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Executives

Tom Watts - Watts Capital Partners

Amiram Levinberg - Chairman and CEO

Ari Krashin - CFO

Analysts

Jonathan Ho - William Blair

Gilat Satellite Networks Ltd. (GILT) Q1 2009 Earnings Call May 11, 2009 9:30 AM ET

Operator

Welcome to the Gilat's First Quarter 2009 Results Conference Call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded May 11, 2009.

I'd like to now turn the call over to Mr. Tom Watts of Watts Capital Partners to read the Safe Harbor statement. Tom, please go ahead.

Tom Watts

Good morning and good afternoon. Thank you for joining us today for Gilat's first quarter 2009 results conference call. A recording of the call will be available beginning at approximately 12 PM Easter Time today, May 17, 2009 until May 30, 2009 at 12 PM. Our earnings press release and website provides details on accessing the archived call.

Investors are urged to read the forward-looking statements in our earnings release, which say 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, and 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 this morning is Amiram Levinberg, Gilat's Chairman of the Board and Chief Executive Officer and Ari Krashin, Chief Financial Officer. Amiram, please go ahead.

Amiram Levinberg

Thank you, Tom. Good day, everyone. I'd like to welcome Tom who joined our team recently. Tom is probably well known to you all as a veteran analyst of our industry. I'm sure we can use his solid knowledge and I'm glad he is with us.

I'd like to begin today's call with a snapshot of our first quarter results, followed by a more detailed review of our business during the quarter. After this, I will take you through the detailed financial results, and then we will open the floor for questions.

Our first quarter ended lower than the comparative quarter in 2008. Taken into account the current economic environment, this is not unexpected.

In general, we continue to see the negative influx of the financial situation from the telecom market and which attract the satellite communication markets as well.

On a positive note, we've started to release money from the restricted cash held by the trustees in Columbia and once are able to recognize revenues from our Columbian operations.

This is a good development and in line with our expectations as discussed during our call in January 2001, when the new agreements were executed.

Basic results were entirely the results from the contradictory in 2008. Spacenet has several expansions of existing contracts as well as expansions for additional services predominantly based on the traditional enterprise Nigerian customers.

During the quarter, we announced that Cumberland Farms signed a contract to upgrade its data network. In general, though, the recession is the US is having an effect on Spacenet's business and we are seeing longer sales cycle and reduction in investments as far as the commercial sector.

In the development regions, we announced several new contracts Netcom in Nigeria, NeraTel Group in South East Asia and Banco de la Nación in Peru. Activity in Latin America remained strong in the quarter and we have won a bid for a leading regional telecom operator, though in other regions we see the market conditions becoming more challenging and which had a negative effect on our results.

We continue to see USO type projects and government-funded initiatives with our VoIP, gateway and corporate communications around the world, usually in the developing country. Recently, there have also been several such initiatives in the developed world, but it is part of the global stimulus package to help the economy climb out of the recession.

One such example is the $7.2 billion stimulus package proposed by President Obama in the US and other is the €1 billion plan by the European community to provide broadband connectivity to 100% of Europe's population.

While we think that much of these funds will be used to develop terrestrial infrastructure, this may provide opportunity for the satellite industry in Europe. Satellite technology is well suited for providing cost effective broadband connectivity to the most regions. But, it's too early to say if and how we can benefit from these opportunities, but these are interesting developments.

Moving to the financial indicators summary slide; revenues for the first quarter of 2009 were $60.8 million, a decrease compared to the comparable quarter in 2008. The decline of the last year's quarter is attributable to lower GNS sales in the emerging markets, and more conservative spending in the telecom sector.

I will discuss the Q1 2009 results in more detail later in the call. Looking into a little more details on our business during the first quarter, I will begin with the developed markets. Spacenet's results this quarter were on par with the results in the comparable quarter last year. However, we are seeing the economic environment in the US becomes more challenging and Spacenet sales heightened following such.

Spacenet has had several extensions and expansions in the past quarter. These were based on enterprise customer and network is genuine sector. VSAT continue to be cost effective solution for customers requiring high availability connections as well as backup for terrestrial networks in cable space.

We continue to see rebundling of both terrestrial and satellite technology into Brazil as an attractive offering and well fitted for many customers. The Cumberland Farms signed its expansion I mentioned earlier is one such example, which contract includes both an upgrade to SkyEdge refresh for faster speed and higher functionality to give the terrestrial technology such as DSL, cable and video.

In addition to the commercial customers, Spacenet also sold government's customers, such the municipal, state and government bodies. So, these customers' communication for emergency plans is a growing requirement and something Spacenet is focused on.

Now I'll turn to the emerging markets. As I mentioned before, we have started to release funds from our restricted cash held by trustees relating to the Compartel projects in Colombia and once again recognized revenue revenues in these operations.

In the first quarter, $2.6 million restricted cash was released from the trust's accounts. In accordance with the amended agreement signed with the Ministry of Communication in Colombia, we have begun the upgrades of internet services in broadband in 50 countries and the installation of 93 new major countries.

We expect to continue further upgrades and installations in the second quarter prior to removal of 1000s telephony sites, which are not being due all as agreed with the Ministry of Communications. We are investing intensive efforts in these projects and we are proud we're able so many people on rural Colombia access the broadband internal and telephony services.

Thus far, the (inaudible) of the government entities in Colombia and users in the low region are now on new upgraded services is very positive.

As we accomplish the upgrade and complete the installation phase, we handle the operation phases of the project and additional restricted cash is expected to be released during 2009 subject to compliance with the performance indicators.

Having said that, our past experience teaches us that projects like the ones in Columbia can take unexpected turns and so we continue to be conservative and recognize revenues only after payments are released.

For GNS, the market conditions had a negative effect on our results while we continue to see (inaudible) in government projects mostly in Asia and Latin America. We also continue to see projects for service providers, which are focused on the enterprise and corporate segments.

I mentioned briefly before that we have won a bid for a leading regional telecom operator (inaudible) for countries in Latin America and Gilat speaks for all these. Following these standards, all those would be placed in the respective countries.

I hope to be able to give more detail of this in the coming few weeks. I also mentioned earlier that we announced with NeraTel will join our SkyEdge for the South East Asian customers. This network includes our new mesh capability.

For ones [mask a million] in satellite network topology, I would like to give you a short explanation. Mostly such networks were based on space topology where each terminal communicates only to the hub. Most abilities enable terminals to communicate to each other directly and not via the hub, which means several advantages to the users, but most significantly lower space segment costs and virtual (inaudible).

Our most capabilities in this card will enable high throughputs for both voice and data traffic of up to 6 megabit per second channels, each can be applicable for telephony network, corporate customers, military application and more.

The notable aspect of NeraTel's network is that the VSAT carries end-to-end MPLS data converged services such as broadband IP, voice, video and multicasting. Also this quarter, GNS has released in addition to the SkyEdge II family of VSAT, further SkyEdge II PRO, which is a modular high-performing VSAT targeted for various segments, such as telecom, military and other high-end markets requiring high speed IP capability usually together VoIP.

(inaudible) which provide additional functionality to the VSAT, such as embedded telephony ports for immense capability. This enables the service provider to customize the VSAT to the specific requirements of each end user. These costs can be installed by the customers so the VSAT can be upgraded in the field.

Let's conclude our business overview. Now I would like to turn the call over to Ari Krashin our CFO, who will review the financial results. Ari, please?

Ari Krashin

Thank you, Amarim. Our revenues for the first quarter of 2009 were $60.8 million, compared to $70.5 million for the same period of 2008. This decrease come mostly from GNS sales in the emerging market, mainly in Africa and more conservative spending in the telecom sector overall.

The decrease in our revenue is partially offset by revenue from our Colombia operations. This quarter as mentioned early by Amarim, $2.6 million of restricted cash were released from the trust's accounts Colombia and maybe even ask to recognize this amount as revenue.

But more restricted cash is to be released in the year 2009, we expect our revenue from the Colombian operation to increase accordingly throughout the year.

Our gross margin for the first quarter was approximately 30%, compared to 36% in the first quarter of 2008. The decrease in our gross margin is attributed mainly to the decrease in the GNS portion of revenues, which typically carries higher margins compared to specific network rollout.

Net R&D expenses decreased from $4.3 million in Q1 2008 to $3.8 million this quarter. The decrease is a result of the decline in our gross R&D expenses, which related to the headcount reductions at the beginning of the year and the increase in this one was (inaudible) the amount of $0.2 million.

This quarter, we incurred third party expenses in the amount of approximately $250,000 related to the $100 million transaction. These expenses are included in our operating expenses and in such affect our operating income.

As we mentioned in previous calls, during 2008 those expenses totaled approximately $2.4 million, which we do not expect to continue to be significant going forward. We are including them as part of our ongoing legal expenses and the general and administrative expenses.

Our operating income for the quarter decreased by approximately $4 million, compared to the first quarter of 2008, reflected a decrease in our revenues and gross margin. This decrease was partially offset by the reduction in our operating expenses due to the headcount reduction. In addition, there was a positive impact of the foreign exchange rate and widely for the increase in the value of the US dollar (inaudible).

Our net financial income for this quarter was $0.3 million, compared to a financial income of $0.8 million in the same quarter of 2008. It was mainly due to the low level of interest rates worldwide.

Our GAAP net income for the first quarter of 2009 was $0.2 million or $0.01 per diluted share, compared to a net income of $4.6 million or $0.11 per diluted share for the first quarter 2008.

Our collateral positions continue to be strong, as our cash and cash equivalents and marketable securities amount to $133.4 million at the end of the quarter, with a low level of debt in the amount of $34.3 million.

The moderate decline in our cash balances this quarter of approximately $3.5 million was the result of our expenses related to the new agreements in Colombia, with severance payments agreed within the company as a result of the headcount reduction.

Our trade receivable at the end of the quarter was $57.5 million, representing DSO of 85 days, which is in line with our expectations, and which continues to be relatively [average] in the industry. Our shareholders' equity at the end of the quarter remained steady and totaled $237.8 million.

Now, I would like to turn the call back to Amiram. Amiram?

Amiram Levinberg

Thank you, Ari. To summarize, while we had a decline in revenue in this quarter, we were able to maintain profitability predominantly due to the steps we took to adjust our cost structure. We have started to release money from the restricted cash held by the team in Colombia, and once again, we are able to recognize revenues from our Colombian operations.

In the previous quarter, we adjusted our budget in order to reevaluate our expenses again at the end of the second quarter, taking into account the economic environment. Overall, the company is in a strong financial position, with $133 million in cash, while having only moderate amount of debt. While the economic situation is difficult, we believe that we can still meet our objective which we have defined for 2009.

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

Question-and-Answer Session

Operator

(Operator Instructions). First question is from Jonathan Ho of William Blair. Please go ahead.

Jonathan Ho - William Blair

My first question is, can you talk a little bit about what you're seeing in the first month of the second quarter and whether we're seeing sort of a pick-up in the enterprise VSAT space?

Amiram Levinberg

Hi, Jonathan, this is Amiram. I didn't say you we can't see pickup. I think [week battle] is much like everyone. So I understand that the bad period is over. But frankly speaking in this field, I don't see any dramatic change, means we find it's good on one hand and on the other hand, it's very difficult to close deals.

Jonathan Ho - William Blair

So can you talk a little bit about maybe the customer environment there? Is this more a situation where they are taking longer to make decisions and so push after the right, or are you seeing more sort of cancellations? Can you talk about what's happening there?

Amiram Levinberg

I don't think cancellation is almost itself, but in reality what happens is that when you see longer and longer sales cycle, you practically spend that or you have net bookings. And with this phenomenon we can't describe, and despite that we see again longer sales cycle that it's normally together just because we have a significant service component.

In Columbia, if we are successful in the implementation or continue to be successful in the implementation, then we should see actually an upside coming to this region. And then the main question is related to GNS. And in GNS, if we start seeing deals that only (inaudible) losing factor, then it's currently due and then if it continues this way, it will continue to be a bit tougher during this period of time.

Jonathan Ho - William Blair

Okay. Taking a look at sort of a pricing environment, have you seen any shifts there in terms of maybe more pricing pressure or customers pressing for that?

Amiram Levinberg

I didn't say that this is specifically different, any different than I will tell you regular updates on the situation in the quarter to be followed. No, I don’t see that.

Jonathan Ho - William Blair

In terms of this Obama and the European stimulus that you guys were mentioning, can you give us a little bit more color on maybe the potential opportunities there and maybe the timeframe that you keep, something flowing out of that opportunity?

Amiram Levinberg

You have similar things in US, the way we begin are not clear. So at this point of time, we have so many people who have to give suggestions and comments and show often advantages to different committees. And we are part of this process. In part, we are cooperating with other companies in our industry and in part obviously at the end of the day, different companies will come with different applications.

We are not at the application stage at this point of time as the rule we begin or not, completely clear at this point, but we've definitely lost the [share point], lost opportunity by many people including ourselves.

In Europe, with stimulus for broadband is somewhat smaller, not to be small money, but it is somewhat smaller, it's €1 billion and I have to say that because, unlike the situation in the US where we have a subsidiary on the job namely Spacenet, in the US, our activity is somewhat more remote because we need to get connected with local sales providers, so we are bit more remote in that situation in Europe.

Jonathan Ho - William Blair

My last question is on the litigation for the breakup fees, has there been any change in the status there? Can you just give us a quick update?

Ari Krashin

I feel it is going to be interesting to a few of the people. The (inaudible) issue past month, where we agreed to discuss a potential settlement through a mediator and as we expect some time. If these discussions do not lead to an effective resolution, as a matter, we will revert to the Israeli court.

We understand the urgency of proceedings there, and we'll do our best for the interest of our shareholders to either do any achievement we are with an aggression or as I said, we'll go to Israeli court. Each and everyone of them has a life of its own, so I won't really want to commitment as to (inaudible) interval takes quite a few years.

Operator: (Operator Instructions). There are no further question at this time. So I ask Mr. Levinberg to go ahead with his closing statement.

I'd like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the US, please call 1-877-332-1104. In Israel, please call 03-925-5947. Internationally, please call 9723-925-5947. Mr. Levinberg, would you like to make your concluding statement?

Amiram Levinberg

Thank you. I would like to thank you for joining us for this relatively short conference call. Good afternoon and good bye.

Operator

Thank you. This concludes Gilat's first quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.

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