RRSat Global Communications Network Ltd.: Beaming programs to the world
Bruce Springsteen sang “Fifty-seven channels and nothin’ on,” but that was when satellite technology was in its infancy. The World Teleport Association estimates that there were 13,000 satellite television channels in 2005; the number is projected to more than double to 29,000 by 2013.
That’s sweet music to the folks at RRSat Global Communications Network Ltd. (Nasdaq: RRST). The Omer, Israel-based company operates a “teleport” in southern Israel, with satellite dishes that bounce signals through any of several dozen satellites to reach over 300 television and 80 radio channels in more than 150 countries.
RRSat managed to evolve with satellite technology. It was founded in 1981 by CEO David Rivel, who still runs the company, to import giant satellite dishes — up to 40 feet in diameter — and install them at Israeli TV broadcast stations.
In 1996, the Israeli government granted the company the first private license to transmit TV and radio signals by satellite, and the company’s life as a video distributor began. Today, RRSat accrues 75% of its revenues by sending TV and radio programs around the world through leased satellite transponders and fiber optic cables. It may beam programming from niche producers who cannot afford their own teleports, such as Fashion TV and the God Channel, to major networks like CBS and Fox. Or it may deliver programs on behalf of media giants such as Fox and CNN to distant stations like Russia Today, Thai Global Network and Al Jazeera.
It also offers content management services: RRSat digitally stores programming and advertising, customizes them (such as adding subtitles), organizes them into broadcast channels and beams the channels to specialized markets that include Russia, eastern Europe and the Middle East.
The total market for teleport services is about $13 billion, although the large broadcasters transmit most of their material themselves. RRSat and two privately owned pure play teleport competitors have a combined market share of just 5%, leaving much room to grow.
The other two competitors are larger than RRSat: Globecast, based in France, is a subsidiary of France Telecom, and has revenues about eight times that of RRSat. Arquiva, based in the United Kingdom, has revenues estimated at three times that of RRSat. But a November 2007 report by Susquehanna Financial Group asserts that “the location of RRSat’s teleport in Israel affords it an unmatched cost advantage” over those two, because its teleport can reach 95% of the world’s population in just one satellite hop.
Over the last four years, RRSat has grown at a compound annual growth rate of about 40%. On Jan. 31, it announced fourth-quarter revenues up 36% from a year earlier to $16.3 million, with adjusted net income up 37% to $3.6 million. It generated $4.7 million in operating cash flow that quarter. For the year, revenues were up 37% to $59.2 million, while adjusted net income increased 52% to $12.3 million.
The big question is whether this stock is already fully valued. It went public at $14 in November 2006, dropped to its current 52-week low of $10.35 in February 2007, but then zoomed back and hit its 52-week high of $26.50 on Sept 24. It dropped in the recent stock market correction and closed at $15.09 on Jan. 30, then shot back up after the earnings announcement to close at $18.11 on Feb. 1. The stock closed at $18.05 on Monday. Its market cap is $312 million.
Most analysts rate it “outperform” or “buy,” but price targets vary from $18 to $27. “The company will do well regardless of economic downturns” because of its cost efficiency, says Susquehanna’s Irit Elrad-Jakoby. Susquehanna does not set target prices, but Elrad-Jakoby has a “positive” rating on RRSat, the equivalent of a “buy.”
The most skeptical is James McIlree with Collins Stewart (formerly CE Unterberg Towbin), who rates it a “hold.”
“It serves a niche ignored by the large satellite companies,” he says, but he’s concerned that while RRSat’s revenue guidance for 2008, at $75 million to $76 million, is slightly higher than Wall Street’s expectations, its gross margin guidance came in below expectations. Management offered no explanation for the lower margin estimate. “The stock is not expensive, but it’s not cheap either,” says McIlree. “I’m concerned that other analysts will lower their estimates. I’d wait for a better time” to get into the stock.
RRSat, which raised $45 million in its IPO, had also said it would make an acquisition (probably more teleport facilities) by the end of 2007, but no deals have yet been announced. Susquehanna analyst Irit Elrad-Jakoby believes a purchase or two will be completed this year. It may add to earnings, but it’s not certain if that would be enough to make the stock a bargain.
The issue is whether the company will be profitable enough to boost the stock beyond its current multiples. The day before earnings were announced, McIlree at Collins Stewart estimated RRSat (RRST) was trading about 13% below its peer group‘s EV/EBITDA. He felt that was justified, given its location in Israel and the fact that three shareholders own a majority of the company’s shares.
And whether, despite 29,000 channels, there will yet be something worth watching.
