Gilat Satellite Networks Ltd. Q1 2010 Earnings Call Transcript

May.11.10 | About: Gilat Satellite (GILT)

Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q1 2010 Earnings Call

May 11, 2010 9:30 AM ET

Executives

Tom Watts – Watts Capital Partners, Investor Relations

Amiram Levinberg – Chairman and CEO

Ari Krashin – Chief Financial Officer

Analysts

John Weidemoyer – William Blair

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gilats First Quarter 2010 Results Conference Call. All participants are present in a listen-only mode. Following the managements formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions)

Please note that following some technical difficulties during last calls Q&A session, weve added a second U.S. dial-in number for this conference call. (Operator Instructions)

As a reminder, this conference is being recorded May 11, 2010. I would now like to turn the call over 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 Gilats first quarter 2010 results conference call. A recording of the call will be available beginning at approximately 12 PM Eastern Time today May 11th until May 13, 2010 at 12 PM. 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 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. We expressly disclaim any obligation to do so. More detailed information about risk factors can be found on our reports filed with the Securities and Exchange Commission.

That said, on the call this morning is Amiram Levinberg, Gilats 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 todays call with a snapshot of our first 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. We will then open the call for questions.

In the first quarter, revenues increased slightly compared to the previous quarter and we finished the quarter with a small profit. Revenues declined compared to the comparable quarter in 2009, though we experienced stronger bookings compared to the first quarter of 2009.

The quarter was highlighted by a definitive agreement we entered into to acquire Raysat Antenna Systems. For those of you who are not familiar with Raysat Antenna Systems, this is a leading vendor of low profile two-way antenna solutions for Satellite Communications On The Move.

The antennas are typically used by government agencies at various levels such as for emergency response, military units and homeland security, and for commercial applications such as uploading (inaudible) for satellite communications.

The acquisition is expected to close at the beginning of the third quarter, subject to regulatory approval and other customary closing conditions. This move represents an important milestone in our strategy to enter the military and defense markets for both the U.S. DoD and for international defense agencies.

This quarter, we also announced organizational changes, which reflect a decision to unify some of the business units of the company in order to better leverage our internal synergies.

We have combined the Gilats corporate unit with our equipment business, Gilat Network Systems, GNS and with our Spacenet Rural business unit to create a stronger, more integrated entity. Our U.S.-based business Spacenet Inc. will continue to operate as a wholly owned subsidiary.

As part of these changes, Jaron Lotan joined us to serve us as our Chief Operating Officer. Jaron oversees our day-to-day business and hes responsible for activities such as sales, operations and customer services, while Im directing and overseeing the companys long-term strategy and corporate function.

Jaron brings to Gilat extensive management experience with NASDAQ companies, including having served as President and Chief Executive Officer for Tecnomatix, which ultimately became part of Siemens (inaudible) and having held several executive positions at Orbotech. I wish Jaron all the best in his new position.

During the quarter, we announced several new projects and activities in Africa, Asia and in the Americas for a variety of applications, including enterprise, gaming, government and defense applications. Significant from humanitarian aspect is that Spacenet donated emergency communications to the International Red Cross as part of relief efforts in Haiti.

The contribution helped disaster recovery efforts by enabling reliable and secure communications to the affected zones. We are proud to be able to provide help in times of need during recovery from this terrible tragedy.

For those of you with the presentation in front of you, you can see the photo of one of the sites in the midst of the destruction and rubble, which captures the environment in which we operated in Haiti.

Moving to the financial indicator summary slide, revenues for the first quarter of 2010 were $57.1 million, a decline compared to the first quarter of 2009. Despite this, we were able to increase our gross margins this quarter to 34.3%, compared to 29.6% in the first quarter of 2009.

As part of our planned investment in future growth drivers, we also increased our R&D in the quarter, leaving our profitability at breakeven. I will discuss the Q1 2010 results in more detail later in the call.

Getting into a little more detail on the business this quarter, I would like to begin with a more detailed description of the acquisition we announced in March. In line with our strategy to enter in new military and defense markets, we signed a definitive agreement to acquire Raysat Antenna Systems, the market leader of Satellite Communication On The Move Antenna solutions.

Raysat Antenna Systems provides low profile and light weight antennas, as well as complete systems solutions to the rapidly growing SatCom On The Move market. These antennas are critical in meeting distinctive requirements of U.S. DoD, which is already a customer of Raysat Antenna Systems. The product portfolio includes different size antennas to meet varying customer requirements.

Raysat Antenna Systems has a diverse global customer base, which includes defense agencies, as well as civil and homeland security users, including emergency [search] responders, police departments, as well as state and local government agencies. We are very excited about this acquisition and expected to continue to expand our penetration to the defense and government sectors.

As part of the Raysat Antenna Systems deal, we also entered into a definitive agreement to acquire from (inaudible) company of Raysat, a research and development center in Bulgaria in addition to certain intellectual property rights.

The R&D center will continue to focus on the development of state-of-the-art, low profile antenna systems for Ku, Ka and X-band for the SatCom On The Move market and has award leading low profile antenna design team of over 60 skilled engineers.

The aggregate consideration for the acquisition is approximately $30 million in cash. The acquisitions are not expected to have a significant effect on Gilats 2010 outlook with respect to earnings and the transactions are pending certain closing conditions. Both acquisitions are expected to close in the third quarter of 2010.

Upon completion of the acquisition of Raysat Antenna Systems, the U.S. operations will operate under Spacenet Integrated Government Solutions, SIGS and the international business will operate within Gilats worldwide operations.

As a reminder, we established SIGS during 2009 to provide fully integrated end-to-end communication solutions for defense, intelligence, homeland security, public safety, federal and civilian government agencies.

Moving to the Gilat business, this quarter Spacenet continued to see business activity for emergency response applications in Haiti and in the U.S. We also continue to expand our services to the government customers at the municipal, state and federal. Many of these government bodies require communication facilities for emergency response or for most regions with no broadband connectivity.

During the quarter, Spacenet successfully rolled out several thousand [lot] terminals for the South Carolina lot. Spacenet saw new activity in the gaming, enterprise and energy industries despite the fact that the market conditions in the U.S. continue to be challenging.

I would like to take this opportunity to welcome David Kagan, who has joined Spacenet as a Senior Vice President of Business Development. In his new role, he has the responsibility of overseeing initiatives which will support Spacenets long-term growth and strategic planning.

David has more than 25 years of experience, with a broad background in management, business and finance. Previous to Spacenet, Kagan served as President and Chief Executive Officer of Maritime Telecommunications Network, MTN, where he led the company through five ownership changes and grew the revenue and profitability of the business substantially during his 12-year tenure at MTN. I would like to wish David all the very best in his new position.

Moving to our international operations, we announced several deals during the quarter, including three in the African market. ETC, Ethiopias national telecom operator, chose Gilat to provide a network that will cover hundreds of sites and will provide an upgrade to ETCs existing Gilat Internet network.

The new network will enable ETC to deliver advanced broadband services, which include video and data centric applications to meet the growing demand of its enterprise and government customers.

ETC will also deploy research at remote community centers nationwide to provide citizens with top quality telephone and reliable broadband Internet access as part of its universal service application.

We also expanded our footprint in West Africa with the award of the multi-million dollar contract to deploy a broadband satellite network, which will be used for gaming and lottery services.

The network will serve an initial 2500 sites in several countries in West Africa, including the Ivory Coast, DRC and Senegal. As the pioneering providing network for the lottery and gaming market, we have vast experience in providing reliable and efficient solutions for this sector.

Also serving the West African market, we delivered a SkyEdge II network to SatCom Systems. The SkyEdge II hub is located in Germany and the business will be deployed in West Africa, enabling high quality broadband Internet connectivity to small and medium enterprises in the region.

In Central Asia, our long standing customer, ASTEL, one of Kazakhstans leading telecommunications operators is growing a SkyEdge II network ,which includes two SkyEdge II satellite hub stations and several hundred SkyEdge II Access VSATs, in addition to a Gilat NetEdge Gateway.

With VSAT network will deliver a wide range of interactive data applications, including Voice-over-IP, video conferencing and (inaudible) private networks. NetEdge is our solution for multi-star requirements, such as small private enterprise networks and for satellite network.

During the quarter, we announced two homeland security projects in Latin America. The first project is a multi-million dollar contract to deliver a turnkey broadband communication solution for an army in Latin American countries.

The new network will be used for border control applications. For this project, we are providing a broadband satellite network solutions based on our SkyEdge II high performance platform to enable the delivery of high speed data, video and voice applications that will serve the militarys different units. We are also supplying additional equipment as part of the turnkey project, including solar panel energy solutions.

The second project was awarded to us by Brazils Amazonian Protection System, SIPAM. SIPAM has chosen to modernize its communication network by deploying a Gilat SkyEdge II network into more than 1000 sites.

SIPAM operates a sophisticated network of cartography and telemetry systems that provide information to help manage the weather forecasting, security and other public services in the remote Amazonian region.

Among the institutions that would benefit from the advanced network are the armed forces, federal police and federal ministries such as environment, justice, development, and (inaudible) reform. The network will also offer more security to communities that live in isolation, the indigenous tribes and the border crossings.

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

Ari Krashin

Thank you, Amiram. Our revenues for the first quarter of 2010 were $57.1 million, compared to $60.8 million in the first quarter of 2009. In comparison to the previous quarter, we had a slight increase in revenues, which is attributed mainly to the higher level of bookings during the fourth quarter of 2009 and higher level of revenues from our international businesses, mainly Latin America and Asia offsetting the decrease in revenues from Colombia.

Our gross margin this quarter was approximately 34% compared to approximately 30% in the first quarter of 2009. As we mention from time to time, our gross margin is affected quarter-to-quarter by the regions in which we operate and the type of deal we consummate.

The improvement in our gross margin this quarter was attributed mainly to the increasing revenue for our international operations, which typically carry higher margins than Spacenet. Gross R&D expenses were $4.7 million this quarter compared to $4 million in the same quarter of 2009.

The increase in the R&D expenses is in line with our strategy and effort to develop new products from new markets. We believe that R&D gross expenses will increase gradually throughout 2010.

This quarter, we incurred over $350,000 of legal and professional fees in connection with the definitive agreement we signed both with Raysat Antenna Systems and Raysat Bulgaria. These expenses are included in our general and administrative expenses and as such negatively impacts our operating income this quarter.

GAAP operating income for the quarter was about breakeven, similar to the first quarter of 2009. We were able to maintain the same level of operating income despite the above-mentioned legal expenses, mainly due to the improvement in our gross margin.

Non-GAAP operating income was approximately $0.4 million in the first quarter of 2009 compared to $0.3 million in the comparable quarter of 2009. Our GAAP net income for the quarter was $0.6 million or $0.02 per diluted share compared to $0.2 million or $0.01 per diluted share in the same quarter of 2009.

On a non-GAAP basis, net income for the quarter was $1 million or $0.02 per diluted share compared to $0.5 million or $0.01 per diluted share in the same quarter of 2009. Our financial position continued to be strong, as our cash and cash equivalents and marketable securities amounted to $144.8 million at the end of the quarter, with a low level of debt in the amount of $29.8 million.

Our trade receivable at the end of the quarter were $54.3 million, representing DSO of 86 days, which is in line with our expectations and is considered to be relatively average in the industry. Our shareholders equity at the end of the quarter totaled $233.2 million. Now, I would like to turn the call back to Amiram. Amiram?

Amiram Levinberg

Thank you, Ari. To summarize our call, while we had a year-over-year decline in revenues this quarter, we were able to offset the declines through an increase in gross margins. We were also able to proceed with our plan of increased R&D and investment in the future, while still maintaining breakeven profitability. We finished the quarter with a sequential increase in revenues compared to the fourth quarter of 2009.

We recently announced several organizational changes, which we believe will help us towards our goals of strengthening our market position, increasing market share and entering new markets. The quarter was highlighted by signing the definitive agreement to acquire Raysat Antenna Systems. This acquisition is part of our focus on the defense and military markets. And we hope to be able to close it by the beginning of the third quarter.

We also look forward to broadening our scope in these markets by investing in additional opportunities as they arise and we continue to have strong balance sheet, balanced M&A activity, which supports our strategy. This concludes our review.

We would now like to open the floor for questions. Last quarter, we had a technical problem that prevented the listeners from asking questions. I apologize for this and I hope that this time it will work well. Operator, please?

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Jonathan Ho, William Blair. Please go ahead. Mr. Ho, would you like to ask a question.

John Weidemoyer – William Blair

Very sorry. We have to pick it off. My apologies. Yes. This is John Weidemoyer for Jonathan this morning. We have a few questions on the Raysat acquisition. Can you talk a little bit about the size of that market and the potential impact on growth?

Amiram Levinberg

Hi, Jonathan. I thought for a moment -- excuse me, Jonathan, its you, right?

John Weidemoyer – William Blair

This is John Weidmoyer, I work with Jonathan. Im on the call for him this morning. Yes.

Amiram Levinberg

Okay. Hi.

John Weidemoyer – William Blair

Hi.

Amiram Levinberg

Hi. Yes, you know, generally speaking, Com On The Move had developed itself predominantly in the L-band frequency band for a long time. And Inmarsat has done great in this area and so, in terms of thousands of terminals of terminals Com On The Move that are using these services, and theres also DoD usage by tens of thousands of these kinds of terminals, but these are predominantly narrowband in nature. As people have the idea to expand into more services on the move, people decided to start using the higher frequency band satellites for this application and specifically, X-band, KU-band and even KA-band.

And this is a fairly kind of technology in infancy at this point. Theres a very big hype. Quite many companies are producing products and developing technologies. However, the total volume of this market at this point in time is still small. So it should be a rapidly growing market, but at this point of time, its still small. In this specific market, Raysat Antenna System is focused on the low-profile antenna -- obviously, different from the, if you like, from a dish that you deploy on the roof of a vehicle, which usually is fairly high-profile in nature. And these are the caps you see from time to time on vehicles. And in this specific niche, actually Raysat Antenna Systems is probably the leading provider at this point in time, but as Ive said before, its a very infant market yet.

John Weidemoyer – William Blair

Okay. Thank you. Do you anticipate -- can you talk to someone about level of expenses that you might incur going forward as you try to address this market?

Amiram Levinberg

Generally speaking, we said at the end of last year when we published Q4, that we will invest more in R&D in order for us to go into the defense, military and DoD market and we have started doing that. With regard specifically to Raysat Antenna Systems, I think that generally speaking, this is a company that kind of carries its own expenses. So in that sense, it is fairly mutual from a bottom-line standpoint when the deal would be closed and we have them as part of our numbers.

John Weidemoyer – William Blair

Okay. Great. Thanks. And switching gears somewhat, can you talk about your pipeline relative to your rural projects regarding a Universal Service Fund?

Amiram Levinberg

What? Sorry?

Ari Krashin

Could you --?

John Weidemoyer – William Blair

The pipeline of your rural projects that use Universal Service Fund.

Amiram Levinberg

I dont think that we distinguish it this way. Weve published the backlog when we published Q4 that hasnt changed and obviously, the backlog we have published includes everything, including these projects as well.

John Weidemoyer – William Blair

Okay. And one last question. Can you give any more color on your update on the Colombian operations? Thank you.

Amiram Levinberg

On the Colombian operations, we have signed yet another extension agreement with the government. This extension agreement with the government means that we continue these preparations and the new agreement -- have we published the size of this extension (inaudible) I think we did. Its about $12 million and -- to be implemented during 2010. So -- and the new agreement is actually changing some of the telecenters from one type to another type; reducing some telephony sites, adding some other telecenters, but basically, it is the same services that will be -- now be extended into 2010.

John Weidemoyer

Okay. Great. Thanks very much.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Levinberg to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-254-7270. In Israel, please call 03-925-5936. Internationally, please call 9-723-925-5936. Additionally, a replay of this call will also be available on the companys website, www.gilat.com. Mr. Levinberg, would you like to make your concluding statement?

Amiram Levinberg

Yes. Wed just like to thank you all for joining us for this quarters call. Good day and good bye.

Operator

Thank you. This concludes Gilats first quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.

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