Gilat Satellite Networks' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Gilat Satellite (GILT)

Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q2 2013 Earnings Conference Call

August 14, 2013 9:30 a.m. ET


Erez Antebi - Chief Executive Officer

Yaniv Reinhold - Chief Financial Officer

Philip Carlson - Investor Relations, KCSA


Matthew Paul - Sidoti & Company

Gunther Karger - Discovery Group

Louis DiPalma - William Blair


Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Second 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, August 14, 2013.

I would now like to turn over the call 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 second quarter 2013 results conference call. A recording of this call will be available beginning at approximately noon Eastern Time today, August 14 2013 until August 16, 2013 at noon.

Our earnings press release and website provide 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.

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 second 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 second quarter of 2013 was highlighted by new client wins, continued execution on existing projects and a significant new partnership agreement THAICOM. In the second quarter revenues decreased 3% to $80.2 million compared to $82.8 million in the first quarter of 2013. Our non-GAAP operating income increased to $1.3 million compared to an operating income of $1 million in the first quarter of 2013. Our EBITDA reached $5.4 million or 6.8% of revenue compared to $5.1 million or 6.2% of revenues in the first quarter of 2013.

Operationally, we continued our cost-cutting efforts and reductions in operating expenses across the board. As an example, we recently moved the production of our Raysat antennas to Bulgaria to reduce costs. We will continue with similar streamlining efforts to reduce costs and increase profitability.

I will now discuss some of our business highlights for the quartet, starting with our commercial division. Our commercial division continued to perform well this quarter as highlighted by several new customer contract wins, continued progress to our internet access projects and a new strategic partnership. I would first like to discuss the ongoing progress we continue to make in providing broadband internet access via multi-spot beam Ka and Ku-band satellite networks. NBN Co. in Australia continues to progress very well. We remain well ahead of schedule to deliver the allocated size budgeted by NBN and to date we have installed over 32,000 units.

Moving to Ka-band, in support of the SES Broadband Service, SBBS, which was launched at the end of 2012, we have already signed six ISPs and delivered over 10,000 CPE units with most of them installed and operational. In Asia, our progress in the area of internet access continues in the second quarter with the signing of a strategic partnership with THAICOM, Asia’s leading satellite operator with whom we have worked on the NBN project. As part of the agreement, we will work in collaboration with THAICOM to provide customers across the Asia Pacific region with an integrated solution using Gilat’s satellite ground equipment and THAICOM-4 IPSTAR high throughput satellite. The Asia-Pacific region is an important growth region for Gilat and this partnership will help further our objective as we look to expand our business there.

We were also selected by one of the largest Southeast Asian telecommunications operator to provide satellite based broadband internet access to several thousand schools across Southeast Asia. For this e-learning initiative, we will be deploying our SkyEdge II HUB and VSATs for the schools to bring internet access to thousands of school children in the outlying areas.

In other areas of the commercial business, we have several new customer wins, including a large multi-year contract for a large USO turnkey project in Brazil providing equipment, infrastructure and services to expand coverage of telephony service to villages. We also continue to see progress in our cooperation with Huawei. For example, in Africa we have closed several new deals during the quarter with Huawei, including one for connecting post office branches via satellite and another providing the cellular backhaul turnkey project to significantly increase capacity for a large African cellular operator. In India, we continue to deliver on the National ATM initiative announced earlier in the year. The contract is part of India’s Ministry of Finance initiative to make financial services accessible to a greater audience across India.

We will now turn to our defense division. As we noted previously, we recorded lower than expected sales in our defense division this quarter due to the budget cuts and purchasing slowdown in the US defense department. We do, however, continue to see orders from leading US defense system integrators but at a lower level than initially anticipated. That said, and as we have noted in the past, we are targeting programs of record that are strategic in nature and as such we remain confident about the long-term prospects of our defense division.

In the international market, we have closed several new customer deals and have seen follow-on sales to existing customers. For example, we recently completed an initial new customer sale of our Wavestream's Ka Y-band amplifier to a European military organization. We also sold our RaySat on-the-move antenna to a new Asian military customer and we secured follow-on sales of 20 EagleRay 7000 antennas to an existing Asian customer. We are progressing well with the development of the EagleRay 5000 antenna which will be one of the first Ka Ku multi-band on the move, low profile antennas on the market. We are also working on a new line of Ka Y band amplifier for aviation and defense systems.

Finally, we look at our services division. During the quarter Spacenet has continued to position itself as a premier North American managed network services provider with the primary focus on the enterprise, government and industrial sectors. We received contract extension from several of our key lottery customers, including Scientific Games International (NASDAQ:SGI) and [Interlock]. We have also seen new growth from Dollar General, one of Spacenet’s largest and oldest customers.

Spacenet also saw continued growth of the new managed service business from Meijer to its partner Motorola. We’ve also seen continued growth in the energy sector with new business from First Electric Cooperative, CenterPoint Energy, Phillips 66 and Williams Information Technology.

In Colombia, as we announced in June, we have received the contract extension to November 2013 under which we will continue to provide broadband internet connectivity to over 1500 schools throughout the country’s outlying areas. In Peru, we are progressing well with the Banco de la Nacion project and the project for the Peruvian Ministry of Education. Overall, we see a strong and growing pipeline in Peru of internet in this region.

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 second quarter of 2013, revenues for the second quarter of 2013 were $80.2 million compared to $85.3 million for the second quarter of 2012. The decrease in revenue is mainly attributable to lower than expected sales in our defense division given sequestration, budget cuts and purchasing slowdown in the US defense department and the end of the Compartel contract. On a non-GAAP basis, our gross margin this quarter reached approximately 32% compared to approximately 34% in the second quarter of 2012.

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 we recognize. The decrease in our gross margin this quarter was primarily due to the lower than expected revenue from our defense division which usually carriers a higher margin revenue and also due to our ongoing installations in Australia at NBN which carries a lower margin level than our other projects.

On a non-GAAP basis, gross R&D expenses were $7 million this quarter compared to $8.3 million in the second same quarter of 2012. The decrease in R&D expenses reflect our integration efforts and growing synergies within the divisions. We are continuing to invest substantial funds in R&D in support of our strategy in Ka and on the move applications.

Moving to selling and marketing and general and administrative, on a non-GAAP basis, expenses for the quarter were slightly higher at $17.7 million compared to $17.3 million for the second quarter of 2012. On a non-GAAP basis, operating income was $1.3 million in the second quarter of 2013 compared to an operating income of $4.8 million in the second quarter of 2012. On a non-GAAP basis, we had net loss for the quarter of $1.9 million or $0.05 per diluted share compared to net income of $3.2 million or $0.07 per diluted share in the second quarter of 2012.

As of June 30, 2013, our total cash balances, including restricted cash net of short-term bond credit, were $69.1 million. Our total debt was $42.7 million, which comprised mostly long term debt in the amount of $32 million to be paid over the next eight years.

Our net trade receivables at the end of the quarter were $62.9 million representing a DSO of approximately 71 days. Our shareholders' equity at the end of the quarter totaled $236.1 million.

That 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 made progress in several areas during the quarter though our financial results were softer than we had expected. In our defense division, we were affected this quarter by the budget cuts and slowdown in purchasing. As a result, we recently updated our 2013 management objective with projections that revenue will range between $335 million and $345 million and EBITDA expecting to be approximately 7%.

In our services division, Spacenet continues to perform both with expanding business of existing customers as well as in bringing new customer for the managed network services offering. And while the completion of the Compartel contract has affected our revenue growth in Colombia, we are seeing a growing pipeline of opportunities in Peru.

Last but not least, our commercial division continues to make headway as evidenced by the progress in the NBN and SBBS projects, the new strategic partnership agreement with THAICOM and the new customers and deals we have closed in Africa, Asia and South America.

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

Question-and-Answer Session


(Operator Instructions) The first question is from Matthew Paul of Sidoti.

Matthew Paul - Sidoti & Company

You guys acknowledged the change in your outlook for 2013 regarding the US government and sequestration concern, can you kind of give a little bit of color on your outlook moving forward and into year 2014 on that subject?

Erez Antebi

I think it’s hard for me at this point to quantify 2014 for you. By the way, I would like to comment on how about this year is going forward. I think that on one hand, we are seeing in the short term, we are seeing the budget cuts in the US – in the US defense budget and as a result of that, the cuts and delays in the current program. But if I look over a longer term the programs that we are having there, that have to do with providing satellite on the move tactical communication to ground forces, marine, special operations forces both in the US defense forces and in international defense forces, like European, Asian, Latin American forces. We see those programs going ahead, progressing and we see that there is definitely an awareness and the requirement for the technology.

Now to what extent, how exactly will 2014 look, that’s unclear to us. I think it depends a lot on how the budget – and how the US budget discussions will end up but I think as a long term trajectory this is – I believe that this is an area that will grow significantly.

Matthew Paul - Sidoti & Company

Second question is, on the same subject on sequestration, does it affect your inflight connectivity prospect and if so, could you kind of comment on the pipeline and – in the commercial sector versus the government sector for the inflight connectivity?

Erez Antebi

What we are providing for inflight connectivity is for commercial use in commercial airlines. So sequestration to the best that I can guess doesn’t have a direct effect on that. Now if I look at that, then in the short term we are seeing orders from the integrators that are providing Ku band services on the existing satellites. But I think that the larger prospect for us is with the launch of a Global Xpress from IntelSat, launch of that constellation and beginning to provide Ka band connectivity to inflight planes using that. Now as we have announced before, we are providing the amplifier to Honeywell who will be providing all the airborne terminals for that constellation. We think that, that outlook is very good going forward. Now I would note that this whole sector of inflight broadband connectivity from our perspective is part of the results of our defense position.


The next question is from Gunther Karger of Discovery Group.

Gunther Karger - Discovery Group

The question on the (inaudible) defense budget and the US sequestration, statistically these are politically motivated, actions that came quickly, and easily could – they change quickly depending on the political atmosphere in Washington. Do you see any specific actions that could be taken by the defense department that could reflect the change in political climate that could affect that outlook on the impact of sequestration?

Erez Antebi

I am not sure I know how to answer that, I think we will just say – I guess we will learn to result and the impact of the decisions by the US government as we learn of them.


The next question is from Louis DiPalma of William Blair.

Louis DiPalma - William Blair

Regarding the sequestration issue again, do you guys believe that run rate for first quarter represented the bottom in terms of US department of defense contribution or do you think that it could get worse from here going forward?

Erez Antebi

Well, I don’t – there is no real way for us to know, to know what will really happen with US budgets going forward. I would comment that the best of our estimates you can see from our management objectives in our published results that we expect our second – the second half of the year in general for the company to be stronger than the first half, that’s reflected in what we have said. But could there be different things in the government? I don’t know.

Louis DiPalma - William Blair

And a follow-up on the inflight connectivity topic, you guys recently mentioned Global Xpress, is that associated with Inmarsat or Intelsat?

Erez Antebi

The Global Xpress is a constellation by Inmarsat.

Louis DiPalma - William Blair

Right. And so that’s expected for 2015, right?

Erez Antebi

They are going to – to the best of my recollection right now and I may not be accurate on this, so I apologize, best of my recollection they are going to start launching in 2014 and a significant commercial service is going to be in ’15.

Louis DiPalma - William Blair

And so you guys would probably start recognizing the revenue for that in 2014 if that’s when they are going to start installing systems?

Erez Antebi

We should start seeing some revenues in ’14, yes.

Louis DiPalma - William Blair

And are they – what competitors are you going against for inflight connectivity solution to this market, because – and the reason [I ask this] is because this market is about to take off, and so latter stages of this year and 2014 and 2015, so I just want to attempt to size the market opportunity?

Erez Antebi

I will try and give – I will try – step back maybe and give sort of an overview of I would call it the food chain in this market, and then I will explain in few words where we fit in. The airlines will typically buy an inflight connectivity from a service provider. There are number of them out there providing services now, GoGo to name one, Row 44 to name another, Panasonic to name another. Now these are the service providers, they in turn go and buy technology equipment and they set it upfront, system integrator or manufacturers, the quality manufacturers such as [Eli].

We have announced in the past that we are providing our amplifier to [T-Com] and AeroSat which provide their technology into Row 44 and GoGo. So we have a part of that market. Panasonic is doing – has their own technology and they – in that sense, we are sort of up against them if you like, it’s not that we are competing directly with them but the result is that where they win, we do not have product sale. Now as Inmarsat puts up a Global Xpress network, that they will be providing services to the airlines and the main – actually the sole integrator for the airborne terminals is Honeywell for other Global Xpress airborne terminals worldwide. As we have announced in the past, we are providing on an exclusive basis the amplifier to Honeywell for that service. So as you can see we are (inaudible) to be removed from directly working with the airlines but we have various inroads to provide our technology into that marketplace.

Louis DiPalma - William Blair

And are you able to disclose the approximate cost of an amplifier for each aircraft?

Erez Antebi

I would say that it depends – we don’t disclose a very specific pricing but you can think that an amplifier will cost in the low tens of thousands of dollars.


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, 03-925-5927. Internationally, please call 972-3-925-5927. Mr. Antebi, would you like to make your concluding statement?

Erez Antebi

I just want to thank you all for joining us today, and we look forward to speaking with you again following the distribution of our third quarter results. Thank you very much.


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

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