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Gilat Satellite Networks Ltd. (NASDAQ:GILT)

Q1 2012 Earnings Conference Call

May 23, 2012, 09:30 a.m. ET


Rob Fink - IR, KCSA

Erez Antebi - CEO

Yaniv Reinhold - CFO


Andrew Uerkwitz - Oppenheimer

Louis DiPalma - William Blair


Welcome to the Gilat Satellite Networks First Quarter 2012 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded May 23, 2012.

I’d now like to turn the call over to Rob Fink of KCSA to read the Safe Harbor statement. Please go ahead.

Rob Fink

Thank you. Good morning and good afternoon everyone. Thank you for joining today for Gilat’s first quarter 2012 results conference call. A recording of this call will be available beginning at approximately Eastern Time today at May 23, and run until May 25, 2012 at noon. Gilat’s earnings press release and website provide details on access of archived call.

Investors are urged to read the forward-looking statements in the company’s earnings releases which state that statements made on this earnings call which are not historical fact maybe 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 contain views 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 that are as a result of new information, future events or otherwise, company expressly disclaims any obligation to do so. More detailed information about the risk factors can be found in the company’s report filed with the Securities and Exchange Commission.

With that said on the call today is Erez Antebi, Gilat’s CEO; and Yaniv Reinhold, Chief Financial Officer. I’d now like to turn the call over to Erez. Erez the call is yours.

Erez Antebi

Thank you, Rob. Good day everyone. I’d like to begin by providing a high level overview of the first quarter and then offer a more detail review of some of the business initiatives we are focusing on. I will then turn the call over to Yaniv, who will walk you through the quarter’s financial results; I’ll then summarize and open the call for questions.

The first quarter was highlighted by several key contract win, particularly in our commercial business. our financial performance which was somewhat softer this quarter was impacted by the implementation timing of specific contract in our Services division as well as lower than expected revenues in our Defense business. Despite the shortfall, we remain confident in our business and are reaffirming our annual management objective.

Revenues in the first quarter decreased to $76.6 million compared to $80 million in the same period last year. On a non-GAAP basis, our operating loss was $0.3 million in the first quarter of 2012 compared to an operating income of $3.9 million in the comparable quarter of 2011. Yaniv will provide you with more details on our quarterly results later in the call.

Operationally, we continue to implement the organizational changes we discussed on our last call which separated our business into three divisions; Commercial, Defense and Services. Within these three business divisions, we continue to work to improve efficiencies and reduce operational expenses. As an example, in the Defense division we continue to integrate Wavestream and VSAT antenna systems into Gilat. By consolidating operational systems and IT infrastructure, we believe we can recognize further synergies within the business. We expect overtime that leveraging this structure will allow us to better deploy resources and drive revenue growth into 2012 and beyond.

With this as a backdrop, I’d like to discuss some of our business highlight starting with our Commercial division. This business has continued to perform well with several important contract win since the beginning of the year. The first one I’d like to talk about is O3b network, as this simplifies our positioning within the growing Ka-band market. As we advanced with this partnership we look forward to paving the way for commercialization of Ka-band as a strong alternative for fiber technology and we expect we ought to be a leader in this next generation VSAT technology.

More recently, we announced the completion of a major project for Rostelecom’s RTComm for the deployment of over 1600 sites for satellite web connectivity to support Russia’s Presidential election. While we have a major contract with RTComm for Ka-band satellite equipment over the coming years this arrangement shows the breadth of our capabilities and depth of pure partnership.

Turning our attention to Latin America. We continue to experience strong business in this region, in Mexico for example, the largest commercial television broadcaster Grupo Televisa has selected our SkyEdge II VSAT network for their private communication network across Mexico. Gilat network will enable the transmission of multicast content such as ads and public messages to remote station which is then inserted to the regional broadcast.

In Southeast Asia we announced the signing of a contract with a local Tier 1 mobile network operator for over 100 bytes supporting their 2G and 3G cellular backhaul network. We also signed an agreement with JSC NURSAT, one of Kazakhstan’s leading satellite service provider for the deployment of a broadband IP network for their corporate customer base.

A strong contributor to the commercial division performance this quarter is our ongoing NBN project in Australia. As of to-date we have 1200 installed and operational across Australia with the local Gilat team managing the remote installation and network operation. The project is progressing very well with an average of 1500 sites deployed per month.

As a reminder in May 2011 we announced that Gilat will provide (inaudible) a turnkey VSAT network as part of the NBN first released satellite service with the potential to reach a deal size of $120 million over a five year period.

Lastly we are very pleased to announce in March our new SkyEdge II Accent dual waveform VSAT. Its ability to utilize dual mode SCPC and TDMA is a significant advantage for operators looking for flexibility in deploying services. The Accent high throughput capabilities make it an excellent solution for 3G and 4G cellular backhaul or other high capacity application. Our solution for O3b is based on Accent and is a testament to our leadership and innovation in this industry.

Now I will discuss our Defense division. As I mentioned at the beginning of the call, Defense spending has not picked up yet. Having said that we continue to see strong interest and long-term revenue prospects for satellite broadband applications in the Defense market, specifically for on-the-move communications and airborne solution, both markets in which we believe Gilat holds a significant technological advantage. As an example, this quarter we signed two significant airborne contract which is a major step forward in positioning ourselves as a solid player in this field.

In addition, we continue to prudently invest in the business with enhancement through our product line. As an example, we recently announced a new product the 80 watt X-band Matchbox solid state power amplifier. Among this improvements from other amplifiers, the 80 watt X-band product offers both efficiency and performance that make it particularly well suited for mobile SATCOM, flyaway and VSAT satellite communication system.

Finally we look at our Services business. We continue to make inroads with the implementation of our major school projects in Columbia. This combined with our implementation of the Compartel contract extension is driving our Services business.

In parallel Spacenet is continuing its expansion in the managed network services marketplace. As part of this expansion, Spacenet has recently introduced Connect Series, a set of tiered managed network services for distinct level of coverage packed according to customers need for connectivity, for active management and security. This is a strong step in differentiating Spacenet in the enterprise and government marketplace and solidifying its position as a leader in managed network services. Spacenet brought on some new customers in the first quarter that will utilize the new managed services; some of the new customers are (inaudible).

That concludes our business overview. I’d now like to turn the call over to Yaniv Reinhold our CFO who will review the financials. Yaniv please.

Yaniv Reinhold

Thanks Erez and hello everyone. I’d 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 non-cash stock option expenses as per ASC 718, one-time operating income, expenses related to our M&A activities during 2010 from 2011, and the motivation of intangible assets resulting from the purchase price allocation. The consolidation table in our press release highlighted this data and our non-GAAP information is presented excluding these items.

Now moving to your financial highlights for the first quarter of 2012. Revenues for the first quarter of 2012 were $76.6 million, compared to $80.0 million for the same period in 2011. As Erez stated this decline is primarily attributable to a lower level of revenue contribution from our Services and Defense division. The decrease was partially offset by a higher level of revenues from our commercial segment reflecting recent wins.

Our gross margin this quarter was approximately 32% compared to approximately 36% in the first quarter of 2011. On a non-GAAP basis gross margin reached approximately 34% compared to approximately 39% in the comparable period last year.

As we mentioned from time-to-time, our gross margin is affected quarter-to-quarter by the region in which we operate and the types of deals we recognized. The decrease in our gross margin this quarter was primarily due to lower level of revenues from our Defense division that usually carried a higher level of margins.

Gross R&D expenses were $8.2 million this quarter compared to $8.9 million in the same quarter of 2011. Our R&D level of expenses reflects our continuing effort of pursuing our strategy in Ka and [VSAT technology].

Selling, marketing, general and administrative expenses for the quarter remained relatively constant at $19.1 million compared to $19.7 million for the same quarter last year. Our GAAP operating loss for the quarter was $2.6 million compared to an operating income of $0.8 million in the first quarter of 2011. On the non-GAAP basis, operating loss was $0.3 million in the first quarter of 2012 compared to an operating income of $3.9 million in the comparable quarter of 2011. The reduction in our operating income was a result of the previously mentioned lower revenue from our Defense division, which typically carries higher margins.

GAAP net loss for the quarter was $3.1 million or $0.07 per diluted share compared to net income of $0.4 million or $0.01 per diluted share in the same quarter of 2011. On a non-GAAP basis net loss for the quarter was $0.8 million or $0.02 per diluted share compared to net income of $2.6 million or $0.06 per diluted share in the same quarter of 2011.

Our trade receivables at the end of the quarter were $59.7 million representing a DSO of approximately 70 days. This slight increase is mainly due to delay in collection from several of our long standing customers and is mostly being collected by now.

As of March 31, 2012, our total cash balances including restricted cash net of short-term bank credit amounted to $50.7 million. Our total debt was $55.4 million which comprised mostly of long-term debt in the amount of $36 million to be paid over the next 9 years. Also of note, during the second quarter of 2012, we received a $10 million loan from a leading U.S. financial institution. The loan will be paid over three years with an interest rate of [0.25%]. This loan was taken to support our working capital needs and further growth objectives of the company. Our shareholder’s equity at the end of the quarter totaled $258.4 million.

This concludes the financial review for the quarter, and now I’d like to turn the call back to Erez. Erez?

Erez Antebi

Thank you, Yaniv. Before we conclude today’s call and turn to your question, I’d like to reiterate our long-term view of the market. As I said in our previous call, Gilat is focused on two main growth engines, Ka-band broadband services and Satellite-on-the-Move applications for the Defense industry. We believe both of these markets present long-term growth prospect. Although, not a significant revenue contributor in 2012, we continue to see Ka-band technology as one of the biggest drivers of growth in the VSAT industry for years to come. We strategically invested resources to position the company to take advantage of this growing opportunity.

To highlight this, market analyst predict that over the next two years the number of dedicated Ka-band satellite launches will triple with more than 25 new launches currently planed through 2014. We believe we are well positioned to take advantage of the expected market demand for Ka-band ground infrastructure and [TP] associated with some of these launches.

Looking at the Defense market we continue to see launcher prospects and the growing needs of Defense and security institutions for Broadband-on-the-Move application primarily for land and airborne uses. Again we believe that our differentiated product offering positions us well in this market.

That concludes our review we would now like to open the floor for question. Operator please.

Question-and-Answer Session


Thank you. (Operator Instructions) The first question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Andrew Uerkwitz - Oppenheimer

Just a couple of quick questions here. Could you give us a little bit more detail on the gross margin, why it was down compared to prior quarters?

Erez Antebi

As we said the decrease in gross margin was down mainly because of the mix of revenue lower than anticipated revenues from the Defense division which most of the time carried higher margins, that changes the mix and therefore our gross margin went down.

Andrew Uerkwitz - Oppenheimer

What’s your expectation here that margins are going to get better or is it going to get back to the prior mix?

Erez Antebi

Yes, we expect when the revenue s of Defense will go up the gross margin will go up together with it and it will change for the rest of it.

Andrew Uerkwitz - Oppenheimer

Sure. And then from the OpEx perspective, I mean it looks like you gave in the guidance to squeeze some savings out in the first quarter. Is the first quarter, is how you view your run rate going forward or do you think there is still some more synergies and get some savings going forward?

Erez Antebi

We still continue to work on savings and efficiencies in the organization or we expect to go even better this year.

Andrew Uerkwitz - Oppenheimer

Okay. And just generally from a higher level perspective, I know it's not material but as you guys start bidding on projects and what not. I mean how do you guys view the competitive landscape more competitive than your historical land satellite business more competitive less competitive. How you look at that?

Erez Antebi

I think in general everything is competitive and it doesn’t get much easier that said. I think the competitive environment goes different between our different sectors. In the commercial segment that we operate in, we are basically a mature market with our competition that we are used to competing with for quite a few years such as (inaudible) and such. In the Ka-band this is a very new market, there has not been many deals in Ka and we have announced some recent win on that as you are aware like with [VSAT] and RTComm where we proved to be proved to be very competitive.

In the Defense segment our positioning is very different, here I think we have a significant technological advantage versus the competitor that we have there such as antenna manufacturers, other amplifier manufacturers, (inaudible) manufacturers and so on. And I think that in itself gives a different been to the way we handle the competition and why we believe we are better positioned. So, different answers to different segment.


The next question is from James Breen of William Blair. Please go ahead.

Louis DiPalma - William Blair

This is Louis DiPalma on behalf of Jim Breen. At the beginning of the call you indicated that you expect that you will still be able to achieve the company’s full-year financial target. Does that apply to both your revenue and your full-year margin target?

Erez Antebi

Yes, it does.

Louis DiPalma - William Blair

Great. And I was wondering if you could provide more commentary on the Department of Defense weakness. Do you think that weakness is more longer term issue with government spending or have you already witnessed a rebound considering that you are able to reiterate your full-year guidance?

Erez Antebi

First I’d say, I know that we didn’t say, in our management objectives for the full-year we didn’t specify which part will constitute what out of the total blend. We reiterate into total blend and not any specific part of it. Regarding Department of Defense, actual spending has not yet picked up and hence the weakness that we indicated in our Defense revenues in the first quarter but longer term we see that in spite and this I take this from comments that were made by the Secretary of Defense and by other. We see that in spite of the cut in the overall DoD spending, there is an increase in spending associated with ISI, Intelligence, Surveillance, on-the-move commutation, things like that. And we provide into that segment of the DoD, so definitely longer term our expectation is that DoD spending will pick up in the relevant areas and programs that we require into. Even though in general DoD spending will probably go down.

Louis DiPalma - William Blair

Great. And I was wondering if you could comment on your backlog figure, I believe last quarter you indicated that your backlog finished up 14% year-over-year?

Erez Antebi

We indicate our backlog number only at the end of the year.

Louis DiPalma - William Blair

Okay. Great. And in terms of the commercial vertical, can you talk some of your contract wins in that space, because that segment appears to be doing very well.

Erez Antebi

I couldn’t repeat what we said about the contract win that we announced, not sure exactly.

Louis DiPalma - William Blair

Can you talk about like pricing been increasing on those contract wins and are you seeing these contracts across all of the geographies or are they concentrated in a particular area?

Erez Antebi

We gave example of contract wins from Asia, from South America, from other geographies; it's not from Russia so we see business in all of the geographies that we operate in. I’d say in terms of pricing, I think over a period of many years, there is of course like anything else in cell communication there is a steady but not very fast decline in pricing which we match with continuous work on reducing their cost to maintain our margins.


(Operator Instructions) There are no further questions at this time. I’d ask Mr. Erez Antebi to go ahead with his closing statement. I’d like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In U.S. please call 1-888-295-2634. In Israel please call 03-925-5921. Internationally please call 972-3925-5921. Mr. Antebi please go ahead with your concluding statement.

Erez Antebi

I actually gave the concluding statement before the Q&A session. So, I’d just like to thank you all for dialing-in, listening to the call and thank you for your questions. And that said thank you very much and good bye.


Thank you. This concludes the Gilat Satellite Networks first quarter 2012 results conference call. Thank you for your participation, you may go ahead and disconnect.

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