RRSat Says Higher Costs Will Weigh on Results into 2011

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PARIS — Satellite video services provider RRSat Global Communications Network said it expects its financial performance through early 2011 will be hobbled by the fact that it is paying for one of its customers to double-broadcast its programming.

In addition, the company said certain customers weakened by the global financial downturn have held on to their satellite programming contracts until the last minute but now may be in such dire straits that RRSat will be obliged to cancel their contracts.

Re’Em, Israel-based RRSat leases satellite capacity, usually for multiyear periods, on several dozen satellites worldwide, permitting television broadcasters to reach audiences beyond their home bases. RRSat also provides program translation and other postproduction functions as part of its service.

The company in 2009 told investors it would be taking a harder line on customers who are late in paying their bills, and it is apparently making good on this threat. In the three months ending Sept. 30, RRSat said it evicted several customers whose problems date from 2009. Because cutting off satellite links is crucial to these broadcasters’ health, the RRSat contracts are often the last to feel the effects of a financial problem.

When these two elements — a costly double-broadcasting, on separate satellites, of a customer’s programming, plus the eviction of a few nonpaying customers — are combined with RRSat’s higher personnel costs as it adds sales staff, the result is what RRSat Chief Executive David Rivel called a “challenging” period.

“There were targets for the past quarter that we did not meet,” Rivel told investors in a Nov. 9 conference call.

Broadcasters use double illumination when they are testing new programming formats. Some need to broadcast in both standard- and high-definition formats as their customers transition to high-definition equipment.

RRSat said that in its case, it had agreed to provide double illumination for a customer at the same time as it sought to change its transponder lease contract from one satellite operator to another.

As Rivel described it, RRSat discovered that the satellite capacity it sought was available more quickly than RRSat needed. Fearing it would be snapped up by someone else, the company elected “to take it the moment that we found it,” Rivel said.

RRSat has thus found itself paying for more capacity than it needs, a situation that RRSat Chief Financial Officer David Aber said cost the company $600,000 in the three months ending Sept. 30 and would cost about the same amount in the last three months of the year. The problem will still exist in early 2011 but should end before March.

Rivel said dual illumination is part of the service RRSat prides itself on offering customers who count on a smooth transition as RRSat, for reasons of its own, switches transponders within a single satellite, or goes from one satellite to another.

The company also has made a point of saying it does not purchase satellite capacity on speculation, but waits for firm customer demand before leasing transponders.

Rivel did not clearly explain why the company saw fit in this case to lease a new transponder months before it was needed. He promised investors it would be a “rare” event.

RRSat reported revenue of $24.7 million for the three months ending Sept. 30, up 2.3 percent over the same period a year earlier. But operating income was down 56 percent, to $1.8 million, in part because of much higher operating expenses.

To prepare for future growth, the company has increased the size of its marketing and engineering teams. Rivel said this investment, while causing short-term financial hiccups, would pay off in the coming quarters.

One bright spot in the earnings report was RRSat’s backlog. While slightly swollen by the rise in the value of the euro in September, RRSat’s backlog increased by $10 million, to $177 million, as of Sept. 30, compared with the same period a year earlier. Its contracts are typically less than five years in duration. Rivel said up to 80 percent of the company’s forecasted 2011 revenue is already in backlog.

RRSat’s two principal competitors are Globecast, which is owned by France Telecom, and Arqiva of Britain. Both are several times the size of RRSat, but Rivel said the three companies combined have no more than 5 percent of the market, with the rest being handled by dozens of small enterprises, or by the broadcasters themselves.

Rivel said none of the three companies is taking market share from the other two. Instead, he said, growth is coming at the expense of the smaller providers.