Gilat Satellite Networks Ltd. Q2 2010 Earnings Call Transcript

| About: Gilat Satellite (GILT)

Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q2 2010 Earnings Call Transcript

August 10, 2010 09:30 am ET


Tom Watts - Watts Capital Partners

Amiram Levinberg - CEO

Ari Krashin - CFO


James Breen - William Blair


Welcome to Gilat Satellite Networks Second Quarter 2010 Results Conference Call. All participants are present in listen-only mode. Following managements formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions)

As a reminder this conference is being recorded August 10, 2010. I would now like to turn 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 second quarter 2010 results conference call. A recording of this call will be available beginning at approximately 12:00 PM Eastern Time today, August 10, 2010 through August 12, 2010 at 12:00 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 that 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 and 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 report, 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 the highlights of the quarter, which include corporate updates of the settlement agreement, a run down of our second quarter results, followed by a more detailed review of our business during the quarter. Following the quarterly review, I will take you through the detailed financial results. We will then open the call for questions.

In the second quarter, revenues decreased compared to the second quarter 2009, and we finished with the loss of $1.4 million. During this period, we continued to increase our R&D expenses as planned. The effect of this was somewhat offset by the improvement in the growth margin, which grew compared to the respective quarter in 2009.

Today we also published a press release announcing that we signed a settlement agreement with each of the purchasers against whom we had filed lawsuit in 2008. You will recall that the lawsuit were filed against the parties that had guaranteed the payments of approximately $47 million as a termination fee under the merger agreement that was approved by the company’s shareholders in July 2008.

Under the terms of the settlement agreement, the investors will pay Gilat an aggregate approximately $20 million over the half of which will be paid by October 3, 2010 and the remainder could be paid in installment ending in October 2013. The settlement agreement will reach as part of a mediation proceedings that began in April 2009.

The agreement has being signed those certain formalities such as filings in the Israeli court, still need to be completed. As its common settlement document agreement, we are bound by terms of confidentiality and so I trust you would appreciate that I can’t provide details beyond our press release on this matter.

The quarter was also highlighted by the completion of the acquisition RaySat Antenna Systems. This is following the announcement we have on March 17 that we reached an agreement to acquire the company. As a reminder, RaySat Antenna Systems provided low profile and light weight antennas as various complete system solutions to the rapidly growing SatCom on The Move market.

The antennas are critical in meeting the stringent requirement of the US DoD which is already a customer operator antenna system. The product portfolio includes different sized antenna to meet varying customer requirements. Following the closing of the acquisition on July 1st, the US operations of RaySat antenna system now operates under the basic integrated government solutions as the international business operates within Gilat’s world wide operations. SIGS was established during 2009 to provide fully integrated end-to-end communication solutions for defense, intelligence, homeland security, public safety, federal and civilian government agencies.

As part of the RaySat Antenna Systems deal, we also entered into a definitive agreement to acquire from its sister company 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 grow profile antenna design team of over 60 skilled engineers out of approximately 100 employees in total.

This second acquisition is almost completed waiting for certain approvals required in Bulgaria. We are very excited about the acquisition and expect this move to assist us in expanding our penetration of the defense and government sectors world wide. The market condition in the US continues to be challenging, and there was a decline in second quarter revenues from the US compared to the comparable quarter in 2009. Having said that, we continue to sign new contracts and extensions to existing contracts, during the quarter. Spacenet announced actually today that we signed a contract with Valero to serve as a provider for to serve as a provider for managed network services and also connectivity to its nation wide rented wholesale locations.

I will talk a bit more about this and the managed network services market later in the call.

On the international front, we announced several new contracts in Africa and Asia during the quarter, VTI in Vietnam, ETC in Ethiopia and a deployment of satellite network for defense and homeland security application in Asia.

Revenues in Africa grew this quarter, compared to the comparable quarter in 2009, though this was offset by lower results in the other regions. Our operations in Columbia and in Peru are stable; we are also meeting the operational parameters in our Columbian operations and receiving the subsidy in a timely manner.

Moving the financial indicator summary slide, revenue for the quarter or second quarter of 2010 were $51.8 million, a decline compared to the $56 million in the second quarter of 2009.

We continue to increase our growth R&D expenses by about $700,000, which is inline with our plan for 2010. We were able to improve our growth margins this quarter to 32.6% compared to 30.4% in the second quarter of 2009.

Our cash balances also increased by close to $10 million this quarter, mainly due to exceptional collection. We had a growth in bookings this past quarter and these increased both sequentially compared to Q1 and compared to Q2, 2009. This is a good sign for us looking forward and we hope this is an indicator regarding business for the second half of 2010.

I will discuss the Q2, 2010 results in more detail later in the call.

Getting into a little more detail on our business during the second quarter, I will begin with the developed markets; I will begin with the developed markets.

In Q2 Spacenet signed extension to existing gaming contract, covering three states. This continues to be an important market for us in the US. Our relation with the US gaming industry also opened opportunities in the international market. As these same players often offers services in other markets.

Emergency response and disaster recovery also continues to be an important market for us. These type of application is seen in federal, state and local government as well as enterprises in [telecomm] An example of these type of deployment is an extension contract we have seen this past quarter for AT&T for management and control of their switches as part of their faster service.

Faster EBIT, fast automatic restoration of voice and data, service network elements to an area affected by the disaster be it natural or man made. On the second quarter of 2010, we had several contract expansions as well as new enterprise customers some example of these include (inaudible) and Centerpoint Energy.

In some of these cases, this was for prime connectivity or where the frequency is always being given to provide communication network. Just for reference, this is what we typically provide for the gaming industry. Yesterday, we announced that we signed a contract where we would serve a broadband managed service provider for Valero’s nationwide wholesale locations. This will be for primary retail applications and natural back up with up to 4000 locations.

Spacenet would be offering to reassign managed network services with high EBITDA sale and satellite connectivity based on the present core platform. Application in real time include the internet, intranet access, point of sale and credit debit transaction, ATM or Automatic Tank Gauge ATG, WiFi, store royalty program and video security.

Below is the long time customer of Spacenet satellite connectivity and we are very happy with our managed network solution has been chosen by them as well.

This leads me to the managed network services market in general. The US telecom landscape is highly fragmented with particularly no single entity able to provide nationwide connectivity, when a wholly owned wire line infrastructure, the results of a large number of Telco operator, with one report stating over 270 such operators, for these reasons many enterprises prefer to have managed network services, where as single entity managed the connectivity to the branches or enterprise side.

In most cases there is broadband connectivity to these sides, but of various levels of the liability and managing the multiple communication providers is complex task.

Spacenet has been entering these market space usually together with Satellite technology providing a hybrid solution, often based on our premium product. During 2010 we, have expanded our offering to also provide connectivity on pure terrestrial technology even without satellite.

In the beginning of the year, we announced such a deal with Regis for over 7000 sites. We see this market as adjacent to Spacenet’s existing market and we have many of the core strengths needed to succeed it.

As I have mentioned before Prysm Pro is one of these being an enabler to provide such services. The recent award of the innovation product of the year for the DC area by SmartVideo was an indication that this product is perceived and satellite not only as a other satellite only product but rather as a solution for the main stream managed network services market.

Now turning to the emerging market, during the quarter, we announced several new projects and activities in Africa and Asia for a variety of applications we saw new networks deployed for enterprise gaming government and defense applications. As I said before, we had a relatively strong quarter in Africa, compared with the second quarter of 2009. One of our announcement was for the satellite network equipment to Ethiopia’s SchoolNet project, this is an expansion of an existing deployment and we are proud to be part of initiative structured base.

We also had another large deployment in Africa for gaming this quarter. In this case it was a Turkey project for about 1000 site to be deployed within three months. It was a difficult project to deliver on, as it was in very challenging environment; we were still able to complete it successfully and on time.

We also announced several deals in Asia this quarter. In Vietnam, we are deploying a SkyEdge II network for Vietnam telecom international (NYSEARCA:VTI) a subsidiary of VNPT Vietnam’s National Telecommunication service provider. This network will operate all VINASAT-1, the first Vietnamese communication satellite. And we provide a wide range of applications such as broadband intent access, GSM recording and private leased circuits.

Government sometimes (inaudible) to launch a national satellite, as a means to initiate better telecommunication services, and especially broadband connectivity in their respective countries. We have seen several such initiatives such as Vietnam and continue to see these national satellite projects in other regions as well.

For those of you [review] presentation in front of them you can see another deployment in Asia. The picture is from Gorak Shep which is the last village in Nepal on the Everest track before the Everest base camp. It’s over 5100 meters elevation. The Gorak Shep VSAT installation is one of the highest in the world. VSAT which enables code from mobile phones and fixed telephony into any location worldwide hosts numerous visitors year long and is part of Nepal Telecom’s larger Gilat Network deployment announced last year.

We also announced that we’ll be providing network for defense and homeland security in another Asian country because of the nature of this deal we cannot disclose the name of the country, we are being seen for the last year or two more demand for defense and homeland security from the international market and this is an encouraging side. So while the US defense market is largest in the world, we see the growth for defense applications outside the US strong.

That concludes our business overview now before I turn the call over to Ari Krashin I just want to give a small update. I will be relocating to the US while continuing to act as our CFO. This will enable us to increase our efforts to focus on the US DoD market and especially looking for M&A target. This also means that for the US investors it will also be easier to make and on the same time zone as most of you, I am sure you will enjoy your new location, Ari, and now let’s review the financials.

Ari Krashin

Thank you, Amiram. for the second quarter of 2010 Gilat’s revenues totaled $51.8 million, a year-over-year declined from Q2 2009 $56 million and a quarter-over-quarter decline for Q1 $57.1 million. On a more positive note our quarter-over-quarter and year-over-year bookings have increased so we are hopeful that revenue will be stronger in the second half of the year. Gilat maintains plan investment program in the quarter with growth R&D up $4.7 million, similar to the first quarter was up from the Q2 2009, $4.1 million.

The project that we are investing in are augmenting the capabilities of our corn products as well as creating new products that would expect to begin contributing to revenues growth as early as 2011.

In addition to our internal R&D, Gilat acquisition of RaySat Antenna Systems plus RaySat advanced research facilities in Bulgaria should further explain Gilat product pipeline over the next 12 months to 24 months.

Despite the revenue decline in the quarter, Gilat margin remain robust, gross margin of 32.5% increase will get to Q2 2009 30.4%, gross margin always vary quarter-to-quarter this on our mix between equipment and services revenue. However, the gross margin trends that Gilat has achieved throughout the economic cycle underscores our commitment to further discipline and cost control.

Last quarter we indicated that we incurred over $350,000 of legal and professional fees in connection with the definitive agreement we signed both at RaySat Antenna Systems and RaySat Bulgaria.

In Q2, we incurred additional transaction related expenses of approximately $200,000 to close the acquisition, these expenses should not continue into Q3. Although, we were able to reduce SG&A in the quarter to $14.8 million for Q1, $15.1 million. However, SG&A has increased year-over-year for Q2 2009, $14.4 million this was mainly as a result of the legal and professional fees mentioned above. GAAP operating income for the quarter came in at the north of $1.4 million; deterioration from both Q2 2009 was north of $0.5 million and Q1 in break even level. Give our cost control during the quarter the increased loss of knew almost (slowly) to the lower revenues in the quarter.

Our GAAP net income for the quarter was a loss of $1.3 million or $0.03 per diluted share, compared to Q2 2009 loss of $1.2 million or $0.03 per diluted share, on an non-GAAP basis net income for the quarter was a loss $0.9 million or $0.02 per diluted shared compared to loss of $1 million or $0.02 per diluted share in the same quarter of 2009.

Last acquisition further reinforced focused on some acquisition today, cash balances in Q2 rose to $154.6 million due to positive cash flow of operation approximately $7.9 million as a result of exceptional collections here in this quarter our cash balances available in the third quarter are expected to decrease reflecting the closing of RaySat Antenna Systems and RaySat Bulgaria transaction in an aggregate amount of $30 million and the repayment of the loan from [bank loan] in the month of $4 million in accordance with the repayment schedule.

Our present (Inaudible) at the end of the quarter were $43.9 million representing DSO of $76 million this represents an improvement from previous quarter mainly as the result of our efforts to manage our working capital in focus and payment term, our share holders equity at the end of the quarter totaled $231.7 million, now I would like to turn the call back to Amiram.

Amiram Levinberg

Thank you, Ari. To summarize our call we have a year-over-year decline in revenue each quarter. We continue to increase our R&D spending as planned we improved our gross margins this quarter compared Q2 2009. Our balance sheet remained strong and this quarter we had an increase in our cash. We started settlement agreements with each of the purchasers against whom we had filed a lawsuit in 2008.

This should enable us to now focus all of our management attention to implementing our strategy and on our ongoing business. The quarter was highlighted by completing the acquisition of RaySat Antenna System. This acquisition is part of our focused on the defense and military market. We experience challenging business condition in most of the world region but there are signs that economic activity is improving and the satellite capacity in some region is becoming less. Our bookings increased this quarter so looking into the second half of 2010, we are cautiously optimistic but the business would be better than the third half, this concludes our review, we would now like to open the floor for questions. Operator please.

Question-and-answer session


(Operators Instructions) The first question is from James Breen of William Blair. Please go ahead.

James Breen - William Blair

Thanks for taking my question. Just with respect to the business trends, obviously we saw revenue down this quarter, can you talk about sort of the combination of things that caused that and then where you see the momentum building in the second half is it did you see freight pressure on existing products or is it just competition from other providers? Thanks.

Amiram Levinberg

No I don’t think that is competition from other providers and certainly not pressure on price that we saw our growth margin actually increased, its more kind of economical situation in many part of the world having said that bookings actually increased both in the US and in the international market so and that declined for both Q1 and also for the whole half of the year, we also saw couple of million slip into Q3 results no good reason you are going to end of the quarter issue, but as a trend I would say is that bookings were higher in the first half this quarter compared to the previous and second quarter as compared to the comparable results as I understand I would like to be cautiously optimistic that second half of the year should actually look better than first half of the year

James Breen - William Blair

And did you see any large adverse effects, just the currency fluctuations within the quarter?

Amiram Levinberg

Not really the currency fluctuations did not have a significant effect on us. And basically we have lots of expenses in Israeli shekels. However, we used to hedge kind of half a year ahead of time, obviously most of our revenues are in US dollars so most expenses in Israeli currency called shekel, most revenues in US dollars and we try to hedge usually half the year down the road. So, now I wouldn’t say that the fluctuation in currencies has a lot of effect on us at this point of time.

James Breen - William Blair

And then just one last question. With respect to your different business lines, where are you seeing the most momentum right now or the greatest amount of sales going forward?

Amiram Levinberg

I would think that Latin America is I think most of the momentum. Africa is kind of relatively small so these are momentums; they are also however it is not a very big portion in our part.


(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 US, please call 1-888-295-2634. In Israel, please call 03-925-5930. Internationally, please call 9-723-925-5930. Additionally, a replay of this call be available on the company’s website, Mr. Levinberg, would you like to make your concluding statement sir?

Amiram Levinberg

Yes. We’d just like to thank you all for joining us for this quarter’s call. Good afternoon and good bye.


Thank you. This concludes Gilat’s Satellite Networks second quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.

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