Ari Krashin – Chairman, CEO
Amiram Levinberg - CFO
James Breen – William Blair
Gilat Satellite Networks, (GILT) Q1 2011 Earnings Conference Call May 17, 2011 9:30 AM ET
Thank you for standing by, welcome to the Gilat first quarter 2011 results conference call. (Operator Instructions), I would now like to turn over the call to Mary Beth Csaby from KCSA Strategic Communications to read the Safe Harbor, Mary Beth please go ahead.
Mary Beth Csaby – KCSA Strategic Communications
Thank you, good morning and good afternoon everyone. Thank you for joining us today for Gilat’s first quarter 2011 results conference call. A recording of this call be available beginning at approximately noon eastern time today, May 17th, until May 19th, 2011 at noon. Our earnings press release and website provide details on accessing the archived call. To the read the forward-looking statements and 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 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, due to events, or otherwise. We expressly disclaim any obligation to do so; whereas detailed information about risk factors can be found in our reports filed with the Securities and Exchange Commission.
That said, on the call today, is Amiram Levinberg, Gilat’s Chairman of the Board and Chief Executive Officer and Ari Krashin, Chief Financial Officer. Amiram, please go ahead.
Thank you, Mary Beth, good day everyone, I would like to begin by commenting on our activity during the first quarter. I will then turn the call over to Ari who will walk you through the quarter’s financial results. Following our prepared remarks we will open the call for questions. The first quarter was highlighted by strong financial performance in our core business and a few key contracts. In addition, we recently announced a major contractor’s for Australia’s MBN project. I will go into further details about this project later in my comments.
I will also discuss Spacenet’s small but strategic acquisition of CICAT Networks. This quarter’s revenue increased to $80 million compared to $57.1 million in the first quarter of 2010. Gross margins in Q1 reached 36% compared to 34% in the comparable quarter in 2010 and EBITDA margins were approximated 10% growth about 6% in the first quarter over 2010. On a non-GAAP basis our operating income for the quarter was $3.9 million up from $0.4 million of non-GAAP operating income in the comparable quarter of 2010. I will provide you with more detail on our quarter results later in the call.
Our North American business was strong in the first quarter led by Spacenet’s commercial activity. We previously announced several wins in the gaming industry, such that we acquired in the first quarter of the year. Spacenet also received orders in the energy sector and from enterprise and government customers. I want to highlight one important deal that we signed this quarter to provide service for FEMA, the U.S. Federal Emergency Management Agency as part of the integrated and public alert warning system. The contract calls for network composed of two fully redundant NetEdge Gateway’s at FEMA data centers that are connected to a remote station in all U.S. space for emergency broadcast capabilities.
The terminals eject emergency audio stream such as to key radio and TV stations, to communicate information related to local and national emergencies. An interesting aspect of this network is that the remote stations need to be connected to both gateways for full redundancy. Currently the emergency broadcast system is based directly on networks but if there is a disaster satellite communication like that enabled by Gilat Networks is a more reliable technology for transmission.
We continue to see the demand for managed network services primarily based on our Prysm Pro product. We recently received another industry award for Prysm Pro, the 2011 NGN Dealership Award from the Next Generation Networks, NGN Magazine.
A few weeks ago we announced Spacenet’s acquisition of CICAT Networks. A U.S. nationwide provider of Golden Network Solutions. CICAT Networks provides cost efficient broadband connectivity for business sites with multi-site locations, mostly based on wire-lined technology. This acquisition is part of Spacenet strategy to expand in the broadband managed network service, market, and further leverage its corner network management, call center and field services capabilities.
The acquisition enables Spacenet to increase its addressed minimum market and to offer an expanded range of connectivity options and managed network service solutions. This is a first quarter; we consolidate Wave Stream affording our quarterly results. While Wave Stream contributed meaningfully to our revenue and profitability this quarter, uncertainty and concerns surrounding the U.S. Government Budget cuts in the 2011 budget process slowed spending in the U.S. Defense Industry in general and also in Wave Stream’s market.
We think we will see the effects from these events mainly was in second quarter performance. The recent passage of the long delayed appreciation bid for 2011 and the proposed defense budget for 2012 which includes some growth in programs that are of interest to us, both to our optimism in the defense business.
We think that spending in the industry will increase in the second half of the year and onwards. We remain well positioned to take advantage of the new defense opportunities and we continue to secure our strategy to increase our presence in the Homeland Security and Defense Markets.
We are confident in Wave Stream’s leading solid state power amplifier (SSBA) Technology and in the SSBA markets, long lasting potential. We plan to focus Wave Stream business also on new opportunities such as commercial satellite broadcast and the international market.
During the quarter Wave Stream announced that HBO is now using the new Wave Stream three band power amplifiers for the video distribution. Internationally, Wave Stream has increased its presence and Gilat’s sales team has started to promote Wave Stream’s products around the world.
Moving in to our international piece of business this quarter we had strong business for some of our Backhaul enterprise and government applications. We have further extended our Backhaul deals both for our SkyEdge solution and as (inaudible) modems. We recently announced an agreement to be the primary VSAT provider for Gateway Communications. The largest provider of carrier solutions in Africa and the first SkyEdge to network is being deployed this quarter.
Our long-term partnership with telecom media continues to grow. We signed an agreement to provide the SkyEdge II broadband satellite network to serve sites as well as the media. Gilat in rural Peru has been awarded six contracts from Peru’s agency for Promotion of Private Investment, Proinversion, in the past 12 years. The contract to provide internet access and telephony services throughout the country’s four regions varied at $14.5 million and is expected to connect over 770 communities across world Peru, providing more than 215,000 people access to substantial communication services.
We also announced two new products this quarter. MLT-1000 and WebEnhance, the MLT-1000, military satellite modem is our new military modem for robust tactical Satcom-on-the-Move applications. It is primarily focused on the international defense market, any supports or objective to become the leading provider of subsidized networking technology for the defense market. Its development is a result of our dedicated defense and the activity initiated a little over a year ago.
In addition, we launched WebEnhance, the industry’s first VSAT with upgradeable, high capacity, micro-gigabyte, micro-SD memory, which we believe creates a competitive advantage for Gilat by providing the end users with an improved web surfing experience while reducing the operating expenses by the service providers. Our first customers of product is Global Sat from Mexico. A couple of weeks ago we announced that we signed a contract with Optus to provide enhanced VSATs and services to the Australian National Broadband Company as part of the first released satellite services, as far as that.
The National Broadband Network, NBN, is an Australian Government Initiative to deliver a nationwide broadband network for all Australian’s. It is a huge infrastructure project undertaken by the Australian Government. A planning investment of up to $43 billion dollars over 18 years. The network will be mostly based on fiber with a small portion to be composed of satellite technology.
NBN initiated the FI Centers, as an entering solution to provide high speed broadband connectivity to remote Australian resident, small businesses and indigenous communities. We are very proud to be part of this project. For this entering solution we will be providing turnkey pieces of network which includes installation, maintenance and support. It will be based on some Optus KU band capacity and IPSTAR, KU, KA, multi-spotbeam capacity over Australia.
This is our first deployment using IPSTAR capacity which for the most part is used only internally supplied with the (inaudible). The initial networks to be provided to Optus include 11 hubs and 20,000 VSATs. The hubs are expected to be deployed during this year while the VSATs are to be deployed over three years. Potentially the network could grow up to 48,000 VSATs, which in this case including the services could reach a deal size of $120 million.
That concludes our business overview. Now I would like to turn the call over to Ari Krashin, I will Ari Krashin who will review the financials, Ari, please?
Thanks, Amiram, I would like to remind everyone that our financial results are presented both in GAAP and non-GAAP basis. The GAAP financial results include the effect of SFAS 123R, the inclusion of stock-based compensation expenses in the P-n-L. Expenses related to our M&A activities during our 2010 and 2011 and the position of tangible and intangible assets resulting from the purchase by some locations and other one-time income.
The reconciliation page in our press release highlights this data and our non-GAAP information is presented excluding these items. Now moving to our financial highlights for the first quarter 2011, our revenues for the first quarter of 2011 moved by 40% to $80 million from $57.1 million in the comparable quarter of 2010. Also quarterly revenues were approximately $50 million is attributable to Wave Stream being consolidated in full for the first time.
The rest of the increase in our business of about 14% is mostly from the rollout of size in connection with the recent win of business in the gaming sector. Our gross margin this quarter was approximately 36% compared to approximately 34% of the first quarter of 2010. On a non-GAAP basis our gross margin reached 39% compared to 35% last year. 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 margins this quarter was attributed mainly to the higher portion of equipment sales which typically carries higher margins. Gross R&D expenses were $8.9 million this quarter compared to $4.7 million in the same quarter of 2010. The increasing R&D expenses is primarily an outcome of the consolidation of RaySat Antenna Systems and Wave Stream. The increase is also in line with our strategy and efforts to develop new products for the new markets and to enhance our current market.
R&D gross expenses might increase gradually throughout 2011, as we enter into new projects and face new requirements. We anticipate that the benefits of this spending will show in our revenues maybe 2012 and onwards as we introduce new and enhanced products for the defense market and to our commercial markets. Selling, marketing, general and administrative expenses for the quarter were $19.7 million compared to $16.1 million for the same quarter of last year. The increase is primarily due to the consolidation of RaySat Antenna Systems and Wave Stream as well.
A higher level of LIBOR expenses related to higher level of revenues. EBIDTA this quarter reached $8 million which represents an EBITDA margin of approximately 10% compared to $3.4 million and an EBITDA margin of 6% in the first quarter of 2010. The improvement in our EBITDA margin is in line with our management objective and is primarily due to the higher level of revenues and the improvement in our gross margin. Operating income for the first quarter was $0.8 million compared to $0.1 million in the first quarter 2010.
On a non-GAAP basis operating income was approximately $3.9 million in the first quarter 2011 compared to $4.4 million in the comparable quarter 2010. Our tax expenses this quarter represent many non-cash changes as the first asset on our balance sheet as a result of the acquisition we made last year.
Net income for the quarter was $0.4 million or 1 cent diluted share compared to $0.6 million or 2 cents per diluted share in the same quarter 2010. On a non-GAAP basis net income for the quarter was $2.6 million or 6 cents per diluted share compared to $1 million or 2 cents per diluted share in the same quarter 2010.
Our financial position continues to be strong as our total cash balances including restricted cash, net of short-term bad credit amounted to $60.7 million at the end of this quarter with a similar level of debt. Our (trends) receivable at the end of the quarter were up $51.3 million representing DSO of 58 days. Our shareholders equity at the end of the quarter totaled $265.4 million.
Now I would like to turn the call back to Amiram, Amiram?
Thank you, Ari. To summarize our call we saw in Q1 an increase in revenue and strong gross and EBITDA margins. The quarter was highlighted by growth in our business in terms of revenue as well as recent new customer wins and strategic buildup of our business. Our strategy to increase R&D and investing in our future while we improve our profitability is going as planned. This includes our long-term goals in defense and re-targeting markets and we are broadening our scope in these markets with new products. We continue to work hard to meet our management objectives, set at the beginning of the year, for revenues of over $330 million and an EBITDA margin of 10%. That concludes our review. We would now like to open the floor for questions. Operator, please?
Thank you, (operator instructions); the first question is from James Breen of William Blair.
James Breen – William Blair
Thank you very much, just a couple questions, one, with respect to the revenue makeup during the quarter, can you talk about the splits of government versus nongovernment revenue? And then also, with respect to going forward and where you see growth coming from, you talked a little bit about the government segment, but I think within the enterprise also, are there opportunities in both areas to continue the growth?
Hi, James, this is Ari; I mean we expected your first question. Government versus non-government, basically the switch would be mostly DOD, defense dollars versus enterprise, or the commercial business that we have. Now as I mentioned earlier, I mean the main numbers represent those revenues of Wave Stream that we estimate were approximately $50 million of the revenue side. So actually if we take them out, means that the call always – will Gilat’s business contributed something like $65 million this quarter which is EBITDA by a significant increase in the revenue.
Now going forward with respect to future opportunities and then identify the market or commercial market obviously we’re not, with the big project in Australia, NBN. We do see some new facilities in our enterprise market in North America, continuing well-off with the lottery segment. Also, international markets, some new opportunities are developing so obviously going throughout the year we do anticipate that we will see growth both in the DOD market, in the government market as you call and also, our core business, commercial business.
James Breen – William Blair
Great and do you think – has the pricing been fairly stable in terms of some of the new contracts your signing up relative to the old ones?
Yes, obviously you can – it’s also reflected in the gross margins, so we do feel quite comfortable with those gross margins even going forward and the pricing is quite stable.
James Breen – William Blair
And then I just, lastly, was there meaningful impact from the FX during the quarter?
We mentioned that in our earlier call, it’s basically, obviously most of revenues are numerated in U.S. Dollars, so with respective revenues we don’t really see any fluctuations do to exchange rates. But the expense side, as being an Israeli company, some of our expenses are obviously in Israeli shekels. So what we try to do is hedge the shekel versus the dollar. So currently we are hedged to the end of Q2 and exchange rates of 3.64 something like that. And going forward obviously we tried to – for the sale, to protect the budget and then once we see a good opportunity we will probably go ahead and hedge further along the way so we won’t be that – recipes for fluctuation in the exchange rate.
James Breen – William Blair
Great, thank you very much.
(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 a replay of this call is scheduled to begin two hours after the conference in the U.S. please call 1-888-782-4291, in Israeli please call 03-925-5928, internationally please call 9723-925-5928. 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 a completing statement?
I would just like to say thank you all for joining us for this quarter’s call, good-day and good-bye.
Thank you. This concludes Gilat’s first quarter 2011 results conference call. Thank you for your participation you may go ahead and disconnect.