Norsat Rides Past R&D To Profitability

Many turnaround efforts are long on rhetoric and short on results but a little more than one year at the helm was all Norsat International [NII] CEO Cameron Hunter needed to turn the Canadian satellite technology company’s losses into profits.

Norsat, a Vancouver, British, Columbia-based provider of satellite products for high-speed transmission, has a 26-year legacy of notable engineering achievements that were not bearing as much fruit as might be expected prior to Hunter’s ascension to the company’s top post. With a customer-centric focus, former sales executive Hunter embarked on a growth strategy that was based on solving the real-world, near-term challenges of its equipment buyers.

The theme last year was fiscal responsibility and controlling costs without sacrificing the interests of customers, Hunter told Satellite News. Investment is taking place to develop new products and to upgrade existing ones in a very “careful and methodical fashion,” Hunter said, adding, “We aim to achieve a return in a very short period of time. We will be aggressive but we will not invest in research and development (R&D) with reckless abandon.”

Norsat’s R&D spending was scaled back since last year and directed at efforts to meet the needs of customers. Future R&D will be devoted to generating near-term revenue from Norsat’s line of portable terminals, Hunter told us. For the first nine months of 2004, product development expenses fell 60 percent to $1.2 million, compared with $2.9 million for the same period last year. The basis for that reduction was the company’s completion of its commercial release of the Norsat NewsLink Model 3200 and the Norsat SecureLink Model in 2003.

Any evaluation of Norsat’s R&D spending should be coupled with an acknowledgment that its engineering efforts have been focused on building product and improving the company’s product to satisfy customers, said Troy Bullock, Norsat’s CFO.

“Norsat’s impressive turnaround within a year underscores once more the growing importance of customer focus as the industry moves towards consumer services,” said D.K. Sachdev, president of the Vienna, Va.-based SpaceTel Consultancy. “Norsat’s product line includes IP-based networking terminals to serve a highly competitive and growing market. Norsat obviously has the right approach to achieve profitability in a short period.”

“This is a sterling example of excellent management turning a company around,” said Roger Rusch, a satellite analyst with the TelAstra consulting firm. “The management certainly deserves congratulations for a job well done. It’s not always possible to improve business fundamentals in one year, but the economic environment has been a positive factor this time.”

As a member of the board of directors at COM DEV, Rusch said he has witnessed a “similar remarkable turnaround” but the recovery took longer than expected due to problems deeply rooted in the “excesses of the 1990s.”

Management is key in improving business performance, Rusch said. It has been said that some companies are best at acquiring new business and others are superb at execution. A successful company requires both, he added. According to Hunter, a long-term business success requires a well-balanced management team that can take corrective actions to improve execution and grow the business.

“One part of the equation is preserving R&D while increasing the profits,” Rusch said. “The old admonition is ‘don’t eat the seed corn.’ What the investors will expect is sustained performance and growth. It will be interesting to review the bottom line in the next few years to see if the performance has been maintained and if growth is still evident.

Losses End

The bottom-line result is that Norsat achieved third-quarter 2004 revenues of $5 million, up from $3.7 million for the same period last year. Earnings for this year’s third quarter jumped to $1 million, reversing a net loss of $2.1 million for the same quarter a year ago.

A further sign of financial strength is that Norsat’s gross margins rose 52 percent during third-quarter 2004, compared with 34 percent in the same period last year. The results are due, in large part, to growth in the portable terminals arena as well as to rising sales momentum from its initial work with satellite newsgathering companies and with the U.S. government.

Norsat’s portable transmission equipment is used for applications that include sending and receiving time-sensitive field reports; video footage; and closed, two-way video- based communications.

Sales of portable satellite terminals, specifically, reached $3 million during third quarter 2004, up 163 percent from the previous quarter. Norsat introduced the product line during fourth quarter 2003, so demand from customers has been brisk.

“Going into the portable terminal business was a big step for Norsat, and it caused our costs to be much higher,” Hunter said. “We have introduced new features, such as higher power. We are looking for more horsepower and higher bandwidth rates for better-quality video.”

A new software package for the portable terminal could be rolled out this quarter, Hunter said, adding the overall system is undergoing “tweaking” and improvements.

Next Steps

“We start looking at new initiatives and launches next year from a product standpoint,” Hunter told us. “We are a technology company that needs to keep innovating to stay ahead of the curve.”

A year ago, the focus was on stabilizing the financial condition of the company and making sure its products were “best in class” in the portable-terminal category, said Hunter, who was promoted to lead the company less than a year after he joined as a sales vice president during January 2003.

To begin the turnaround, Hunter said he needed to cut costs in different areas but also to shore up its sales force, especially in the portable-terminal business. In addition, he adopted small but important customer-friendly changes, such as having someone answer the phone throughout the day when a customer calls rather than using an answering machine to take messages when the receptionist is at lunch.

“If you are not there to take their calls or support them, you will miss opportunities and possibly tarnish relationships,” Hunter said. “I think customers appreciated feeling that they are Number One with us. We have to be focused on satisfying their requirements.”

The company’s budget for next year is in the preparation stage, and it will result in modest increases, CFO Bullock said. Staffing additions likely could come in the form of sales and marketing people. The company currently employs 47 people, and it may create three or four new jobs, he added.

The addition of “top-notch” sales people who know how to build relationships has aided Norsat, Hunter said.

(Cameron Hunter, Norsat, 304/292-9108; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; Roger Rusch, TelAstra, 310/373-5539)