Shlomi Cohen and I are throwing the spotlight on companies whose shares form a major component of our portfolios, and which have not yet earned the attention they deserve in our regular weekly Head to Head column. I have chosen to focus on Gilat (GILTF), one of the most successful Israeli companies issued on Wall Street.
The Technology
Gilat's VSAT (Very Small Aperture Terminals) products enable communication networks to be set up with data or voice transmitted between a central station and a large number of terminals. Gilat is currently considered the world's number two company in its field, after giant Hughes, but is expected to become the global leader by the end of the year.
The first product Gilat developed was the one-way VAST which enables data transmission in one direction - from the central station to a large number of terminals. This product is ideal for applications such as financial data, paging and more. A small percentage of sales today is still based on VAST one-way communications, but the product has ceased to be Gilat's flagship.
Gilat stepped up another rung in the ladder a few years ago when it developed two-way VSAT. This product appeals to a much larger market, and Gilat manages to adapt it to a wide range of applications - from control to inventory, including national lottery networks.
The company developed an additional product line that enables voice transmission on VSAT. It was then able to enter the giant telecommunications market, growing at a dizzying pace. Sales of Gilat's DialAway and FarAway voice products will increase over 100% this year. These products, the company's growth engine during the past year, will represent 30% of sales in 1998. Gilat won significant contracts in Kazakstan and this year and South Africa which will enable it to beat analysts' forecasts at least in the next two quarters.
Gilat's voice products will also be mainly responsible for growth in 1999, but the company is already involved in new growth engines. Gilat is developing products that enable fast access to the Internet (SkyBlaster and SkySurfer) in 2 Mbps to 20 MMbps files, which are similar and even higher than ADSL and Cable Modems against which it will compete.
Gilat's VSAT products are more expensive than the alternatives and are therefore not expected to reap its initial success on the Internet, but rather as the network base for organizational Intranet. There are already preliminary sales for these products which are not insubstantial, but significant sales are expected only at the end of '99. Moreover, Internet providers are expected to prefer Gilat products in places without advanced communications networks, since they are completely independent of any networks.
Marketing Strategy
Parallel to R&D development, Gilat is also showing originality in the field of marketing strategy. The most outstanding example is the GVT (Global Village Telecom) development that attracted first class cooperation. GVT uses Gilat's telephony products and sets up communications networks in villages around the globe. The company has already set up installations in Chile, and other installations are expected in South America by the end of the year. GVT brings public telephones (based on VSAT) to villages not joined to telephone networks.
Competing with GVT are much more expensive products, such as in Iridium projects, that are making many waves in the media yet do not manage to compete with Gilaton the ground. The reason is very simple: the price of a call minute on Iridium’s LEOs is several times higher than the price GVT offers.
Despite the crisis affecting many developing countries in the world, including South America, Gilat is not reporting any damage to sales. As mentioned, the company’s product is much cheaper than competitors, and countries in that region attach importance to linking remote villages to a telephone network. Nevertheless, if you invest in Gilat, it is recommended that you keep one eye open regarding events in South America since the situation there is liable to worsen.
Management
I believe Gilat has been blessed with one of the most high quality managements in Israel. The company is also keenly aware of the importance of on-going contact with Wall Street, and worked very hard to improve relations over the past year. The company’s management meticulously meets with analysts and investors several times a year, and that is more than can be said about many Israeli high-tech companies.
The share
Gilat is expected to earn $2.11 profit per share this year, compared to $1.5 in ’97. In ’99, it is expected to earn $2.65 per share. As of the third week of September ’98, the share is trading in the vicinity of $39, i.e. at a p/e ratio of 18.5 for ’98, and only 14.7 in ’99.
Among possible explanations for the low price of Gilat shares, it is worthwhile mentioning the uncertainty surrounding relations with its US partner GE. Gilat is currently negotiating renewal of its agreement with GE, after the US company wanted to develop products to compete with the Israeli company. Gilat has already announced that it has prepared an alternative (cooperations with several sizable enterprises) in case the negotiations with GE fail. I estimate that GE has decided to get down off its high horse now that it understands it does not stand a chance to compete with Gilat technology, and they are expected to sign a renewed agreement during the last quarter.
The bottom line
Gilat is growing at a dizzying pace and is likely to benefit from the tremendous need for bandwidth on the Internet. The share, on the other hand, is trading at a price suited to industrial companies. It is still not benefiting from sales of new products (analysts do not include these figures in their assessments). However, South America features in the company’s story, and the not yet solved problem with GE. You should decide for yourselves.
Published by Israel's Business Arena September 23, 1998
Published by Israel's Business Arena September 23, 1998