Norsat Claims 18-Month Lead In Broadband Satellite Race
stockhouse.com
Shares of Norsat have been climbing steadily higher on good news from numerous fronts, after suffering years of a flat-lining stock chart. The company's multi-faceted business model, based on engineering satellite dishes and related ground-based equipment, and a distribution agreement for Hughes Network System's DirecTV product, will double revenues in the next year, and may soon lead to profitability. But the real money for Norsat, says CEO Robert Bucher in an exclusive interview with StockHouse, is in the broadband space, especially as DirecTV's installed base upgrades to broadband connections. Broadband Internet via satellite will be a multi-billion market in which the company has already claimed a foothold. Says Bucher: "My personal belief is in the area that we are involved with in the broadband market, we have at least an 18-month lead on everyone else out there."
Toronto, ONT, January 4 /SHfn/ -- For years, Norsat International [NSATF] was plagued by management overhauls, and inventory overloads. The stock chart of the company, which engineers and distributes ground-based satellite products for the wireless communications and cable television industries, bore an unfortunate resemblance to the ECG of a fading heartbeat.
But recently, a number of factors have revived the ailing patient, pushing shares listed on the Nasdaq Small-Cap exchange up more than 400% since the beginning of November, on volume reaching into the seven-figure range.
First, US legislation positively affecting satellite television service providers was passed. Investors showed their approval for the bill that allows satellite companies to provide local television channels to subscribers. This bodes well for DirecTV, a product developed by Hughes Network Systems', a division of Hughes Electronics [GMH], and heavily distributed by Norsat. The second driver behind the stock price is a recent $8-million private equity placement by an unnamed San Francisco-based institution. The unsolicited investment reflects a certain faith in Norsat as it repositions toward the broadband wireless communications market.
The sharply escalating stock price, on solid volume, bears further proof that the market is beginning to recognize Norsat's positioning. "It's the US market waking up to what this company does, as they have woken up to other companies that are involved with this market space," opines CEO Robert Bucher, in an exclusive interview with StockHouse.
Yet, no analysts have initiated coverage of the company, and many were justifiably surprised by its sudden turnaround. Norsat might finally be about to garner some of the attention it has been sorely lacking. With the recent hiring of a US investor relations firm, and its revamped industry direction, it could be in a position to scale new heights.
"I think comparably, our stock price has a long way to go from where we are right now," says Bucher, adding that Norsat has revenues, where many of its competitors do not. "We're like a very exciting wireless Internet startup, but we've already got revenues to support the company."
Right now, Norsat has a varied business model, based on several ventures. "We basically have a three-leg story company," explains Bucher. The original foundation of the company is its traditional commercial satellite business, the Satellite and Cable Group. Now, it is building on its satellite technology to target broadband, creating the second prong of its forked structure. The third part of the company is the Norsat America subsidiary, which distributes DirecTV, and DirectPC for Internet connection.
While Bucher tends to refer to this last portion of the business somewhat dismissively, reserving his enthusiasm for the exciting broadband realm, it currently provides 60% of the company's revenues. Direct Broadcast was an incredibly successful new technology offering in the consumer market. Subscribers, tired of cable's dominance, signed up in droves for direct broadcast-numbering 600,000 in 1994, to grow to more than 10.2 million in June 1999. DirecTV accounts for more than 7 million devotees.
Now, with the escalating demand for fast Internet access, satellite broadband products may enjoy the same kind of market acceptance. That, at least, is Norsat's hope. While the company acts only as a service distributor for DirecTV and DirectPC, its capacity to pursue the broadband market stems from its roots as a satellite engineering company.
The Satellite and Cable Group brings in the remaining 40% of revenues, with new products introduced each year. Bucher estimates Norsat controls up to half the global market for traditional satellites. "We're known as the premier label in that business, for quality and performance." That customer base is a crucial one for Norsat, as it will become the source of upgrades revenue for the company's new broadband terminals.
This is where the future of satellite lies, believes Bucher, and the race is on to stake out the territory. Norsat already face competitors in the nascent space, openly going up against companies such as Adaptive Broadband [ADAP]. In Bucher's view, the broadband market will be filled with players from the satellite, cable and even telco sectors. "What is key in this market is being first," he says forcefully. "My personal belief is in the area that we are involved with in the broadband market, we have at least an 18-month lead on everyone else out there."
That lead is built on two important satellite ground station product rollouts initiated in the past year. Norsat won a contract to be the preferred supplier of an outdoor unit that will be integrated into a Satellite Interactive Terminal, for Europe's ASTRA-NET project. It will be the first satellite network to offer two-way digital access to the broadband Internet, and it aligns Norsat with Nortel Networks [NT], who will be supplying the system to Societe Europeenne des Satellites (SES), the satellite-operating company. SES built a multimedia analog satellite network about ten years ago, which it is now switching over to two-way digital. Its 70 million subscribers in Europe will all need new dishes and user terminals to employ the new technology. It is also, according to Norsat's press material, the first commercial application of Ka-band technology. Ka-band, a high-frequency satellite band, offers promising capacity and, although limited by direct-line-of-sight transmission, many different terrestrial uses.
Norsat has already shipped the prototypes, which are now undergoing testing that will continue over the next couple of quarters. Bucher doesn't expect the high-volume rollout until next summer.
"We want to dominate by being the key component supplier."
He finds it difficult to estimate what Norsat's total take from the venture could be. "It's a new frontier. The key is getting early on into customer take-up." The initial value of the agreement with Nortel is estimated at $8.5 million during the first year, but further revenue depends on the subscriber rate. The sales network consists of local providers, and it is already in place. Bucher is expecting sales of anywhere between 5,000 and 10,000 units upon rollout, and predicts the long-term sale rate to be between 40,000 and 60,000 units per quarter.
"We want to dominate by being the key component supplier," Bucher says. That component is the transmitter/receiver, which is the main, and most costly, piece of the unit that also consists of a high-bandwidth transceiver and a dish antenna. Norsat hopes to license the component to all the companies with access to the market, as well as provide a complete terminal to sell to operators. "We're working on developing all the different channels, whether that be direct, or as a component to other suppliers, whether that be as services operators or directly to the satellite operators."
The only other broadband Internet network via satellite is being undertaken by Korea Telecom [KTC], for which Norsat will again be supplying prototypes of the outdoor unit. The first prototype will be shipped in February, and it is a similar device to that used for ASTRA-NET. Bucher expects projects such as these to become a major revenue stream for Norsat. "We're very known in this business, and our intention is that as all of these broadband projects go forward, we're going to be a supplier to all of them." Looking ahead, Norsat plans to establish itself as an R&D and distribution company, and outsource the integration jobs, the same way it already does with manufacturing.
Partnerships with big-name, high-flying industry giants, such as Nortel, are a decisive factor in Norsat's favor. Bucher also recognizes the importance, and potential, of Norsat's relationship with Hughes. As a distributor of Hughes products, exclusively, Norsat will share in the growing popularity of DirecTV, but there are other profitable opportunities on the horizon. First, Norsat will likely be involved in any new product rollouts. "We'll be early on any new program that Hughes has coming out in terms of distribution to the customers," says Bucher.
In the broadband arena, the potential of a closer relationship with Hughes is promising. DirecTV and DirectPC will ultimately be replaced and expanded by two-way broadband technology. According to Bucher, "That's not that far away." Also, set to start this month is AOL TV, a product that will combine America Online's [AOL] interactive television Internet service with DirecTV's digital satellite television programming, which will increase the subscriber base. "We'll be one of the partners in that," says Bucher. "It's really our long-term business to be involved in multimedia."
AOL has also invested in Spaceway, a unit of Hughes Network Systems, which hopes to provide high-speed bandwidth-on-demand satellite communications by 2002. Bucher points out that the system will need to have the same type of terminal that Norsat is now developing for ASTRA-NET. "We'll be in a very unique situation," he says. As one of the three largest distributors of DirecTV, and the largest distributor of DirectPC, in the US, as well as the largest manufacturer of the broadband satellite interactive terminal, Norsat has an enviable point of entry to become a product supplier to Hughes. "Nothing certain," asserts Bucher carefully. But he fully expects the business to proceed, and believes Norsat will play a role. "That's when our distribution business in the US converges with our technology development that we're doing for ASTRA broadband networks," he says. "It is really when Hughes puts Spaceways together?When everything comes together, we couldn't be in a better position, in terms of going to the marketplace."
Norsat's most recent press release details another segment of the satellite market that it is gearing toward. An agreement with Globalstar USA, for Norsat to distribute its satellite-based telephony services, provides a gateway into the narrowband sector. Norsat has also developed a prototype of a narrowband data access device, which could transfer small packets of data, such as financial transactions. Its data services are scheduled to be available in the second half of the year.
"By next year, this group [Satellite and Cable] alone could grow 100%, to help at least double the size of the company as a whole."
The company's established operations have been growing at a consistent rate-between 50% and 60% year over year-and the recent infusion of capital will help bring it to "the next level," Bucher says. But despite the charted growth, Norsat has disappointed investors before. Most recently, in its third quarter ended September 30. The company was unable to meet sales expectations in its Satellite and Cable Group, because a new line of satellite transmitters didn't add to the quarter due to the late delivery of a component. The fourth quarter will still show the effects of that tardiness, Bucher says, but in Q1 2000 "we'll see good numbers, and even better numbers in Q2," for the group. By next year, this group [Satellite and Cable] alone could grow 100%, to help at least double the size of the company as a whole.
The DirecTV distribution line is also primed for gains, with Bucher expecting revenues to double or even triple over the next year. "That will keep funding good revenues, and our major short-term profitability will primarily come from those numbers," he says. "But the big one is the broadband business. That's where the money is."
Part of the reason for lackluster earnings in the past, is the company's heavy R&D spending, mainly invested in its broadband initiative, which hasn't yet reported sales. "If we didn't invest in the third market, we would have had profit last year, and this year, and done quite well," Bucher says defensively. "But that wouldn't have led very far. We would have had profit for two years, and then fallen off as the market goes." Norsat came very close to positive earnings in the third quarter, pulling even after a loss of $0.02 per share in the previous quarter. Bucher won't reveal when the bottom line will hit the plus zone, but will only say that, "Near-term shareholders' value comes down to what they believe the opportunity in the company is."
That sizable opportunity may be close at hand. In Bucher's opinion, the broadband satellite business will explode in about 12 months. "It has to," he says emphatically, because consumers are demanding the technology. "Brokers and institutions will start recognizing that we are a key component in this multi-billion dollar business." |
