Gilat Satellite Networks' (GILT) CEO Yona Ovadia on Q1 2016 Results - Earnings Call Transcript

| About: Gilat Satellite (GILT)

Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q1 2016 Earnings Conference Call

May 18, 2016 09:30 AM ET

Executives

June Filingeri - Comm-Partners LLC

Yona Ovadia - CEO

Dov Baharav - Chairman of the Board

Adi Sfadia - CFO

Analysts

Gunther Karger - Discovery Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s First Quarter 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, May 18, 2016. I would now like to hand the call over to June Filingeri of Comm-Partners to read the Safe Harbor statement. June, please go ahead.

June Filingeri

Thank you, Lauren. Good morning and good afternoon everyone. Thank you for joining us today for this conference call and webcast on Gilat's first quarter 2016 results. A recording of this call will be available beginning at approximately noon Eastern Time today, May 18 and will be available on our Gilat website until May 21st at noon.

Also please note that investors are urged to read the forward-looking statements in Gilat's earnings releases, with a reminder that statements made on this earnings call, that are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such 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 these forward-looking statements whether as a result of new information, future events or otherwise. The company expressly disclaims any obligation to do so. More detailed information about risk factors can be found in Gilat's reports filed with the Securities and Exchange Commission.

With that said, let me turn to introduction. On the call today are Yona Ovadia, Gilat's CEO, Dov Baharav, Chairman of the Board and Adi Sfadia, Gilat's Chief Financial Officer. I would now like to turn the call over to Yona Ovadia. Yona please go ahead.

Yona Ovadia

Thank you June, and hello everyone. Before I begin please let me say that I'm honored to address you for the first time as a CEO. I was appointed CEO about two months after almost a year of holding various executive positions at Gilat. I would like to thank our chairman, Dov Baharav who during his time as interim CEO successfully led Gilat to new strategic gross margins. I intend to work closely with him to continue advancing the strategic directions that have begun to bear fruit. On March 24th of this year we announced the successful outcome of our right offering wherein shareholders holding approximately 90% of the company's shares exercised their basis subscription rights. Gilat shareholders submitted substantial over subscription requests covering more than the unsubscribed portion.

As a result of this process the company received gross proceeds of about $35 million providing us with added flexibility and capital to take advantage of larger scale projects in end to end services HTS and IFC in line with our strategy. I would like to take this opportunity to thank our shareholders for their continued confidence and support. I will now provide a brief summary for the first quarter and afterwards Adi will discuss our financial results. I will then conclude and open the call for questions.

I'm pleased to report the positive first quarter in line with our plan. As Adi will report in more detail, we achieved good results in the first quarter of 2016 including top-line growth of 17% over the same quarter last year and EBITDA of $537,000. As a result of our business progress and good first quarter results we are pleased to reiterate our management objective of revenue targets of $290 million to $310 million and an EBITDA target of $18 million to $24 million. These results are a strong testament to the validity of our strategy. I will now review the highlights of the quarter. Our cloud based X-Architecture is continuing to gain wide acceptance as the most advanced HTS ground equipment technology. This single platform supports both fixed and mobility applications uniquely enabling our expansion into markets such as mobility, consumer, enterprise and satellite.

The advantages of X-Architecture enable us fully in substantial view in this market. For example Eutelsat has chosen Gilat's X-Architecture as the platform for all 18 KA bandwidth of their ROTC expect AMD1 Eutelsat 36B satellite. Our X-Architecture platform was chosen after head to head competition against all the leading providers and as such that will enable coverage throughout Western Russia and will supply -- end user terminal to consumer.

In the second example, SCS and Facebook have collected X-Architecture for a Facebook initiative to deliver broad band internet to -- access throughout Africa. Our demonstrated ability to support multiple satellites from a single platform is a key factor for this project. The enlargement of supply in the hub for HTS and VSAT directly to Facebook’s designated partners in 11 African countries. In the third example, Telefonica del Peru has chosen our X-Architecture to extend cellular and broadband coverage, the rural areas over high growth of satellites. GIlat’s X-Architecture has the flexibility to support any number of frequency bands, enabling the smooth migration of thousands of VSAT from KU to KA frequency band.

In the mobility market, our In-Flight Connectivity s strategy is getting momentum with growth in the first quarter, resulting from a major project with Gogo. Gogo, the global leader in providing broadband connectivity solutions and wireless entertainment to thousands of sectors selected GIlat for its next generation airborne IP network modem system. The system will include our X-Architecture platform and our SkyEdge II-c Taurus modem featuring speeds of up to 400 megabits per second, dramatically improving the connective services to the aircraft. With Gogo’s wide reach and connections in the airline industry, this is an excellent win and the further validation of our strategy.

In Peru, our substantial Fitel regional infrastructure projects have progressed as planned this quarter. These projects are expected to generate significant revenue during 2016 and 2017 with continuing recurring revenues for operation of the network and selling additional services for another 10-12 years. As a reminder, these initiatives bring broadband Internet connectivity to communities and government institutions in rural areas around the country.

Finally, our market leadership in satellite backhaul was confirmed this quarter when the small scale firm bestowed their word of the world’s fastest LTE systems to our customer SoftBank in Japan and this is our testimony to the security of our capital with them. In closing, I would like to note that our positive first quarter results were achieved despite the fact that we are witnessing the slowdown in certain regional economies, notably in the Latin American and CIS markets.

Our first quarter has demonstrated that we have more than compensated [indiscernible] market conditions. We have significant achievements in new growth areas. I would like to now turn the call over to Adi, our CFO, who will review the financials. Adi, please…

Adi Sfadia

Thank you, Yona and good morning and good afternoon everyone. I would like to remind everyone that our financial results are presented both on a GAAP and non-GAAP basis. The GAAP financial results include the effect of stock-based compensation, amortization of purchased intangibles, impairment of goodwill and long-lived assets, restructuring cost and net income or loss from discontinued operations.

The consolidation table in our press release highlight this data and our non-GAAP information presented exclude these items. I will now move to our financial highlights for the first quarter of 2016.

Our results were in line with our plan for 2016 on both GAAP and non-GAAP basis. Revenues for the first quarter of 2016 were $52.7 million, a 17% increase compared to $45.2 million in the first quarter of 2015. The growth was driven mainly from increased revenue in our service segment, reflecting revenue from our project for Fitel in Peru. In addition, we saw growth in our mobility segment, especially In-Flight Connectivity offset in part by slowest revenues in our commercial segment due to soft economic condition in Latin America and CIS regions, as Yona discussed earlier.

In comparison to the fourth quarter of 2015, our revenues were 22% lower. The decrease is primarily attributed to a seasonality in our business with our fourth quarter typically our strongest. In addition, we had higher revenues from Fitel in the previous quarter. Revenues from Fitel can vary quarter-to-quarter depending on the percentage of the project completion. In the first quarter of 2016, our GAAP gross margin decreased to 24% of revenues from 29% in the same quarter last year as expected. The decrease in our gross margin is mainly attributable to different product mix due to the fact that revenues from the Fitel project in Peru have a lower gross margin compared to our satellite business.

Our gross margin in the previous quarter was 15%. During the previous quarter, we recorded an impairment of long-lived assets of $10.1 million related to our Colombia Kioscos project due to expected future losses from this project. Excluding this impairment charge, our gross margin in the previous quarter was 30%, which benefited from higher revenue volumes.

Total R&D expenses on a GAAP basis was $5.9 million compared to $6.5 million in the same quarter last year and $5.7 million in the previous quarter. We continue to invest substantially in R&D to support our strategy HTS and mobility, especially IFC solutions.

Certain marketing expenses were $5.1 million compared to $6.3 million in the same quarter last year and $6.1 million in the previous quarter. The decrease in certain marketing expenses is attributable mainly to lower variable expenses.

G&A expenses were $4.4 million compared to $4.6 million in the same quarter last year and $3.4 million in the previous quarter. In the previous quarter we benefited from an adjustment to a contingency position stemming from a favorable court decision offset in part by restructuring expenses. Total operating expenses on a GAAP basis were $15.4 million compared to $17.2 million in the same quarter last year and $13.8 million in the previous quarter. GAAP operating loss was $3 million compared to an operating loss of $4 million in the same quarter last year and an operating loss of $3.4 million in the previous quarter. The GAAP loss was $4 million or $0.09 per diluted share compared to a loss of $5.6 million or $0.13 per diluted share in the same quarter last year and a loss of $5.2 million or a loss of $0.12 per diluted share in the previous quarter.

We regularly use supplemental non-GAAP measures internally to understand, manage and evaluate our business to make, and to make operating decisions. We believe this non-GAAP financial measures provide consistent and comparable measure to help investors understand our current and future operating performance. Non-GAAP financial measures mainly exclude the effect of stock based compensation, a motivation of purchase in tangible restructuring expenses and impairment of good will and long live assets. On a non-GAAP basis the operating loss for the first quarter was $1.4 million compared to an operating loss of $2.1 million in the same quarter last year. Non-GAAP operating profit for the previous quarter was $8.9 million. Non-GAAP loss was $2.4 million or $0.05 per diluted share compared to a non-GAAP loss of $3.7 million or $0.09 per diluted share in the same quarter last year.

Non-GAAP net income for the previous quarter was $7 million or income of $0.16 per diluted share. EBITDA for the first quarter of 2016 was $537,000 compared to EBITDA of $180,000 in the same quarter last year. EBITDA in the previous quarter was $11.1 million. As of March 31st 2016 our total cash and equivalence including repatriated cash net of short term bonds, loans and credit was $122.1 million an increase of $1.2 million from the previous quarter. During the quarter we received about $15 million on the rights offering. The remainder of the possible received during April 2016. DSOs which exclude receivables and revenues of our service segment increased to 137 days compared to 100 days in the previous quarter. We received significant late payments during April.

Our shareholders' equity at the end of the quarter totaled to about $191 million compared with $178 million in the end of the fourth quarter. That conclude our financial review for the quarter and I would like now to turn the call over back to Yona. Yona?

Yona Ovadia

Thank you, Adi. To summarize, we had a good first quarter and we are on track to meet our management objectives for the year which are full year revenues in the range of $290 million to $310 million and an EBITDA of approximately $18 million to $24 million. Looking forward I'm confident that we can leverage our capabilities and translate our strategic focus areas into profitable growth for the company. So that concludes our review and I would like now to open the floor for questions. Operator please.

Question-and-Answer Session

Operator

Thank you, [Operator Instructions] the first question's from [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you for the call. Your gross profit is positive, yet your net income is loss, negative, what your company's planning to do in order to change the situation of this company that we see year after year 2014, 2015, loss after loss. What are you planning to do that this company the net income finally will be profit. Thank you.

Dov Baharav

It's Dov. I will address to our strategy how to increase the shareholders' valuation which is based on the net profit. In order to generate net profit we adopted a strategy that will increase profitable revenue. We are now focusing on mobility on broadband for the masses on cellular backhaul and rural area a broadband internet projects. We believe that these -- and of course we have substantial activity in China. These five strategic focuses will generate and start generating already growth for the Company. And not only growth but profitable growth.

Our unique offering in In-Flight Connectivity of the dual band and antenna of Ka/Ku and the fastest modem in the industry of that will get to 400 megabit per second that will generate we’ve already agreements and we expected to be substantial growth factor for our activity. The same is the activity in Peru. The same is the contract that we achieved in China. And the contract and the activities that we are initiating of full solution end-to-end in certain areas for consumer broadband.

So, we believe that the current business which will continue supported by the growth engines will generate revenue and profit. So we expect to see from loss to profit. More than that, we are changing the way that managers in the Company are referring to achieving profitability in the project. All that measurement system in the Company has changed. The way that we measure the success of the people is changed, so all the Company’s focus on achieving profitability. So we believe that the internal activity of the measuring and pursuing profitability and EBIT and the external one of the growth engine, profitable growth engine will bring the Company to profitability and positive net income.

Operator

The next question is from Gunther Karger of Discovery Group. Please go ahead.

Gunther Karger

I have two questions. The first question has to do with China. What is the status if any change in the China rolling start rail business and since the announcement nothing has been heard? And the second question is if any gain in market share worldwide moving from terrestrial to satellite based cellular backhaul?

Dov Baharav

So regarding China, we announced two substantial wins I think it was Q4, one with China Satcom, one with Synertone with substantial amount of money. The revenue will be actually included in the second half of the year. That refers to satellite that will be launched and that’s based on the agreement that we have with the customer. That is the plan. But in the meantime we see by far more opportunities in China, not only in fixed satellite but also in mobility.

We announced the MOU with CRC, the largest trains’ manufacturer in the world that chose us to be their partner for satellite communication. And we see other opportunities in China. So we are focusing on it. And we will see the growth in the revenue starting the second half of 2016. And we believe that that can be substantial growth engine move forward.

What was the second? Can you please repeat the second question?

Gunther Karger

The second question was, is there any -- do you see any movement in market share from terrestrial based cellular backhaul to satellite based cellular backhaul?

Dov Baharav

Well, yes. I would say…

Yona Ovadia

Dov, let me take this one. This is Yona. I think the answer will be as follows. I don’t know that there is a movement for market share but I think that market is growing, because of the fact that the price of capacity is going down and because of the fact that technology such as the X-Architecture that give us things to the table allow comparable user experience. I think that the market is growing. And as part of that the satellite portion is also growing. So we do very much see potential because there is more demand and more people that consume more as the prices go lower and as technology enables them.

So we have good user experience, global market growth, and we not only hope to benefit, we already benefit from that because our share also is growing as part of it. So, it's not that it's moving, it's growing, and we started to grow a bit and we hope to continue.

Gunther Karger

Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Yona Ovadia to go ahead with his concluding 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 1-888-782-4291, in Israel please call 03-925-5901 internationally please call 972-3-925-5901. Mr. Ovadia would you like to make your concluding statement.

Yona Ovadia

I would like to thank all of you for joining us on this call and for your time and attention, I hope to see you soon on our next call, thank you very much and have a great day.

Operator

Thank you. This concludes Gilat's first quarter 2016 results conference call. Thank you for your participation you may go ahead and disconnect.

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