When it comes to Gilat Satellite Networks (Nasdaq: GILTF), one of Israel’s biggest high-tech companies, that used to be traded at a company value of $4 billion, it is difficult not to wonder at the impact of the Nasdaq bubble burst on Israeli high-tech. This is especially true in view of the situation of other Israeli giants, such as Check Point (Nasdaq: CHKP), which recently issued a profit warning , and Comverse (Nasdaq: CMVT), whose share plummeted in the past few days, and which put out a profit warning today.
All in all, Israeli high-tech succeeded in giving rise to several successful companies that sell for hundreds of millions and even billions of dollars, and also make a profit. At the same time, the more air the bubble loses, the worse these companies' fortunes. Some of these Israeli success stories are likely to lose some of their glamour temporarily, but when the crisis is over, emerge stronger on the other side. Others, though considered giants, may not survive.
It’s difficult to put Gilat Satellite Networks in either of these categories. On the one hands, it has sales of hundreds of millions of dollars, and used to be profitable. On the other hand, its huge debts and its declining stock are casting a heavy shadow on its activity and future. This shadow grew bigger after the grave profit warning the company issued for its Q1 results. The company’s Q1 revenue was $100.3 million, a 42% fall compared with the previous quarter. The bottom line was also particularly bad. The company lost $56.6 million, or $2.5 per share. That’s not very nice.
Gilat Satellite Networks’ cash flow in 2000 shows a
problematic picture. The company burned $124 million, compared with $44 million
in 1999. The only consolation is that the bulk of the cash was used as working
capital.
The downturn in Gilat Satellite Networks’ business is due to its high-speed Internet venture, Starband. The shareholders in the venture, set up in March 2000, are Gilat Satellite Networks (42.1%), Microsoft and satellite broadcasting company EchoStar (17.7% each), and ING Barings (7.2%). Microsoft and EchoStar invested $50 million each, and ING Barings put in $25 million. EchoStar today announced it was increasing its share in the venture by funneling $50 million into it.
One way or the other, to finance its growth, Gilat Satellite Networks raised large sums, some through share issues and some through convertible bonds. The company’s problematic convertible bonds issue was done in February 2000, when Nasdaq was near a peak. The company raised $350 million. As of the end of Q1, all that was left from the financing rounds in Gilat Satellite Networks’ coffers was $124 million.
The question is, of course, how Gilat will pay all its debt, notably the bonds. The answer depends on the company’s business situation, but also on whether the banks will continue to finance its continued activity. The answer appears to be in the affirmative, at least for the time being. A document filed by Gilat Satellite Networks with Nasdaq indicates that the company received a $108 million loan from one of the Israeli banks (Bank Hapoalim or Bank Leumi) to finance Starband. The loan is at Libor plus 0.8%, and will be repaid in six equal annual payments, starting 2002. The company also has a $24 million credit line from Discount Bank.
It appears that the cash in Gilat Satellite Networks’ coffers will suffice for the near future. In the meantime, the company continues to restructure and lay off workers. As of April 15, Gilat Satellite Networks had 1,435 employees: 228 in administration and finance, 134 in marketing and sakes, 343 in engineering and R&D, and 612 in manufacturing. 640 workers were employed in Israel and 477 in the US. From the end of 2000 to April, the company fired about 500 workers under its restructuring program.
As Gilat Satellite Networks was busy restructuring, several lawsuits were filed against it. On June 11 of this year Terayon (which bought Combox) filed a $2.4 million claim against Gilat Satellite Networks for alleged beach of contract. BroadLogic filed a $2.8 claim against Gilat Satellite Networks, also for alleged breach of contract. A company called Celestrak is demanding $6.1 million from Gilat Satellite Networks over the cancellation of some orders placed by the latter. According to the document Gilat Satellite Networks filed with the stock exchange, it does not think its adversaries have a case. Still, lawsuits over order cancellations and breach of contract are not encouraging.
Apart from the worrisome figures on Gilat Satellite Networks’ debt, the company had some more bad news in Q1, such as the $20 million allowance for doubtful debts, and a relatively high stock, which is liable to burden the company in coming quarters and compel it to make some write-offs. One of the reasons cited by Gilat Satellite Networks in connection with the large stock is lower-than-expected demand for Starband.
The document Gilat Satellite Networks filed also lists the investments the company made in 2000. One of the least known investments was in a company called Knowledge Broadcasting.com (KBC). The investment was made on March 6, 2000, when the Internet bubble was at its peak. Gilat Satellite Networks invested $10 million in KBC, at a company value of $180 million, after money. KBC develops and markets a technology for Internet content transmission and presentation.
In 1998, Gilat made an investment in a company called KSAT, listed on the Vancouver stock exchange. The investment was made through converting debt into shares, and Gilat Satellite Networks now owns 39% of KSAT. Last September, Gilat gave KSAT a $5.15 million loan. The Canadian company offers satellite communications services in China, and its plight is indicated by its market value on the Canadian stock exchange: $2 million only. Its share has plunged 90% in the past year.
Another interesting point is the tax rates set for the company. Senior Israeli high-tech officials keep complaining about company flight from Israel due to high tax rates. It appears, however, that as far as Israel’s leading companies are concerned, the tax rates are not just tolerable, but very low.
Gilat Satellite Networks is a case in point. The company was entitled to a tax concession of $11.4 million in 1999 and of $35 million in 2000. Gilat Satellite Networks also received grants from the Chief Scientist’s Office and from the Ministry of Industry and Trade. The company is supposed to repay some of the grants over the years, depending on its revenues.
Gilat’s actual tax rates in recent years indicate that
the State is bending over backwards to make things easier for high-tech
companies, despite all the complaints made in this connection. Up to 1998, Gilat
Satellite Networks did not pay tax exceeding 2.1% of its profit. In 1999, it
paid tax amounting to 10.9% of its profit, and in 2000 the tax rate was down to 6.2%, due to tax rebates from previous years. In short, the company’s tax rates were very low throughout its years of activity, and are unlikely to rise significantly in the year ahead.
Published by Israel's Business Arena on 11 July, 2001