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Globecomm Systems Inc. (NASDAQ:GCOM)

F1Q10 Earnings Call

November 05, 2009; 10:00 am ET

Executives

David Hershberg - Chairman & Chief Executive Officer

Keith Hall - President & Chief Operating Officer

Andrew Melfi - Chief Financial Officer

Matthew Byron - Corporate Vice President

Analysts

Steve Ferranti - Stephens Inc.

James McIlree - Collins Stewart

Matthew Crews - Noble financial

Rich Valera - Needham & Co.

Dick Ryan - Dougherty

Operator

Good day and welcome to today’s Globecomm Systems fiscal year 2010 first quarter earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I will like to turn the call over to Matthew Byron, Corporate Vice President; please go ahead, Mr. Byron.

Matthew Byron

Thank you, [Tasha]. Good morning everyone and welcome to the Globecomm Systems fiscal 2010 first quarter earnings conference call. Joining me today from the company are Chairman and CEO, David Hershberg; President and COO, Keith Hall and our Chief Financial Officer, Andrew Melfi.

Last night after the closing bell, Globecomm issued its fiscal 2010 first quarter earnings press release. Including in the release is management’s expectation for the fiscal year ended June 30, 2010, which includes first quarter actual results and the company’s current expectations for the next three quarters.

In the event, you have not received or not seen a copy of the release, it is posted on the Globecomm Systems’ website at www.globecommsystems.com, or you can contact me at 631-457-1301 and I will send a copy to you.

Comments made during this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Globecomm Systems. These statements are only projections and reflect the current beliefs and expectations of the company. Actual events or results may differ materially. With that said, it is routine for internal projections and expectations to change as quarters progress.

All forward-looking statements are based on information available to the company on the date hereof and the company assumes no obligation to update such statements. Please refer to the documents the company files from time to time with the SEC, specifically the company’s Annual Report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and the Safe Harbor language contained in the company’s press releases.

These documents contain and identify important factors that could cause the company’s actual results to differ materially from those contained in its projections or forward-looking statements, which the company urges all investors to consider. Globecomm undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Please note that this call is being recorded on Thursday, November 05, 2009, contains time-sensitive information, and will be available as a webcast replay for at least nine months on the Investor Relations section of the Globecomm Systems website and as a phone replay at 1-888-203-1112 for domestic callers, or 719-457-0820 for international callers with an access code of 7604430.

At this point, I’d like to turn the call over to our Chairman and CEO, Dave Hershberg. Dave.

David Hershberg

Thank you Matt and welcome to our fiscal 2010 first quarter earnings conference call. As you know over the years we’ve been talking about increasing our service revenue and I’m happy to report that we had record services revenues for the first quarter, that help the company achieve its 22 consecutive profitable quarter and meeting our fiscal 2010 plan.

We finished the quarter with approximately $50 million and no debt. We continue to see record consolidated revenues of $215 million to $225 million for this fiscal year and service revenues of approximately $125 million and a record EBITDA of approximately $20 million.

Andy will walk through the financial details later in the call. The company continues to identify certain vertical markets that we believe the company’s suite of products and services conserved very well today and in the future. Our acquisition team is busy continually building a pipeline of perpetual targets mostly in the service area.

We’re looking at deals that would be easily absorbed through our existing cash position and will give company an immediate footprint in the vertical and we are adding management now have and also we are hoping these companies will also be accretive immediately after repurchase them.

As we have been reporting, our infrastructure business was down last fiscal year, but as you can see from recent press releases, we’re beginning to see improvement in our infrastructure bookings. With some programs that we’ve been bidding where now things funded.

Some of the larger service base, we are making also have significant infrastructure content. Recently, our government group finished development on new came and experienced satellite terminals to address the recently launched WTS system. This goes well going forward with our robust service business allowing us to provide improved guidance to share comparing with last year.

Keith Hall, our President will now give an overview of the business outlook. Keith.

Keith Hall

Thanks Dave, good morning all. It’s been a busy and exciting few months since we last spoke and I’ve enjoyed working closely with the Globecomm management team on the execution of our Managed Network Services strategy. The team executed very well in achieving our first quarter objectives and in setting the stage to continue the positive trends.

Q1 consolidated revenues, were up year-over-year to $47.7 million and services revenues increased to a record $28.6 million. As Dave highlighted, we’ve remain on target for a record year revenue and EBITDA. The increase in service revenue was driven in part, by the company’s acquisitions of Mach 6 and Telaurus, with a combined full quarter revenue contribution of approximately $8 million. Infrastructure revenues were down in Q1 year-over-year, but we had a strong bookings quarter and we continued to see opportunities over back up on the commercial side of the business including in the Global Broadcast Market.

Overall, we are please with the strong contract renewals in all markets, which help at the stage for long term stability. One of my main objectives this year is to bring the infrastructure and service visions inline and we are making progress towards this goal. The unified capabilities is the true value proposition for the Globecomm and our entity remains targeted on leveraging our global network and its value proposition into vertical market growth.

I’d like to provide a quick status on our market based initiatives. We are making straits with the broadband Maritime market with our two new service subsidiaries Telaurus and Mach 6 and have continued to increase the number vessel served each month. The integration of both entities is going well and we are please with the positive results both financially and with the cultural fit of the management teams.

In the media and broadcast markets, Globecomm continues to develop IT based content solutions. It’s a body installation in India, which was put in to service last year, now services over 2 million subscribers. Globecomm is addressing several opportunities to implement new networks leveraging this technology. Globecomm is also working on developing a new software based hybrid satellite-terrestrial solution to support streaming and on demand content delivery solution that will serve end users that cut across all market segments.

In the wireless market, Globecomm will be launching our [Inaudible] based hosted cellular platform and services in Q2. This new platform will further enhance the capabilities of our global network and we’ll further open up cellular-based market opportunities. On our GCI program in Alaska network expansion continues with an installation base now exceeding 100 sites. In the government market, efforts to support our military within a rack in Afghanistan with Globe access and infrastructure solutions have continue to increase.

Government based business represents 64% of our total revenue in Q1. Globecomm is also actively involved in [acts] and Ka-Band initiatives in support of the U.S. government. Globecomm launched its manpack solution for using tactical environment and other rapid response applications. Trademark TomCat, the solution is a portable lightweight X band terminal that can be rapidly deployed.

These are just a few examples of our activity and we’ll continue to keep your abreast of our progress in market development as the year progresses, including additional financial metrics.

From an organizational perspective, I’d like to announce the promotion of Andy service team as you new VP General Manager of our network services business. Andy will be focused on the growth of our GNSC and GSM subsidiaries. I look forward to working closely with Tom Coyle, who views our infrastructure business and Andy on the execution of our plan.

To conclude, we finished the quarter with a strong balance sheet, which will allow us to aggressively review strategic acquisitions as we continue to around auto product and service offerings in various vertical markets. We continue to hold our revenue and EPS guidance and I’m pleased with the prospect for both our infrastructure and service segments.

I’d like to thank everyone for their support and then I’m excited about the future for Globecomm. Andy Melfi, our CFO will now take you through our financial results.

Andrew Melfi

Good morning. Thank you, Keith. Revenues for the company’s fiscal 2010 first quarter increased 12.6% to $47.7 million compared to $42.4 million in the same period last year. Revenues from services increased 52.0% to a record $28.6 million compared to $18.8 million in the same period last year. The increase in service revenue was primarily driven by the company’s acquisitions of Mach 6 and Telaurus, which combined contributed $8.2 million, coupled by an increase in access services.

Revenues from infrastructure solutions decreased by 19.0% to $19.1 million compared to $23.5 million in the same period last year. The decrease in infrastructure solution revenues was primarily caused by the global economic slowdown resulting in government and commercial customers and prospects delaying projects, which affected, in particular, pre-engineered systems. As mentioned earlier, we’ve seen some pickup in this area and optimistic that things are improving.

Net income for the company’s fiscal 2010 first quarter increased to $1.2 million or $0.06 per diluted share compared to net income of $0.8 million or $0.04 per diluted share in the same period last year. Adjusted EBITDA for the first quarter of 2010 increased to $4.0 million compared to $3.0 million in the fiscal quarter of 2009.

As mentioned earlier, Globecomm currently expects the following financial results for fiscal 2010. Consolidated revenues to be between $215 million and $225 million, service segment revenues to be approximately $125 million, GAAP earnings per diluted share to be between $0.30 and $0.35 and adjusted EBITDA to be approximately $20 million.

At this point, I’d like to hand the call back to Dave.

David Hershberg

Thank you, Andy and Keith. At this time, we’d like to answer any of your questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Ferranti - Stephens Inc.

Steve Ferranti - Stephens Inc.

David, it sounds like you have a little bit of higher level of optimism on the pre-engineered side of the business. Can you give us a sense, in your discussions with customers? Are you getting any better order visibility in that segment? How we expect that to particular segment to trend over the next couple of quarters?

David Hershberg

We did announce some infrastructure pre-engineered system business this last quarter. We have a number of bids out now and we are working very hard on marketing our new tactical manpack terminal, called TomCat. We got very good results on the test phase of that program, we think it’s a superior product it’s out there. We do have a lot of biz out and I don’t have a real crystal ball on how much of this stuff are really going to book, but we do have the products now to invest the WGS system.

I think we have some of the only Ka-Band tactical terminals out there now, which we’re bidding and hopefully, it’s going to look a lot better than it did last year, it does already look a lot better in the last year, plus we use these terminals and implementing networks also. So we have a number of networks projects that we’re looking forward to implementing this year.

Some of the major projects that we’re hoping to book in the service area have a very significant amount of infrastructure involved in building network side. All-in-all, I think we have some very good prospects in that area. I don’t have crystal ball, how much money the government is going to be spending in this area. So I really can’t tell you about does look like things are picking up.

Steve Ferranti - Stephens Inc.

So it sounds like the programs that are sort of leading a pick up or would be WGS for you guys in terms of expanding Ka-Band terminals?

David Hershberg

We have a lot of hope for that plus. Some of the legacy expand product that we’re starting to see some requirements for in that we book some business and also.

Steve Ferranti - Stephens Inc.

In your services business, your gross margins seemed to continue to trend higher, which is great. I wonder and I don’t know it’s a difficult thing to forecast, but as part of the up tick in gross margins and services in the first quarter attributed to the revenue contribution from the new acquisitions. In other words, is there something inherit about this businesses that might help gross margins trend higher?

Keith Hall

The gross margins of both Telaurus and Mach 6 pretty much below online with our normal course of business on the service side. They are not contributing to driving the gross margin higher. We did have some attractive programs at high gross margins in our GSM subsidiary, which led to an up tick in Q1.

Steve Ferranti - Stephens Inc.

So probably safe to assume when we might see a reversion in back to a more normalized level as we move onto the year?

Keith Hall

That thus far fair statement.

Steve Ferranti - Stephens Inc.

You’ve been talking more about the host switch services that you’ll be offering with the UMTS switch services. Can you give us maybe a little bit more background there in terms of what drew that investment and any least early signs of interest from customers at this point?

David Hershberg

We have a number of clients that we’ve been supporting from our hosted switch services for the couple of years. We’re just advancing the application side of it and making a biggest so, we’re taking that into the next generation. It’s not a new business for us. It’s something that we’ve been supporting for the last two years. Just to add further capabilities to our global network and brings in higher CTF customer from the market opportunity perspective.

Keith Hall

We are bring up our first client on that switch this month, I think like we said we have month up in operating. The switch is in operation and now it’s a very large investment for us and we’re hoping the kind of service we can provide. We will attract more customers plus give our existing customers more capability. This kind of decision that we took a long time making, it is a large investment we’d also hope working with Ericsson, to having that switch working with Ericsson, we’ll also drive more business this way.

Steve Ferranti - Stephens Inc.

I know the switches are scalable, but can you based on the investment you made thus far, can you give us some sense for what the revenue generating capability that switch is based on the investment you made so far?

David Hershberg

First of all, it’s difficult to answer, but from a limitation perspective there’s ample growth in the switch, if you looking at what kind of additional investments you’ll need to make based on revenue, not in the foreseeable future.

Operator

Your next question comes from James McIlree - Collins Stewart.

James McIlree - Collins Stewart

You’ve mentioned a couple of times, some service bids that would have a lot of infrastructure pull through? Are those contemplated in your guidance? Do you have significant winds in that area, built into your guidance for fiscal 2010?

David Hershberg

One of those projects we’ve already won an announced on a limited basis of five month project that had a significant infrastructure component, but there’s a very a large one out there that were chasing, that is not in our plan, if we’re successful on DSO, a very significant amount of infrastructure business. We’re hoping to hear about that in next month or two, but we do not have that in our plan now.

James McIlree - Collins Stewart

Is that a domestic or in international project?

David Hershberg

It’s international

James McIlree - Collins Stewart

Then I wanted to get a little bit of clarification on the pickup and orders that you talked about. Was that an overall pickup in orders for the infrastructure business or where you referring specifically to the pre-engineered systems pickup in orders?

David Hershberg

It’s really combination of both and if we do a network trends as we use a pre-engineering system, let’s say to put that network together. So I don’t really make a big distinction out of that other than if we sell a pure product the margin that are usually somewhat better than if we sell complete, integrated system and I’d say on a bookings that we got in the first quarter there were about 50/50 in that way between pure product and network infrastructure.

James McIlree - Collins Stewart

Just lastly on the operating expenses, was there anything unusual in this quarter either good or bad that we should be aware of that might have an impact on the future quarter operating expenses?

Keith Hall

Jim, I think we continue to see these expenses running at this level or slightly higher.

Operator

Your next question comes from Matthew Crews - Noble financial.

Matthew Crews - Noble financial

Just looking at the infrastructure solution again and backing of the services fees to $225 million for the 2010 outlook, at the bottom end you range about $90 million. We believe that the first quarter here just reported would the bottom of the infrastructure solutions and going to ran through the year?

Andrew Melfi

Correct, yes. It is based on our forecast. It appears that this is the low quarter of the year.

Matthew Crews - Noble financial

With the introduction of the TomCat and another products which you mentioned, do you think it’s more of a sequential increase in or there any contracts that will cause some lumpiness in your forecast?

Keith Hall

We have some major contracts that based on milestone so; I would say going out over the next three quarters there’s going to be some lumpiness in each quarter, but growth in each quarter.

David Hershberg

Say your lumpiness is for changes on the upside though?

Keith Hall

Yes.

Matthew Crews - Noble financial

Little bit more on the guidance, just your tax rate assumptions for the year; do you have that again the same as reported first quarter?

Keith Hall

Currently, we’re using 30% tax rate, which assumes a 2% R&D credit we are looking at the rules, because in December those rules are going to be reestablished. So, there is a possibility, the effective tax rate may go down a few more points based on the R&D tax credit, but we haven’t forecast that yet.

Matthew Crews - Noble financial

Just lastly the interest income, do you have a rough forecast for the year?

Keith Hall

Basically, I would say, based on what we see with our cash balances assuming no acquisition. I’d assume that the run rate for Q1 is about that rate for the year.

Operator

Your next question comes from Rich Valera - Needham & Co.

Rich Valera - Needham & Co.

Keith, you referenced some significant renewals in the services businesses. I was wondering, if you could give us anymore color on those sort of the nature of those contracts and what tends to happen to your run rates on renewals to date typically stay flatter? Are you sometimes able increase those run rate?

Keith Hall

Yes, our churn remains extremely low across the entire service business and what tend to happen on the year-to-year basis, in the government side of the business is for filling options, because they fund the contracts on a year-to-year basis, but being embedded in those contracts, we’ve been fortunate over the years to be able to expand on those contracts during the renewals cycles. So, we have seen up ticks in the revenue trend on a year-over-year basis as we obtain renewals.

Rich Valera - Needham & Co.

Just looking at the full year guidance, as wondering if you could give any sense of the expected quarterly flow of the numbers, whether you would expect sort of the fairly steady sequential progression through the year or if there might be a quarter or two that would standout be stronger than the balance other than the fourth quarter, which I presume would be a strongest?

Andrew Melfi

I think on a service side, it sort of sequential. On the infrastructure side, we may see towards the end of the year a bigger quarter.

Keith Hall

We do expect some minor improvement each quarter.

Rich Valera - Needham & Co.

So, sequential progression for each of the next two quarters with possibly bigger sequential progression from the back half?

David Hershberg

Yes, that’s a good assumption.

Operator

Your final question comes from Dick Ryan - Dougherty.

Dick Ryan - Dougherty

I got on the call a little late, I’m not sure if you gave any color to bookings either what the bookings level was in the quarter or maybe kind of compared to the revenue side, what’s your book-to-bill would have been?

David Hershberg

We did have total booking significantly higher book-to-bill this first quarter and we do have from a standpoint of extremely good backlog now compared to previous years.

Dick Ryan - Dougherty

How is the backlog skewed between infrastructure in service now versus I mean there’s a change from stand of the year or…?

David Hershberg

A lot of it has to do about how we book revenue and infrastructure side we have more backlog than we do when the service business because sometime in the service business we don’t put things in the backlog because month-to-market kind of bookings. So it is in really an exact picture what’s going on.

When you book a hardware project, it book at all because if it’s funded you booked a whole project and has of five night time to make a sale when it finished. In the revenue that we book for the government side typically a lot it is month-to-month, a lot of it is needs renewals to put it into backlog. So it’s somewhat less in the service side.

Andrew Melfi

In think to answer that question now is that we ended Q1 with a much stronger infrastructure backlog in the prior year.

Dick Ryan - Dougherty

Dave you trying to say some real connectivity business through some of the stimulus funding, can you give any update there? What do see happening?

David Hershberg

While if we’re chase that we have an active group that going after. I can’t report any real success yet, because we just don’t making any traction there, but we do have proposals for a number of different ways for providing that kind of service. We have talk to different carriers, we’ve talked directly to the government, we have a group of people chasing that and I can’t report anything now, we typically have a very good offering.

One is in France with the satellite offering is that the infrastructure can be installed very quickly without a lot of labor involved and when you install a satellite earth station put up and combine it with a WiMAX product to provide service you can do it in a week. If you did trenches to put fiber, and you get more jobs and I takes longer, so what we’re trying do is be that supplier that fills in areas where very remote that doesn’t make sense to put threshold services in. So we think, we have a very good offering there, but we have not been successful in and being able to really pricing down, is the reason that we’re not trailing.

Operator

It appears so we have no further questions at this time.

David Hershberg

We wan to thank you all for participating in our call and hope to have a numbers that look a little better going forward and we still looking at our guidance being to accurate for the year. Thank you again.

Operator

This does conclude today’s teleconference. You may now disconnect you lines and have a wonderful day.

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