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Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q1 2013 Earnings Conference Call

May 08, 2013 9:30 am ET

Executives

Erez Antebi - Chief Executive Officer

Yaniv Reinhold - Chief Financial Officer

Philip Carlson - Investor Relations, KCSA

Analysts

Michael Cikos - Sidoti and Company

Gunther Karger - Discovery Group

Andrew Uerkwitz - Oppenheimer

Louis DiPalma - William Blair

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s First Quarter 2013 Results Conference Call. All participants are at present in a 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, May 08, 2013.

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 first quarter 2013 results conference call. A recording of this call will be available beginning at approximately noon Eastern Time today, May 08, until May 10, 2013 at noon.

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 releases, which state that statements made in 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.

With 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 first quarter and then offer a more detailed review of some of the progress we have experienced in each of our business divisions. I will then turn the call over to Yaniv who will walk you through the quarter's financial results. I will then summarize and open the call for questions.

The first quarter was highlighted by solid performance across all our divisions, including year-over-year increases in revenue, operating income and EBITDA. Revenue in the first quarter increased by 8% to $82.8 million, our non-GAAP operating income was $1 million compared to an operating loss of $0.3 million, and our EBITDA reached $5.1 million or 6.2% of revenues compared to $3 million or 3.9% of revenues for the same period in 2012.

In addition to the increase in revenue and operating income, we also increased our total cash by $3.3 million during the quarter. Operationally, we have continued our cost-cutting efforts, which includes a limited workforce reduction and streamlining of operations, as we continue to integrate Raysat and Wavestream into Gilat.

I will now discuss some of our business highlights for the quartet, starting with our Commercial Division. This quarter, our Commercial Division was highlighted by a number of successful implementations of existing contracts, coupled with significant technology advancements in our strategic growth area. To begin, I would like to discuss the advancements we have made during the quarter in the growing segment of providing broadband Internet access via multi-spot beam Ka and Ku-band satellite networks.

As an example of broadband services provided over Ku band, we have our implementation at NBN Co. in Australia which is progressing very well. As a reminder, NBN is an Australian government initiative to provide broadband to every home and school in Australia. At the Australasia Satellite Forum 2013 on April 8, it was announced that over 30,000 VSATs have already been installed in homes. We have stated in the past that the network is slated to grow to as many as 48,000 sites by late 2015. I am happy to inform you that we are well ahead of schedule to deliver the allocated sites budgeted by NBN. We are receiving positive feedback regarding both the service and technology. We are currently providing remote site installation, maintenance service, 24x7 knock, telephone support and operational support systems.

Moving to Ka-band, I will discuss the SES Broadband Services, SBBS, which was launched at the end of 2012. The first quarter of 2013 was the first full quarter of available Ka-band satellite service provided by SBBS. In support of this service, we have already signed five ISPs and delivered over 6,000 CPE units with most of them installed and operational. We have received very good feedback from our customers thus far regarding quality of products and ease of installation. Many of the customers are installing our DIY, do-it-yourself, units themselves.

As we announced last week, the France-based NordNet, a subsidiary of France Telecom and one of Europe's largest satellite broadband ISPs, has begun commercial deployment of Gilat's Ka-band VSAT in support of the SBBS service. Providing up to 20 megabit per second HTTP on download and 2 megabit per second on upload, NordNet is able to offer one of the fastest broadband over satellite services currently available in France.

In addition, SES announced on April 30 that it has signed an agreement with BeyonDSL for the distribution of SES broadband in United Kingdom and Ireland with VSATs to be provided by Gilat. The new satellite Internet service with up to 20 megabit per second download speed will enable competitive and affordable high-speed satellite Internet packages for customers throughout the U.K. and Ireland. The services are being implemented on the recently announced SkyEdge II-c Platform.

As part of our move to maximize the potential of the growing market for broadband Internet access and support growing demand, we have launched the SkyEdge II-c Platform for Ka and Ku-band Internet access. The SkyEdge II-c Platform only requires a minimal initial investment but has the ability to scale. It is based on a rapid and efficient hub assembly and installation and self installed CPE terminals. It enables customized value-added services and usage plans for ISPs, flexible business models for operators and VNOs, and better web experience with patented HTTP acceleration for consumers. It also comes with an integrated and automated network management system for streamlined network management.

This platform is being used for the Ka services provided to SBBS as well as for Ku Internet access. For example, the recently announced $12.8 million Ku-band Internet access project with the Peruvian Ministry of Education in our Services Division was also based on the SkyEdge II-c Platform. In another example of providing broadband Internet access to consumers, we have signed an extension with HISPASAT, which marks the third segment expansion of the networks launched in 2011 in support of the Spanish government's Avanza 100% broadband access program. In this segment, SkyEdge II will support thousands of new broadband users residing in underserviced areas across Spain, expected to join the network by the end of this year.

On the enterprise side, we continue to close new commercial business around the globe. For example, in the oil and gas vertical, we have closed a deal in Africa with one of the leading oil and gas companies. Also in Africa, we've closed a project with a large governmental postal service to connect post office branches to the central data center and also provide e-post services. In Latin America, we have closed several projects for enterprise connectivity and banking. And we've closed several projects in Asia as well, including a new cellular backhaul implementation.

Moving to our Defense Division, as possible impacts of sequestration are likely on everyone's mind, I will discuss them first. Like many other companies, we have limited visibility in the U.S. for DoD programs and potential orders. We are closely monitoring the effects to understand the impact on our programs and the timing of when potential orders may occur. In our international defense business, however, we are seeing growth and a healthy pipeline of potential deals. Despite this uncertain environment, we continue to see ongoing sales to defense system integrators in United States for both new and existing programs. We also continue to see ongoing sales to integrators in the aviation market, including TECOM and AeroSat.

As we recently announced, we were selected to equip the Israeli Defense Forces, IDF, with our SatTrooper-1000 military Manpack terminal for advanced tactical field communications. The lightweight, compact, and easy to carry Manpack was made to address the unique field requirements of ground forces. The SatTrooper-1000 provides soldiers with dependable data, video, and telephony at broadband speeds. Weighing only 13 kilos, the compact and easy to carry terminal is highly efficient and can be set up in a minute by a single warfighter. The rugged design of the auto pointing antenna enables rapid connectivity even in the harshest environmental conditions. The selection of our SatTrooper Manpack by the IDF speaks to our Satellite-on-the-Move technology capabilities, a key growth driver for the Company.

We have also seen demand in Asia for our Raysat low-profile antennas. For example, we have closed a deal with a large government entity for 20 EagleRay 7000 antennas to be used to enable IP connectivity on vehicles providing real-time video, voice and data. In another Asian country, we closed the deal to provide local police forces with EagleRay 7000 antennas to be used to provide a time critical data, voice and video for secure real-time information flow.

Finally, we look at our Services Division. Spacenet continues to close new contracts and expand on existing services as it works to expand its business for managed network services. During the quarter, we closed a new customer deal with Meijer, a major regional American hypermarket chain, to provide our ClassicConnect service. We also closed several other new deals including a project to provide our VSAT business continuity and multitask to over 1,800 locations for a leading big-box retailer, and a project to provide ClassicConnect services to Home Depot, a retailer of home improvement and construction products, servicing over 1,100 locations.

In Colombia, we are currently providing Internet connectivity to over 1,600 schools based on a project with the Colombian Ministry of Information Technology and Telecommunications. This contract will end in August and we are currently in discussions to expand this project. Additionally, and as we have discussed before, our Compartel contract ended on March 31, 2013. We are expecting a new bid to come out from Compartel later this year. As such, we are taking the necessary steps to cut costs and streamline operations in Colombia.

Turning to Peru, we are seeing a strong pipeline in this country, particularly for rural Internet and our enterprise business. We continue to execute on two of our recent contract wins which are both progressing very well. On the enterprise side, we are providing Banco de la Nacion with satellite connectivity for 320 rural locations and a disaster recovery site. In the area of rural Internet, as mentioned previously, we are providing the Peruvian Ministry of Education with our SkyEdge II-c Platform for Ku connectivity to provide Internet access to 2,600 schools nationwide.

That concludes our business overview. I would now like to turn the call over to Yaniv Reinhold, our CFO, who will review the financials. Yaniv, the floor is yours.

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 of non-cash stock-based compensation as per ASC 718, and amortization of intangible assets resulting from the purchase price allocation. The reconciliation table in our press release highlights this data and our non-GAAP information is presented excluding these items.

Now, moving to our financial highlights for the first quarter of 2013, revenues for the first quarter of 2013 were $82.8 million compared to $76.6 million for the same period in 2012. The increase in revenue is mainly attributable to our continued delivery of NBN projects in Australia. On a non-GAAP basis, our gross margin this quarter reached approximately 32% compared to approximately 34% in the comparable period last year.

As we have mentioned over the past few quarters, our gross margin is affected by the regions in which we operate and the types of deals which we recognize. A decrease in our gross margin this quarter was primarily due to our ongoing installations in Australia at NBN which carries a lower margin than our other projects.

On a non-GAAP basis, gross R&D expenses were $7.5 million this quarter compared to $8.2 million in the same quarter of 2012. R&D is becoming more efficient as we shift towards the lower-cost facilities. We are continuing to invest R&D funds in our Commercial Division for SkyEdge II to support features for vertical market such as cellular backhaul and oil and gas. We are also investing in new acceleration technologies and enhancements for Internet access for our SkyEdge II-c Platform and for cost-reduction efforts.

On the defense side, we are progressing with the development of the EagleRay 5000 antennas which will be one of the first Ka/Ku multi-band on-the-move low-profile antenna on the market. We also continue the development of our phased array antenna for the Ka and Ku-band which will provide a very low-profile antenna used for specific tactical defense applications. We are also working on a new wideband amplifier for aviation and defense systems.

Moving to selling and marketing and general and administrative, on a non-GAAP basis, expenses for the quarter remained relatively constant at $18.6 million compared to $18.5 million for the same quarter last year. On a non-GAAP basis, operating income was $1 million in the first quarter of 2013 compared to an operating loss of $0.3 million in the comparable quarter of 2012. On a non-GAAP basis, net loss for the quarter was $0.3 million or $0.01 per diluted share compared to net loss of $0.8 million or $0.02 per diluted share in the same quarter of 2012.

As of March 31, 2013, our total cash balances, including restricted cash net of short-term bond credit, increased to $73.3 million. As a result of timing differences between our recognized revenues and cash collection mainly from two large projects as well as some inventory stock requirements, we used $5.3 million of cash in our operating activities. These funds have been mostly collected already.

As we stated in the 2012 20-F filing, we closed a financing agreement with a U.S. financing company for $14.7 million loan which is almost entirely non-recourse. The loan is secured by monthly payments from one of Spacenet customers. Our trade receivables at the end of the quarter were $55.1 million, representing a DSO of approximately 60 days. Our shareholders' equity at the end of the quarter totaled $240.2 million.

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

Erez Antebi

Thank you, Yaniv. Before we conclude today's call and turn to your questions, I would like to make a few closing remarks. We started the year better than last year as we continue to execute on our strategic plans with both existing projects and new deals. Our expansion into the broadband market has been well received as we have been making significant strides in our Commercial Division with SBBS and are ahead of schedule with our NBN contract.

On the defense side, while sequestration is limiting our ability to forecast defense contracts in the U.S., our pipeline in the international markets is growing. We have also seen ongoing sales to defense system integrators as well as integrators in the aviation marketplace. Furthermore, our Services Division continues to perform as we deliver new client wins for our managed services as well as our ongoing execution of existing contracts and the pipeline in Peru.

Due to the seasonality of our business, our first quarter results have been historically weak. We anticipate our revenues will continue to grow during the year. As such, we are reaffirming our management objectives that we announced at the beginning of the year and anticipate revenues in the range of $350 million to $360 million with EBITDA margins of 9%.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Michael of Sidoti and Company. Please go ahead.

Michael Cikos - Sidoti and Company

If possible, can you shed some additional color on your efforts in the oil and gas vertical? Did this segment represented a significantly growing portion of your revenue, and if so, can you shed some color on where it lies within your strategic growth plan?

Erez Antebi

I think that the two major areas that we consider our growth areas are broadband Internet access and satellite-on-the-move. So, obviously oil and gas does not make it that high up the list. It is a segment in our regular enterprise business. We are seeing some business in that for quite a few years. There may be some additional growth but I don't think that that's a segment that I would specify as something that is a significant growth driver for us.

Operator

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

Gunther Karger - Discovery Group

I just wanted to say that you guys are on a good track, congratulations and keep it moving. Have a pleasant day.

Erez Antebi

Thank you very much.

Operator

The next question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Andrew Uerkwitz - Oppenheimer

One quick one here on the commercial side. What do you consider the size of the market there? As you guys continue to get good wins, how much more is there or how much should we expect there over the next couple of years?

Erez Antebi

I think that I would – I will rephrase this. I think that I would define the market or divide the market I think into two parts. One would be the traditional enterprise market, connectivity to banks, businesses, et cetera, which has been a traditional business of what is now the commercial segment for quite a few years, and I think that we are not going to see any significant growth in that. However, in the broadband Internet access, I think we are going to see significant growth because what's happening in this market is we are seeing more and more plans to launch multi-spot beam satellites, primarily in Ka but also in Ku, and these satellites will bring about an abundance of space segment on one hand. On the other hand, it will be space segment that will come at a significantly lower cost point than the traditional Ku and C-Band space segment is.

And from another perspective, because it's a spot beam, these are spot beam satellites, then they will be more attuned towards the Internet broadband and not like the current traditional satellites towards video distribution. All of these factors put together, and as these satellites come up, I think we're going to see a lot more demand for broadband over satellite Internet access and there will be a significantly growing demand for ground segment. And that's where we see most of the growth in the Commercial Segment, that's the reason we have invested heavily in developing the platform that's geared towards that, which is the SkyEdge II-c that I discussed, and we are starting to see the first implementation of that network. So I think we are going to see a lot more growth over there.

Operator

(Operator Instructions) The next question is from Louis DiPalma of William Blair. Please go ahead.

Louis DiPalma - William Blair

This is Louis DiPalma in for Jim Breen. I was wondering what percentage of VSATs shipped for the quarter were Ka-band versus Ku-band?

Erez Antebi

The majority is still Ku I think even by far, but Ka is now picking up. Really the SBBS network that I talked about is our first Ka implementation, it's not our first multi-spot beam implementation but it's our first Ka implementation. So this is now picking up but the majority is still Ku.

Louis DiPalma - William Blair

And when do you expect for Ka to hit an inflection point? Are there any significant events or deployments in the pipeline that you think that Ka-band will pick up?

Erez Antebi

What I can say on that is that there are more and more multi-spot beam satellites, and I'll refer to them as multi-spot beam because I think that's the key factor, most of them will be Ka but some of them will be Ku as well. And as they come up and decisions are being made on the ground segment, we'll see a growing number of terminals ship for those. How fast will that happen, when is there an inflection point, that's harder for me to say. It's still, for now, this is still primarily a Ku market.

Louis DiPalma - William Blair

Great. And as a follow-up to the last question and answer, are the economics generally more favorable for the multi-spot Ka-band versus the Ku?

Erez Antebi

Are you asking, I just want to clarify the question, are you asking, are the economics more favorable for multi-spot Ka versus multi-spot Ku?

Louis DiPalma - William Blair

Yes.

Erez Antebi

Okay. No, I think that generally the economics of those should be about the same.

Louis DiPalma - William Blair

Okay, great. Thank you very much.

Operator

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 1-888-782-4291. In Israel, please call, 03-925-5900. Internationally, please call 972-3-925-5900. Mr. Antebi, would you like to make your concluding statement?

Erez Antebi

Just want to thank everyone for joining the call and listening to us, and I'd like to wish you all a good day. Thank you very much.

Operator

Thank you. This concludes Gilat’s first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.

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