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Executives

Philip Carlson – Investor Relations-KCSA

Erez Antebi – Chief Executive Officer

Yaniv Reinhold – Chief Financial Officer

Analysts

Matthew Paul – Sidoti & Co. LLC

Gunther Karger – Discovery Group

Gilat Satellite Networks Ltd. (GILT) Q3 2013 Earnings Conference Call November 13, 2013 9:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Third Quarter 2013 Results Conference Call. All participants are at present in 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, November 13, 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

Good morning and good afternoon everyone. Thank you for joining us today for Gilat’s third quarter 2013 results conference call. A recording of this call will be available beginning at approximately noon Eastern Time today, November 13t until August 15, 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. There has been a number of update since our last call and I look forward to discussing them with you today. I would like to start with an update on our Spacenet transaction and then I’ll provide a brief overview of our quarterly results and our business division. I’ll then hand the call over to Yaniv to discuss our financial results in more detail, before summarizing and opening up your call for questions.

In August we announced that we entered into a definitive agreement to sell Spacenet to SageNet, subject to regulatory approval and the satisfaction of customary closing conditions. We received the required FCC regulatory approval last week and notified SageNet that all conditions for closing have been met.

We have been notified by SageNet that it is not willing to proceed to closing at this time based on several assertions. While Gilat rejects all of SageNet's assertions and believes them to be unfounded, it is in continuing discussions with SageNet concerning their assertions. At this time the closing has been delayed.

Turning to a brief summary of our financial results, in the third quarter we ended it with revenues of $71.3 million down 11% from $80.2 million compared to the second quarter of 2013. EBITDA decreased to $2.1 million or 2.9% of revenues. On a non-GAAP basis our operating loss was $1.3 million compared to an operating income of $1.3 million in the second quarter of 2013.

Our revenue and profit numbers were not where we expected them to be for Q3. The shortfall was mainly attributed to our commercial and services division.

In our commercial division, two projects that we expected in Q3 were delayed. The project has a total value of around $21 million are primarily equipment sales. The first one is deal with Entel, a deal valued at over $12 million which we reported last month. The second is an expansion project for an existing customer in South America.

In our services division, the Compartel project was finished during December as we previously announced. Compared to the third quarter of 2012 there is a significant reduction in revenue from this project.

In Peru, we had a delay in the implementation of part of the $12.8 million project that we announced in February with the Ministry of Education. The delay was primarily due to the customer sites being unavailable for equipment installation. We are making all possible efforts in conjunction with the Ministry of Education to finish the implementation.

Following the results of the last two quarters and in accordance with our commitment to further streamline the Company, we have taken immediate action to cut costs. We have implemented changes in our organizational structure reducing headcount worldwide. We have also shifted certain fixed expenses to variable expenses. It is important to note that during this process we have taken care not to reduce our sales teams and not to reduce our R&D investment in our strategic growth areas of broadband Internet access and Satellite-on-the-Move.

The fixed cost savings will be approximately $9 million annually. The savings will come primarily from reduced COGS and G&A. We expect to begin to see the impact of the reductions in the first quarter of 2014. Yaniv will provide you with more details on our quarterly results later in the call.

Let's move to some of our business highlights for the quarter starting with our commercial division. I will begin with an overview of our strategic focus for delivering broadband Internet access for consumers and enterprise. Our implementation for NBN Co in Australia continues to progress very well as our 42,000 sites have been installed. We're confident that the installation of the full 48,000 sites will be completed ahead of schedule by mid-2014. The Australian government has shown interest in continuing to provide support for NBN services going forward. While we do not have any commitment yet, there is a possibility that they will extend the service pass the 48,000 sites.

In Europe, we continue to support the SES Broadband Services, SBBS, which was launched at the end of 2012. As of the end of the third quarter, we have delivered over 12,000 CPE units and we are working with ISPs in France, England, Belgium and the Netherlands.

In Asia, as we announced in June we signed a strategic partnership with THAICOM, Asia's leading satellite operator to provide customers across the Asia Pacific region with an integrated solution using Gilat’s ground equipment and THAICOM IPSTAR high throughput satellite. We're happy to report that we have already closed our first order and have begun joint sales in distribution activities with THAICOM.

Also in Asia, we close the first sale of a system to upgrade on the O3b constellation. The first four O3b satellite were launched in June of 2013, although service has not yet in operation. As we announced last year, Gilat was one of the vendors chosen by O3b for the development and supply of Ka-Band infrastructure for O3b’s VSAT services.

Outside of these deals we continue to work on additional broadband Internet access contracts in Asia and South America and other continents we will close additional deals in this segment.

In other regions around the world, we continue to execute on various commercial projects. In Africa, we closed a deal with Sonatel, the largest telecommunications provider for an IT based network which will be mostly used for backhauling and future services of telecenters and remote sites.

In Eurasia, we were chosen for an infrastructure project at [indiscernible] a major energy company to replace old equipment from our competitor with Gilat Hub and VSATs.

As we turn our attention to South America, in addition to approximately $21 million of business I mentioned previously that was delayed, we have closed a number of other projects during the quarter. Telefónica Perú extended their SkyEdge II network with hub expansion and additional VSAT.

[indiscernible] Brazil expanded their network with an additional 1,200 VSATs for a Brazilian retail chain, and Telespazio in Brazil purchased a new hub of 600 VSAT support the expansion needs of its customers within 2014.

We will now turn our attention to the defense division. While we see stable results from our defense division, we are still not achieving the revenues we hope to achieve primarily due to ongoing budgetary pressures in the U.S. We believe strongly in the necessity of satellite technology in the defense industry now and going into the future and we have the technology to meet those needs.

As such, we remained confident with potential for growths going forward and continue to invest in our defense division and Satellite-on-the-Move solutions. We continue to work with two leading U.S. system integrators to provide Satellite-on-the-Move antennas and box for various ground based programs of record. We are working with other system integrators on UAV programs.

Additionally, we are on track with Honeywell on the Global Xpress project that we announced earlier in the year. We expect to start getting revenues from this project within one year.

Internationally, we are seeing interest in our solutions for Satellite-on-the-Move as well as interest in our terminal solution for UAVs. Specifically, in Latin America, defense organization has expanded their SkyEdge II platform to support expanded capacity including additional reset for their network and services related to the Hub expansion. We have also provided Satellite-on-the-Move solution for an Israeli agency; Wavestream box as part of remote LAN security solution for an Asian country and the EagleRay 7000 antennas for a Eurasian customer.

Finally, we look at our services division. During the third quarter, Spacenet continue to close new business and expand service for existing customers. Looking at some of the new business to close, Spacenet signed a satellite services agreement with the larger oil and gas drilling company for around $9.5 million. The agreement was to provide data services at 200 domestic and 20 international sites.

Other new business highlights including oil and gas service provider for data services over the satellite as well as new customers for their managed network services offering and financial service and telecommunications industry. Spacenet also closed additional business with existing customers such as Sunoco, Scientific Games, Centerpoint, Dollar General and others.

In Peru, while we have seen delays in the Ministry of Education project as I mentioned previously, there have been some significant developments in Peru and we are very excited about our prospects going forward.

In September, the Peruvian Congress passed the law that regulates the market and entry of mobiles virtual network operators into the market and the conditions for their operations. The law has been send to the Ministry of Transport and Communication and the regulatory agency for implementation. Once the laws has been implemented Gilat with its presence and experience operating in many of the rural villages should be able to increase its business as a rural mobile infrastructure operator providing infrastructure services to mobile operators. The potential of this new business improved and is expected to begin to yield fruits towards the end of 2014.

In Colombia we are continuing to provide support for the 1,500 schools currently under contract until December 5. In addition, we intend to submit a bid for a major project in Colombia to provide broadband internet access to several thousand schools.

The overall project includes six regions with a value of $290 million. Each bidder can be awarded up to two regions or approximately 1,400 sites, with an estimated value of up to $100 million over three years. We expect to know by the end of the year whether we will be included in this project and if so, what portion we have been awarded.

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

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 effects of non-cash stock option expected as per ASC 718, one time other incomes, expenses related to our M&A activities during 2010 and 2011, and amortization of intangible assets resulting from the purchase price allocation.

Now moving to our financial highlights for the third quarter of 2013. Revenues for the third quarter of 2013 were $71.3 million compared to $89 million for the same period in 2012. The decrease is primarily due to lower revenues from our commercial division and lower revenue from the services division mainly from the Compartel project in Colombia.

On a non-GAAP basis, our gross margin was 30% compared to 34% in the comparable period last year. The lower gross margins are primarily due to lower revenue offset partially by a reduction in fixed costs.

On a non-GAAP basis, gross R&D expenses were $7 million compared to $7.6 million in the third quarter of 2012.

Moving to selling, marketing, and general and administrative, on a non-GAAP basis, expenses for the quarter were lower at $16.6 million compared to $17.5 million for the third quarter of 2012. Selling, marketing, general and administrative were lower due to both reduced fixed and variable expenses.

On the non-GAAP basis operating loss was $1.3 million in the third quarter of 2013, compared to operating income of $5.7 million in the comparable quarter of 2012.

As Erez mentioned, we have implemented an organizational changes with a focus on our commercial and business divisions. We expect to realize a fixed cost savings of approximately $9 million annually, which will come primarily from COGS and G&A. some cost reduction were also mainly R&D but not in our strategic growth areas.

On the non-GAAP basis net loss for the quarter was $1.9 million or $0.04 per diluted share compared to net income of $5.8 million or $0.13 per diluted share in the same quarter of 2012. Our expenses have been negatively affected by the shekel-dollar exchange rates, while the majority of our revenues are generated in U.S. dollar a portion of our expenses are in shekel, which has significantly appreciated in value over the last year against the U.S. dollar. This has caused an increase in our expenses in dollar term.

Our net trade receivables went down from $62.9 million as of June 30, 2013, to $59.2 million as of September 30, 2013. Representing a DSO of 75 days, the increase in DSO was due to the decrease in quarterly revenues.

As of September 30, 2013, our total cash balances, including restricted cash net of short-term bond credit, amounted to $58.1 million. During the quarter, we repaid $6.7 million of Silicon Valley Bank loan. Our shareholders' equity at the end of the quarter totaled $232.7 million.

This concludes our financial review for the quarter and I would now 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.

Our quarterly results for third quarter were lower than anticipated primarily due to the two equipment deals in South America which were delayed. Reduced revenue from Compartel and the delay of implementation at the Ministry of Education in Peru. We do expect that Q4 will be better than Q3, especially in our commercial and services divisions with stable results from defense. But we do not expect it will be enough to make up for the Q3 shortfall.

As such we do not expect to meet our previously updated management objectives for 2013. We now expect to finish 2013 with approximately $310 million in revenue for the year and EBITDA of around 6%.

Going forward, we believe we are well positioned for success. We continue to close deals in our commercial divisions with the new and the existing customers. Our defense division is stable and we see excellent opportunities in our services division. We have also taken the appropriate steps to significantly cut cost and streamline the Company. As such we are confident in the road ahead and believe that with the steps we have taken the Company is better positioned to succeed going forward.

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

Question-and-Answer Session

Operator

Thank you, ladies and gentleman at this time we will begin the question-and-answer session (Operator Instructions) The first question is from Matt Paul with Sidoti & Co. Please go ahead.

Matthew Paul – Sidoti & Co. LLC

Hi guys, good morning. In reference to the major deals in Colombia that you made from the quarter dealer updated times they want do you expect to recognize that revenue?

Erez Antebi

I think you were asking about two deals that we set in Latin America?

Matthew Paul – Sidoti & Co. LLC

Yes, sorry, I will repeat the question. In reference with two deals in Latin America that were missed on the quarter and do you an updated timetable of when do you expect to recognize revenues from those projects now?

Erez Antebi

I think we should expect to see that during the first half of 2014.

Matthew Paul – Sidoti & Co. LLC

First half of 2014. Okay, second question is, you said on the call that you expect revenues from the Honeywell deal for In-flight Connectivity to be recognized as portion of the next year. Give any color to add on your In-flight Connectivity business, any increase in demand there as we see more commercial usages for the In-flight Connectivity products?

Erez Antebi

I think we’ve discussed this a couple of times, but I will be happy to recapture it. The one project that we’re talking about is with Honeywell for the Global Xpress constellation that is going to be launched and get into service in probably about a year. And as that gets into service we will expect to see airlines go for Internet access over that Ka constellation from Inmarsat and they will order their terminals from there, Honeywell will in turn order equipments from us.

In addition we are working with a couple of integrators within the Ku-band that are currently providing equipment for airlines. And those are T-Com who is working together with Row44 and AeroSat who is working with Gogo to get additional airlines and they need more installations we get additional order for equipment and we think that’s going at a very nice pace.

Matthew Paul – Sidoti & Co. LLC

Okay. Thank you guys.

Operator

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

Gunther Karger – Discovery Group

Yes, thank you for taking the call. I have two questions. The first question has to do with natural disaster in the Philippines and in the Southeast Asia area generally. And obviously this disrupts telecommunications of all kinds, and needs refurbishment or rebuilding. Do you see any business coming from this unfortunate event to Gilat? And the second question is, do you have any expectations on the resolution of the Spacenet are delaying all problem.

Erez Antebi

I think the disaster in the Philippines is really – it’s still going on. We are trying to provide some support for relief agencies and help them with what they need to do, but we’re not discussing with them to see how we can get business out of it at this point. Down the road we will see what they want to do with infrastructure and we’ll get to that some later point not at this time.

Regarding Spacenet, all I can say is that we’re in discussions with SageNet and there is not much I can add to that.

Gunther Karger – Discovery Group

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with his closing statements, I would like to remind participants that a reply of this call is scheduled to begin two hours after the conference. In the U.S., please call 1888-326-9310. In Israel, please call 03-925-5918. Internationally, you please call 972-3-925-5918.

Mr. Antebi, would you like to make your concluding statement?

Erez Antebi

Thank you Operator. I would like to thank everyone for your time today. We appreciate your joining us on the call. I hope we’re able to give you a good understanding of the results at hand. We appreciate your continued support. Thank you and good afternoon.

Operator

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

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