s earnings release on the hope of better results, and these gains were wiped out early Feb. 13 as the market digested the news.

In a Feb. 13 conference call with investors, Gilat Chief Executive Erez Antebi said Wavestream, which Gilat purchased in 2010, remains “profitable and cash positive” and improved its performance |in 2012.

He noted Wavestream’s recent contract with Honeywell to provide Ka-band transceivers for installation on airborne platforms to connect to London-based Inmarsat’s Global Xpress Ka-band network, now in development. Wavestream was also selected by Tecom Industries of the United States to provide Ku-band transceivers for commercial and military aircraft.

But Wavestream’s near-term success depends in large part on the U.S. Department of Defense, and the U.S. military spending in the next couple of years is anything but transparent.

“The key word is uncertainty,” Antebi said in a Feb. 13 conference call with investors. Wavestream provides solid-state power amplifiers and other hardware to U.S. prime contractors working on what are known as “programs of record,” meaning developments that in principle have a place in the budget. But some of those programs may be eliminated, and others cut, as the U.S. Defense Department tailors its spending in the face of budget cuts.

“It’s very, very hard to pinpoint exactly which programs will be hit by what degree,” Antebi said. “But as an overall estimate, we are seeing more softness in that area. And therefore we have somewhat modified our outlook.”

Antebi said that apart from the clouded U.S. defense picture, and the coming end of its work on Colombia’s Compartel rural connectivity contract, Gilat’s business is developing as expected.

Gilat declined to bid for an extension of the Compartel services contract because it viewed the Colombian government’s price points as too low. The contract expires in June. Antebi said the company was booking Compartel-related revenue at a rate of some $10 million for the last six months.

Offsetting the Colombia government program, which has long been a source of difficulties for Gilat, the company has won government satellite broadband deployment projects in India for a nationwide ATM project for up to 30,000 bank branches, and a satellite terminal installation contract to connect Mexican government offices and schools.

Gilat’s Peruvian affiliate won a $9.5 million contract to provide broadband connectivity to Peru’s Banco de la Nacion.

Gilat’s commercial prospects are focused on Ka-band satellite projects that are not tied to a given ground terminal manufacturer, allowing Gilat to compete for the work.

Gilat has won business for consumer broadband projects managed by satellite fleet operators SES of Luxembourg and Hispasat of Spain, and is in the middle of a contract with Australia’s NBN Co. to provide Ku-band terminals as NBN awaits the launch of its two Ka-band satellites.

Antebi declined to comment on the status of a Ka-band satellite broadband project in Russia with Rostelecom and RTCom whose status is unclear.

For 2013, Gilat is forecasting that revenue will increase by 3 percent, to between $350 million and $360 million, with EBITDA, or earnings before interest, taxes, depreciation and amortization, at about 9 percent of revenue, similar to 2012.