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  Com Dev on the launch pad

BENJ GALLANDER and BEN STADELMANN

Thursday, December 5, 2012

Canada's reach into outer space is getting shorter. Last spring, the Canadian Space Agency was put on notice of a 10 percent budget cut, on top of a previously announced 14.4 percent chop. Back in 2002, when a budget of $300 million was proposed, that represented 0.23 percent of program spending. Under the current plan, this will shrink to 0.14 percent. These days, the iconic Canadarm would be cut off at the elbow.

Not that the agency has altered its mandate or cancelled key projects; in fact, not a word about the budget crunch makes its way to the CSA's home page. There, it's all about celebrating our proud history of 50 years in space, starting with the first Alouette satellite, which made Canada the third country on the planet to reach orbit.

In theory, programs such as Radarsat Constellation, a set of three remote sensing satellites that will keep watch over our landmass and adjacent waters, has the full support of government. In practice, Cambridge-based contractor Com Dev International laid off 31 workers last month. CEO Mike Pley warned of further job losses unless the government's commitment is backed up with sufficient development funding.

Com Dev was purchased for the VP portfolio about a year ago at $1.87. The company had been watched for years and was nearly purchased in 2003, when it was trading for under $1 after getting into a mess of trouble with some ill-timed convertible debentures. The enterprise's fortunes improved rapidly, and revenues shot up to $221 million in 2010.

However, it soon became apparent that the sunny top line was courtesy of overly aggressive bidding on fixed-price contracts. Cost overruns and imploding margins led to the removal of longtime CEO John Keating. Mr. Pley has brought a steady hand to guiding the company, an approach more focused on profitability and efficiency and one that tempers overenthusiasm.

The company has executed well, the ExactEarth EV-1 satellite was successfully deployed, and they completed and shipped their largest-ever contract, an instrument designed and built for NASA's James Webb Space Telescope. The revenue mix has also evolved. A year ago, the split was 59 percent commercial, 19 percent civil and 22 percent military. Civil has moved up smartly to 35 percent, with commercial at 45 percent and military at 20 percent.

Looking ahead, the restructuring of the Canadian division will result in a hit of about $2 million to the upcoming quarter. On the plus side, Mr. Pley is optimistic about the $5.6 million in new orders for the ExactEarth subsidiary. These ship-monitoring satellites are key to security on the oceans and directing emergency efforts during hurricanes such as Sandy.

Com Dev is also bidding for work on new generation Ka-band satellites, which promise vastly greater bandwidth. That sort of steady progress in market penetration will be needed to push the stock to the sell target range of $4.75-$6.

Obviously, the Canadian government has many priorities, and in an era of restraint, it is tough to find money to invest in space. One could argue that keeping the Arctic and surrounding waters under comprehensive satellite surveillance is just as important to protecting our sovereignty as spending billions on jet fighters.

One thing the bureaucrats could do, that would cost next to nothing, is to streamline export licences for satellite technology. Com Dev has lost business in India and China to European competitors due to these controls. By clearly targeting parts with potential military applications, the majority of components would not need licences at all. This will be important in the future, as emerging nations take a stake in this vital technology.


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