Gilat Satellite Networks' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov.14.12 | About: Gilat Satellite (GILT)

Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q3 2012 Earnings Call

November 14, 2012 9:30 am ET

Executives

Philip Carlson – Investor Relations-KCSA Strategic

Erez Antebi – Chief Executive Officer

Yaniv Reinhold – Chief Financial Officer

Analysts

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Gunther Krager – Discovery Group

Roni Biron – UBS Securities Israel Ltd.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks third quarter 2012 results conference call. All participants are at present in listen-only mode. Following the management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, November 14, 2012.

I would now like to turn the call over to Philip Carlson of KCSA to read the safe harbor statement. Philip, please go ahead.

Philip Carlson

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's third quarter 2012 results conference call. A recording of this call will be available beginning at approximately noon, Eastern Time today, November 14, until November 17, 2012 at noon.

Our earnings press release on the website provides details on accessing the archived call. Investors are urged to read the forward-looking statements in our earnings releases which state that statements made on this earnings call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties and contingencies, many of which are beyond the control of Gilat and which may cause actual results to differ materially from anticipated results. Gilat is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our reports filed with the Securities and Exchange Commission.

That said, on the call today is Erez Antebi, Gilat's Chief Executive Officer and Yaniv Reinhold, Chief Financial Officer. Erez, please go ahead.

Erez Antebi

Thank you, Phil, and good day everyone. I would like to begin by providing a high level overview of the third quarter, and then offer additional insight on some of the progress we made this quarter. Following my comments, Yaniv will discuss our financial results. I will then summarize and open the call for questions.

The third quarter was a strong quarter for Gilat, before I get into some of the business highlights, I will briefly review our financial performance for the quarter. Our revenues increased to $89 million in Q3, up by 4.3% from the second quarter of 2012, with EBITDA reaching $9.8 million or 11% of revenue.

On a non-GAAP basis, our operating income was $5.7 million in the third quarter of 2012, compared to $4.8 million in the second quarter of 2012. I am also pleased to report that in the third quarter we generated significant cash from operations of $8.5 million. Yaniv will provide you with more details on our quarterly results later in the call.

I will now discuss some of the business highlights for the quarter, starting with our commercial division. Our commercial division had another robust quarter highlighted by a strong rate of implementation at NBN Co in Australia.

Our implementation of hubs and VSAT as well as site installations and network operation for NBN’s interim satellite service are progressing extremely well as increased demand is expediting the network rollout. As we have stated in the past, the network may grow to as many as 48,000 sites by late 2015. We are very excited about the advancements made during the quarter and one of our strategic areas of focus, our KA-band initiative.

In late September, SES launched its Astra 2F satellite, which will enable SES broadband services SBBS to deliver commercial KA-band satellite broadband service in Europe. The service is expected to commence in early December. As part of the SBBS consumer rollout, we received our first order from a larger European ISP. The initial order is for several thousand self installed customer premise equipment or CPE kit based on our award-winning SkyEdge II Aries VSAT. The service will allow European households to benefit from broadband satellite access enabling Internet, video and Voice over IP services.

In addition to the initial ISP order, we have received another ISP order with additional orders expected. While we continue to execute on current contracts like NBN and SES, we also have been active in securing new commercial projects in various parts of the world. For example, in Asia we closed a large cellular backhaul project at a Tier 1 mobile operator; we closed various deals in Latin America, including one to provide satellite communication and support of a national presidential election, and another with a large service provider.

In addition, we won a large portion of a major ATM banking project in India. To enhance our operation in Asia, we have recruited Stephane Palomba, an industry veteran for the position of Regional Vice President Asia. We believe that this move strengthens our operation in the region.

As we turn our attention to our defense division, I will begin with our continuing efforts to consolidate the sales and marketing teams within the division. We have hired Michael Barthlow as the General Manager for Gilat in North America. Michael brings with him a vast amount of experience under defense industry. Michael will head up our North American sales efforts to include all Gilat’s Wavestream and raise that product line.

While the macro defense industry remains challenging, our pipeline continues to grow and we continue to sell ground equipment to various government contractors and system integrators in United States and the international markets. We continue to close deals on the Satellite-on-the-Move market. For example, we closed during the quarter business with an additional airborne system integrator in the United States as well as deals to provide On-the-Move equipment for our railway system in Africa, and security forces in Eurasia.

Finally, we look at our services division. Spacenet continues to close new contracts and expand on existing services. During the quarter, based on expanded, the managed network and VSAT service agreement were Valero Energy Corporation to include new contract and refresh technology in over 500 locations. We renew the contract with Sunoco that includes new managed services for over 4000 company-owned and dealer location.

In addition, Spacenet expanded their partnership with Centerpoint Energy, one of America’s leading energy delivery company. Centerpoint is expected to bring Spacenet new customers in the oil and gas pipeline and drilling industry.

Moving to South America, Gilat Colombia continues to perform and receive ongoing revenue from the schools project. We are pleased to announce that we signed a six-month extension of the Compartel project worth around $10 million through March 2013.

While we are pleased with the previous success and current extension of this project, we have not placed a proposal for the rebid of the continuation of the project, which includes the sites we are currently servicing. This is due to economic conditions and the terms of the rebid which we considered unfavorable, we are currently evaluating several alternative to continue to providing services to some of these sites.

In Gilat Peru, we successfully completed the installation phase of FITEL 10 and have move to ongoing operation of the project, which is scheduled to continue into 2015. In addition, we have closed several local government and rural banking deals during the quarter. As mentioned previously, we follow the solid second quarter in 2012 with a stronger third quarter. We expect Q4 will be stronger than Q3, although we may not be able to fully compensate for the Q1 shortfall in EBITDA as per our objective.

That concludes our business overview. I would now like to turn the call over to Yaniv Reinhold, our CFO who will review the financial. Yaniv, please?

Yaniv Reinhold

Thanks, Erez, and hello everyone. I would like to remind everyone that our financial results are presented both on a GAAP and non-GAAP basis. The GAAP financial results include the effect the non-cash stock options expenses, as per ASC 718, one time other income, expenses related to our M&A activities during 2010 and 2011, and amortization of intangible assets resulting from the purchase price allocation. The reconfiguration table in our press release highlights this data and our non-GAAP information presented excluding these items.

Now, moving to our financial highlights for the third quarter of 2012. Revenues for the third quarter of 2012 were $89 million compared to $83.9 million for the same period in 2011. The increase is primarily due to strong sales in our commercial division, which with higher revenue level from the NBN Co project in Australia. Our gross margin this quarter was 32% compared to 35% in the third quarter of 2011.

On a non-GAAP basis, our gross margin was 34% compared to $37 in the comparable period last year. The gross margin is inline with the gross margin realized in the previous quarters of the year.

Gross R&D expenses were $7.7 million this quarter compared to $8.4 million in the same quarter of 2011. Although integration efforts continue we are able to recognize cost efficiencies which have lowered the R&D expenses. We continue to invest R&D funds in support of our Ka and business initiative.

Selling and marketing expenses for the quarter decreased to $9.3 million compared to $11.6 million for the same quarter last year. The decrease is mainly attributed to cost savings in both our services and defense divisions. General and administrative expenses for the quarter amounted to $8.8 million compared to $8.6 million for the same quarter last year.

Our GAAP operating income for the quarter were $3.2 million compared to operating income of $1.9 million in the third quarter of 2011. On a non-GAAP basis operating income was $5.7 million in the third quarter of 2012, compared to an operating income of $4.3 million in the comparable quarter of 2011.

GAAP net income for the quarter were $3.3 million or 8% per diluted share compared to net income of $4.3 million or $0.10 per diluted share in the same quarter of 2011. On a non-GAAP basis, net income for the quarter were $5.8 million or $0.13 per diluted share compared to net income of $2.3 million or $0.05 per diluted share in the same quarter of 2011.

Our trade receivable at the end of the quarter were $61.7 million representing a DSO of 62 days. Our DSO fluctuate revenue and the (inaudible) conditions of deal flow as of September 30, 2012, our total cash balances including restricted cash, net of short-term bond credit amounted to $68.2 million.

We continue to focus our efforts on increasing cash flow, and as a result in this quarter we’ve generated $8.5 million from operations. In the beginning of October, we paid $14.7 million of convertible notes with interest on schedule. Our shareholder’s equity at the end of the quarter totaled $264.4 million.

This concludes our financial review for the quarter, and I would like to turn the call back to Erez. Erez?

Erez Antebi

Thank you, Yaniv. To summarize, we follow the solid second quarter in 2012 with a stronger third quarter and we expect the Q4 will be stronger than Q3. We have generated significant cash from operations in the quarter and continue to invest back into our business segments including our Ka-band and Satellite-on-the-Move initiative.

As we continue to execute on our growth strategy, we remain confident about the future prospects at Gilat. We appreciate your continued support, and we look forward to providing you updates on our progress in the coming quarters.

That concludes our review. We would now like to open the floor for questions. Operator, please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Hey, thanks for taking my question. As always the call I just want to, I mean, from a billing perspective, how is that working over the quarter, and from a linearity perspective is it getting better or worse? Thinking more along the long-run like a book-to-bill sort of ratio?

Yaniv Reinhold

Hi Andrew, this is Yaniv. If you look into our backlog we are publishing the backlog only at the end of the year.

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Yeah. So I mean, you can just kind of give me some general comments around that, I mean, is it improving is it declining, if you could?

Yaniv Reinhold

I’m sorry, but I cannot reply for this, we are publishing only at the end of the year.

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Okay. And then, I guess, moving to Ka-band orders are those the, I know you booked several orders, are those being shipped yet?

Yaniv Reinhold

They’re shipping really within these days, as I’ve stated SBBS is going to start to serve in the beginning of December, that’s when they expect to start service…

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Okay.

Yaniv Reinhold

So we will start shipping equipment just ahead of that, so it’s like these days basically.

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Okay. And then switching over to defense side just for a quick moment, obviously Washington is quite uncertain at this point. But as you think about Satellite-on-the-Move, in the past you’ve said that, these specific projects are more of a win not dip, it’s counter accepted deal, I mean do you see it as a positive, no change to your general thoughts there?

Yaniv Reinhold

We have no indication that there is going to be a negative effect on the Comm-on-the-Move project, that said we don’t know of course what congress will do or won’t do.

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Sure.

Yaniv Reinhold

But from everything we understand, we are not familiar with any tendency or trend to cut back on the general direction that we’ve stated before, which is to continue moving with projects that do deal with Comm-on-the-Move reconnaissance versus ISR in general.

Andrew Uerkwitz – Oppenheimer & Co. Inc.

Okay, perfect. Yaniv, thanks a lot for the questions. Thanks guys.

Operator

The next question is from Gunther Krager of Discovery Group. Please go ahead.

Gunther Krager – Discovery Group

Yeah. So the only comment I have to make is that, congratulations to the company and the management is doing an outstanding job. Thank you very much.

Yaniv Reinhold

Thank you.

Operator

The next question is from Roni Biron of UBS. Please go ahead?

Roni Biron – UBS Securities Israel Ltd.

Yeah. Hello, gentlemen. There was announced deals that recently in Israel, Orbit Communications, and it is also a Ka-band kind of, albeit not [deal]. Can you comment on this, if it’s competition how you view this, is it an indication of the market ticking up.

Yaniv Reinhold

I don’t want to comment specifically on an announcement of the deal made by another company, especially when the customer was not specifically named. But I can tell you in general that Orbit is a company we’re of course familiar with, Orbit manufactures antennas, we do not see them in anyway as competition, we actually work together on some projects, and sometimes – we know them well. But beyond that there’s not much I can say.

Roni Biron – UBS Securities Israel Ltd.

And just a follow-up on that, but talking about it, a huge project, is this a project you guys were aware of and is it something that you guys are also looking at?

Yaniv Reinhold

Look they’re talking a huge project. But they did not name the customer, so we can speculate, but since they did not name, I would rather not refer specifically to it.

Roni Biron – UBS Securities Israel Ltd.

Okay. Thank you very much. Good quarter gentlemen.

Yaniv Reinhold

Thank you.

Erez Antebi

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference.

In the U.S. please call 1-888-295-2634. In Israel please call, 03-9255-900. Internationally, please call 972-3-9255-900. Mr. Antebi, please go ahead with your concluding statement.

Erez Antebi

Thank you, operator. I’d like to thank everyone for you time today. We appreciate your joining us on the call. I hope we were able to give you a good understanding of the results at hand. We appreciate your continued support. Thank you, and good afternoon.

Operator

Thank you. This concludes the Gilat Satellite Networks’ third quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.

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