Gilat Satellite Networks Ltd. (NASDAQ:GILT)
Q2 2014 Earnings Conference Call
August 13, 2014 9:00 am ET
Erez Antebi – Chief Executive Officer
Yaniv Reinhold – Chief Financial Officer
Gunther Karger – Discovery Group
Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Second Quarter 2014 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. For operator assistance during the conference, please press star, zero. As a reminder, this conference is being recorded August 13, 2014.
I would now like to turn the call over to Philip Carlson of KCSA to read the Safe Harbor statement. Philip, please go ahead.
Good morning and good afternoon everyone. Thank you for joining us today for Gilat’s second quarter results conference call. A recording of this call will be available beginning at approximately noon Eastern daylight time today, August 13 until August 15 at noon. Our earnings press release and website provide 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 fact 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.
With that said, on the call today is Erez Antebi, Gilat’s Chief Executive Officer, and Yaniv Reinhold, Chief Financial Officer. Erez, please go ahead.
Thank you, Phil, and good day everyone. I would like to begin by providing a high level overview of the second quarter results and then discuss the business. Following my comments, Yaniv will discuss our financial results. I will then summarize and open the call for questions.
Our revenues for the second quarter of 2014 were $54.1 million compared to $50.9 million in the first quarter of 2014. The revenue increase is attributable to our three divisions which have all performed better in the first quarter. We are continuing to see the results of the cost-cutting efforts implemented last year. Our commercial and defense divisions improved their profitability when compared to the first quarter of 2014; consequently, our non-GAAP operating income increased to $1.5 million in the second quarter compared to $0.5 million in the first quarter of 2014. GAAP operating loss for the second quarter of 2014 was $0.5 million as compared to an operating loss of $1.5 million in the first quarter of 2014.
Our EBITDA also improved to $3.9 million in the second quarter compared to $2.8 million in the first quarter of 2014. As we have mentioned before, the second half of 2014 should show progressive improvement and end with a strong fourth quarter. Management reaffirms the 2014 objectives for annual revenues of $240 million to $245 million and EBITDA margin levels of approximately 9%.
I will now discuss some of our business highlights for the quarter. Let’s start with the commercial division. Addressing the strategic market for high throughput satellites and Ka- band, which provides broadband access to consumers and businesses, we signed two additional internet service providers in Europe for the SES broadband service network. One of these ISPs is Swisscom, the leading teleco operator in Switzerland. Swisscom is our first ISP in Switzerland. We are happy to see the distribution channels for the Ka-band services continuing to expand. We also received our first orders for VSATs for use with the IPSTAR satellite in Indonesia with Thaicom. We previously announced an agreement with IPSTAR last year and announced the commencement of service earlier this year. We have started some marketing activities and these results are the fruit of this.
We have received an expansion order from (indiscernible), which provides wholesale services to ISPs in Spain over a Ku satellite. The expansion is with our rated SkyEdge II-c product and is targeting residential consumers and small enterprises in suburban regions. The ISP for this expansion is Euskaltel for the Basque region.
In Australia, we are continuing to operate the network and provide services, including field maintenance for the NBN project. At this stage, we do not expect an expansion of the FRSS service to include additional sites.
Looking forward, we see a healthy pipeline of HDS networks that are planned for launch. We are working to be the ground equipment provider for many of these opportunities. A few of these could still be decided in 2014. We intend to continue to pursue the opportunities we see in this market going forward.
Moving to a different market segment, cellular backhaul continues to be an important application in the market. We have awarded a deployment of cellular backhaul networks around the world; for example, one of these is for replacing SCPC modems with our TDMA VSAT in Asia. Another network in the (indiscernible) is to provide backhaul connectivity for CDMA cell in remote regions. These networks currently network 2G and 3G cellular technologies. Going forward, we believe that as data will become a bigger driver for mobile networks, we will see a bigger move to 4G as well.
As we mentioned previously, we launched two products this year relevant for the cellular backhaul market: SkyEdge II-c Capricorn, our newest VSAT, and CellEdge, Gilat’s small cell solution over satellite. We believe that the Capricorn is the fastest TDMA VSAT in the market today, reaching download speeds of up to 200 megabits per second. As more networks move from 2G to 3G to LTE, the need for high speed data grows. Today, we are already seeing customer requirements to connect the LTE base stations with such high speeds. I would like to take a minute and explain why we think that TDMA is so important for LTE data networks.
As mobile subscribers consume more and more data, this has become the majority of the traffic in the network. While the peak of speed continues to grow, the variability of traffic in the link also grows. Some of the time, users may be downloading content at very high speeds; at other times, users are not downloading at all. An SCPC link has a fixed amount of capacity, therefore the link is often not filled and much of the capacity goes to waste. Our Capricorn TDMA VSAT is able to share bandwidth between multiple sites, allocating capacity to the link that has more traffic. The combination of 200 megabit per second capability and TDMA translates into much better economics for the mobile operator when deploying satellite for LTE networks. We believe that with both TDMA and up to 200 megabit per second speeds, Capricorn has a significant advantage over the competition.
In the second quarter, the Capricorn successfully completed tests on the IPSTAR satellite for 4G LTE cellular backhaul traffic. The results were very positive and this strengthens our view that satellite is an excellent solution for providing rapid deployment of LTE to underserved areas. The solution is being tested for LTE 4G cellular backhaul at a Tier 1 operator in East Asia, and we are seeing heightened interest from other mobile operators for this solution.
Our second product, CellEdge, brings many benefits to mobile network operators who need affordable cell coverage in remote areas. As a reminder, CellEdge is a complete turnkey solution in which we have combined the small cell, the VSAT, the energy solution and the infrastructure, all optimized for challenging environments. CellEdge can also be deployed in a very short time, so it is especially valuable when the operator has tight deadlines for deployment. For example, the order we received from a leading mobile operator in Brazil, which I mentioned in last quarter, has already been deployed in a very short time frame considering it included site survey and acquisition, equipment delivery, installation, and activation of the network. This is an excellent validation that we can deliver the solution quickly and successfully to leading mobile network operators.
Let me highlight now some of the enterprise projects for which we have received orders or that we have deployed in the second quarter. We have signed up a new Tier 1 telecom operator in Asia Pacific region for our VSAT network. It is interesting to note that we are also providing this customer hub operations and teleport services as value-added services in addition to the VSATs. Gilat received several projects in Angola for the expansion of SkyEdge and SkyEdge II networks, as well as a new network. The expansions include integrated solutions in addition to the VSATs, such as solar panels and peripheral equipment.
In Latin American, we have expanded our reach to Chile where we were not present. We have installed SkyEdge II-c hub and will supply several hundred VSATs to an operator in Chile. This is an important milestone for Gilat as we were able to replace the competitor’s network in a country where we had not had a presence.
Following the previously announced order of Entel Bolivia, we continue to implement the telecenters project. The network is used for the Bolivian government’s National Digital Inclusion Initiative and operates over the first Bolivian communications satellite, Tupac Kutari 1, which was launched in December 2013.
Now moving to the defense division, the second quarter was a better quarter for our defense division and we continue to see an improved sales pipeline into the future. We believe the defense sector has improved this year compared to 2013 and we are continuing to see more visibility with DoD programs compared to the previous year. Outside of the U.S., we are seeing increased interest in satcomm. In the second quarter of 2014, we were awarded deals in Latin America and in Asia for defense agencies. In Latin America, we are providing the satellite communications to connect a UAV ground control station to the core network. In Asia, the network provides star and match connectivity to remote stations. Our motor will be connected to various antenna configurations, including (indiscernible).
As a reminder, Gilat develops all the components required for on-the-move applications and on-depart terminals. We typically provide low profile tracking antennae, power amplifiers and modems that we sell to defense system integrators. In some cases, we also supply complete terminals. Our main strengths are in applications that require smaller sized, lighter weight and low-power terminals. This is where we believe Gilat has a significant advantage over our competitors. We see two main applications in which these advantages are highly required: unmanned platforms and manpack terminals.
Our solutions for unmanned platforms, called BlackRay, are based on either our low-profile antennae or our new small lightweight parabolic antennae. They are available in both Ka and Ku bands, thus providing operators flexibility when choosing satellite capacity. The BlackRay terminals are one of the smallest and most compact units available on the market. Their small size and light weight extends the operational range of the UAVs as well as increasing the mission payload capacity. Our SatTrooper manpack terminals are available in Ku and Ka bands. It is one of the smallest and lightest ultrapoint terminals in the market. One reason for this is its very low power consumption which reduces weight of the energy pack. At the same time, the SatTrooper enables (indiscernible) transmissions such as video.
In the U.S., we continue to focus on programs on record as well as various needs that are raised by users. Lockheed Martin recently chose our BlackRay terminal for its Fury unmanned aircraft systems. It has now made some additional follow-on purchases to support deployments within the continental U.S. We have also sold our SR71 RaySat antenna, MLT modem and Wavestream BUC to the United States Special Operations Command, or SOCOM. SOCOM is the unified combatant command charged with overseeing the various special operations components command of the Army, Air Force, Navy and Marine Corps of the United States Armed Forces.
In April, Immarsat sponsored an invitation-only industry event for multiple U.S. government agencies, including SOCOM, to evaluate new technology for future requirements. We participated in this limited user evaluation which was conducted by Immarsat at their ground station in Italy. Immarsat is planning to service the various U.S. government agency services worldwide with its new global express Ka satellite, Constellation, hence the significance of this evaluation. The Gilat equipment tested included RaySat on-the-move terminals and a SatTrooper manpack terminal. We are also proud to have the Wavestream wideband 12-watt BUC used by many of the participating vendors’ terminals in addition to being used in our own terminals. We are very satisfied with the good results demonstrated by all our equipment in the tests. As mentioned, the tests used a new Immarsat global express Ka band satellite. This is the first operational satellite of the global express Constellation, planned to have global coverage by 2015.
Regarding the services division, the installation and deployment of Gilat Colombia’s project to provide internet services to communities in remote areas in Colombia is on track and we have already started to generate initial revenues from this project. As I have stated on previous calls, significant revenues will be generated in the second half of 2014, starting in the third quarter. In addition, Gilat Colombia signed a contract to provide telephony services in some remote regions to one of our competitors in the country. This enables us to leverage the telephony infrastructure we have built in Colombia to generate further revenues.
In Peru, the Integration Amazonica Loreto, or IAL project is being rolled out according to plan. This project includes the deployment and operation of microwave infrastructure as well as wireless service to 70 communities along the most remote section of the Amazon River. We have not recorded revenues from this project yet; however, we expect to generate revenues beginning in the second half of 2014. This year, the Peruvian government is expected to issue additional requests for proposals for wireless and fiber projects in remote regions of Peru. Each of these projects is expected to be worth tens of millions of dollars. We have responded in the past to tenders without satellite communication such as IAL and Fitel 10. Based on this experience, we intend to respond to some of these tenders as well.
That concludes our business overview. I would now like to turn the call over to Yaniv Reinhold, our CFO, who will review the financials. Yaniv, please?
Thanks Erez, and hello 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 effects of non-cash stock option expenses as per ASC 718, amortization of intangible assets resulting from the purchase price allocation, with restructuring costs and net income (indiscernible) from discontinued operations. The reconciliation table in our press release highlights this data and non-GAAP information is presented excluding these items.
Now moving to our financial highlights for the second quarter of 2014, revenues for the second quarter of 2014 were $54.1 million compared to $61.9 million for the same period in 2013. The difference is mostly attributed to the decrease in revenue in our services division. The MINTIC project in Colombia which started to bring initial revenues in the second quarter will generate increased revenues in the third and fourth quarter. We will also generate revenues from the IAL project in Peru beginning of the third quarter.
On a GAAP basis, our gross margin this quarter reached approximately 35.7% compared to approximately 32.3% in the comparable period last year. As we have mentioned over the past few quarters, our gross margin is affected by the regions in which we operate and the types of deals we recognize. The increase in our gross margin this quarter was primarily due to two reasons. The first is due to the mix of deals with high margin in the commercial division, and the second is due to our cost reduction in COGS.
Gross R&D expenses on a GAAP basis were $6.9 million this quarter compared to $7.1 million in the same quarter of 2013. The decrease in R&D expenses reflects a reduction in fixed expenses which was offset by the negative effect of the shekel-dollar exchange rate. The shekel significantly appreciated in value over the last year against the U.S. dollar. This has caused an increase in our expenses in dollar terms.
Moving to selling, marketing, general and administrative expenses, on a GAAP basis expenses for the quarter remained relatively constant at $13.5 million compared to $13.4 million for the same quarter last year. We experienced higher variable expenses which were offset by a reduction in fixed expenses.
Operating loss on a GAAP basis was $0.5 million in the second quarter of 2014 compared to an operating loss of $0.1 million in the comparable quarter of 2013. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. We believe these non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating cash flow performance. On a non-GAAP basis, operating income was $1.5 million in the second quarter of 2014 compared to operating income of $1.9 million in the comparable quarter of 2013. On a GAAP basis, net loss from continuing operations for the quarter was $1.4 million or a loss of $0.03 per diluted share compared to a net loss from continuing operations of $2.9 million or a loss of $0.07 per diluted share in the same quarter of 2013.
As of June 30, 2014, our total cash balances including restricted cash net of short-term bank credit decreased to $59.3 million. This was mainly due to our investment in the IAL project in Peru and the MINTIC project in Colombia. Our shareholders’ equity at the end of the quarter totaled $224 million.
That concludes our financial review for the quarter, and now I would like to turn the call back to Erez. Erez?
Thank you, Yaniv. To summarize, we are seeing progress across all of our divisions as we continue to execute our plan and growth strategy in the second quarter. Our cost-cutting measures implemented in 2013 continue to bear fruit as we have seen an increase in profitability. In our commercial division, we see significant market potential in high super satellites and cellular backhaul applications, and we believe we have the right solutions to expand upon our growing global footprint. We have several deployments of our cellular backhaul networks around the world that included our newest and fastest TDMA VSAT in the market today, SkyEdge II-c Capricorn, and CellEdge, our small cell solution over satellite.
Our defense division has improved given the increased visibility from DoD programs. We are beginning to see an improved sales pipeline and were recently awarded contracts for defense agencies in Latin America and Asia. We expect to see continued growth across this division as we believe we hold a significant advantage over our competitors when it comes to small, lightweight and low-power terminals.
In our services division, our IAL project in Peru is on schedule and our internet services project in Colombia has started to generate revenues with more significant revenues expected in the second half of 2014. For these reasons, we believe that the second half of 2014 will be stronger than the first half of the year. We feel confident we are on track to meet our 2014 objectives for annual revenues of $240 million to $245 million and EBITDA margin levels of approximately 9%.
That concludes our review. We would now like to open the floor for questions. Operator, please?
Question and Answer Session
The first question is from Gunther Karger of Discovery Group. Please go ahead.
Gunther Karger – Discovery Group
Yes, good afternoon everyone. Great report. Just one question regarding the aviation industry. (Indiscernible) in that sector, the aviation airline-type of business.
I’m sorry – you were breaking up, Gunther. Did you ask about the aviation sector business?
Gunther Karger – Discovery Group
Yes sir, aviation, the global express, that sort of thing.
Yes, you’re right – I didn’t discuss it in the call. This is continuing business. There hasn’t been any significant developments. We’re continuing to sell into that sector. I continue to view that as a growth area for us, especially when the global express Constellation comes online and we’ll start providing terminal—sorry, units to Honeywell to serve airlines on the Immarsat global express. It continues to look good and it’s, I would say, business as usual for now.
Gunther Karger – Discovery Group
Thank you. My second question, if I could, with regards to the defense sector, I know you announced continuing growth in that area, but the current unrest worldwide, particularly in the special operations-type of business, do you think that what’s happening now globally is increasing your outlook in that sector, or the results that you’ve reported reflect what you had originally anticipated?
I don’t think that we see anything that is immediate—as an immediate result of very recent developments of the past few weeks, but I would say that in general over the past year, what we are seeing is that there are heightened tensions in various conflict areas around the world, in eastern Asia, in eastern Europe, in other areas, and we see an increasing requirement and even starting to see budgets and programs in other countries that perhaps two years ago we didn’t see having programs in satcomm for their special forces.
Gunther Karger – Discovery Group
Thank you very much, Erez.
Sure, you’re welcome.
If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions.
There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with his closing statement, (indiscernible) replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-326-93101-888-326-9310. In Israel, please call 039255937. Internationally, please call 972-3-9255937.
Mr. Antebi, would you like to make your concluding statement?
Yes, I just want to thank everyone for listening in on the call. I appreciate your time and I hope to meet you on the next conference call, if not earlier. Thank you very much, and good morning or good afternoon to all. Bye bye.
Thank you. This concludes Gilat’s second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.