Gilat Satellite Networks Ltd (GILT) 2002 Q2 法說會逐字稿

Good day, everyone, and welcome to the Gilat Satellite second quarter results conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the vice-president of investor relations, Mr. Tim Perrot. Please go ahead, sir.

Thank you, Jessica, and good morning and good afternoon to everyone. Thank you for joining us for our second quarter results call today. With me on the phone is Yoel Gat, our chairman and CEO, Mr. Amiram Levinberg, our president and COO, and Yoav Leibovitch, our vice-president and CFO.

Before beginning the call today, I would like to call attention to our Safe Harbor statement that is attached to all of our press releases and make you aware that certain statements made today that are not historical are in fact forward looking statements within the meaning of the private securities litigation reform act of 1995. The words estimate, project, expect, believe or similar expressions are words that will be indicating that these are forward looking statements. Many factors could cause the actual results and per performance to differ materially from the actual results.

So, with that, now I would like to turn the call over to Yoel Gat, our chairman and CEO. Yoel?

Thank you very much.

The outline of the call, we are going to discuss our financial results give you a short business update, talk about the restructuring process, a go forward plan and some financial me tricks going forward. Just if you take a look at the overview of the quarter, there has been several positives, cash flow has increased [inaudible] $2.6 million for the quarter and the ending cash balance was around $100 million. On the financial metrics side, we started the company for lower revenue going forward and we reduced operating costs 20 percent over second quarter of '02. So we expect that by the first quarter of '03 there is going to be a $5 million improvement in cash and reduction in operating expenses that are results of [inaudible] in August of 2002. [inaudible]. The progress in all of the working capital element, [inaudible] inventory to cash every quarter, gross margins are in line. We have announced several large deals that we won recently with over $35 million in bookings. I'll spend some time on every one of them, have to do with China Telecom, South Africa, Africa itself and some deals that were announced in the United States. We are going to be discussing for the first time debt restructuring process and what the plan is on that front and we received renewed orders from our key existing customers. The main challenge that we're facing is revenues are lower than expected and our revenues have actually gone down into last quarter. And it's the result of several elements. We mentioned a few of them. First one is Latin America in general in Columbia specifically, and I will dedicate a few minutes for Colombia in this call because it is [inaudible] for the company. I will tell you the market in Latin America is weakened in the last few months and together the situation in Colombia has affected our results significantly in the second quarter. The Worldcom [inaudible] largest customers is actually affecting us both in the U.S. and in [inaudible]. We will discuss that a little bit and the timing of this deal, some of the deals that we signed recently have been expected to be signed prior to that and revenues were expected to be [inaudible] prior to that, but [inaudible] slipped both because of internal element and it is absolutely very obvious that I can say we are operating in a very challenging environment both from the perspective of the market and from the perspective of the company. Now with that I'll go through the financial and try to discuss them and highlight some of the things which are important to understand on our financials.

Revenues were 51.$6 million, gross margin was 30 percent. R and D was about $7 million. SG and A was $18 million and I'll talk about the last number specifically because the [inaudible] effect is pretty much going to be minimized after the end of the third quarter. I just want to say that if you take a look at the total expense side on operating expenses, came out to $25 million or slightly less which is actually 30 percent reduction over Q2 of '01 which is something we said all along we are going to achieve it. We achieved it now we're going to say to take it from this level 20 percent lower to $20 million a quarter or less in the beginning of '03. We took a provision for, mainly for Worldcom [inaudible], again primarily on [inaudible]. It has to do with [inaudible] besides the fact we've been able to negotiate the [inaudible] amount and get paid for some of the [inaudible] amount and we've been able to extend [inaudible] going forward with them. We have a critical vendor status with them. We still have exposure on our balance sheet to Worldcom affiliates which is over $25 million and we have decided to take a reserve against it because much of that revenue is capital leases which are extending over several years forward and we felt that was appropriate to do. Operating loss, without appropriation, is $9.3 million. Financial expenses were up to $5 million, then we had substantial losses in associated companies of nine and a half million dollars, 5.2 has been attributed to [inaudible]. Again we expect that number to improve significantly over the next few quarters. $2.9 million and that is something that is going to go away after the end of the third quarter where we have only between one and $2 million as a base for [inaudible] investment and once we write that off, at that point in time we'll have no further [inaudible] in our financials and also the deal has been completed in the third quarter. There will be some elements that relate to that which I'll discuss further in the third quarter, but it's not supposed to have any effect on our numbers beyond the third quarter. So net loss again without the provision was $23.7 million.

Switching to the cash, great news this is the number one measure [inaudible] to date, cash is increased to 99.8 million dollars from 97.two. So the cash improvement for the quarter was $2.6 million, not only [inaudible] contributed four.$6 million this quarter which was very, very good sign for us. Now, the capex is pretty much in a very low rate now. It's between two and $3 million a quarter where SG and A is $11 million a quarter. So that gives you the feel of the difference between the investments that we're making now compared to the investments that we did in the past and to focus on [inaudible] nicely now. There is a charge in the next slide that shows cash flow improving from cash use of $92 million in the first quarter over '01 to cash generation of $2.6 million in second quarter of '02. We think we are actually in the process of having cash under control now and we will discuss the focus of the result of the cash [inaudible].

Just a few elements that relate to the working capital. [inaudible] continues to improve [inaudible] improved, even if you don't take into account the reserve that we made. It improved significantly. Inventory improved by $8 million and the accounts payable improved by $14 million and with everything else that we have currently, the current assets minus the current liability in the balance sheet are about $118 million. I just want to talk briefly about in flow and new business that we signed recently. We've announced a [inaudible] deal which represents substantial [inaudible]. Research [inaudible] primarily in the United States, but not only. Worldcom, we've been able to negotiate a critical vendor status and actually [inaudible]. And we renewed their commitment for additional three years. We've announced a few new deals, [inaudible], gulf oil, [inaudible], taking shape all together comes out to substantially amount of [inaudible]. And some of it is is part of the connect service of platform that we are successfully operating now. There has been several deals that we are announcing in Africa, Asia in the Pacific rim. A very large expansion of network in Africa which is more than $11 million which is expected to be completed between now and the beginning year of 2003. China telecom, that's a 1300 site [inaudible] network in Tibet, signatures above $8 million. That has been awarded to us and [inaudible] is signed with telecom South Africa for global infrastructure represents several million dollars in short term and significantly bigger amount afterward that has been signed and executed recently. In Latin America we received an extension for the [inaudible] for additional 550 sites and additional 2000 sites of 360 for bell one network in Brazil. All of that together actually represents a substantial amount of business that we focus this [inaudible] bookings which is about $35 million. I want to dedicate a couple of minutes to Colombia because it's an important deal and we received a lot of questions about it so we wanted to [inaudible]. We believe we are in Colombia and what we are doing there. So [inaudible] background operates under contract with the Colombian government to operate more than 7,000 400 [inaudible]. Over two years and we've been paying roughly $40 million by the Colombian government. The other thing the sole leader of the tell central contract [inaudible] telecenters in Columbia for several years. [inaudible] we have also been notified it was the lowest bidder for 3,000 telephone I sites in Colombia. That is the total subsidy of $65 million out of government budget of roughly $100,000,000. We have not asked for the full subsidy, just taken two-thirds of that subsidy, and we had expected roll out most of the telecenters in 2002 is an extension to our current existing network. This is important because we thought that, you know, this is a [inaudible] amount of revenue, substantial [inaudible] should have been done in we'll say one year that was supposed to start in the second quarter of 2002 and actually we have not been able to achieve that. The telecenter bid was rejected by the previous government and we have an appeal with the new government and expect to get the results of that appeal shortly. I just want to emphasize a few things, that this is the balance sheet at the end of Q2 meet all the Colombian bids requirement both for the telecenters and telephone I. We believe we met all the requirements [inaudible] and our position is very solid on that deal. And we really hope to be able to continue to serve the people and the government of Colombia many more years and not to actually analyze and assess again our government in Colombia we stood a [inaudible] people, no how, underground in Colombia and we hope that will bear fruit in those continuing [inaudible].

Several assets of the restructuring progress I think is one of the most meaningful elements in my announcement today. We can actually talk about the plan that we have to restructure the debt and improve our balance sheet. The total debt which is under discussion is about $450 million. That includes $350 million convertible notes and $100 million of bad debt. The convertible bond holders actually there is an ad hoc committee of the bond holders representing the majority of the class. Several meetings were held by the committee and between us and the committee and the thing that we expect to get out of those discussions is a conversion of the debt to common equity. All common equity and new convertible debt at a [inaudible] price. And we decided not to make the payment of the coupon that was expected on September 15th in anticipation of an arrangement with the bond holders. While working with the bank and both us and the bond holders [inaudible] restructure alone and we'll go here to try zero complete the restructuring process by year-end. [inaudible] activity going on right now and we're optimistic that is an achievable goal.

Our go forward plan, number one priority is complete the restructuring, [inaudible], continue our focus on cash flow which [inaudible] more important than any other element right now, that the number one measure internally in the company and continue to capitalize on our core opportunities in ash Asia, Africa and Latin America, discuss some of them and continue our relationship with particular customers in the U.S. and throughout the [inaudible] service. Just to describe the [inaudible] that we're working on, as you see the target projecting a low revenue streams in the next several quarters. Currently the revenues are expected between 50 and $60 million for the next few quarters. This is what we believe that most of this is pretty much in the bag. I would say it is not expected that the Colombia - the Colombia deal, it will materialize. [inaudible] it is not included in those numbers. Only $60 million the gross margin is around 30 percent which would mean that it's between 15 and $18 million of gross margin per quarter and our operating expense structure is $25 million now and is expected to be below $20 million in the first quarter of '03. Now, [inaudible] you see without the BMA, take a look at the EBITDA, it should be between zero and $8 million a quarter. Under the extreme cases and the earnings report is supposedly low also a -10 and pretty much result that has been demonstrated this quarter to minus two and it's slightly higher revenues we can break even on our operating income. I would say that the third quarter looks a little bit better, but same shape as the second quarter. We hope all the deals we launch will have a positive impact on the fourth quarter. On the] the fourth quarter. [inaudible] much less significant in 2003. [inaudible] by the end of Q3. And we expect significant reduction in our financial expenses following the successful restructuring.

On the cash flow side, we expect in the third quarter to be close to break even without financing and without the close of the [inaudible] dealing which we paid $10 million for the minority shareholder something we said all along we would do and some other expenses, and the expected ending balance of cash at the end of the third quarter is between 75 and $80 million. The fourth quarter we expect to break even on cash without any financial cost. We don't have any financial cost in the fourth quarter we expect the cash balance to stay pretty much the same as it's going to stay, the same as it's going to be after the end of the third quarter.

I think with that actually we can open the floor for questions. Jessica?

Yes, sir. Our question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch tone telephone. Once again, ladies and gentlemen, for any questions it is star one on your touch tone phone. We'll pause for just a moment to give everyone a chance to signal.

[Pause.] our first quarter will come from Abe Finkelstein [phonetic] at Goldman Sachs.

Hi, guys. In terms of third quarter [inaudible], you mentioned most of it is in the bag. But are you still - do you still need to close some deals in order to make that 50 million?

I think that for the 50 [inaudible]. It's been very close to the 60. We still expect to get some orders, but you understand the magnitude which is the few million dollars, in order to get mid number between the five and of zero which would be a nice achievement but I think the 50 is pretty much already in the bag.

In terms of your cash balance forecast for the third quarter, if you ended the second quarter around 100 million and now you're talking about 75 to 80 and assuming that that includes the $10 million payment to R-Star shareholders, why is there or what is the other decline in the ten to 15 million come from?

Okay. The R-Star payments was $10 million for the minority shareholder payments and something like [inaudible] for end the ending expenses and that's about 12. So we did pay ten to the bank. Partial payment on the loan that we were expected to do on the second of July, something like eight to eight and a half million dollars. So all together, that puts us in slightly above $20 million, maybe $21 million of nonoperational expenses I would say [inaudible], operation of the company. We said we were going to be close to break even. And if we do very well, we'll break even. If we don't, [inaudible]. All together this is how we expect 75 to 80.

The current 100 million does not include the payment to - the payments to R-Star?

No. It's not included in the 100, yes.

And those payments all together you're talking about is close to $20 million?

Yes.

Okay. And then the final question is for the quarter, can you give us some sense of what your cash flow from operations was, and also maybe touch on how much money you received coming in from - I know there was the J V as well as the R and D money you received. Maybe you can touch on that.

J V N?

You also received some money for R and D project with Alcatel? I know you were supposed to receive cash in from a couple places.

We did not receive money in the quarter. We did receive money from - but we had some one time expenses which maybe not fully offset it, but a big element of offset. Some operations were pretty much around break even, I would say slightly positive. If you take everything else out and the numbers came in a little bit better because we were able to get some money from other sources, but which is really where [inaudible]. At this point in time we're pretty much break even from operation even up to paying for the capex. And once we [inaudible] $5 million from our expense structure we should see income from first quarter of '03 and forward.

Thanks.

Our next question will come from John stone at Landerberg Salomon [phonetic].

Hi, guys. My first question is related to the linkage between finance and operations [Question]. Obviously you guys are having some problems in Colombia in terms of you were the low bid on the deal and still haven't been able to secure it and hopefully you'll be able to turn that. But I'm interested also in other contracts and in bidding processes both public sector and private sector during the quarter. Were there other instances where perhaps you guys were the lowest bidder on a contract and were not able to secure it due to your financial situation? And if so, can you give us some - quantify it or color on how important that magnitude is?

It certainly doesn't help. I think that we're pretty much proud of the achievement of the deals we've been able to close recently and we have a long list of deals that we did during the last, I would say 30 days, maybe 45 days. So we have been able to be successful. And I think that I would say 80 percent, if not more than the deals that we won, were in competition. We were not, you know, some actually won in the sole situation [inaudible], but all duress was done through competitive bidding. If you like, China deal, the [inaudible] and we wanted to be able to go through the whole issue including the financial situation. South Africa telecom was a very big deal and we won it in a tender again being able to deal with the financial situation. I think we benefit from the fact that our equipment in the market is regarded as superior and we have a very good track record. It's a company that meets its obligations and the customers in general most of our customers are reference accounts and I want to say gladly come back and buy things from us. Many people, you know, which are not in the deals that we signed are looking and trying to analyze what will happen with our restructuring process. I am confident after we'll be able to successfully finish the restructuring we will be in much better shape in many of the deals which are pending. Colombia specifically which you mentioned, I think we actually meet and we surpass all the requirements and there was nothing we've been able to demonstrate our capability and [inaudible]. I just want to say that the reason why he didn't get it is because it was - people in government people is the last place - the government period, you know, were not very willing to go ahead and be able to make that commitment. We very much hope, and again even though we don't assume that we will be able to work with the new government and continue to serve well the government and the people of Colombia. So far we did lose some deals and it absolutely didn't help us with the financial situation and it's something that, you know, we have to spend a lot of time explaining and demonstrating why we're doing okay. But if we can get the customer to focus on the right things like cash flow, like, you know, what is the plan process going forward and how we can demonstrate that other people are buying our product and continue to support our company, we could make most of the deals that we want to. Not necessarily all of them, but most of them.

Okay. The direction I was coming from in that was if you can't put a handle on this I understand because I understand private debt sometimes the information isn't always available. I'm trying to get some idea in terms of what magnitude of deals might you have won if you had already gotten the restructuring under your belt and how this might affect you in future quarters.

You know, with respect to Colombia specifically, debt itself would have been a contribution of, say, you know, the numbers, $65 million over the course of a couple of years. So that's just the one deal example. I think that we'll be in a better position, I think we'll be able to work on a higher revenue rate, but, you know, it's all speculation and it will take us time to work through it and demonstrate it. But I'm sure that it will have a positive effect on our capability to sell and continue to service customers.

Okay. And one last follow-up regarding the issue of you've got a substantial inventory and at the current rate that you guys are reducing that inventory, it implies that some of that inventory is going to be around for quite some time before it has a chance to come up and get sold. To what extent do you guys feel comfortable with the value that you're carrying that inventory and is there a risk of further write downs on it?

We've done a fairly extensive exercise around our inventory at the end of the quarter. [inaudible] actually debt that was address bid our own people and accountants. So we've taken a very good look at the inventory and we came out with the following notion. We have plenty of [inaudible] inventory [inaudible] most of the inventory I would say [inaudible] you know, [inaudible] 360 research and others we can use, even though they may be used over an extended period of time and most of the rest of it is pretty much seems that used in a general course of businesslike [inaudible] and other elements. We came to the notion that the inventory, even though it's high but the current level of revenues sustainable for an extended period of time. Now, if we can continue to drive inventory down at the rate of seven to $10 million a quarter, within I would say four quarters the inventory should reach a reasonable level. I just want to say from the other side we had made significant write^offs on inventory in the third quarter of 2001 and we do have elements in inventory from then that we either are slightly using or could use in the future that would offset anything that we think we cannot be able to use for the current inventory but we keep the inventory that we have. It's pretty much okay, couldn't use even though it may not be used over the next two quarters. We can absolutely be absorbed. One of the good things is the fact that it's not a lot of [inaudible] product evolution. [inaudible] best in class and we can sell them and we don't have to make a lot of changes knot product which is why we believe we can sell the product in a [inaudible]. Product is ababsolutely not our issue.

Great. Thanks for your help.

Our next question will come from William Kent at Lehman Brothers.

Good morning. I guess my first question is what do you need to do in order to fully utilize the R-Star cash? Do you need to buildup your ownership percentage more? I guess my question is in the context of using that cash to help the Gilat issue.

I want to say that currently we can use the R-Star cash. We have full control over R-Star from the laboratory perspective [inaudible] and have a separate board and it's going after a business which [inaudible] broad band business in Latin America which I think is currently being done [inaudible]. So if you take that into account, that cash is usable for this cause and which is the cause that we're working on. For example, you know, just to give an example, if we were to build the network in Colombia, the operation of the network in Colombia would have been in R-Star especially the growth there and possibly others. So that cash is pretty much in our minds fully usable. We can utilize it for the right cause and it's something that we're doing any^way with our without R-Star which is why we can utilize it any^way we want.

Can you give us some details on what happened around the interest payments that I guess in the release it says it was stopped or accidentally paid and stopped, was it a decision you made or was it [inaudible] that made that decision and can you give us some color there?

It was a mistake which I cannot exactly say who made the mistake and which in the process probably had to do [inaudible] and nobody has been able to interview the company or other people. And then we started to pretty much allow the payment of the coupon without the company approving it and without the company putting any money [inaudible]. The bank has actually given us a letter saying they feel the responsibility and we're not to be liable for that. It's our understanding that they will collect the money [inaudible]. The company did not give any instruction to do it on the contrary, and it's pretty much [inaudible] has nothing to do with the company.

A while back you switched out the - I guess it was - I think it was the advantage term also initially given the star band customers enthen they could switch out to the new 360 product. In that situation, is Gilat or was it star band that reclaimed the terminals [inaudible] what is the cost basis of those terminals after they're reacquired?

That's a very good question. First of all, Gilat replaced the 130 - [inaudible] 360, it received the 180 [inaudible]. Now, the good thing about it is that the cost base of a 360 substantially lower than the cost base of the 180. So we have been able to resell the refurbished 180s and prices somewhere in the middle of 180 and 360 and make money out of it. You know, we did collect over 30,000 terminals from the field and I think we sold the majority of them in several deals that required that and were willing to do that and we're now very short on those type of terminals. We have only a few thousand left and those are pretty much going to be utilized in the next quarter or two and everything else from this point onward is new 180s and new 360s.

With respect to the inventory balance that you're now reported, can you give us an idea, is that all, you know, in terms of its marketability, would you consider the inventory that you now on hand whether raw or unfinished to be your new product stuff that you're currently selling? Is there a further risk in inventory levels?

One second. Let me give you a detailed answer, so hold on for one second.

Our next question will come from Todd Mitchell of Salomon Smith Barney.

Just a second. Hold on for one minute. I want to answer William's question. [inaudible]. It's nor more than this. The [inaudible] final in raw material, final product and raw material of 180 and 360 in inventory is over $55 million. That's the brand evident new 180, 360 and that's the newest element. There are plenty more elements in far away terminals to distance that but just to give you you a feel the dis[inaudible] items we're selling to most.

Hello? Hello? Hello?

Mr. Kent, your line is open.

Thank you so much.

[inaudible] thanks a lot.

Our next question comes from Todd Mitchell at Salomon Smith Barney.

Hi. Most of my questions have been answered. One thing, can you give us an operational update on the associated companies, that's what's going on with [inaudible], what's going on with J V?

Okay. The thing that actually [inaudible] there is only one element that is currently responsibility with regard to star band and this is part of their satellite space segment that was signed by us. [inaudible] we're trying to - our plan is to work a deal in which we will not be [inaudible] for that segment beyond the year 2002. We expect that that would be achieve as star band should be cash flow mutual in the first quarter of '03 and from that point onward hopefully positive which is very good news from our standpoint. Resize, the rescale, they're doing a good job, continuing to sign customers, dozens of customers a day, and everything seems to be positive in that direction. That's with regard to star band. [inaudible] has been finalized. We are pretty much a shareholder and we're trying to help the company establish itself. This company is actually a combination of enterprise [inaudible] and consumer with a lot of running enterprise business that was [inaudible]. We tried to help the company establish customers in all those fronts. They seem to be in a very good position marketing wise because [inaudible] is a very strong player in the European market and this company has I would say close to 20,000 installs in Europe now and growing. So at this point in time I think that they are doing fairly well and they are just building themselves up in order to be able to [inaudible] and consumer customers in Europe to [inaudible]. And I think we did talk about R-Star. The deal is pretty much concluded right now we're actually restaffing the company to go to the global business in Latin America. It would only start the end of this quarter and [inaudible]. And from that point onward, since it's - we're just going to consolidate it, we're not going to give any details. Gilat consolidate numbers and nothing beyond that. So I think we're okay on all those fronts at this point in time.

Thank you.

Once again, ladies and gentlemen, if you do have a question it is star one on your touch tone telephone.

There are no other questions standing by at this time. I will turn the conference back over toial Gat for any additional or closing remarks.

Okay. Thank you very much everybody for participating in our conference call. I think the fact we have been able to show we can generate cash in the second quarter, the fact that we have actually continued to adjust our costs by additional $5 million per quarter, the deals that we won recently demonstrate our capability to continue to execute and with possible debt restructuring which is shaping up the company will be very well positioned for growth moving forward. Thank you very much.

This does conclude today's Gilat Satellite second quarter earnings release conference call. We thank you for your participation, and you may disconnect at this time.