Slowdown in Pentagon Sales Hits Gilat’s Bottom Line

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PARIS — Satellite broadband terminal provider Gilat Satellite Networks on May 23 reported a decline in revenue and profit for the three months ending March 31 but said it expects the business to recover later this year.

In a conference call with investors, officials from Petah Tikva, Israel-based Gilat said the slowdown in U.S. Department of Defense purchases has had a disproportionate effect on Gilat’s operating profit given that defense contracts typically are more profitable than its commercial business.

The U.S. defense spending picture remains unclear. However it turns out, Gilat said, its line of products are focused on the areas of U.S. military work that are likely to grow even if overall spending is under pressure. These areas include intelligence, reconnaissance and surveillance and mobile communications activities.

In the conference call, Gilat Chief Executive Erez Antebi said Gilat’s largest commercial market opportunity is the expansion of Ka-band radio frequencies for broadband communications.

Commercial Ka-band satellite systems are being fielded in many areas of the world as governments and commercial companies take advantage of the less-crowded conditions in the Ka-band compared to the more-established Ku-band.

Gilat said market forecasts show that about 25 dedicated Ka-band satellites will be launched between now and the end of 2014.

Gilat has a deal with O3b Networks of Britain’s Channel Islands to provide Ka-band ground infrastructure to connect with O3b’s constellation of 12 satellites, which are scheduled to launch in 2013 and 2014. Gilat also won work with Russia’s RTCom to provide Ka-band satellite ground terminals.

In one of its biggest recent wins, Gilat booked an order valued at up to $20 million over five years with Australia’s NBN Co. broadband provider and is now fielding satellite terminal sites at a rate of 1,500 per month, Antebi said.

Gilat’s two biggest competitors for Ka-band ground hardware are ViaSat and Hughes of the United States, both of which have their own commercial satellites in orbit to provide a captive market for ground hardware.

Antebi said Gilat won the RTCom Ka-band work in Russia despite a lively competition, proving it could compete with its larger rivals. For the defense business, he said, Gilat is counting on a technology advantage. Gilat is integrating into its defense division its Wavestream and RaySat acquisitions, both of which are expected to give Gilat a stronger presence among military customers.

“[W]e have a significant technological advantage versus the competitors, such as antenna manufacturers, other amplifier manufacturers, terminal manufacturers and so on,” Antebi said.

For the three months ending March 31, Gilat reported revenue of $76.6 million, down 4.3 percent from the same period a year earlier. The company reported an operating loss of $2.6 million compared to a gain of $800,000 a year earlier, with product gross profit margins slipping to 32 percent from 36 percent.

Gilat Chief Financial Officer Yaniv Reinhold said that despite the first-quarter performance, Gilat is sticking with its earlier forecast that 2012 revenue would end up at around $345 million, which would be a 1.7 percent increase over 2011.