Gilat Satellite Networks' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug.10.11 | About: Gilat Satellite (GILT)

Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q2 2011 Earnings Conference Call

August 10, 2011 9:30 AM EST

Executives

Rob Fink – KCSA

Amiram Levinberg – Chairman of the Board and CEO

Ari Krashin – CFO

Analysts

Louie DiPalma – William Blair

Chris Quilty – Raymond James

Operator

Ladies and gentlemen, thank you for standing by.

Welcome to Gilat’s Second Quarter 2011 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.

I would now like to turn the call over the call to Rob Fink of KCSA to read the Safe Harbor statement. Rob, please go ahead.

Rob Fink

Thank you, Rachael. Good morning and good afternoon. Thank you all for joining us today for Gilat’s second quarter 2011 results conference call.

A recording of this call be available beginning at approximately noon Eastern Time today, August 10th until August 12th at noon. Our earnings press release and website provide details on accessing the archived call.

Investors are urged to read the forward-looking statements and our earnings release which states 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.

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.

Amiram Levinberg

Thank you, Rob. Good day, everyone. Before going into our regular call agenda on reviewing the results of the second quarter, I would like to highlight the recent development.

On August 1st, we announced the signing of a strategic contract with SES ASTRA2Connect in Ka-band. This is a significant project which opens new opportunities for us in a rapidly growing segment of the market. We are excited about this project and I will go into further details about this later in my comments.

The second quarter was highlighted by a strong financial performance in our core business. This quarter’s revenue increased to $81.7 million compared to $51.8 million in the second quarter of 2010. Gross margin in the second quarter was 36% compared to 33% in the comparable quarter in 2010 and EBITDA was $6.6 million compared to $2.2 million in the second quarter of 2010. On a non-GAAP basis, our operating income for the quarter was $2.7 million, up from a non-GAAP operating loss of $1 million in the comparable quarter of 2010. I will provide you with further details on our quarterly results later in the call.

Our North American business was strong in the second quarter, led by Spacenet's commercial activity. We received orders in the energy sector from customers such as ConocoPhillips, [inaudible] pipeline and Sunoco. And Spacenet also received extensions from its gaming and enterprise customer.

In the second quarter, we also announced the acquisition of CICAT Networks. A US nationwide provider of broadband network solutions. This acquisition is part of Spacenet strategy to expand its business in the broadband managed network services market and further leverage its core network management, call center, and field services capabilities. We have begun the integration of CICAT Networks with Spacenet’s enterprise business and has received significant orders for broadband connectivity. One such order for broadband connectivity was received from CICAT partner IBM for advanced auto parts, a leader in the automotive market and retail store nationwide.

Wavestream contributed meaningfully to our revenue and profitability this quarter. However, the uncertainty and concerns surrounding the US Government budget continues. We have been expanding Wavestream’s business to new opportunities such as commercial satellite broadcast, digital satellite news gathering, and airborne communication. During the quarter, Wavestream received orders for products that will be used in commercial airlines and in UAVs. In addition, Wavestream’s expansion to the international market continued to profit.

Moving to our international VSAT business, this quarter we announced a significant transact with Optus to provide a VSAT’s hubs operation, installation, and maintenance for a major network in Australia. Optus will provide broadband services for a Australian consumers in remote areas as part of NBN Co’s First Release Satellite Services, FRSS. As a reminder, National Broadband Network is an Australian Government initiative to deliver a nationwide broadband network for all Australians with the planned investment of up to 43 billion Australian dollars over eight years. NBN initiated the FRSS as an interim solution to provide high-speed broadband connectivity to remote Australian residences, small businesses and indigenous communities. The first pilot customers have already begun receiving service and the initial feedback we have received is positive.

This quarter we also announced a contract with HISPASAT for consumer services focused on the residential market in Spain. We had strong demand for SCADA enterprise in USO applications, including several similar backhaul deals both for our SkyAbis solution and SCPC modems.

We were also selected to deliver a Satellite-on-the-Move communication solution as part of a security initiative aimed at combating internal and border threats. As part of this initiative, valued at over $10 million, Raysat Antenna Systems will provide equipment and services, including over 100 StealthRay Satellite-on-the-Move antennas. This is significant for Raysat Antenna Systems as it is one of its largest orders to date.

Last week, we announced our selection by SES, for the delivery of consumer Ka-band equipment for ASTRA2Connect. As part of this contract, we will provide Ka-band user terminals that enables download speeds of up to 20 megabit per second as well as delivery of the hard gateway equipment. The use of our Ka-band platform will allow SES to deliver significantly faster Internet and voice-over-IP services to private households and small businesses across Europe. Currently ASTRA2Connect serves over 80,000 end users and is the largest satellite-based broadband network in Europe.

SES is the second largest satellite operator in the world. The project, including potential sale of VSATs to SES and ISP nominees, can reach a value of up to $70 million over the next five years. Usually in this type of project, we sell gateway infrastructure to the satellite operator and the VSATs are resold by the ISP. This award is an important achievement beyond its financial revenue; it is our first major VSAT award in the Ka-band arena. And as such, we see it as an important strategic milestone for us. We see Ka-bank multi-spot beam satellite as more than a new frequency. We see them as a next-generation technology that will drive significant future growth. Ka-band multi-spot beam satellite provide much more capacity than traditional satellites. In such, these new satellites enable more subscribers with higher data rates at competitive prices.

NSR, a leading industry analyst firm believes that this technology will divide growth in the satellite industry in general, both in the consumer market and the enterprise market. According to the latest market research, service revenues for the entire broadband satellite sector are forecasted to more than double by 2020 and ranging from $3.7 billion in 2010 to $8.1 billion in 2020. In NSR’s view, the growth in this market will come predominantly from satellite broadband access services using Ka-band high-speed satellite capacity. NSR project that the number of subscribers for broadband access to quadruple reaching some $5.8 million globally by 2020.

The SES ASTRA2Connect award is a strong acknowledgement of our Ka-band technology and it represents an important opportunity for Gilat to be at the forefront of these next-generation satellite services while providing consumer and businesses across Europe with valuable improvement in their day-to-day broadband services.

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

Thanks Amiram. I would like to remind everyone that our financial results are presented both on GAAP and non-GAAP basis. The GAAP financial results include the impact of FAS 123(NYSE:R); the inclusion of stocks based compensation expenses in the P&L; expenses related to our M&A activities during 2010 and 2011; amortization of tangible and intangible assets resulting from the purchase price allocation; and other one-time income. The reconciliation table 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 second quarter of 2011, our revenues for the second quarter of 2011 grew by 58% to $81.7 million from $51.8 million in the comparable quarter of 2010, with approximately $30 million attributed to Wavestream. Excluding the revenues from Wavestream, our revenues increased by 33% year-over-year from the $51.8 million in the second quarter of 2010 to $68.7 million. The increase in our revenues is mainly attributed to our solid performance in the international market and Spacenet continued rollout of size in connection with the recent win in the gaming sector.

Our gross margin this quarter was approximately 36% compared to approximately 33% in the second quarter of 2010. On a non-GAAP basis our gross margin reached 38% compared to 33% last year. As we mentioned from time-to-time, our margin is affected quarter-to-quarter by the region in which we operate and the type of deals we’re consuming. The improvement in our gross margin is mainly attributed to the higher portion of equipment sales which typically carry higher margins and these margins are in line with our expectation.

Gross R&D expenses were $8.9 million this quarter compared to $4.7 million in the same quarter of 2010. The increase in R&D expenses is primarily attributable to the cost associated with the consolidation of RaySat Antenna Systems and Wavestream. As mentioned in previous quarter, this increase is in line with our strategy and efforts to develop new products for new markets and to enhance our offering for existing segment. Gross R&D expenses may continue to increase lightly throughout 2011 in connection with our recent award from SES for delivery of the consumer Ka-band equipment for ASTRA2Connect.

Selling, marketing, general and administrative expenses for the quarter were $21.6 million compared to $14.8 million for the same quarter last year. The increase is primarily due to the consolidation of RaySat Antenna Systems and Wavestream as well as higher level of variable expenses related to the growth in revenue.

Operating income for the second quarter of 2011 was $0.2 million compared to an operating loss of $1.4 million in the second quarter of 2010. On a non-GAAP basis, operating income reached approximately $2.7 million in the second quarter of 2011 compared to an operating loss of $1 million in the comparable quarter of 2010.

Net income for the second quarter of 2011 was $0.9 million or $0.02 per diluted share compared to a net loss of $1.3 million or $0.03 per diluted share in the same quarter of 2010. On a non-GAAP basis, net income for the quarter was $2.6 million or $0.06 per diluted share compared to a loss of $0.9 million or $0.02 per diluted share in the same quarter of 2010.

Our financial position continues to be strong as our total cash balances, including restricted cash, net of short-term bank credit amounted to $50.9 million at the end of the second quarter. Our trade receivable at the end of the period were $53.1 million, representing DSO of 58 days. And our shareholders’ equity at the end of the quarter totaled $266.4 million.

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

Amiram Levinberg

Thank you, Ari. To summarize our call, in the second quarter, we saw a year-over-year improvement across all financial parameters as we increased our revenues, gross margin, EBITDA, and operating income. The quarter was highlighted by our strong financial performance as well as new orders for Spacenet and significant new customer wins. We made progress in our strategy to expand Spacenet’s business in the broadband managed network services market through a strategic acquisition. We won a major contract in our international recent business. And, last week, we received our first major award for our Ka-band VSAT technology.

That concludes our review. We’d now like to open the floor for question. Operator, please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). The first question is from James Breen of William Blair. Please go ahead.

Louie DiPalma – William Blair

Hello, this is Louie DiPalma on behalf of Jim Breen. How are you guys?

Amiram Levinberg

Hi.

Ari Krashin

Louie, how are you doing?

Louie DiPalma – William Blair

Not bad. Given that you guys have exposure to a lot of verticals, I know in the past, you’ve seen strength for mobile backhaul, gaming and the US Department of Defense and rural broadband deployment. Where did you particularly see strength in the second quarter?

Amiram Levinberg

I’m not sure I fully understood, Louie, the question. So you asked specifically about domestic US or what?

Louie DiPalma – William Blair

Just in general; what verticals drove the revenue increase in the second quarter?

Amiram Levinberg

Okay. I think the verticals that actually drove significant growth in this quarter were cellular backhaul. We’re doing many implementations in cellular backhauls. You know that application pretty well. We were strong in lottery as a vertical in the US; we had quite a few implementations in energy and SCADA; and we had significant activity in consumer in this quarter in Australia; and at the beginning of the third quarter we actually announced the transaction with SES. So I think you may say consumer is also a vertical.

Louie DiPalma – William Blair

Okay. And this quarter, EBITDA margins declined a little bit. Would you attribute that weakness overall US Department of Defense weakness considering that Wavestream has higher margins than the overall company?

Amiram Levinberg

Yes, to some extent. Well, A, to put it in perspective, not only we grew the EBITDA from 2.2 to 6.6; we also grew the EBITDA margin from 4% to 8%. So it’s just to put it in perspective. But you’re right. It’s – generally speaking, Wavestream has a nice kind of margins and there is some pressure in the US government and market at this point. So, yes, this is true.

Louie DiPalma – William Blair

As you mentioned during the call that you have been like diversifying Wavestream and Spacenet like away from the US Department of Defense. Do you think that margin should remain like stable at around this level going forward for the rest of the year?

Amiram Levinberg

Well, Spacenet was not kind of exposed significantly to US Government in any events.

Louie DiPalma – William Blair

Okay.

Amiram Levinberg

So Spacenet is working predominantly with the private sector. With regard to Wavestream, I would think that as long as we stay unique in the market which we still try to do because Wavestream really has a unique technology. Wavestream as such we will be to maintain its regular “margins,” yes.

Louie DiPalma – William Blair

Okay. And, like overall, is the – are the integrations going successfully for Wavestream, RaySat and your other acquired companies?

Amiram Levinberg

Generally speaking, definitely yes. I mean we are – we have just – it’s kind of the beginning, but we are selling now Wavestream internationally. We just started. Wavestream almost didn’t have any presence in the international product and I’m sure we can do a lot there. We have started working now in three Gilat offices and we are expanding to the other taking the Wavestream products. And with regards to RaySat Antenna Systems, I’ve just said in this call that they’ve won a very significant deal for them for more than 100 antennas which is in their size – remember, it’s a pretty kind of expensive piece of equipment plus services and additional equipment, and this is being done in combination with Gilat. So we are [inaudible], yes.

Louie DiPalma – William Blair

Excellent. Thanks for taking the questions.

Amiram Levinberg

Okay, thank you very much, Louie.

Operator

(Operator Instructions). The next question is from Chris Quilty of Raymond James. Please go ahead.

Chris Quilty – Raymond James

Good afternoon, gentlemen. Congratulations on the SES award. That’s clearly a big accomplishment. But as a follow-up to that, it looks like SES also made announcement earlier this morning with Newtech which I think has been their traditional supplier for Ka-band and technology. Can you explain how you think that arrangement will work? Are they basically dual sourcing and are they going to support dual gateway and infrastructure build outs, or is it eventually are they are going to select a supplier for their Ka-band infrastructure?

Amiram Levinberg

Hi Chris. Well, I guess, the Newtech publication is kind of synchronized with this call, because same publication was out like a few months, so one-to-one copy of the same publication was published again today. We’re not exclusive with SES. If you read the publication, though the technical specification is somewhat different between the two products, and no we are not exclusive. We should do a better job and customers should prefer our product than the other product which will most likely be in the market as well. If, at least, as I’ve said, if they stick to the publication as they put it a few months ago and today again, we should be much higher in terms of performance than the Newtech product. And therefore I think we should be successful in the market.

Chris Quilty – Raymond James

And do you know, has SES communicated in any way that they plan on acquiring discreet high throughput satellite dedicated to Ka-band in a way that Eurosat has or are they looking at more of the sort of piecemeal, adding a number of Ka-band transponders on their satellites in the way that they’ve been doing currently?

Amiram Levinberg

Well, you should refer this question to SES. The one thing we definitely know is these payloads that are currently planned on a few of the satellites which are not a single satellite dedicated to multi-spot beam the way Eurosat do that. If they have a plan on another satellite, well that question should be referred to them.

Chris Quilty – Raymond James

Great. And a separate question, switching gears on to the, I guess the Wavestream side of the business. It looks like the WIN-T program got some pretty good funding at least in the preliminary numbers from the White House and the House, but not yet from the Senate. Can you give us any indications of whether you have seen any disruptions in order activity coming from the customer and what your expectations are for both, market share on that program and perhaps to out your growth potential?

Amiram Levinberg

I would say the following: generally speaking, WIN-T is proceeding, but we saw some pressure, I would say, on savings and then on this program as well. The next phase of WIN-T is going to be Increment 2, and Increment 2 is in its stage which is called LWIP [ph] which means it’s a partial acquisitions with kind of smaller numbers to be tested around the beginning of Q2 next year. So this is the increment 2 phase of WIN-T and then it will take some probably some period of time to make this task and they will go for full acquisition probably around Q3 next year when you talk about WIN-T in specific.

The other programs, generally speaking, I would say that satellite communication is still kind of fairly essential. So we see all those on one hand. And on the other hand, there is some pressure to cut budgets and the uncertainty around the whole budget is somewhat a cloud I would say. So on one hand, yes you’re right, WIN-T budget has not been cut yet; and on the other hand, there is some question marks with regards to, if there will be cuts and how much with regards to this procurement as well.

Chris Quilty – Raymond James

Okay. And I think you mentioned earlier in the call that you’ve now added international customer for Wavestream and I presume that was using the historic Gilat channel and leveraging that as a synergy. But can you comment, A, is that correct? And B, was it a commercial customer, or was this a pickup of a defense military customer?

Amiram Levinberg

We’ve just started, so we actually increased sales in one specific market, which I don’t want to refer to in specific. And we have Gilat people that are now kind of dedicated to promote Wavestream product in three offices, in Russia, Brazil and India. And currently we are more focused on the commercial market which is the video type of applications. But as part of the bouquet of defense product which we started to introduce to the market in this time we are including obviously the Wavestream product. So in some future, mostly in 2012, the one we will go more and more vigorously I would say after this market, then Wavestream becomes part of our bouquet of product. And there I will see – I would think that the potential with the military integrators in these countries is actually even bigger.

Chris Quilty – Raymond James

And you didn’t mention Latin American sales effort, which kind of surprises me given your strength there.

Amiram Levinberg

I have mentioned Brazil and we are very strong in Brazil, and I’m pretty optimistic about this market.

Chris Quilty – Raymond James

But Brazil is sort of its own separate entity from the rest of the market there.

Amiram Levinberg

Yes. Well, for some extent, you are right. The next – probably the next country which we haven’t opened in the Wavestream context is going to be Mexico, but we didn’t start there yet.

Chris Quilty – Raymond James

Great. Okay, great. Thank you.

Amiram Levinberg

Thank you.

Operator

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, 03-925-5901. Internationally, please call, 972-392-55901. 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 concluding statement?

Amiram Levinberg

Yes, thank you. Well, we know it’s kind of turbulent times in the market these days, so we would just like to thank you all for joining us for this quarter’s call. Good day and good-bye.

Operator

Thank you. This concludes Gilat’s second quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!