RRSat Global Communications Network ( Nasdaq - RRST ) - Follow-up Report

RRSat Global Communications Network (RRST $7.50) reported unexceptional Q4 results.  Sales increased 4% to $25.8 million.  Non-GAAP earnings declined 54% to $.06 a share.  Margins narrowed due to the addition of new video transmission capacity, which created some temporary redundancy.  The old contracts expired during the quarter, so those extra costs won't be reflected in upcoming periods.  The price paid by RRSat for the new transponders generally were higher than its previous rates, as the economy rebounded, which tightened the market.  RRSat continued to gravitate towards larger customers, moreover, which limited the company's own pricing flexibility.  So a period of less lucrative margins is likely to develop.  For the entire year earnings fell 37% to $.47 a share.  Sales rose 9% to $102 million.

We have reduced our 2011 earnings estimate by 20% to $.60 a share.  We also have lowered our sales forecast by $5 million to $110 million.  Deals with Fox and British Telecom could lay the groundwork for a more dynamic shift towards larger customers.  But those relationships are rolling out at a measured pace.  Backlog did expand by $11 million in Q4 to $188 million, so marketing efforts appear to be regaining momentum.  But a meaningful acceleration in financial performance doesn't appear to be in the cards for 2011.

Aggressive investors are advised to close out positions.  More value oriented holders can realistically stay on.  RRSat continues to pay cash dividends that produce an attractive yield given the current stock price.  Finances remain solid, moreover.  And the longer term view remains positive.  It's just unclear how quickly RRSat can return growth to the fast lane.  An upturn could develop later in 2011 if the company succeeds in cultivating its existing large accounts, and some new ones are added.  Near term, though, the outlook suggests more of a sideways pattern.

( Click on Table to Enlarge )