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Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q3 2009 Earnings Call

November 16, 2009 9:30 am ET

Executives

Tom Watts - IR, Watts Capital Partners

Amiram Levinberg - Chairman and CEO

Ari Krashin - CFO

Analysts

Jonathan Ho - William Blair

Rich Valera - Needham & Company

Operator

Welcome to Gilat's third 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 November 16, 2009.

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

Tom Watts

Good morning and good afternoon. Thank you for joining us today for Gilat's third quarter 2009 results conference call. A recording of the call will be available beginning at approximately 12:00 PM Eastern Time today, November 16, 2009, until November 18, 2009 at 12:00 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 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 would like to begin today's call with a highlight of our third 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.

The third quarter was a new breakeven for Gilat, we improved our cash position and saw an improvement in bookings compared to the previous two quarters of the year. In revenues, we saw a decline in the third quarter compared to the comparable quarter in 2008. Taking into account the challenging market conditions, I think that Gilat's performance is good and that the measures we took earlier this year have had a positive effect on our financial results.

We continued to release money from the restricted cash held by trustees in Colombia and therefore recognized more revenues from our Colombian operations. The market condition in the US continues to be challenging, so while we continue to sign new contracts and extension to existing contracts during the quarter with a decline in revenues compared to the comparable quarter in 2008. A large portion of our new contracts continue to come from the gaming sector, which we feel is less affected by the economic environment in the US.

We announced our new contracts in Latin America and Asia during the quarter, Cable & Wireless Panama, Telespazio Brasil, Kazakhtelecom and China Unicom. Revenues in Latin America during this quarter compared to the comparative quarter in 2008, although this was offset by weaker (inaudible) inside the other regions. We continue to experience tight business in most of the worlds regions, but there are signs of economic activities improving or expected to improve in the coming quarters.

As I said earlier, our bookings increased compared to the previous two quarters, so perhaps the first signs of recovery maybe appearing. We announced several universal service obligation type projects and government funded initiative based on our solutions. This is a segment where Gilat continues to be very well positioned.

Cable & Wireless Panama, China Unicom and Kazakhtelecom which is just mentioned earlier, are examples of such projects. While the current global economic slowdown has also had an impact on government projects, we believe that USO related projects are usually less affected by the economic environment than projects by the private sector.

Moving to the financial indicators now on slide. Revenues for the third quarter of 2009 were approximately $55 million, a decrease compared to the comparable quarter of 2008. This quarter though we were able to balance our financial results by maintaining cost control, finishing the quarter with a new breakeven while increasing our cash balances position. I will discuss the Q3 2009 results in more detail later in the call.

Going into a little more detail on our business during the third quarter, I will begin with the developed markets. Spacenet signed new deals in the gaming sector which is an important market for us in the US. In the US commercial sector overall however, we will continue to see a slowdown, this emphasize the importance of the initiative, which we have highlighted in the last few quarters to increase public sector revenues in the US.

Spacenet made favorable progress in these initiatives during the quarter expanding our services to government customers at the municipal, state and federal level. Many of these government bodies require communication facility for emergency response also remote regions with no problem connectivity. This quarter we found a small contract with US DoD. This contract is still not significant in terms of size, but it reflects a [12 working hours] strategy to expand our business in the government sector.

I would like to take this opportunity to work on Susan Miller, who has joined the company as CEO of Spacenet Integrated Government Solutions division. Susan will oversee the strategic direction and marketing efforts of Spacenet's government services unit with a focus on expanding its reach to new customers including the Department of Defense, Homeland Security, the Intelligence community and government related agencies.

Previous to joining Spacenet, Susan served as President and Chairman of the Board for Intelsat General Corporation and grew the business from $80 million to just under $300 million in annual revenue during her tenure. As an executive role held by Susan, include, Senior Vice President for SkyTerra LP, and Vice President Engineering and Operations for Lockheed Martin World Systems.

With over 20 year of experience in the telecommunication and satellite sector and a broad background in management, technology and operations, our [precedent] Susan will be the highly valuable addition to Gilat. So I would like to congratulate Susan on joining this company in [research] and lot of success to business.

Now turning to the emerging markets, this quarter, we also announced which we explained a multi-million dollar contract to the defense customer in Asia. We believe this contract as another important milestone in expanding our government and defense-related business. We'll continue to see Universal Service Obligation in government projects, mostly in Asia and Latin America. I've already mentioned slide three for this. This includes projects for cellular providers together with satellite backhaul as a means to provide communications to remote regions. The mix of the two technologies, cellular and satellite provided very efficient and cost-effective solution for [clients] that are mandated to provide communication in remote regions, such as in China and Kazakhstan.

During the quarter, we announced the deal with Telespazio Brasil to provide 1,200-site network for Sicredi Bank. This network will provide [electronic] communications to branches without broadband connectivity and back-up to other branches.

Education also continues to be a driver for government projects and we announced that in Panama our customer Cable & Wireless is using our technology to provide internet and interactive learning to remote regions. We're always proud to participate in these types of projects which have a substantial and lasting results on the communities improving not only their quality of life today, but also enabling future generation of choosing to have springboard as a future.

This quarter we continue to release funds from our restricted cash flow budget relating to the Compartel project in Columbia and recognized revenues from these operations. We have signed short extension to the agreement we reached with the Columbian government. We are continuing negotiations to the further extension, such as [speaking these] projects are winding down.

This concludes our business overview. Now, I would like to turn the call over to Ari Krashin, our CFO, who will review the financials.

Ari Krashin

Thanks, Amiram. Good morning and good afternoon to everyone joining us on the call today. Our revenues for the third quarter of 2009 were $54.6 million compared to $65.3 million in the third quarter of 2008. Our revenue this quarter reflects the continued effect of the slowdown in the market and the relatively low level of booking we add in the previous quarter. Although our booking level this quarter was higher than either of the previous two quarters of 2009, it is still too early to say this will represent an upturn in our revenue trend.

As we saw in previous quarters, the decrease in our revenues compared to the previous year was partially offset by the revenue from our Columbian operation as we continue to release money from the receipted cash held by trustees and recognized revenues in the amount of approximately $7.7 million.

As mentioned by Amiram, we signed a short extension towards the end of the year with a Columbian government, which [affirmative] performance will lead to additional revenues of approximately $3 million. The revenue recognition of the extension will be similar to rest of the project [as such] some will appear in the fourth quarter of 2009 and some in the first quarter of 2010 depending upon the timing of the release of the relative receipted cash.

Our gross margin for the third quarter was approximately 30% compared to 32% in the third quarter of 2008. The year-over-year decrease in our gross margin is attributed mainly to the decrease in revenues mostly in GNS and Spacenet offset by the increase in revenues and profitability from Columbia.

As we have mentioned in the past, our gross margin is affected by the mix of equipment and services, the size of our deals and the timing in which transaction are consummated. As such, we might experience variation in our gross margin from time to time.

Selling and marketing, general and administrative expenses decreased from $15.1 million in the third quarter of 2008 to approximately $13.4 million this quarter. This decrease reflects the cost-cutting measure which (inaudible) at the second quarter as well as the lower level of revenue related expenses.

During the third quarter of 2009, we had the minimal operating loss of $383,000 compared to an operating income of $490,000 in the third quarter of 2008. The minimal loss this quarter is due to the decrease in our revenues offset by our continued efforts to control our level of expenses and the cost-cutting measures we made during the past few quarter together with the positive impact on the Columbian operation.

The income this quarter includes a gain of approximately $2.4 million from the sale of the reminder of our shares in GVT, Brazil which has previously been written-off in our books.

Our GAAP net income for the third quarter of 2009 was $2.5 million or $0.06 per diluted share compared to a loss of $0.5 million or $0.01 per diluted share for the third quarter of 2008. Our financial position continues to be strong as we maintain our efforts to control our level of expenses and manage our working capital.

This compared with the positive impact of our operation in Columbia and the funds we will see from the sale of our shares in GVT and that will increase our free cash balance by approximately $5.8 million during this quarter, including a repayment of $4 million of the loan from Bank Leumi. Our cash and cash equivalent in certain bank deposits amounted to $146.9 million at the end of the quarter.

Our shareholder equity at the end of the quarter remains steady and totals $232.2 million. Our focus during this period of economic weakness has been to manage our cost and expenditure such that we could maintain a breakeven operating profit and positive cash flow despite the revenues declined. We feel positive that we have been able to achieve this consistently over the past few quarters and that the business remains well positioned to participate in the market upturn once the economies we operate begin to strengthen.

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

Amiram Levinberg

Thank you, Ari. To summarize our call, while we had a decline in revenue this quarter, we're able to significantly balance this by maintaining cost control. We finish the quarter almost breakeven and had a sequential increase in cash. We are continuing to invest a discretionary R&D budgets and plan to enter a new segment within the satellite communication industry.

In addition, we are increasing our focus and (inaudible) industry both between the US and into the international market. We have made some small straight steps towards rebuilding.

This 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 Jonathan Ho of William Blair. Please go ahead.

Jonathan Ho - William Blair

Just a couple of housekeeping questions to get started on, in terms of the interest income what was the currency impact this quarter or just may be the overall currency impact on the financials?

Ari Krashin

Well, correct, it wasn't that high. I mean there have been some availability in the currency. If you remember, we have hedged the shekel versus a dollar throughout the end of the year. So in the first two quarters of 2010, will not be effected by the shekel. In fact, you see from the for instance from other facilities that we have in Brazil, Colombia and Peru, it wasn't that significant this quarter. (Inaudible) expects its performance basically interest from deposits from [capitalist] interest nothing significant.

Jonathan Ho - William Blair

Can you maybe give us a sense of how to think about the fourth quarter and maybe heading in to 2010, what your expectations are relative to this quarter in terms of the top line performance?

Amiram Levinberg

I'd like to believe that as we improve on bookings we'll start to see that on the top line growth. This is my view at this point.

Jonathan Ho - William Blair

Can you talk a little bit about the pipeline and maybe sort of that opportunity there?

Amiram Levinberg

Other than the fact that, if this year started very kind of low on bookings and then improved quarter-over-quarter still not at the level we would like it to be, I'd hope that Q4 would be stronger than Q3, which at this point of time is stronger than Q2, which we know was stronger than Q1. So other than that and as I have said, kind of very aggressively maybe the situation in the market was slightly changed and we see the market stronger. So this is the way we look at it at this point.

Jonathan Ho - William Blair

Can you talk a little bit about maybe the competitive environment here, are you seeing more pricing pressure and particularly within the enterprise segment can you give us a little bit more color on what's happening there?

Amiram Levinberg

I would say the following; the enterprise market in the US, I think the dominant “competition” is actually from other means of communication and there is really a triangular VSAT as a mean of communications became secondary, because the united primary communications in most of the application unless for [lotteries].

So the main, I think issue in the US either and obviously the economical situation and the fact that we see new investments predominantly in hybrid networks for which it is the secondary for a combination of dual tariff and VSAT, which is the situation in the US, not so much the VSAT competition though seriously coming from [youth].

Internationally, again I think that it's mostly the economical situation and not so much the competition, I would see the competition coming predominately from either (inaudible) and [SAT] in that orbit, in the enterprise international market.

Jonathan Ho - William Blair

What's happening with the bankruptcy and some of other litigations that you guys have opened right now?

Amiram Levinberg

No change really. I mean, there is nothing to update [in this fiscal]. It will be mediated and that could be the end of it. I am not very optimistic and if not, we will go back to court.

Jonathan Ho - William Blair

Just talking about some of the newer initiatives that you guys have, you (inaudible) a little bit about sort of this government initiative. What are your thoughts in terms of the potential for growth there and how should we think about that as a contributor for 2010?

Amiram Levinberg

Generally speaking, DoD is a very strong satcom market, which unlike the competition we were not playing in at all. So we would like to enter this market. We have a few very interesting types of communication and applications in satcom for DoD like communication of the phones, communication on the move, and we will try to go into this direction with some solutions that we'd like to provide to the market.

The international ministry of defenses, I would say; A, at this point of time a quite significantly smaller [indoor] activity in satellite communication as compared to DoD. These are currently lagging behind, but following in the same trend, and to give you a perspective as much as there are so many VSATs being sold if you like to the DoD.

If you look at the satellite equipments market, as the commercial, the global, international commercial. I mean the entire world commercial and VSAT equipment is as big as equipments being acquired by DoD for the satellite communication, which on the part of it is weaker than other parts with the current report in this kind of application. This represents that we will find the appropriate technology when the appropriate company we can do some M&A activity. We will no hesitate to do this as well.

Jonathan Ho - William Blair

In terms of the backlog, can you may be qualitatively give us a sense of where the backlog stands relative to at the beginning of the year or relative to your historical sort of positioning and how much forward visibility that is giving your right now?

Amiram Levinberg

Well, I knew this was coming, Jon. Usually, we kind of shy away from, frankly, the backlog number middle of the year and (inaudible) these publish once in a year as you know. But let me give you kind of a sense that will help you understand exactly what we are. Generally speaking, we as part of the year with approximately $195 million backlog, out of which the project in Columbia were $24 million, we'd expect that we'll consume with Columbia and if everything works okay, we'll consume that through the year. So if nothing would have happened, we would have finished the year with roughly $117 million. Now since this year looks weaker than previous year, my guesstimate at this point of time and not (inaudible) by word but my guesstimate would be that towards the end of the year will be around $160 million.

Operator

(Operator Instructions). The next question is from (inaudible). Please go ahead.

Unidentified Analyst

My question is, maybe you could just help me out here. The net cash position on the balance sheet, what is that number currently?

Ari Krashin

Well, we are looking at the first two lines of balance sheet, which is basically cash and cash equivalent and bank deposits which is around $147 million, $146.9 million. This is basically what the cash balance is. We do have some other restricted cash in the balance sheet, we don't count it in our capital, some of it relates to Columbia, some of it relate to other. This (inaudible) that we need to keep in restricted cash there so, basically when you look about our cash balances in terms of the free cash balances which increased approximately $5.8 million this quarter from $141.1 million to $146.9 million.

Unidentified Analyst

So the number you are using as 147, is that the correct number when I do a value here?

Ari Krashin

Yes.

Unidentified Analyst

In terms of the liabilities right now, you have a current maturity of a convertible notes and you also have on the books on a long-term basis some long-term loans and a convertible note as well. What's going to happen with those?

Ari Krashin

Well, the convertible notes are basically the vast majority of them is due in 2012. There is small portion of approximately $400,000 which is now payable once a year or I think it's going to be in July something of 2010, but basically the vast majority of the convertible loans should be paid by 2012. There is also a loan from Bank Leumi, which is currently $8 million. This is the $4 million debt that we did pay this quarter, so that's not a big main item. There is additional loan that you (inaudible) that we have at least back-to-back sort of the (inaudible), so we don't really count it. So, basically, we count our total debt as about $30 million currency which is the subordinated loan. That will no longer (inaudible).

Unidentified Analyst

Now I am sure you have done this a few times this exercise but, when you put everything together you get to around $4 a share with the real estate, and then Wall Street is not giving you much respect for the actual business. I am wondering are there any initiatives that you guys are looking at given the very strong cash position to enhance the shareholder value, and in any shape or form. Because that's the way I look at it is what this business is doing for you. You are working very hard at business, but it gets actually no value. I am just wondering what are your thoughts in this and how do you guys look at this?

Amiram Levinberg

Well, that situation not for long time though, the first time we are being appreciating more and then for first time we're appreciated so fast. I guess you know this phenomena better than (inaudible) but on the night of the (inaudible) show I think that there will be two potential upside from our perspective; One, we'll continue to work hard and we're come to core of the business and predominantly we enterprise market final metrics into international market and also we are very unique I think in the US market being only one of the two types of others dealing services to each kind of enterprise. In addition to that we are looking to new initiative between that using our cash to do some M&A activity in which we were trying to dominate towards the DoD and MoD or market. To give you some color.

Unidentified Analyst

Let me ask you a different question. In your opinion how much cash do you made on the balance sheet just for those rainy days, where maybe business doesn't go so well and how much do you feel is excess cash on the balance sheet that could be used for other initiatives?

Amiram Levinberg

It's a very rough answer, I'd think that, you probably need to on the business $20 million, $30 million and rest of it you can use for other purposes.

Unidentified Analyst

So, over $100 million is excess cash on the balance sheet that you don't need.

Amiram Levinberg

You don't need is not rightly said, but you can use for other activity. I'd say that I need to want to have access to additional cash then as we probably know, we are “shifting on real estate” but we may turn this back, if we want to have yet another say $50 million world (inaudible). So, unlike other companies we won't face, we are not leveraged at all as you can see.

Unidentified Analyst

Yes, but I'm like wondering there is other Israeli companies now that are initiating this idea of dividend, companies with large cash positions on the balance sheet, and I'm wondering is this something you guys would entertain?

Amiram Levinberg

There is no decision by the Board to distribute dividend at this point of time.

Unidentified Analyst

Well, I was very happy to see that your business is certainly turning in the right direction and good luck.

Operator

The next question is a follow-up question from Jonathan Ho of Willaim Blair. Please go ahead.

Jonathan Ho - Willaim Blair

A couple of quick follow-up questions. You guys had talked about a large multi-million dollar deal in Asia. Can you maybe give us a little bit more color on the timing of the deal that you guys thought it was a turnkey solution and whether there is additional opportunity with this customer overtime?

Amiram Levinberg

The nature of this deal is like, I can't give you too much color of the news, but the deal has been signed very recently and since we will see revenues coming in more in Q4 and Q1, by the way, we will be succession (inaudible) multi-million dollar deal, because we wanted to share that we have such a deal it is important for us going in this direction. At the same time, the customer wouldn't allow us to put any color to the press release. So frankly speaking, we just wanted to say it is meaningful for us and that was the way to express it. Quite many of the deals that we probably show are multi-million dollar deals, so this not such an exception in that sense.

Jonathan Ho - Willaim Blair

Just talking a little bit about the pipeline again, do you guys feel that there is pent up demand in your customer base and that the budgets maybe haven't been there in 2009 and potentially could be a pickup in 2010 as a result of that. Is there in that sense?

Amiram Levinberg

I wish I would know the answer, you know. Generally, I mean the, I said very cautiously that we strengthen change in the market generally macro economics and I don't think I know this practically better than you.

Operator

There are no further questions at this time. Before I ask Mr. Levinberg to go ahead with his closing statements, I would like to remind participants that a replay of the call is scheduled to begin in two hours after the call. In the US, please call 1-888-269-0005. In Israel, please call 039255927. Internationally, please call 9-723-925-5927. Additionally a replay of this call will also be available on the company's website at www.gilat.com.

Mr. Levinberg, would you like to make your concluding statements?

Amiram Levinberg

Operator I am seeing in my screen this may be Rich Valera from Needham might have a question, so if Rich wants to ask a question, you may do so and if not, all of you thank you.

Operator

The next question is from Rich Valera of Needham & Company.

Rich Valera - Needham & Company

You may have mentioned in your prepared remarks two small deals, I believe in Spacenet with the DoD customer and I think your implication was small from a revenue perspective but might have some bit of strategic implications going forward about further penetration of that market. Want to know if there is any more color that you can share on that deal in terms of who is with or what other types of opportunities it might open up.

Amiram Levinberg

After so long you want to ask a question, Rich, I don't think can give you any different answer. It's a small deal. No, it is not meaningful in itself. We decide that we are (inaudible) in this market. I think joining Susan Miller as having Spacenet Government Solutions is very important. If she thinks she can do something then we could (inaudible) to come over. I hope it would be a very meaningful business firm.

Rich Valera - Needham & Company

I guess we'll look to more announcements on that front in future. Then secondarily on the Columbia business just wanted to clarify, it sounds like you planned to recognize most of the 24 million outstanding this year I think there maybe a small trickle over in to the first quarter next year. But I just wanted to get your sense of what you expect next year. Its sounds like as it stands now you wouldn't really expect further business but you are negotiating force impossible business. Could you add a few more color to that about expectations for Columbia for 2010?

Amiram Levinberg

Yes, first kind of a reminder. We have in Columbia three projects, two of them are kind of the same projects that we get money from the restricted cash for this project and recognize revenues for this project. These are called TLC, Telecentros (inaudible) and Compartel 2. Then we had an old program which is called Compartel 1, which is still need to be services telephony and small Internet access facility until the end of 2010.

This is not a paying contract to get the contract obligation on our part and we've explained with quite a few times in the past. So we have this obligation for 2010. We are being able to extend the other contract till the end of the year, but we just got a very short period of time and the hope is that we might be able to extend some of the paying contract for 2010 and this is two thing to say.

So if we are able to extend some of it, we'll have some revenues from Columbia. If we are not able to extend it, then we will still have the obligation to give services for Compartel 1 until the end of 2010 and we will not have revenues. So this is kind of a short summary of the situation here.

Rich Valera - Needham & Company

Can you say roughly how much bit of profit you got from the Columbia revenue recognized this year?

Ari Krashin

I would assume roughly just around the number from the top of my head. I mean, they really means, well, so far along the 18 to 19. I would say it came up to approximately between $5 million to $6 million within the nine months and it will contribute a bit more in the fourth quarter.

Operator

There are no further questions at this time. Mr. Levinberg, would you like to make a concluding statement?

Amiram Levinberg

Yeah. I would just like to thank you all for joining us for this conference call. Good day and good bye.

Operator

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

Thank you for participating in today's conference call. You may disconnect at this time.

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Source: Gilat Satellite Networks Ltd. Q3 2009 Earnings Call Transcript

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