Growth in defence and satellite spending fuels growth at Calian, despite recession

As the world struggles to shake off the deepest slowdown in 80 years, Ottawa-headquartered Calian Technologies Ltd. is cashing in on growing defence spending and demand for its systems engineering division. And new analysis of global trends suggests the turnaround is real. “We have two divisions: Business and Technology services, or BTS, and the Systems Engineering Division, or SED,” explains Calian’s president and chief executive officer, Ray Basler, in conversation with Tech Media Reports. “BTS is the people side and represents about two thirds of our revenue, whereas the SED side is systems and hardware.” The company recently reported 14% growth in revenue, with SED representing a 19% jump. Overall, the company expects $215 million to $230 million in revenue for 2009. A lot of this is coming off of increased defence spending – the company has large and long-term outsourcing contracts with DND. But there is also growth on the satellite side with SED. “BTS represents stable revenue, whereas SED lives on a project-by-project basis and is basically lumpy, but with higher margins,” says Basler. “If either one of the businesses were standalone it couldn’t benefit the other.” Basler argues that it is the reliability of the BTS business that allows Calian to invest and take risks for the higher margin SED business. “Last year a lot of highly leveraged companies were thinned out,” says Basler. “There has been a tightening of capital expenditures. Fortunately, we can wait out the storm and keep our presence up. SED does a little business with the Canadian Space Agency – revenue is mostly US, European, and Asian, customers.” It’s a good position to be in, and it’s paying off: in early August SED was given authorization for a $15-million contract with the European Space Agency (ESA) for the provision of a 35-metre deep space antenna and RF system in South America. The entire deal, expected to close before the end of 2009, has an estimated total value of $39 million. “When you look at overall satellite launch activity, there was 47% growth in the last ten years” says Steve Bochinger, managing director of the Montreal office of Paris-headquartered research firm Euroconsult. “We expect that to continue.” Specifically, Euroconsult forecasts that nearly 1,200 satellites will be built between 2009-2018. “On the observation side Canada has always been very strong,” says Bochinger. “And now there is renewed interest in space and satellites in Canada. In the last five years the situation was blurred and there were budget tensions, but we are seeing renewed commitment.” This should play well for Calian. Along with network management solutions, the systems engineering division supplies satellite communication ground systems, satellite control systems and services, as well as test solutions and manufacturing. Bochinger says that there are multiple rationales for why the market is robust. Some of it has to do with smaller countries wanting to take control of their own destinies. Some of it has to do with defence concerns. Overall, there is a surge in consumer demand for satellite-supported services; however, it is the public sector that is driving the spending. “Globally, the market is still driven by government – two thirds of satellite spending is government, either military or civilian,” says Bochinger. “There is a boom in demand from emerging markets, but the big guys – Europe, Japan, the US, Russia – these are the drivers.” That said, the financial community has a cautious outlook. Benoit Poirier, an analyst with Desjardins Securities, commenting on Calian’s recent numbers, says that “the current market turmoil will impact the division as start-ups face financing constraints and established players reduce capex to preserve cash”, though he notes that “the outlook for BTS remains positive and the company believes that its main customer, the DND, and other departments of the federal government will continue to require more support services.” The political environment south of the border has also affected Canadian companies in the satellite business. “The US has the International Traffic in Arms Regulations, or ‘ITAR’,” notes Basler, “and satellite equipment has been put on the munitions list. It’s a very strict control, and it’s cost US industry a phenomenal amount of business in that area.” Basler adds that this has an ongoing impact on companies like Calian, too – if a Canadian company uses US equipment in its designs, then it has to abide by those rules. But if it doesn’t use US technology, then there are opportunities to do business where US companies cannot sell equipment.

Growth in defence and satellite spending fuels growth at Calian, despite recession

News | August 18, 2009

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