Profile: Profiting from a Solid Market

John Keating Chief Executive Officer, Com Dev International Ltd.

The Canadian satellite-component supplier Com Dev International is likely to be one of the biggest winners in a newly dynamic global satellite telecommunications market. The company, which supplies switches and multiplexers to most of the world’s major satellite prime contractors, reported in December perhaps the best yearly performance in its history.

Backlog, revenue, gross margins, cash flow – all were up. From 700 employees three years ago, Com Dev now counts some 920 employees, with more to be added in 2007.

The next step for Com Dev is to better position itself to attract classified U.S. Defense Department business. Company Chief Executive John Keating says Com Dev teams are scouting acquisition targets in the
United States
even as Com Dev’s existing
California
office is made stronger. Keating discussed Com Dev’s strategy with Space News staff writer Peter B. de Selding.

Telesat Canada, a satellite operator, has been purchased in part by Loral, a satellite prime contractor. Will this affect your business?

We sell to all the primes, although some more than others. We sell switches to Loral, but we have been less successful selling multiplexers to them. We certainly hope to develop a great relationship with Loral.

In general we see this transaction as good news insofar as Telesat will now have an expanded role. So we have the potential for us to be well-positioned with the bigger company. And there is a potential advantage in the political sense of being part of Canadian industry.

Will Telesat now purchase satellites exclusively from Loral?

That’s for Telesat to decide. I know some existing Telesat suppliers were surprised at the speed of the Telesat decision [in December] to buy its first Loral satellite. Telesat has told us that they will be looking to make decisions based on value. Certainly they are going to want to keep some separation of the satellite operations side and the manufacturing side.

We counted 27 commercial telecommunications satellites contracted in 2006 – a much better year than 2005. How do you see 2007?

Our habit is to count transponders rather than satellites because that gives us a better sense of our market. If you remove military satellites and transponders from the count, we arrive at a total of 734 transponders on 27 satellites ordered in our 2005 fiscal year, which ended Oct. 31, and 879 transponders on 25 satellites ordered in fiscal year 2006. The 2006 figure includes two MSV satellites.

Our macro view is that satellite radio, mobile communications and broadband are still growing, and our conversations with our customers – the prime contractors – suggest that 2007 will be a pretty solid year.

Wasn’t consolidation among satellite operators supposed to result in lower capital expenditures?

The private-equity guys have been chattering away about a capital holiday. I even heard one talk about a 15-year capital holiday. I remember thinking, ‘Well, good luck to you.’ But new demand continues to show up. Of course, you never know – contracts could be canceled. But for now the market looks promising.

Com Dev has made an effort to position itself in the military satellite market. How is that going?

The commercial side is growing again, but the military market is bigger, and it’s largely a
U.S.
market. We have participated in military programs including the Advanced Extremely High Frequency and Mobile User Objective System programs in the
United States
, Skynet 5 in
Britain
and Satcom Bw in
Germany
, but these have been what I call pseudo-commercial programs. The prime contractors have been relatively free to select suppliers as they see fit.

Ideally, we would like to have our business evenly divided among the civil, military and commercial markets.

You have spoken about increasing your presence in the


United States


to win more


U.S.


military business. What are your plans?

The decision is made. We are going to be there, either through an acquisition or through a development of our existing business. We already are hiring more people for our
California
sales office, and we have been evaluating possible acquisitions. We have looked at a range of possibilities for acquisitions and we think we know what a fair price would be. We’re going to continue looking.

Would developing your U.S. presence be a way of improving access to defense programs that are now off-limits to you?

Yes, if we are going to participate in this arena then we need to get the needed security clearances and satisfy the foreign ownership and control regulations.

Would you say the International Traffic in Arms Regulations (ITAR) rules that limit technology transfer are getting easier to deal with?

ITAR regulations now are more stringent than when ITAR started some seven years ago. For a company like Com Dev, the issues arise when we buy stuff from the
United States
. It can be difficult. We have been forced to source a fair amount of items outside the
United States
as a result.

Have you reduced your purchases of U.S-supplied components because of the technology-transfer rules?

We have had to do this, yes. We would rather work with
U.S.
suppliers that we know rather than try to create relationships elsewhere, especially because the volume of business we give our suppliers is relatively low. But since ITAR was put into place the amount of
U.S.
components we buy as a percent of our total is slightly down.

Would you expect necessarily higher margins if you began to pick up more


U.S.


Defense Department work?

That might be the case generally. But the higher margins people talk about in the defense business are in part due to a lack of competition. Take Telesat
Canada
as an example. When Telesat wants to order a satellite, it might have four aggressive bidders competing for the business.

There’s competition in U.S. Defense Department programs as well, with Lockheed Martin, Boeing and others.

I don’t see much evidence that these companies are cutting each other’s throats in trying to win this business. Despite, that, I can assure you that at Com Dev we haven’t seen any evidence of the so-called pork-barrel, fat military programs.

Have you set a timetable for an acquisition or other growth in the United States that will give you a U.S. presence for bidding on coming programs like the Transformational Communications Satellite program or GPS-3?

Time is of the essence for us only because we have made the decision and so we want to move. If we made a purchase, we could take advantage of the relationships the acquired company has established. Then again, individuals you hire also have established relationships. So we are keeping our options open, but we are going to be there, one way or the other.