Undiscovered Investment in Satellite Communication Networks
First, let's all make sure we know something about Gilat Satellite Networks (NASDAQ:GILT), the industry it serves, why I believe solid long-term growth lies ahead. I'll also say right upfront this brief report should not be considered an "analyst report" full of numbers written for other analysts and investment professionals. It is written for you!
The Evolution of Commercial Satellite Communications
The commercial SATCOM industry was launched in 1965 to provide a few basic telephone and TV circuits for AT&T and a few TV stations. Over the years, satellites became important long haul transmission facilities for telephone companies eventually providing satellite networks via VSAT (Very Small Aperture Terminals) networks for businesses dispersed over a wide areas spanning even continents. This included gasoline stations, restaurants, banks, distance learning and indeed any business spread out over a wide area. The VSATs offered such companies an alternative to using the telephone utilities and their government controlled regulations.
This industry matured over the years until recently when technology advances inclusive of the Internet replacing the switched network created a whole new set of uses for satellite-based communications, some of which are emerging as this report is written.
Internet Aboard Commercial and Corporate Passenger Aircraft
Soon, passengers aboard commercial airplanes (already aboard corporate jets) will be able to use their laptops, smartphones, tablets with a wireless capability to communicate just as now done in your home, office, car, etc. This is already being implemented by Boeing with Honeywell as prime contractor (GlobalXpress) and should be available on airplanes soon. It already is available aboard private corporate jets. Gilat Satellite Networks is Honeywell's provider of the aircraft to satellite microwave communication system.
Satellite on the Move (SOTM)
Satellites and Ka band (very high frequency microwave equipment designed to operate in the 25-40-Ghz (Gigahertz) band) have made it possible to provide reliable Internet-based communications aboard high speed trains (200 mph plus), buses, vans, military vehicles and nearly anything that moves for low profile satellite antennas to be placed aboard high speed trains and indeed any mobile vehicle. This breakthrough in communications is made possible by low profile antennas and associated microwave equipment capable of operating in harsh environments.
Unmanned Vehicles (Aerial and Surface)
SOTM systems such as low profile satellite microwave Ka band integrated antennas have made possible the UAVs (unmanned aerial vehicles), tactical military drones and SUVs (unmanned surface vehicles) such as the new unmanned high speed reconnaissance boats used for coastal homeland Security protection and drug interdiction. The success of the military drones is owed to the capability of being guided to targets by remote "console pilots" receiving real time targeting intelligence via satellite and firing missiles to destroy terrorist targets in Pakistan, Afghanistan, Yemen and anywhere. The UAVs (military drones) is the very means available to seek out and destroy terrorists with targets as small as a car on a desert road to a major training camp.
Satellite-Based Cellular Communications Backhaul
Until recently, cellular communication networks were impractical in remote or underserved rural areas of the world which limited their development. This includes remote places in the South American Andes mountains, jungles and the steppes of Central Asia. Right here at home in the U.S., there are many rural and remote areas without cellular service putting travelers across many highways out of touch. For example, until now, travelers on the Alaskan Highway from Seattle to Alaska and within Alaska had no enroute communications available. Soon, most if not all such previously unserved places will have the same communications available we all take for granted, thanks to satellite-based backhaul. Backhaul access to the world network is simply provided by emplacing a satellite terminal in such locations capable of servicing a cellular network on the surface by establishing a satellite link connecting that remote location to anywhere in the world. Some of these terminals even can be deployed integrated with a small local area network and the good news is that no local power is required because these have solar power packs. Rural areas can be supplied with these "small cell satellite-based networks" serving farms, villages, mining fields and temporary work locations.
Emergency and Disaster Relief Communications
When disaster strikes like earthquakes, tsunamis, terrorist acts, hurricanes, tornadoes, civil riots and other situations that destroy existing communications, the need for immediate emergency relief communications becomes critical. Satellite-based small cell stations inclusive of all that's required including antennas, local area network and solar power can be delivered via air and operational within hours of arrival.
Gilat Satellite Networks
Gilat Satellite Networks is an Israeli-based global company with over 25 years of experience, with more than a million systems installed at nearly 100 countries. Gilat has provided enterprises, service providers and operators with efficient and reliable satellite-based connectivity solutions, including cellular backhaul, banking, retail, e-government and rural communication networks. Gilat also enables leading defense, public security and news organizations to implement advanced, on-the-move tactical communications on board their land, air and sea fleets using Gilat's high-performance SOTM solutions. Go now to Gilat's website, to visualize how and where Gilat's systems are being deployed worldwide with offices on all continents and in most major countries. Gilat also provides managed network and satellite-based services for rural telephony and Internet access via its subsidiaries in Peru and Colombia. I also suggest you visit Gilat's most recent corporate presentation which gives an excellent overview.
Summary of Gilat's Fundamentals
- 2014 revenue: $235 million
- Operating income: $5 million
- Cash: $28 million
- Long-term debt: $27 million
- Book value per share: $5.3
- Institutional ownership is 70% with 35% of total shares owned by FIMI Opportunity Fund, which under Israeli law gives board control. FIMI purchased these shares in the past few years with an estimated paid for cash cost averaging $4.5 per share.
- CEO through last year acquired 850,000 shares or 1.8% of outstanding shares and paid $4.95 for the final acquisition. Was Chairman of Israeli Aerospace Industries.
- Worldwide employees: 936, with 328 in Israel and 109 in the U.S.
Highlights Over the Past Several Years
- Gilat sold its U.S. based Spacenet division offering VSAT services in the U.S. for $16 million cash getting rid of a mature business yielding about $77 million annual revenues.
- Acquired Raysat and its line of low profile satellite antennas making it possible for Gilat to offer SOTM (satellite on the move) systems which is an important emerging requirement in military systems and the rapidly growing satellite mobility sector.
- Acquired Wavestream and its line of advanced satellite microwave amplifiers serving the defense markets.
- Signed agreement with Honeywell Aerospace for satellite systems to GlobalXpress, which is the new system providing onboard Internet to the corporate aircraft market now being expanded by an agreement with Boeing to implement the system aboard commercial passenger aircraft using Inmarsat satellites.
- Developed the "SatTrooper" military manpack satellite on the move (SOTM which is a lightweight portable tactical military satellite manpack providing data, video and telephony under the toughest battle and environmental conditions. The small-size antenna can be set up in just a few minutes with automatic pointing and does not require any tools for assembly.
- Developed satellite-based systems enabling remote control of UAV (unmanned aerial vehicles such as military drones) and SUV (surface unmanned vessels) for naval and coast guard ships suitable for coastal surveillance and operations.
- Introduced self installable CPE (consumer premises equipment) designed for underserved areas making it possible for ISPs (Internet Service Providers) to offer full high speed broadband internet to nearly any area. The initial markets were in Europe and Australia.
- Introduced small cell self contained solar powered backhaul satellite terminals making cellular providers to offer service nearly anywhere filling weak areas as well as opening new markets.
- Restructured the company to focus on the above high margin high growth markets.
- Realignment of ownership from original founders to private equity firms such as the FIMI Israeli Opportunity fund, which purchased over the past few years a 35% control interest with an average per share cost of about $4.5, thus significantly limiting the downside risk of share prices.
- Cellular carrier RuralCom selects Gilat as Prime Network Contractor for its Alaska Highway and BC Coast Networks.
- Gilat will provide a bandwidth-efficient cellular backhaul solution for 2G and 3G sites of SMART Communications in the Philippines.
- Gilat awarded $285 million Regional Telecommunications Infrastructure Project by Peru's Fitel. This is a ten-year framework contract with the expectation of additional revenues over time as network users grow providing a stable revenue base over the long term.
- Latin American Telco selects Gilat's high-throughput satellite platform.
- Gilat offers Innovative Cellular-Over-Satellite Solutions at LTE Latin America 2015
- Private equity group (FIMI Israeli Opportunity fund) acquires a 35% control position and the former chairman of Israeli Aerospace Industries taking over as chairman and CEO of Gilat having himself purchased for cash nearly a million shares most at $4.95 per share. This is significant because owners who paid for their shares tend to add more value for shareholders.
Why Do I Believe Gilat is a Strong Investment for the Long Term?
Gilat Satellite Networks, over the recent several years, has repositioned itself as a leading pure play investment in the expanding satellite-related growth markets. The recent restructuring focusing itself on high margin systems which will see increasing demand for years provide a stable and profitable revenue growth base. The global reach with multiple products in military, telecom providers, vertical and consumer markets offer a strong diversified business base. The low number of shares outstanding (43 million) offers opportunity for future stock splits should the stock rise significantly and opportunity for further growth as the rising equity value provides capital for internal and external expansion.
Note of Caution: Due to the combination of low number of shares outstanding and high institutional ownership and the 35% control position by FIMI, shares can be very volatile with wide fluctuations up and down with occasional days of low volume.