U.S. Government Satellite Industry Awaits Real Impact of Sequestration

    The much discussed sequester, officially enacted March 1, will result in an 8 percent (or $42.7 billion) reduction in the Department of Defense’s full-year 2013 budget compared to its prior budget. The total reduction in 2013 U.S. governmental spending is $85.7 billion, which will be split equally between defense and domestic programs.

    Needham Analyst Richard Valera named specific companies that would feel the impacts of sequestration. “Our most exposed name is Harris Corp., with about 70 percent of its revenue derived from the U.S. government,” Valera wrote in the report. “We note that KVH and ViaSat, which we like for their respective commercial broadband satellite initiatives, both have significant Department of Defense exposure, which does create some risk to our forward estimates in a post-sequestration world.”
 

    During its most recent Jan. 29 earnings call, Harris’ management stated that the company was already seeing a sequestration-like slowdown in much of their business and had lowered their forward guidance to attempt to account for the enactment of sequestration.

    “In fact, under orders from Deputy Secretary of Defense Ashton Carter, much of the DoD’s procurement operations already went into a sequester-like slowdown in January of this year,” said Valera. “Additionally, some of our covered companies have substantial backlogs relative to our next 12 month estimates for DoD/U.S. Government revenue, which we think could help to buffer against the sequester for at least a couple of quarters.

    Valera notes that determining how the sequester will translate to incrementally reduced sales or bookings is challenging since many companies have already been seeing some level of pre-sequester slowdown. According to ViaSat’s recently reported third quarter and full-year 2013 results, the company derived 47 percent of its revenue from its Government Systems segment in an unusually strong quarter for this segment.

    "Our next 12-month revenue forecast [for ViaSat] calls for its government revenue to represent a more moderate, but still substantial 39 percent of total revenue,” said Valera. “While ViaSat’s Government exposure is certainly significant and potentially exposed to sequestration-related cuts, we think the impact could be mitigated by a healthy funded backlog of $391 million in its Government Systems business against our NTM revenue estimate of $471 million.”

    Needham also noted that Comtech has recently seen declining exposure to the Department of Defense as its MTS and BFT programs wind down. In Comtech’s most recently reported quarter, it derived 43 percent of its revenue from the U.S. government. “We would look for more color on sequestration’s potential impact on the company on its upcoming earnings call on March 8,” Valera added.

For KVH, Needham forecasts that the company will derive about 35 percent of its NTM revenue from U.S. military and government programs. “We believe the company’s backlog solidly supports our 2013 first half DoD-related forecast, but we see incrementally higher risk in the second half of 2013 as we would look to see some incremental DoD-related orders to support our estimates,” Valera said.

Much of KVH’s recent TACNAV business, however, has been with non-U.S. military organizations, which should be unaffected by sequestration.

    Despite fears of sequestration blowback, the government satellite sector has recently pulled in a slew of bulk-buy contracts – the size of which seem to run counter to the tight budget scenario. Earlier this year, Lockheed Martin was awarded a contract to manufacture two Advanced Extremely High Frequency (AEHF) satellites for the United States Air Force, confirming a deal that was expected to generate nearly $2 billion for the company. Under the terms of the deal, Lockheed Martin also will produce the fifth and sixth AEHF satellites, representing a significant upgrade on the Milstar system, which has been in place since 1994.
 

    North American and European regions account for an estimated 80 percent of global defense spending, but were also among the hardest hit by the global financial crisis. The current situation of defense budget cuts across most countries is expected to persist during the next decade, though the need for enhanced communication capabilities and Intelligence, Surveillance and Reconnaissance (ISR) requirements for international armed forces is expected to drive demand for military satellites during the next decade, according to online market research firm ReportsnReports.

In the study titled, “The Global Military Satellite Market 2012-2022,” ReportsnReports said the current situation of defense budget cuts across most countries, however, is expected to persist during the next decade.
 

    "Defense departments around the world are exploring and inviting new alternatives for reducing their costs,” the firm wrote in a recent report. “Apart from pushing back their project timelines, utilization of COTS equipment is a potential choice for the government. Thus, the military satellite industry is gradually undergoing a transition towards selecting commercial providers against defense suppliers for its programs.”

    North American and European regions account for an estimated 80 percent of global defense spending. ReportsnReports, however, added that these regions were also among the hardest hit by the global financial crisis. The firm’s report includes an analysis of the global military satellite market over the next ten years identified potential market opportunities to enter the industry using market size forecasts. The firm also benchmarked the industry against key global markets and provides detailed understanding of emerging opportunities in specific areas.

    “With the increasing usage of Commercial-Off-The-Shelf (COTS) equipment in the military sector lately, the bandwidths of military satellites are being increased through hosted payloads from commercial satellite providers,” ReportsnReports analysts wrote in the study. “Hosted payloads are components attached to commercial satellites, which are designed to function independently of the host satellites, while at the same time sharing its resources. These enhancements can be used for numerous applications of satellites mainly including military communication and ISR.”