Gilat Satellite Networks Ltd (GILT) 2005 Q4 法說會逐字稿

Good morning my anymore is Leann, and I will be your conference facilitator. At this time I would like to welcome everyone to the Gilat Satellite Networks quarter 4 and year end conference call. After the speakers' there will be a question and answer session. [OPERATOR INSTRUCTIONS]. Thank you, Ms. Priest you may begin your conference call.

Thank you. And good morning and thank you for joining us today for Gilat's 4th quarter and full year 2005 results.

Before we get started I'd like to remind everyone that today's call contains forward-looking statements. Such forward-looking statements involve risks and uncertainties. The actual results may differ materially from such forward-looking statements. Gilat Satellite Networks Ltd. does not undertake to publicly or privately update or revise it's forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied will not be realized.

With that said, on the call this morning is Gilat's Chairman of the Board, and Chief Executive Officer, Amiram Levinberg and Tal Payne, Chief Financial Officer. Amiram.

Thank you, Andrea.

As some of you may know this is our first call in a long time. We look forward to updating you on a quarterly basis going forward. During this call, I will give you an update on the initiatives Gilat has undertaken to help the company increase market share and improved profitability. I will also be providing you with an overview of 2005, then Todd will take you through the financials for the fourth quarter and for year, followed by time for a question and answer session. I will then conclude with a brief summary of our call today. For those of you on the call or webcast who may not be too familiar with Gilat I would like you to take sometime here to review our market business segment to actual and update you on the progress we made in these areas. I hope you can see the presentation on your PC's.

As you may notice, the company's gone through a significant financial turn around during the years 2003 to 2005. In July 2005, a new controlling party, York Capital, has stepped in, brought with them new management, me being one of them, and I hope that we bring back to the company some entrepreneurial spirit combined with significant business and technology experience.

We are operating in a growing market, as you will see in a short while. In this growing market, we have a new product line, which we call SkyEdge, and since we have lost some of our market share in the last few years, we think that with this product line, the opposition to regain market share. But in addition to that, when we look at the market, we try to have some growth, which would be [inaudible-accent], A, to the natural growth of each market, B, to us capturing back our fair share within these markets. So rather than in the equipment side of the business serve just to [inaudible-accent], we would like to do more than that and start integrating solutions, and in the service side of the business, we would like to move from just connectivity to managed network services.

We have four ambitious goals for 2006, and our management-- 2006 management financial objectives are double digit revenue growth and net income profitability.

If you want on York capital, which is our new controlling party. York is a private equity firm with $7 billion under management. York has purchased $70 million convertible loans from Bank [inaudible-accent]. I guess some of you know that they have a convertible option at 6.75 until the end of September to convert this and be-- which is equivalent to 32% of the shares if they would convert. In addition, York currently has approximately 15% of the shares, and they have central board representative, Mr. Jeremy black.

You see on the batch shot of the market side and trend, before we go to the batch shot, just for you who are not that familiar with the business we in, I would like to mention who are the players in the [inaudible-accent] market. So the players are service providers, which supplies services to the end user, usually for X dollars per month. The cell provider rents space segment from satellite operator, like satellite operators[inaudible-accent], buy equipment from equipment provider, such as Gilat, hopefully, and doing installation and maintenance of business.

Here in the-- in the bar chart, you will see the left side in blue, the service providers global market service provider, and then since we operate only in the America's, as a function of service providers, you can see the Americas service provider, and the right hand of the slide, you can see the VSAT Networks or the equipment providers. You can see that there is growth in each and every market here, but here with the higher growth in the equipment, more than 25%, and more than 10% in the service providers business. And you can roughly see the magnitude of the market we operate in.

Now, we characterize or we separate the market into few segment, consumer enterprise and rural telecom. Consumer market is mainly active in the U.S. You can see here direct wave [inaudible-accent] all of them are service providers operating in the U.S. But we can find a few initiatives outside the U.S. as well. Like Taiwan with a service called Easy Bend, in Brazil, IP Star in southeast Asia. Those are a few sporadic other initiatives, but the main market is really in the U.S. This market is characterized by high growth, even very high growth, I would say, but at the same time it requires a significant capital investment. You really need to have deep pockets to afford yourself in this business, and we at Gilat, we know that because we have been there almost the first installment, and it requires a lot of capital to retrieve new subscribers to the service. We are subsidizing subscribers at the beginning, and then you recover, hopefully.

Obviously since it's internet access it's a commodity. Low margins very high competition other service providers, cable and DSL, and the churn is very high. I think that the average churn in this kind of business is usually around 2.5% a month, or in other words, within one year you need to find yourself 30% of new subscribers just to replace the subscribers that have been churned-- have been churned out. This is not very easy. By the way it's compared to numbers like 1.6, 1.7% a month in the direct to home television via satellite.

The enterprise market is also a growing market. Much more professional. Margins are better because you give other values to other customers, which usually afford themselves higher grade of service and pay for it, and the customer loyalty is much better because people are signing for contract usually for a typical time of three to five years.

Last segment is rural telecom. It is probably the smallest segment of the three, but still a very interesting one, still growing, and initially just to be world telephony, nowadays it's world telephony and internet access, which is not achievable in these areas by other means. It still requires a lot of capital, but this capital this time is coming from subsidies from governments usually, and the provider needs to give full system solution. Usually if you do it the right way, margins are good and customer loyalty is extremely good because you will install system that will probably serve this population for many years to come.

Now let's see how we structure the corporate to operate in these markets. Gilat Network Systems is the equipment side of the hub, [inaudible-accent] operating as a service provider mainly in Latin America and Space Net a data communication and networking service provider in the U.S. You can see here the 2005 revenue in any VSAT that we have published today. You can see that GNS has revenues of $98 million. 16 of it is sold to [inaudible-accent] and [inaudible-accent] 41 million, Space Net Inc. 86 million. GNS and Space Net [inaudible-accent] profitability as you can see. And by the way, the $12 million in GNS, two of them are eliminated in the consolidation and in the GNS numbers that you have seen in the previous slide, $16 million of the 98 also in the consolidation so the total number of the year is 209, and we'll talk about that later.

Now I'd like to say a few words on each and every business unit. Starting with GNS, Gilat Network Systems, this is where we really started our business, this is the equipment side of the hub. We built VSAT and we ship them all around the globe to more than 80 countries by now, and hundreds of service providers, which are operating in these countries. Once you notice that in some of these countries there is more than one service provider, in a few countries we have a few service providers that are using our equipment.

The GNS has now a new advanced platform, which we call SkyEdge, and we believe that SkyEdge is very well positioned to compete in this marketplace. On one hand it is fairly new. Slightly more than a year. On the other hand, it is fairly mature and has overcome the bumpiness of the often early, early unit. We have shipped, up until now, 60 hubs of SkyEdge and roughly 35,000 VSATs of SkyEdge, so it's a fairly mature [inaudible-accent] on the one hand.

On the other hand, has few advantages over the competition. But in addition to us competing head-to-head with other manufacture providers on providing the modem, we would try-- or we are trying now to go up the value chain and sell full solutions to customers. Means not just sell them the VSAT per sale [inaudible-accent], but come with a turnkey solution that will meet the customer requirements. There are a few examples to that, but we don't want to go fully into it, I will just mention we have now a full solution for GSM back haul.

We have a very complete solution for Election Network, and as an example, we have recently announced on Russia post, that we were able to sell Russia post because we have sold previously similar solution to Kenya post, and in the Kenya post, it started with them asking for visa just for Fox application in each and every branch and ending up having a much more comprehensive system that is doing-- is tracking parcels, email services in each and every branch, internet service with a prepaid IP, and finally even and electronic [inaudible-accent]. So this is a typical solution where, if we position ourselves to sell the full solution, then we are in a good shape, because we're not, again, in the head-to-head competition on the boxes. Space Net rural is [inaudible-accent], and actually it started its way with this kind of services, because Space Net rural provided services and solutions [inaudible-accent] really to the end user.

Now what is really a rural project? It started as telephony to rural areas without connectivity, and today it's actually a rural telephony and internet to remote villages. Currently, we're probably the biggest rural telecom provider of this kind, satellite telecom provider of that kind in Latin America. We have 18,000 rural sites, and we have our services mainly in Peru, Columbia, Venezuela, and Panama. We have services basically of two types. Sometimes we do very large governmental projects, and to give just two examples the [Compartel] project, we-- up until now, have subsidy accumulated to 110, and the [inaudible-accent] project $50 million, and the other model is build up and transfer, for example, with cable [inaudible-accent] in Panama, where we build the network for them, and then we just-- we actually transferred the network to them, and we only supervise their network now.

Space Net is also trying to grow up the value chain by trying not to sell just connectivity, but sell managed network services. Space Net is a veteran in this industry. Company exists for 25 years. We made an acquisition of the company back in '98 from [GAmericom] at the time, so now it is with us. Space Net's more than 80 networks, 50,000 enterprise subscribers and close to 30,000 consumers under the [inaudible-accent] logo. It has a very fine serviceability, and it's a great service provider.

As I said before, as much as it is so great, we still need to focus Space Net, and we are trying to do that in two ways. One way, let Space Net be more focused on enterprise rather than the consumer. Typical enterprise segments are retail, hospitality, restaurant chain. If you can notice in the upper right-hand side of the slide, with a picture of Holiday Inn, which we sold for quite many years by now is an example, but in addition to that, we want now to sell other services other than just the connectivity.

So we try to find, on one hand, new enterprise segments of the company. Like you can see the bottom picture, [inaudible-accent], which we think will be just perfect for the utility market, and we just announced this kind of status precept last week, and we would like to go for other services like managed network services and [inaudible-accent] network solutions, and to give you a flavor of that, for example, in Holiday Inn, each and every hotel has DSL and also satellite, and we would like to manage them both. We don't yet do that in [inaudible-accent], but in other customers, for example, Goodyear, we already installed our boxes that would take control-- for example, if the DSL stops operating it would move to the VSAT. It would show the traffic between the two alternatives and so on.

In this slide you can see the geographical revenue distribution of the company. No big change from 2004 to 2005. You can see that the North America is about 40%. Latin America has shrink, to some extent, from 37% in 2004 to 30% in 2005, mainly because we stopped operating in a project that will not-- was not profitable. GSAT project in Brazil. Europe became bigger, mainly because we became more successful in acquiring [inaudible-accent], and the market in Russia has opened up.

Just to remind you of a few deals we recently announced. We have announced Russia post. It's a very interesting deal. Russia post is a very big company. They are like 40% post offices. 40 to 45 in post offices. Annual revenues of $1.5 billion, 370,000 employees, a very, very big company. We will install, we actually have not installed yet, but we will install a hub in [inaudible-accent], and this hub will first serve a few hundred to 5 million mainly in Siberia and far east Russia. Applications there is just to give connectivity to this side. This side is left connectivity.

Another very interesting deal is China Unicom. China Unicom, I guess you all know, is a very big company. $9.5 billion revenue this 2004. They have universal service obligation, and we are selling them VSATs to be installed under this obligation. Mainly in [Chingeon] and inner Mongolia, in very, very rough areas with very, very difficult to approach, to reach, to install. Indeed there is now the small 2 to 3 meters now, at least in the north side of [Chingeon].

We mentioned Kazakhstan just because it's kind of interesting. In Kazakhstan there are nine service providers that are giving VSAT services. Six are semi-using [inaudible-accent] equipment, four out of the six has already adopted the SkyEdge product, and has purchased from us SkyEdge and started installation of VSAT with that. [inaudible-accent]is a nice network in Brazil. [inaudible-accent] chain. They are served by Star One, who is an [inaudible-accent] global company, long-time customer of ours.

And finally, scientific gains we have announced 3,000 buildings [inaudible-accent] terminals to be installed in Colorado, Pennsylvania, North Dakota, South Dakota. We are the first to install VSAT for the local applications. All the way back in '91, there was flat we shipped 32,000 VSATs for that application. We work nowadays fairly close with [scientificens], and we do some business with G Tech as well.

If we look at the backlog, then backlog for the year has increased from 191 at the end of 2004 to 205.6 at the end of 2005. And you can see that most of the growth in backlog came, really, in GNS. We can refer why to that later, but it indicates, really, the situation that GNS S, the equipment side of the hub, is moving more and more to more complicated deals, which, in turn, brings us to a situation that we cannot recognize as we sell very fast because we don't-- we do not just sell boxes. We need now to install a more sophisticated network.

With that note, I would like to turn it over to Tal Payne, our CFO, who will take you through our financials. Tal.

Thank you, Amiram. Good morning everyone.

Let me share with you the results of the quarter and the year, and then provide some more details on the financial results. The fourth quarter has marked a strong finish for 2005. The results revealed improvements in all parameters compared to the previous quarter. Revenues for the fourth quarter of 2005 were 56 million, up from 49 million in the third quarter. EBITDA was 6.6 million, an increase from 4 million in the third quarter. And net income was 1 million or $0.04 per share compared to the net loss of 1.7 million or $0.08 per share in third quarter. Additionally, we booked an impressive number of orders, which increased our backlog to a level of 206 million as of December 31, 2005.

Revenues for the fourth quarter and for the year declined, when compared to the same period last year. Mainly due to the elimination of GSAT project in Brazil at the end of 2004. The project had revenues of approximately 17 million in the year 2004, and 5 million in the fourth quarter of 2004. The GSAT project has had an operating loss. Therefore, the elimination reduced our revenues and EBITDA in 2005, but improved our operating and net income.

In addition, part of our recent transactions include the provision of bundled equipment, solution services, all in line with our corporate strategy in progressing upward on the value chain in project implementation. The continuation underlying some of these agreements is not included in our revenues, although shipment has occurred and has increased our backlog accordingly.

Gross profit for the fourth quarter remains the same as last year at 38%. Operating income for the fourth quarter was 2.2 million, compared to 1.6 million in the fourth quarter of 2004. An increase of 36%. This was as a result of increase in more profitable business, and a reduction of operating expenses. Net income for the fourth quarter of 2005 was a positive 1 million, or $0.04 diluted per share, compared to a net loss of 1.7 million, or $0.08 diluted per share in the fourth quarter of last year.

Now let's look at 2005 annual financial highlights. For the year ended December 31, 2005, gross profit increased to 36%, compared to 32% in the year 2004, as a result of an increase in more profitable business and a reduction in operating expenses.

Operating income improved dramatically to a positive 1.4 million in 2005, from a loss of 8.6 million in 2004. We narrowed our net loss to 3.7 million, or $0.17 diluted per share for 2005, from a net loss of 11.5 million or $0.52 diluted per share from the year 2004.

Our cash balances at the end of the quarter were over 110 million. And we have generated cash flow from operating activities of 10 million in the fourth quarter.

Our balance sheet is very strong. And overall we made solid progress in our financial goals in 2005.

And now I would like to turn it back over to Amiram.

Thank you, Tal.

I suggest before I summarize, we first open the floor for questions. Any questions?

[OPERATOR INSTRUCTIONS].

Your first comes from Tom Watts with SG Cowen.

Hi, Tom.

Hi, congratulations on a solid quarter. On your orders, you showed very, very strong growth there, and you mentioned that there is more detail, particularly on the GNS, growing 24.5 million to 52 million. Could you just comment on that? And also, given that orders are up year-over-year, how quickly do you think we can get back to a year-over-year growth position on revenues?

How quickly, Tom, what was the last part of your question?

Can-- we can move to get back to being-- growing year-over-year on revenues?

Well I can start with that. Definitely, our goal at this point and the-- as I said before, the management objective is to grow revenues double digit. That means at least 10%, hopefully more. So this is definitely our goal. When I analyze the different business unit, I can say that we feel quite strongly, as you can notice from the backlog with regards to GNS. GNS is-- starts the year with a nice backlog. And the backlog is attributed out of two elements. One element, we ramp-up production for the second quarter, conceptually, and the previous one, I believe it was like 30%. This quarter more than 40%. Means we ramp-up manufacturing, and that in itself caused some backlog.

And the other element, the more we move to more complicated solutions implementations, then it becomes a multiple element deal, and the revenue recognition of this kind of deals are more complicated and takes more time. So eventually, obviously you see all of that in the revenues, but it could take longer time. By the way, it's kind of interesting, the accounting treatment here called for revenue recognition over time, even in cases where multiple equipment has already been shipped, and sometime money has been collected, and still this is the way that it works. So when it comes to GNS, we definitely see a strong demand at this point.

[inaudible-accent] we also feel fairly good. We anticipate that we will grow the business there. Somewhat less than in GNS, but still grow the business, and we think we can improve on Space Ne as well, and when it comes to Space Net, I think this is really the tougher part of the business. We still have our-- on our plan to roll the Space Net business as well, but the market in the U.S. for enterprise is not going as fast as outside the U.S., and hence, we have the challenge of now trying to get customers towards managed network solutions and [inaudible-accent] solutions, so we need to educate them the market to some extent. That could take sometime.

Okay. And then on the Star Band side, should we expect that customer base to decline as Wild Blue and other competitors ramp up, and since you said that that was less critical than your enterprise base?

Basically what we are trying to do in Star Band, we're trying to move more and more, if you like, into the professional side of the customer. So if a consumer subscriber churn, we would really like to replace this one with a So Ho. If the So Ho churn we would like to replace this one with small, medium enterprise, and if small medium enterprise churn, we would like to replace it with enterprise. We really tried to position Star Band, again, as a higher end service more than just a consumer service. So we use the very same infrastructure out of Marietta, to provide services for the existing customer base of star band, but with a very, very strong focus that if customers aren't churned, we do not apply too many efforts to have consumers in the network, we would prefer having So Ho as the main enterprise.

And then just a final question. You have a substantial cash balance, and that now you have largely completed your turn around, and are generating cash, what are the plans for cash use, and could we see share buy backs or dividends in the future, or are you looking at other uses.

Well the first user of this cash is walking capital. The company didn't really require a lot of working capital in 2005, because sales shrink to some extent. Since we intend to grow the business, we intend to use it mostly for working capital. In addition to that, we have now a corporate business development unit that are looking into other opportunities as well. And we don't have any decision yet on the direction, but if we find the right opportunity, we might use some cash for that direction as well.

Okay. Thanks very much.

Thank you, Tom.

Your next question comes from Bob Sales with LMK Capital.

Hi, that was a nice quarter. Given, though, this is your first call, I know some of these questions you may not be willing to divulge yet, but I'll ask them nonetheless. I'll start with the easy ones, how does that sound? First of all, in terms of going after value-added applications, where are you seeing today the biggest traction, and have you started to recognize any revenue for this effort?

The answer to that is yes. We have started collecting revenues from value-added application. I guess you mean to-- you refer by that to Space Net, Bob?

Well, I guess it applies to both, right? Because for value-added applications on the equipment side, I assume there is going to be more equipment involved, like you are talking about with your post opportunities, but let's take for example the GSM back haul. Is that an application that you are starting to recognize revenue? I'm trying to get an idea of what stage you are in maturing your efforts to realize revenue from these various applications.

Okay. We-- just from a terminology point of view, we call them solutions when it comes to the equipment.

Okay.

Value-added services when it comes to the services. On the equipment side, yes, to your questions, we just started-- actually we have one GSM network in the field, but we didn't have the approval to public the name of the user in any details, so I can't tell you a lot. We just started-- we have done a few demos with customers, and the first one is already signed for a contract, only we did not get permission for publishing names and any details.

When it comes to others, for example, postal, which you had mentioned, yes, we already did postal in Kenya as I said, and the recent deal we announced we have announced with Russia post, I believe it's kind of just the beginning, because in the Russia post case, we came to them with a bouquet of we value-added services. They initially purchased only hub in a few hundred terminals, but I think that the potential is, there and we are working with them to adopt application to their recent network, so I think it will definitely be there. Other than that, we have other, if you like, solutions that we are selling that, again, I can not reveal any details at this point. It's a bit premature. When it comes to the value-added services of Space Net, the answer to that is also positive. We have started signing customer, like Goodyear, I mentioned before, and like others, which I cannot mention yet because I don't have an approval yet for value-added services, which are at the top of the managed network service as I mentioned.

Do you expect in the Space Net entity to see more competition from Wild Blue on the commercial side of the business? What I'm getting at is their potential entry into the commercial side of the business.

I doubt our competition will come from Wild Blue.

Uh-huh.

Because Wild Blue is really a consumer solution.

Uh-huh.

And they have the connectivity, but it takes, really a lot more in order for you to become a service provider for the enterprise. Just to give you an example that we're kind of [inaudible-accent] easily, DSL, for example, is vastly used by many companies and individuals. But finding an enterprise grade of service with an availability of 99.8% is a big issue, very, very difficult to find in the DSL arena. There are basically two companies trying to be build this kind of service. It's a big task in itself. Wild Blue, at this point, is a consumer, [inaudible-accent] They sell connectivity. All of the other layers are not there at this point.

Where your biggest opportunity appears to be, and that's specifically the growth of your equipment segment outside of the U.S., who do you typically run into from a competitive standpoint in those deals? If you could profile the competitive landscape internationally that would be helpful.

Okay. Typically we would run into AGNS, Vast Net, in a few cases we would run to I Direct, and I Direct is a small competitor that identified a niche in the market for small networks and also SAPC in UK and China markets, which happen to be fairly nice for I Direct. Basically, we are trying now to go after their market so we-- we'll meet, usually AGNS and Vast Net going after deals that we are trying to trace. And we will now go after deals that typically-- I don't know half a year ago, are directly--

Okay. I'll ask one more question and I'll get back in queue. The question I have is will you be able to start breaking out your VSAT shipments or bookings in terms of units by quarter, as well as hubs?

We had a dilemma that. This time your decision is that we don't like to public the number of VSAT we ship because we think it is data that the competition could use. Perhaps I just did that in the last quarter and-- I think for us, just to give you a sense it proves that-- for example, in the enterprise market, we ship a lot more than that.

Yeah. And then so maybe you could just-- maybe a broader question, then, in a given quarter if you, just kind of doing the math, if you ship 10 or 12,000 VSATs, what would be the expectation or the ratio or whatever you want to use just to understand how many hubs were shipped in a given quarter. Because I understand those are what, half million dollar type of units often.

In a hub?

Yes.

It varies so much that-- no, you can't really drive this-- no. No. Not easy. Because hubs-- we now have many hubs, and we have large hubs, and sometimes the deal is composed of other services, and that is the reason that even so the equipment is not that big in terms of, just list of equipment parts to the value of the deal is high, and very, very difficult to drive it. The mix of products is complicated.

Okay. Thank you I'll get back in queue Thank you for your time.

Thank you very much.

[OPERATOR INSTRUCTIONS].

Your next question comes from Kelly Pan with Pantheon Capital.

Hi, yes, can you hear me?

Yes.

I just wanted to ask how the overall financing of some of these international deals is occurring.

Tal, if you would like to take that.

Hi, Kelley.

Hi.

I would separate between the three business units as follows. When it comes to Space Net rural, which is activity in Latin America, telephony and internet, most of these revenues are actually government projects, which are subsidized by the government. It depends on the specific project, but just for for example, in [Compratel] that we had in Columbia, 100% of the cash was transferred into the trust account in a very short period, and Gilat withdraw from that trust account over a certain period. We secure a collection from the government through a trust account. The rest of the activity in Space Net is government, it is either Peru or Columbia, and the amounts mainly in dollar value. When we look at the Space Net Inc., it depends on the transaction. Naturally, most of the transactions there are services bundled with equipment.

And therefore, it's a more in the structure of the transactions are paramount precise over a typical contract will be between 2, 3 to 5 years, and some of the transactions are the cash collection of the equipment is at the date of the shipment of the equipment or the installation, while the service is paid over the life of the contracts, but we look at GNS, which is the equipment sale. I would say most of the sales a short-payment terms, can be down payment, can be an LC, depends on the customer, depends on the region, depends on our experience with them. Up to 30, 60, 90 days, sometimes a bit more, but I would say less than a year. Then again, you might have some a transactions that we would do for a longer period, also in the equipment. Small percentage in our revenues, and in those cases, we usually have a bank guarantee or some financing instrument to secure the collection.

Could you talk about that with respect to some of your more recent deals with Russia and China? The financing.

I would like to refer to specific transaction. It's--

Like the China Unicom deals and the Russian post deal.

I would say the recent deals, again, I would like to refer to one specific transaction, but I would say the recent deals are either a quick collection, which means less than a year, or secured by bank financing.

I see. Okay. Thank you.

Thank you.

Your next question comes from [Abbah] Horowitz with Old School Partners.

Hi, good morning. I was wondering if you could give us maybe some guidance on the kind of gross margins that you expect to see in 2006? And the potential of your company right now, how big can the company become, given the current market and growth rates of those markets, and your competitive position. Where do you see yourselves in the next three years if somehow you could give us some sort of thought here?

Hi. At this point we do not give guidance, and we do not give forecast. To be very clear on that. But just not to leave you with any answer at all, I would say the following. Generally, speaking in the equipment side of the business, as you can notice and as any natural in other mentioned other businesses as well, you can see that the price per unit and cost per unit is going down, and the number of units is going up, and this is a process that has taken place for a few years by now, and we see it continuing. And if you look at that with some sort of a strategic view, in the past, the VSATs, in general, would address multiple protocols, and it would have been kind of odd to tell you a specific VSAT solution for a customer.

Nowadays it all shrinks to one protocol, which is TCPIP, so the technology develops in terms of enhancing protocol solutions in one hand, increasing bitrate to simplify issue of the capacity of the unit, and still, and there are many technology differences between products of the different vendors. Not that there are too many of there, there are only three major vendors, but there are technology differences. And besides that, quantities increase on year by year basis, and the differentiators should be found someplace else, in our opinion. Meaning, if you look at the market segment, the consumer is really the extreme example of market, which is kind of doomed to grow the commodity trend. The enterprise is much more sophisticated. There is room for other solutions, and other implementation on the [inaudible-accent] just to give you a flavor of it.

We have implemented in our VSAT an IP SEC embedded into the V chip with our private network implementation without having the client on the PC of the user. This kind of flavor you can find. But seeing a broader view, taking a broader view, we think that we have to go wider than just the connectivity element, and that is the reason why we have moved towards value-added services on the service side of the business, and solutions in the equipment side of the business. Looking into the future without doing any forecast but looking more generally about the market, I would think that the market would continue to grow, and since we have identified these directions, which we believe are the right directions, I think we are positioned to continue our growth.

Okay. And any luck on getting a gross margin number? You said that you had a 36% versus 32% on the call just now. I'm wondering if we could get a sense of maybe some sort of range of gross margin that you see for the year of 2006 that you would feel comfortable with.

Again, we do not publish forecast. It would be fairly obvious to say we will try to keep it this way, and also fairly obviously to say that if you can grow yourselves, you are under some risk of erosion in this growth margin percentage wise. So the challenge is we will try, no promise. At the same time we factor the management objective, and I have said that a goal of net income profitability, which means that we will try to work our way in this combination.

I'm sorry I may have missed one other point, and my last question is, you mentioned that you generated, and I don't know if I caught this right, $10 million of cash in Q4. Is that what you said?

Operating cash, we had, yes.

10 million generated. All right. Thank you very much. Bye-bye.

Thank you.

Your next follow-up question comes from Bob Sales with LMK Capital.

Just a different cut on the gross margin line to understand the trends. Can you talk about the difference in gross margin for your equipment sales versus your service sales?

Bob, you refer to-- it's a trend in equipment and a trend in services?

No. No. What I'm saying is-- plainly, I guess is do you expect-- does your equipment generate gross margins that are higher, the same or lower as a percentage of revenue versus your service revenue?

Yes. The answer to that is yes. The GNS creates higher growth margin percentage wise than the service side of the business.

Is that something you would be willing to quantify for us, perhaps for the year or for the quarter?

Well, we will publish that, but you can look at the [inaudible-accent] last year, and the numbers are there.

Okay. And then given some appreciation for your desire not to forecast revenue, can you talk a little bit about what your goals are for operating expenses in '06? Whether we should manage our expectation for them to trend up or be flat on an absolute basis.

Don't pull my leg, Bob. I have already said that, I have set the goal, and you should leave me some degree of freedom in the constrains that we don't publish focus, on the other hand, we said what our management objectives are.

Yeah. Okay. Okay. No problem. And then-- yeah. I think that's it for now. Thank you very much.

Okay.

You have a follow-up question from Kelly Pan with Pantheon Capital.

Hi, I wanted to understand on the backlog, which seems very nice increase, can you break that down by geography, and also, are there any customer concentrations in that backlog?

The second part was what, excuse me?

Whether there was any customer concentration in that backlog. In other words is-- like a large percentage of the of backlog by one or two customers.

No. The answer to the second one is fairly clear. No. The distribution, and specifically when it comes to the increase in revenues, varies widely distributed among many customers. Obviously,-- excuse me, yeah, Tal wants to add something too. Go ahead Tal.

I think-- if you look at the backlog you see it consists from three groups GNS, [inaudible-accent] enterprise, and in GNS, as Amiram mentioned, it's sporadical over the regions. Many customers and not one specific one. We can see the main increase in the backlog actually came from the GNS business unit. If you look at Space Net rural, I would say the reason, it's consistently fueled, but there is one specific customer and I'll give it back to Amiram.

Yeah. In Space Net Rural, we have two, if you like, big customers is the government of Columbia and the government of Peru, and government of [inaudible-accent], which is the nature of this activity, as I explained before. Obviously. And when it comes to Space Net, again, multiple customers, no specific one. With regards to the geographical distribution, I'm afraid we don't have this data at the moment. [inaudible-accent] this call.

Okay. Thank you.

We do have another follow-up question from Bob Sales with LMK capital.

I only ask these follow-ups because it's-- the Israeli time difference creates an difficult time inter-quarter, so I appreciate your patience.

The trend I was wondering about is it strikes me that for Space Net in the U.S., that as DSL and cable and, I guess just general T 1's, become more pervasive, that the traditional VSAT customer base of retail is probably the most threatened. And I'm-- I'm wondering in your Space Net recurring revenue base, how much of that is retail, and what your expectations are in terms of that being able to preserve that particular-- a customer base, or whether you expect there will be other industry opportunities that can help you out to replace it?

Yeah, it's an interesting observation because we-- I think I showed the following-- the same observation the following way. Yes, you can have-- in the past people, would have taken VSATs because they couldn't have any other means of communication, and they wanted to connect gas stations in remote areas, and this was the only way to do that, and they wanted to have credit card authorization. I would think that the main elements that, just as with VSATs, is not so much the inability to be connected in any other way, it's actually the reliability and the ability to manage the network.

The reliability of VSAT Network is much higher than almost all other alternatives, and I know intuitively for people who are not coming from our industry, it sounds a bit strange. But basically, this is the way it is done, and Space Net actually is signed on contractual obligations to supply services to very high availability numbers with penalties aside sometimes. So I think that the market is going change and be-- the market for the enterprise users for which the availability is very important, and--

But what about the-- what about the cost competitiveness of VSAT today for retail North America versus other flavors of connectivity?

We have extensions with this kind of customer-- kind of left in line. Most of them continues our service contracts, because people tend to do the mistake and compare this kind of service with the regular DSL they can can have at home. A, if you have DSL for business, you pay more, B, you don't have that great of service at all. Basically they don't have so many alternatives. Some of them require for example, higher traffic, higher capacity, and they would like to go sometime for same relay and pay the extra money for even managed frame relay, and yeah, it happens, but generally speaking, there's definitely still room for enterprise customers interested in having a larger network, specifically if they want [inaudible-accent] to be managed as well.

Okay. Thank you.

At this time there are no further closing-- do you have any closing remarks?

Yes. Flip here the slide, to the last two slides of our presentation, and you will see in a short while--[inaudible-accent] five to ten seconds until it shows up. The delay much higher than the satellite delay, by the way, which is a fraction of a second, but the time it takes here is much more. Any way, you can see in this slide the connection turn around to the company as a guidance through in the year 2003 to 2005.

You can see the left side of this slide, the balance sheet elements, which most-- mostly I would think is shareholder equity that went from minus 173 to plus 85, [inaudible-accent] total debt went down from 512 to 120, and the cash balance, as we define cash balance-- and I want to repeat definition, from 71 to 113, inventory and [inaudible-accent] helped in achieving that, and then you look at the P&L, the right side of this slide, you can see that we move in gross profit from 17% in 2003 to 36% in 2005, from $93 million loss in 2003, to break even or operating $1.4 million in 2005. EBITDA went from minus 25 to plus 21. We have a new controlling party, which is York Capital, which in itself hopefully signifies some belief in the company.

We have shared with you our management financial objectives to double digit revenue growth during the year. And net income profitability. And we think we're fairly well positioned, or we think we stand a fairly good chance to achieve these goals because we are operating in a market which is growing. As we saw earlier in this presentation. And the market is growing both for equipment and for services.

We have the right product and the right sort of services to be positioned to grow within our market, and in addition to that, we are trying to find some [inaudible-accent] of growth by going up the value chain and find some other sources for growth and profitability, mainly, return key projects, the tailored solutions value-added applications and managed services.

And with that note, I would like to thank you for participating in this call. And hope to talk to you between the calls and in any event in the next call. So thank you and bye.

This concludes today's Gilat conference call. You may now disconnect.