Unnamed Customer’s Unpaid Bills Hurt RRSat Bottom Line in 2009

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PARIS — Satellite video services provider RRSat Global Communications on Feb. 2 said its fourth-quarter and full-year 2009 revenue, backlog and profit had suffered following the company’s decision to terminate a large contract with a customer that was not paying its bills.

Omer, Israel-based RRSat, a fast-growing provider of production and broadcast services for television networks, said it had performed an in-depth review of its other customers and concluded that none posed similar problems.

In a conference call with investors, RRSat Chief Executive David Rivel declined to name the customer in question, but said it is a company that is publicly traded and continues to operate. RRSat, he said, holds out some hope that the customer will pay its bills, at which time RRSat will report the revenue as income.

In the meantime, the company said, the contract termination has removed $9 million from RRSat’s backlog and reduced by nearly 50 percent its operating-profit margin for the three months ending Dec. 31.

The news caught investors by surprise, especially since the company has portrayed itself as unwilling to take on broadcasters whose ability to pay was questionable. RRSat stock, traded on the U.S. Nasdaq exchange, fell sharply in early Feb. 2 trading.

Acknowledging that 2009 “was a tough year for our industry,” Rivel told investors not to expect a quick recovery in profit margins in 2010. RRSat, he said, will be spending more than it planned on engineering and marketing costs as it positions itself to attract the business of major broadcasters in addition to the smaller broadcasters that once were thought to be RRSat’s core customer base.

Pointing to recent contracts with NBC Universal and Fox Sports, Rivel said the company is “at a crossroads in our development” that would double its revenue in the coming years. To capture this new business, especially larger broadcasters, he said, RRSat will be making one-time investments in 2010. “This will enable us to operate as a much larger company and a more significant market player,” he said.

Rivel said that to win the Fox Sports business, RRSat connected the customer by fiber cable to RRSat’s production facility. The Fox programming is then sent up to capacity RRSat leases on the Eurobird satellite owned by Eutelsat of Paris. RRSat leases capacity on several dozen satellites worldwide and resells it to customers that also purchase RRSat’s television production and distribution services.

RRSat Chief Financial Officer Gil Efron said the investment in 2010 would amount to 1 percent to 2 percent of RRSat’s revenue, which the company estimates will be $107 million to $110 million.

That revenue target represents a 15.8 percent increase over 2009 revenue of $93.7 million, which was a 19 percent increase over 2008.

The full-year operating profit margin of 31.1 percent was down from 32.3 percent in 2008. Efron said the additional investments to be made in 2010 would keep operating profit to around 28 percent to 30 percent of revenue. Rivel said investors should look at 2010 as “a gap [on the way to] our target. Then gross margin should come back to normal levels.”

Net income for the year was $13 million, flat from 2008.

Efron said the company had $47.5 million in cash as of Dec. 31, more than enough to enlarge its operations and to make one or more small acquisitions.

Backlog, at $167.6 million on Dec. 31, was down 2.6 percent from three months earlier despite the addition of multiple contracts, principally because of the $9 million reduction for the bad-debt customer.

Some $83 million of the backlog is for service to be performed in 2010. Efron said the weighted average contract duration in the company’s backlog is 31 months.