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Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q4 2009 Earnings Call Transcript

February 16, 2010 9:30 am ET

Executives

Tom Watts – IR

Amiram Levinberg – Chairman and CEO

Ari Krashin – CFO

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's fourth quarter 2009 results conference call. All participants are present in 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 February 16, 2010. I would now like to turn over the call to Tom Watts from Watts Capital Partners to read the Safe Harbor statement. Tom, please go ahead.

Tom Watts

Thank you. Good morning and good afternoon. Thank you for joining us today for Gilat's fourth quarter 2009 results conference call. A recording of the call will be available beginning at approximately 12:00 PM Eastern Time today, February 16, 2010, until February 18, 2010 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 detailed 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 snapshot of our fourth quarter results followed by a more detailed review of our business during the quarter. Following the quarterly review, Ari will take you through the detailed financial results. After this, I will summarize 2009 and share with you our management objectives for the coming year. We will open the floor for questions right after this.

In the fourth quarter, we continued to increase our free cash position and saw a significant improvement in bookings compared to the previous quarter of the year. Revenues also increased slightly compared to last quarter, but declined compared to the comparable quarter in 2008. We ended the quarter with a small operating profit.

Summarizing the year 2009, it was a challenging year in general. A harsh market environment has impacted our business. We have taken measurable steps to offset the reduction in revenues during the year, and in this way, offset most of the negative impacts in our financial results. We will go into more detail in the 2009 summary a bit later.

In the fourth quarter, US market conditions remained challenging and continued to affect Spacenet revenues, which declined compared to the fourth quarter of 2008. The quarter ended with the award of significant contract from Regis Corporation, a global leader in beauty salons. Up until now, Spacenet was mostly doing managed network services for customers giving both satellite and terrestrial technologies.

What is special in this deal is that the non-satellite component, they are only terrestrial links. Spacenet has been selected solely due to publicly [ph] managing huge competitive enterprise network and due to our unique Prysm Pro product. We see this as an important achievement that may open large opportunities for us in the managed network services model. I will explain on this a bit later.

In line with our strategy to focus on government sector, we established SIGS, Spacenet Integrated Government Solutions led by Ms. Susan Miller, an industry veteran with over 20 years of experience in the telecommunication and satellite sector. During the quarter, we were awarded several government sector deals, which were not yet significant in size, but significant to our effort to (inaudible) into this sector and further expand ours.

We had a very strong quarter in Latin America. Revenues increased this quarter compared to the comparable quarter in 2008, and we have seen several growth potential contract awards in this region. We announced two Universal Service Obligation type projects in the region, Telefonica del Peru and an extension in Costa Rica with ICE [ph]. This is a segment where Gilat continues to be very well positioned.

Turning to our successful fulfillment of the new arrangement with the Colombian government during 2009, the Ministry of Communications in Colombia extended and amended the agreements for the provision of services under the Rural Communitarian Telephony Compartel II and Telecentros projects for an additional one-year term, through December 2010.

The current extension for continued service provides a government subsidy approximately $1 million per month, which is dependent upon making certain installation schedules, performance indicators, and providing similar services to those provided over the past year. The operations in Colombia continued to have a positive impact on our business this quarter. We continued to release money from the restricted cash held by the trustee in Colombia, and therefore recognized more revenue from our Colombian operations.

Our success in Latin America was offset by (inaudible) the other regions where we continued to see a slowdown in business. While our bookings decreased significantly this quarter compared to previous quarter, it is still too early to determine whether the market conditions are improving or expected to improve in the coming quarters.

Moving to the financial indicators summary slide, revenues for the fourth quarter of 2009 were approximately $56.5 million, an increase over the previous quarter and a decrease compared to the comparable quarter of 2008. This quarter, we again were able to balance our financial results and (inaudible) finishing the quarter with a slight profit while increasing our free cash balance position. For the year 2009, we recorded revenues of $228.1 million compared to $267.5 million for the comparable period in 2008.

Net income for the year 2009 was $1.9 million compared to net loss of $1.1 million in 2008. The decline in our revenues compared to 2008 can be attributed to the satellite market environment in 2009. Our record remains steady compared to that of last year at approximately $181 million. Ari will discuss the Q4 2009 annual results -- and the annual results in more detail later in the call.

Getting into a little more detail in our business in the developed markets, one of the highlights of the quarter and full year was the award of the Regis Corporation contract. Regis is a global leader in beauty salons, hair restoration centers, and cosmetology education. They are using Spacenet's managed network services and Prysm Pro network management appliance to provide integrated support and management for the business communication infrastructure. This infrastructure includes DSL, 3G, (inaudible), analog and digital voice, WiFi, and VPN networking in beauty salon stores.

Gilat will provide its Prysm Pro network appliance to over 7,000 Regis Corporation North America locations. The Prysm Pro, announced earlier this year, provides support for automatic hybrid switching between the wireline and wireless technologies for network backup, integrated WiFi hotspot services for customers; integrated Analog Telephone Adapter, ATA, for Voice-over-IP functionality; and point-of-sale hardware for retail applications. The new award reflects our strategy to strengthen our position in the managed network services market irrespective of (inaudible) technology.

As I mentioned earlier, we are focused on extending our expenses within the government sector. And to this end, we have established our six business units. During the quarter, we made progress in our efforts to expand our services to government customers at the municipal, state and federal level, mostly for emergency response.

We also received another small contract from the DoD, but we are seeing progress in expanding our business in this sector. The year was also highlighted with new deals in the gaming sector, which continues to be important market for us in the US.

Now turning to the emerging markets, Latin America remains a very significant market for us. The year was highlighted by large-scale contract awards in the region, including projects for USO, enterprise, government, and energy sectors. We announced two more USO projects in the region this quarter.

For one of these projects, Gilat is providing 3,500-site SkyEdge II network to Telefonica del Peru to enable the delivery of broadband Internet services to remote areas in the country. This contract is part of Telefonica Latin America’s initiative to deploy broadband service and support solutions, and Gilat was chosen as the supplier of broadband satellite communication network for several Telefonica subsidiaries.

Instituto Costarricense de Electricidad, ICE, Costa Rica's national telco, is another example. In Israel, we were chosen to provide a 500-site expansion to meet the requirements of future Universal Service Obligation. In addition, we were chosen to provide SkyEdge II network to serve ICE’s corporate customers in Costa Rica.

Similarly, the SkyEdge II network, which Gilat is delivering to STL Ghana, is another example of (inaudible) for the corporate sector. The new 1,000-site SkyEdge II network will be used to provide broadband satellite-based services to STL’s enterprise, health care, and financial services customers in West Africa.

During the quarter, we also had large two additional government defense agency contracts in Asia. We are awarded several defense agency contracts in Asia in 2009, and we view this as an important factor in expanding our government and defense-related business. SkyEdge II continues to gain traction in this sector related [ph] to meet the mission critical application requirements of the corporate and financial service industry.

During 2009, we continued to strengthen our SkyEdge II platform and released new features and capabilities. SkyEdge II is a leading platform in terms of performance and bandwidth efficiency, providing the best total core performance [ph] to satellite service providers. (inaudible) SkyEdge II in GTECH in Brazil, where our technology the Ministry of Education is serving [ph] about 11,000 public schools and Internet centers throughout Brazil.

GTECH is a Brazilian Ministry of Communications program for digital inclusion and core for the delivery of broadband Internet services to underserved public institutions. Our customers (inaudible) new SkyEdge II network to deliver broadband Internet services to thousands of schools and public Internet centers and more than 4,000 institutes nationwide.

Bandwidth efficiency was once the important factor for these projects (inaudible). As I said before, we always strived to participate in these types of projects that have extension and lasting effects [ph] on these communities, improving not only their quality of life today, but also enabling future generations of choosing (inaudible). During 2009, we were also chosen by Telefonica in their regional (inaudible) the next generation VSAT platform. We see (inaudible) encouraging signs regarding our technology leadership.

We have made two recent announcements regarding our technology. The first was, in the fourth quarter, we had deployed in two Asian networks the Bandwidth Optimizer product, or BWO. This solution (inaudible) cancellation technology to save (inaudible). The second announcement was that we are the first to receive certification for the latest DVB-RCS version 1.3 requirements. DVB-RCS is an open ETSI standard for two-way communication defining an optimized return channel supported by multiple VSATs and hub system suppliers. We have been mandated by many governments and institutions around the globe.

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

Ari Krashin

Thanks, Amiram. Good morning and good afternoon, everyone. Revenues for the fourth quarter were $56.6 million compared to $56.1 million in the fourth quarter of 2008. Our revenue this quarter reflects the continued effect of the slowdown in the market we experienced during the year. In comparison to the third quarter, we had a slight increase in revenues, which is attributed mainly to the higher level of bookings during the second half of the year and particularly during Q4.

This quarter, we were able to release $6.2 million of restricted cash in Colombia, which is reflected in our revenues. In 2009, we released the entire $24 million in restricted cash that was held by trustees at the beginning of the year. Following the successful implementation of (inaudible) project, last month we signed an additional extension for the remainder of 2010. We expect that this will contribute approximately $10 million to $12 million in revenues in 2010, should we meet the operational indicator.

Our gross margin for the fourth quarter was 33.1%, reflecting an increase over 30.7% in the comparable quarter of 2008. The improvement in our gross margin this quarter reflects our continuing effort to improve our profitability, both through managing the type of transaction we have and through focusing closely on [ph] budget control. As we continued to mention every quarter, our gross margin is also affected by the mix of equipment and services, the size of our deals, and the timing in which transaction are consummated. Each of these factors resulted in variation in our gross margin.

Net R&D expenses decreased from $5.0 million in the fourth quarter of 2008 to $3.4 million this quarter. Selling, marketing, general and administrative expenses decreased from $17 million in the fourth quarter of 2008 to approximately $15.2 million this quarter. The overall decrease in our operational expenses reflect the effect of headcount [ph] investment we had at the beginning of the year and the cost-cutting measure we took at the end of the second quarter of 2009.

Going into 2010, in support of our strategies, we intend to increase our budget by approximately $7 million to $8 million. Approximately half of this will be allocated to R&D and the remainder will be allocated to other activities in the company. This increase in budget will be gradual over the year.

Our operating income for the quarter was approximately $200,000 compared to an operating loss of approximately $6.8 million in the comparable quarter of 2008. On a non-GAAP basis, we had an operating income of approximately $400,000 this quarter compared to a loss of approximately $1.6 million in the comparable quarter of 2008. The improvement in our operating income this quarter despite the reduction in revenues compared to last year was achieved mainly through the higher level of gross margin combined with a reduction in expenses.

Our GAAP net income for the quarter was $300,000 or $0.01 per diluted share compared to a loss of $6.5 million or a loss of $0.16 per diluted share in the same quarter of 2008. On a non-GAAP basis, net income for the quarter was $600,000 or $0.01 per diluted share compared to a loss of $1.3 million or a loss of $0.03 per diluted share in the same quarter of 2008.

Now let’s look at our financial highlights for 2009. Our revenues in 2009 were $228.1 million compared to $267.5 million in 2008. As mentioned earlier, the decrease in our revenues year-over-year reflected the continuing effect of the slowdown in the economy, a decline in the market in which we operate, and the relatively low level of booking we had during the strip of 2009. During this year, we took some cost-cutting measure in order to balance our operating expenses with the lower level of revenues. The steps we are taking enabled us to end in breakeven despite our revenue declines.

Our net income for the year was $1.9 million or $0.04 a diluted share compared to a loss of $1.1 million or a loss of $0.03 per diluted share in 2008. On a non-GAAP basis, during 2009 we had a net income of $2.8 million or $0.06 per diluted share compared to a net income of $4.6 million or $0.11 per diluted share in 2008.

Geographic revenue distribution for the year was as follows. Latin America accounted for $89 million or 39%. The US accounted for $85 million or 37%. Asia accounted for $36 million or 16%. Africa accounted for $11 million or 5%. And Europe accounted for $7 million or 3%. When comparing 2009 figures with 2008 in absolute terms, we see growth in Latin America mainly due to our revenues from the Colombian operation and the release of the restricted cash while other regions experienced a revenue reduction.

During the fourth quarter, we continued to increase our cash balances by approximately $7.5 million. At the end of the year, our free cash balances totaled $154 million. Our trade receivables at the end of the quarter were $45.6 million, representing DSO of 73 days. This represents an improvement from 2008 mainly as a result on our efforts to manage our working capital and focus on payment terms. Our shareholders’ equity at the end of the quarter totaled $232.3 million.

In summary, 2009 was a year of tight cost control and expense reduction to ensure that our business remains strong financially even in the face of challenging market environment. During 2009, we increased our free cash by approximately $17 million and reached approximately $154 million in free cash, with only $30 million in debt, which gives us a solid foundation to build the business in 2010 and onwards.

Now, I’d like to turn the call back to Amiram. Amiram?

Amiram Levinberg

Thank you, Ari. Before moving to our 2010 management objectives, I would like to give you a short overview on how we see the market. 2009 was another good year for the VSAT market. We estimate that the total VSAT market declined in terms of revenues last year compared to 2008. This is as a result of mix of reasons, but we think primarily it is a result of the global financial crisis and shortage of satellite capacity over certain regions.

We conduct market analysts research to see estimates stating the economic crisis was still not over, but showing some signs of improvement. Market analysts also estimate that the satellite capacity would increase, but we believe that the pent-up demand will bring a return to market move [ph]. For this reason, we will increase our investment and budgets in the VSAT markets to be able to benefit from the growth when it comes, which we estimate will start in 2010 and likely to be more significant in 2011 and onwards. This investment will be built in the core markets where we are active today and (inaudible).

Regarding the increase of budget for activities in our core markets, our focus will be to improve our competitiveness, especially in market segments where we are less active today such as small and high-end networks. You may recall our announcement of the NetEdge, targeting industry [ph] segment. Another example, with the expansion of our management (inaudible) to satellite -- hybrid satellite terrestrial and even to all terrestrial networks. With budget allocations, we will probably not have a substantial impact on our fair [ph] in 2010, but we believe it will in 2011 and onwards.

The second area I said we want to focus on is the military market. We think the military market for our product base will continue to grow in the future. We are therefore be allocating a significant budget for this market. Already we have established SIGS and we recruited Ms. Susan Miller to add this activity. We have also had some first (inaudible) 2009, both in the US DoD market and in the international defense market. And you may recall, several of our announcements related to this market in the past year.

The investment in the DoD market is longer term and we expect to see substantial revenue coming from this organic initiative only in 2012 and onwards. We are also targeting non-organic growth and are looking for potential candidates. As I’m sure you remember, we have over $150 million of free cash, very low debt, and several alternatives for financing new debt, and we will strive to generate growth to our business through M&A activities.

If we move on to our 2010 management objectives, we have taken into account the market environment that lies ahead in 2010, and we will increase our budget for our core market activities and for entry to the military market. We expect our financial management objective to increase our 2009 revenue level and to improve profitability. (inaudible) while we had year-over-year decline in revenue this quarter, we were able to significantly balance this by maintaining cost control. We finished the quarter with a sequential increase in revenue, a small operating profit, and had a sequential improvement in cash. This also is a summary of 2009 with decline in revenues compared to 2008, but with only a small loss and with a significant improvement in free cash.

Looking at 2010, we have a clear vision of where we want to be. We have excellent technology (inaudible) we believe in the VSAT platform in the market, and the Prysm Pro is a unique product. We want to strengthen our position in the markets as well as focus more on the (inaudible). We also want to focus in the defense markets, which include the US DoD and international defense agencies. Our budget and roadmap has been adjusted to support this strategy. We have a strong balance sheet to finance M&A activities and support our strategies.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) There are no questions at this time. Before I ask Mr. Levinberg to go ahead with his closing statement, I’d like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the US, please call 1-888-269-0005. In Israel, please call 03-925-5921. Internationally, please call 9-723-925-5921. Additionally, a replay of this call will also be available on the company’s website, www.gilat.com. Mr. Levinberg, would you like to make your concluding statements?

Amiram Levinberg

I would just like to thank you, everyone, for joining us for the quarterly results call. Good afternoon and good bye.

Operator

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

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