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Gilat Satellite Networks (NASDAQ:GILT)

Q22012 Earnings Call

August 15, 2012 9:30 am ET

Executives

Philip Carlson - Investor Relations, KCSA Strategic Communications

Erez Antebi - Chief Executive Officer

Yaniv Reinhold - Chief Financial Officer

Analysts

James Breen - William Blair

Andrew Uerkwitz - Oppenheimer

Gunther Krager - Discovery Group

Mike Cikos - Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks second quarter 2012 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, August 15, 2012. I would now like to turn the call over to Philip Carlson of KCSA to read the safe harbor statement. Philip, please go ahead.

Philip Carlson

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's second quarter 2012 results conference call. A recording of this call will be available beginning at approximately noon, Eastern Time today, August 15, until August 17, 2012 at noon.

Our earnings press release on the website provides details on accessing the archived call. Investors are urged to read the forward-looking statements in 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 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 and 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 Erez Antebi, Gilat's Chief Executive Officer and Yaniv Reinhold, Chief Financial Officer. Erez, please go ahead.

Erez Antebi

Thank you, Phil, and good day everyone. I would like to begin by providing a high level overview of the second quarter and then offer additional insight on some of the strong progress we have made this quarter. Following my comments, Yaniv will discuss our financial results for the quarter. I will then summarize and open the call for questions.

The second quarter was a solid one for Gilat, a marked improvement over the first quarter of the year and we are optimistic about our prospects going forward. Our financial performance was strong with revenues increasing 11.4% from $76.6 million in the first quarter to $85.3 million this quarter with EBITDA reaching $8.6 million or 10.1% of revenue.

Operationally, our organizational changes continue to bear fruit as we work to improve efficiencies and reduce operational expenses. On a non-GAAP basis, our operating income was $4.8 million in the second quarter of 2012 compared to an operating loss of $0.3 million in the first quarter of this year. I am also pleased to report that I the second quarter we generated cash from operations o f$3.2 million. Yaniv will provide you with more details on our quarterly results later in the call.

I will now discuss some of our business highlights for the quarter, starting with our commercial division. Our commercial division continued to perform well and revenues are on track for the year. We have seen in this quarter a stronger than expected rate of implementation at NBN Co in Australia.

As a reminder, last year we signed and an agreement with Optus Networks to provide hubs, VSATs, site installation and network operation for the Australian government, NBN Co interim satellite service. We are pleased to announce that Gilat has successfully completed the deployment of the first 10,000 VSATs.

The project is moving forward, ahead of schedule as increased demand is driving a faster than expected network rollout. As such, while the initial commitment was for a network of 20,000 VSATs, the network may grow to as much as 48,000 sites by late 2015. Our customer is very satisfied with the implementations and support it has received to date.

Building on previous success and credibility in various market segments, we continued to focus our efforts on supplying products and solutions in vertical markets such as oil and gas and cellular. We also continue to provide both new and existing customers with enterprise solutions.

For example, in the Americas, we continue to expand upon our relationship with Cable and Wireless Panama, Panama's largest telecommunications operator. Cable and Wireless has been our partner since 2005 and they recently signed a network expansion that includes solar powered VSAT as well as installation maintenance and operation of the SkyEdge II Hub equipment and Voice over IP gateway.

Another example comes from Argentina's Servicio Satelital which chose our SkyEdge II Hub and broadband satellite platform to upgrade its existing network and provide additional support to hundreds of new sites with broadband internet and data connectivity.

Our KA-band initiative are also well underway and our pipeline growing nicely. These initiatives are starting to take form and we expect to see KA revenue growth from 2013 onwards. In preparation for the planned KA satellite launches in the second half of this year and beyond, we continue to make great strides technologically with our VSAT equipment.

In fact, our SkyEdge II-c Aries VSAT was recently awarded the renowned Bronze A' Design Award. The SkyEdge II-c is our newly developed KA-band consumer terminal which will be used to support SES Broadband satellite-based Internet service as well as other KA satellite services upon deployment. In fact, we are seeing market interest in other applications of KA-band in addition to consumer market such as IP tracking and Satellite-on-the-Move.

With our highly advanced communications equipment and versatile technology enabling multiple applications, coupled with our flexibility in meeting both technical and business requirements and our strong pipeline, we believer we are well positioned to take advantage of the KA-band satellite growth going forward.

As we turn our attention to our defense division, I am pleased to inform you that we are beginning to see more traction in this area. While I am not able to delve into the specific contracts or programs we are targeting, I can say that our pipeline is growing and we are pursing both U.S. and international programs.

We saw good traction in our Satellite-on-the-Move business this quarter with initial sales to new customers of our low profile antennas in Russia, China, Israel and Mexico. We continue to work the front for these markets and expect follow on orders to these initial implementations.

In addition to these sales, some of you may have seen our low profile antenna integrated on the U.S. Army all terrain vehicles in an article published in SatNews Daily dated August 1. The article discusses the mission command on the move as systems being deployed for the U.S. Army 2nd Infantry Division in South Korea.

We also continued to see substantial interest and significant prospects within the airborne and maritime verticals for our Wavestream products. In the airborne vertical, we received Commercial FAA Certification for our Wavestream Aerostream Transceiver earlier this year. In addition we closed several deals with leading system integrators who provide satellite broadband services to commercial airlines.

We are integrating our Wavestream amplifiers as part of their solutions for in-flight satellite connectivity. We see the airborne market as an attractive opportunity for Gilat. Airlines today are looking to higher bandwidth solutions to add to the passenger experience and to generate additional revenues and we are well positioned to provide the necessary technology for these applications.

To give you a feel for the market, In-Stat Research estimates that the total number of broadband enabled planes in 2011 was 1,835. They forecast that in-flight Wi-Fi broadband deployments will surpass 6,100 planes worldwide in 2015.

In another segment of the airborne market, we introduced last week our integrated solutions for the UAV market. The lightweight miniature dimensions of our solution addresses the defense and military market's critical need to broadcast high broadband data from increasingly smaller UAVs. In order to do so, those UAVs can only carry the smallest, lightest and lowest possible power consuming communications solution.

In the maritime vertical, we recently announced a significant win for our Wavestream product as our Ku-band solid state power amplifiers were selected by Harris CapRock Communications for integration into end-to-end VSAT antenna systems onboard Royal Caribbean cruise ships.

In addition to theses successes Wavestream continues to provide amplifiers for major U.S. systems integrator who is providing mobile and transportable satellite ground communications systems as part of a program of record.

These wins help to cement our reputation of being able to create and deliver products that are designed and tested to mix strenuous requirements while maintaining constant connectivity.

During this quarter, we have made good progress towards integrating the operational systems at Wavestream and RaySat antenna systems into Gilat systems. We expect the full integration to be completed during 2013. Upon completion, we expect all of our business divisions to leverage the streamline which will facilitate revenue growth and a quick transit as we increase our efficiencies across the board.

Finally, we look at our services division. Our services business in Columbia and Peru continue to perform driven by the ongoing implementation of the school project in Columbia we secured in early 2012 and the Compartel contract extension. In addition, we have successfully finalized the installation phase of FITEL 10 in Peru.

Spacenet is continuing to gain credence for its Connect Series, a set of tiered managed network services introduced early in the quarter. The series has already secured seven new customer wins including Gannett, the owner of USA Today, Hurricane, J Crew and Nordstrom retail chain and is continuing to headway with several new prospective customers coming onboard in the coming quarter.

Our pipeline for the second half of the year is solid and we are encouraged by the deals that we have seen so far. That concludes our business overview.

I would now like to turn the call over to Yaniv Reinhold, our Chief Financial Officer who will review the financials. Yaniv, please?

Yaniv Reinhold

Thanks, Erez, and hello everyone. I would like to remind everyone that our financial results are presented both on a GAAP and a non-GAAP basis. The GAAP financial results include the effect of non-cash stock option expenses as per ASC 718, one-time other income, expenses related to our M&A activities during 2010 and 2011, and the motivation of intangible assets resulting from the purchase price allocation. The reconciliation table in our press release highlights this data and our non-GAAP information is presented excluding these items.

Now, moving to your financial highlights for the second quarter of 2012. Revenues for the second quarter of 2012 were $85.3 million, compared to $81.7 million for the same period in 2011. The increase is primarily due to a strong quarter for our commercial division driven by the higher level of revenues from the NBN project in Australia.

Our gross margin this quarter was approximately 32% compared to approximately 36% in the second quarter of 2011. On a non-GAAP basis our gross margin was approximately 34% compared to approximately 38% in the comparable period last year.

As we have mentioned in the past, our gross margin is affected quarter-to-quarter by the regions in which we operate and the types of deals we recognize. The decrease in gross margin this quarter was primarily due to the mixture of deals involving system integration that were closed by our commercial division. We expect the gross margin to improve over time.

Gross R&D expenses were $8.4 million this quarter compared to $8.9 million in the same quarter of 2011. The decrease in R&D expenses reflects our integration effort in growing synergies within the divisions. We are continuing to invest substantial part in R&D in support of our strategy in KA and defense.

Selling and marketing expenses for the quarter decreased to $9.6 million compared to $12.1 million for the same quarter last year. The decrease is attributed to a lower level of fixed expenses and variable expenses associated with deals we secured this quarter.

General and administrative expenses for the quarter decreased to $8.3 million compared to $9.5 million for the same quarter last year. The decrease primarily came from continued streamlining of processes connected to our continued integration of Wavestream (inaudible) as well as from tighter budget control and reduction of expenses in certain areas.

Our GAAP operating income for the quarter was $2.4 million compared to operating income of $0.2 million in the second quarter of 2011. On the non-GAAP basis, operating income was $4.8 million in the second quarter of 2012 compared to an operating income of $2.7 million in the comparable quarter of 2011.

GAAP net income for the quarter was $0.9 million or $0.02 per diluted share similar to the net income of $0.9 million or $0.02 per diluted share in the same quarter of 2011. On a non-GAAP basis net income for the quarter was $3.2 million or $0.07 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 $58.2 million representing a DSO of 61 days. This will fluctuate with revenue and the terms and conditions of deals closed.

As of June 30, 2012, our total cash balances including restricted cash net of short-term bank credit amounted to $62 million. Our total debt was $64.9 million which was comprised mostly of debt in the amount of $36 million to be paid over the next 9 years. Our shareholder’s equity at the end of the quarter totaled $259.7 million.

This concludes our financial review for the quarter, and I would now 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 would like to reiterate our view of the second quarter performance and our prospects going forward. As I mentioned previously, our performance in the second quarter was solid and marked improvement both over the first quarter of 2012 and over the second quarter of 2011 in terms of revenue growth, operating income and cash generation.

We continue to improve efficiencies and reduce operational expenses with tight spending controls in place. Our commercial division is doing well and we expect this trend to continue throughout the second half of the year and beyond.

In addition we are optimistic from the traction we are seeing in the defense division and the solid pipeline they have developed. We are confident about our prospects going forward, especially given the fact that historically the second half of the year is typically the strongest period for Gilat. These factors give us confidence that we will achieve our stated objectives for 2012.

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

Question-and-Answer Session

Operator

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

James Breen - William Blair

Just a couple of questions. Just about the business and the margins going forward. Based on the guidance for EBITDA for the year, it seems that you are going to see some margin expansion in the back half. Can you just talk about what feeds into that? Is it a combination of better revenues in conjunction with what seems like R&D, expense were down a bit and is that something to think about?

Erez Antebi

I think what we would expect to see in the second half of the year, we probably expect to see typically in the second half, we will see higher revenues that we see in the first half of the year. We would expect on the expense that we would expect to see continue to work again on the integration and efficiencies. So I would expect to see some improvements there as well.

James Breen - William Blair

Okay, and then, generally in the third quarter, do you see a rebound from the department of defense of how Wavestream sells just because it’s the year end for the government?

Erez Antebi

While I don’t want to comment specifically as a third quarter versus the fourth or something like that but I think, in general, you have to bear in mind in the food chain, when the government will typically buy from proved programs of record from system integrators and those system integrators will flow orders onto us. We have one site where government did not say and therefore we have a little less visibility on both timing and on the exact amount.

James Breen - William Blair

Okay, great, and then, just lastly. On the R&D, it seems like R&D expenses were down a little bit. Do you think this will continue or is it more seasonal?

Erez Antebi

I don’t think there is much seasonality here. It's really like Yaniv said during our call. We are doing some efforts to integrate both the RaySat antenna systems and Wavestream and Gilat R&D and in doing that, we are achieving efficiencies.

Operator

The next question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Andrew Uerkwitz - Oppenheimer

Just two quick ones here. First, you seem to be incrementally more positive on the defense side, and obviously so but how do you weight that against some of the potential budget pressures that the U.S. could see by the end of the year?

Erez Antebi

Well, there is no doubt that the overall defense budgets are under pressure from the government and we have seen reductions in those but I think that we have both heard from secretary of defense and we have seen that in the various provision that one of the areas that is probably not going to hurt and actually it is planned to be increased as everything that’s related to ISR, Intelligent Surveillance and Reconnaissance and everything that has to do with Special Forces.

That is the target area that where we fit into the defense programs. So I think that actually as the military moves more funding into those areas we should see actually an improvement over time.

Andrew Uerkwitz - Oppenheimer

Great, thank you, that’s helpful. Around the Australia deal, you shipped 10,000 satellites, I think, as the press release indicated, and that’s a long term deal. From a revenue perspective, or contract perspective, can I do a simple 10,000 divided by number of expected satellites times the expected deal size, that’s where you guys booked or how do I look at that deal going forward?

Erez Antebi

Well, it's probably a bit more complex than that. I think just to correct you a bit. The deal we have done with NBN is where we provide Hubs and VSATs, not the satellites themselves, of course, but the CPE terminals and we do also do the installation of the CPEs and we also do the network operation.

And what we have announced is that we have achieved the milestone of installing 10,000 sites and obviously that network is continuing to grow. Now, we have said in the past, that we would expect that the network could potentially grow up to 48,000 sites and that’s over multiple years that should or could present a revenue potential to Gilat of $120 million.

So this is not exactly linear but I think you can do perhaps some extrapolation from that.

Operator

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

Gunther Krager - Discovery Group

The question has to do with the overall world economics as it evolves, it looks like it is so far the weak, would it be a fair statement to make that the offerings that Gilat has offered an opportunity for increased efficiencies therefore not being impacted that much, in fact not even being improved because of the overall worldwide economic situation.

Erez Antebi

I don’t think I would go so far as to say that. I think that the offerings that we have, in our commercial business they present an alternative to terrestrial broadband where that does not exist and therefore in our commercial business, we are seeing most of our revenues coming from more developing areas of the world, Latin America, Asia, (inaudible) et cetera which have I think, a very robust economy.

On the defense side, like I said, its our main technological advantage is mostly around a big technical advantage or technological advantage over our competition in Satellite-on-the-Move which, as I mentioned previously is actually an area of the U.S. defense budget that is not being hurt and perhaps even growing.

So I wouldn’t tie it to specifically that efficiencies of some kind in our equipment are going to do better because of economic downturn worldwide. I would look at it a bit different.

Operator

Your next question is from Mike Cikos of Sidoti & Company. Please go ahead.

Mike Cikos - Sidoti & Company

Just a question, wanted to follow up on the NBN. So you delivered 10,000 VSATs at this point? And you are saying that could grow to 48,000 sites which would provide an opportunity of about $120 million for you guys. Would the $120 million then be received by, I think in the press release you said that 48,000 sites would be deployed by late 2015, would you see the $120 million by then as well? Or would it come in later based on service or maintenance?

Erez Antebi

No, I think, if the network were to grow to that size and there is no assurance that it will but if it were to grow to that size I would expect that the major portion of the $120 million we would be able to recognize that by around 2015 but it would be gradual and rate is not predetermined and we can't really forecast that.

Mike Cikos - Sidoti & Company

And at this point, you have deployed 10,000 of the VSATs which is why we saw the stronger than expected implementation for NBN and commercial in the second quarter. What makes you believe that the commercial will continue to do well in the back half of 2012?

Erez Antebi

Well, historically, the second half of the year was always stronger for Gilat and we are looking at the pipeline of deals that we are seeing that we are working on right now. So both of these together make us feel that the second half should be stronger.

Mike Cikos - Sidoti & Company

Can you provide any more color on the pipeline that you are currently looking at?

Erez Antebi

I am afraid I can't.

Mike Cikos - Sidoti & Company

Okay, and then just one more question on the operating expenses. Are you looking to reduce your cost further from where you are now or is it more that they will just be a smaller percentage of revenue as sales continue to grow?

Erez Antebi

We are looking to reduce this. I mean, first of all, you bear in mind that some of the operational costs are fixed and some are variable. We are looking to reduce our fixed costs to the extent that we can without hurting the business of course and we are looking to do that further. Variable cost will behave according to revenues. It is all related to the integration of the various businesses that we have bought. The RaySat antenna systems and Wavestream and the more we integrate, I believe we can achieve more synergies and reduce our costs as we go into 2013.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with a 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 U.S., please call 1-877-456-0009. In Israel, please call 03-925-5921. Internationally, please call 972-3925-5921.

Mr. Antebi, would you like to make a concluding statement?

Erez Antebi

Thank you, operator. I would just like to thank everyone for your time today. We appreciate your joining us on the call. I hope we were able to give you a good understanding of the results at hand. We appreciate your continuous support. Thank you and good afternoon.

Operator

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

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