A strong increase in profits and revenues in the second quarter for Gilat Satellite Networks has given the company’s CEO and financial analysts reason to be optimistic about the satellite service provider’s future.

Revenues for the second quarter, which closed June 30, were $61 million, up almost $10 million compared to the same quarter in 2005. Gilat posted a profit of $2.1 million in the most recent three months, rebounding from a loss of $1.1 million in the 2005 second quarter.

"I think that generally speaking we are in a very good period of time for our market in terms of macroeconomic considerations," Amiram Levinberg, Gilat’s CEO, told Satellite News. "There are a large number of VSAT deals taking place. As long as the macroeconomic situation stays like this, it will help the entire industry as well as us."

Gilat has been a restructuring mode and the results appear to suggest the company is on the right track, Tom Watts, a satellite equity analyst at SG Cowen, said in a research note. "Gilat reported solid [second quarter] results, confirming our thesis that Gilat is back on the path to revenue and EBITDA growth," he said. "We maintain our outperform rating and see 50 percent-(plus) outperformance potential relative to the market over the next 12 months."

Levinberg outlined some growth areas for the company. "If you look at the three VSAT markets, which are: consumer, enterprise and rural telecoms, we are more focused on the enterprise and rural telecom markets," he said. "In the rural telecom market, we see the development of applications by customers who are subject to universal service obligations. We also see government budgets going into rural telecom in certain countries. In the enterprise market, we should distinguish between the U.S. and other markets. While in the U.S. where the existence of terrestrial alternatives is a challenge for the satellite solution, growth could come from managed networks services and hybrid networks. Outside the U.S., we see the traditional market driver which is broadband connectivity in absence of terrestrial alternatives."

Gilat also is hopeful it can develop its Skyedge family of satellite communications platforms which are designed to deliver voice, data and video services over a single platform.

"We have quite a few models of Skyedge right now," Levinberg said. "The basic one is called the Skyedge IP and it is a simple star topology. We then have mesh-capability or multistar topology in other models of this product. We have other models which are more tailored toward telephony or cellular backhaul applications.

One of the biggest moves for Gilat has been its recently announced agreement with Cisco, Levinberg said. Gilat has been certified as a Cisco Technology Developer Partner and, a VSAT will be added as a module into the Cisco routers, allowing communication with a Skyedge hub. "We see this as an important milestone," Levinberg said. "With every Cisco VSAT NM sold, we should see revenues from the sale of accompanying Gilat equipment. In addition, Spacenet will serve the North American Cisco VSAT market as a certified hub operator and service provider, giving rise to an additional potential revenue stream. If the Cisco VSAT is well received, we hope that many of our Skyedge hub operators will become certified service providers for these Cisco VSATs. That said, this VSAT is provided by Cisco and sold through Cisco’s sales channels with typical sales cycles in our industry of nine to 12 months. As such, Gilat’s visibility into the size of this market and its future success is hard to estimate."

Watts also believes the Cisco link-up could be crucial to the company’s revenue opportunity. "Gilat sees a large potential market for the new Cisco VSAT network module which supports disaster recovery and business continuity applications in North America," he said. "One customer is trialing the product. 2006 revenue guidance of double-digit growth assumes no revenues from the Cisco VSAT network module and Gilat sees this as a 2007 opportunity."

Gilat also has high hopes for its Spacenet subsidiary, a provider of managed network solutions by satellite and terrestrial connectivity for business, government and residential users in North America and around the world. In July, former SES Americom Chief Commercial Officer Andreas Georghiou was named CEO of Spacenet.

"Spacenet’s strategy is to go further up the value chain by selling more than just connectivity," Levinberg said. "In particular, Spacenet offers managed services and hybrid solutions. Hybrid solutions are usually a combination of DSL and VSAT, sometimes in different locations and sometime in the same site. This would be mainly for disaster recovery and business continuity applications. We view this as a new and interesting market for us."

— Mark Holmes

Contact, Shira Gafni, Gilat Satellite Networks, e-mail, [email protected] Tom Watts, Cowen, e-mail, [email protected]