Gilat Satellite Networks Ltd (GILT) 2006 Q1 法說會逐字稿

Good morning, my name is Deborah, and I will be your conference operator today. At this time I would like to welcome everyone to the Gilat Satellite Network's First Quarter 2006 Conference Call. (Operator Instructions).

Thank you, Miss Ferrer you may begin your conference.

Good morning and good afternoon and thank you for joining us today for Gilat's first quarter 2006 results conference call.

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 its forward looking statements even if experience or future changes make it clear that any projected results, expressed or implied, will not be realized.

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, Emmanuelle. Good day, everyone. On the agenda for today's call, I'll walk you thru a few of the business highlights, the key financial indicators and I'll give you a quick overview of the business units.

Then, Tal will take you thru the detailed financial results and we'll open the floor for questions. Once we are done with the Q&A session I'll summarize.

Business Highlights, Gilat is off to a good start in 2006 with a strong first quarter and improvements in all-key financial indicators. As a result, we feel we are on track at present to achieve our 2006 management financial objectives of double-digit revenue growth and net income profitability.

We see continued growth in our business, driven by several factors including a steady flow of small deals coupled with some large transactions. We currently enjoy strong sales to the markets, which we are focusing on; enterprise, governmental and rural communication.

In line with our business strategy, we continue to focus on moving our services and solutions up the value chain. To illustrate how we are, "moving up the value chain", we will share with you a few examples later in the presentation.

Now I understand we have some problem with the webcast, so we'll leave the presentation on the website when we're done. And I'm not going to be some old version of the conference call with the hope that we're going to sometime to fix it and you can see the presentation on the site, but meantime I suggest we all (inaudible) to see. I hope you all have the press release that we have published an in any event we will mention the main element and the main numbers.

Looking at this financial indicators summary slide, which you don't have in front of you at this point. You can see that our first quarter revenues increased to $58.6 million from $53 million in the first quarter of 2005.

As you know, stock options granted to employees, are to be expensed per GAAP beginning with this quarter. You will hear more details regarding this from Tal Payne a little later.

For comparison to the first quarter 2005 results, we have eliminated the non-cash stock option expenses from the financial results. Hence the non-GAAP, EBITDA increased by about 85% to $8.7 million from $4.7 million in the first quarter of last year.

Net income for the same period went from a net loss of $1.9 million in first quarter 2005 to a net income of $1.2 million and a non-GAAP net income of $2.7 million in the first quarter 2006. Again, Tal will go into more details on our financials a bit later.

As I mentioned in our last call, our corporate strategy is focused on moving products and services up the value chain, further expansion into international markets, and focusing on enterprise segments, governmental projects and rural telecom. What follows are some highlights of the progress we have made.

As you know, Gilat has three business units: Gilat Network Systems or GNS an equipment provider to operators world-wide, Spacenet a service provider in North America, and Spacenet Rural a service provider mainly in Latin America.

GNS provides VSATs to carriers, service providers and enterprises around the world.

We've recently seen a great deal of growth particularly in Latin America and Asia, with rural communications projects, which have been driven by the need of operators to fulfill Universal Service Obligation (USO). In the last few months we received orders of this sort from a few operators. One example is Bolivia's second largest telecommunications operator - COTAS. Another example is China Satcom where Gilat shipped roughly 1,000 VSATs for rural telephony applications in Gansu Province and Inner Mongolia. We also provided USO networks to China Unicom and to operators in Brazil and in Russia.

As you know, we are looking, in GNS, for ways to move our products and services up the value chain by offering turnkey solutions. One example that we are quite proud of is our recent contracts in Mexico.

The project combines our equipment and services to provide a satellite solution for the Enciclomedia project. Under this program, Gilat will be providing over 15,000 SkyEdge VSATs to approximately 33,000 classrooms for 5 out of the 7 regions, which have commenced implementation. Enciclomedia is the largest project of its kind for education in Mexico. The goal of the Enciclomedia program, when completed, is to install an electronic whiteboard, a projector and a PC, in fifth and sixth grade classrooms across the country.

If you would have the presentation in front of you I would refer you to a nice picture where you could see a student standing behind a whiteboard and the installed system enables the board to function both as a screen and as a virtual keyboard.

VSATs are an important facet of this project, enabling the program management to verify that the equipment and applications are functioning correctly. The system enables providing Voice over IP telephony services, to help solve technical problems quickly. The VSATs also enable students to browse the Internet and teachers to access a portal that provides information specific to them.

Gilat is providing more than VSATs in this project. In some of the regions we also provide the integrated monitoring solution that actually verifies that the equipment and applications are fully functional.

In other regions, we are supplying full end-to-end satellite services, via our sub-contractor. This project, besides being a large and important government project, highlights how Gilat is "moving up the value chain", providing more value in its solutions to its customers.

Spacenet Rural provides telephony and Internet services to end users in remote areas. We are among the leading rural telecom service providers in Latin America. We have operations in Peru, Colombia, Venezuela and Panama. Some of Spacenet Rural's activities are government-subsidized projects to supply telecom to rural areas.

A new example of this model is FITEL 5 in Peru, which was recently awarded to us. This is not a big project compared to others we have implemented in this region, but it's interesting as it is a pilot program of the government to promote Internet literacy and usage.

Under this unique program, we will be providing all required equipment to Internet Cafes to be established in rural areas around the country and we will be training the local population to use the Internet. In FITEL 5, the subsidy provided to us depends on the actual usage of the network, not just on deploying the services. Spacenet Rural's obligation then is to encourage Internet use, mainly through effective training and teaching of Internet applications such as browsing and e-mail. We believe that we have the experience and capabilities to make this project a success. The Peruvian government has declared that if the project is a success, it will issue a larger bid based on this model.

Moving to Spacenet Inc. in the US. Spacenet provides broadband data services in North America and is focused on the Enterprise market, such as retail, hospitality, restaurants and lottery.

We are seeing growth in the lottery market and we have had an increase in the number of deals as well as the amount of VSATs shipped for this segment. Spacenet Inc. is also moving up the value chain by providing managed network services as well as communication solutions based on hybrid networks. By hybrid networks, I mean networks that provide a combination of both satellite and terrestrial technologies Managed network services refers to providing more than communication services, such as proactive monitoring of the network, configuration management and outsourced firewall management.

As for the InterContinental Hotels Group, which I mentioned in our last call, Spacenet is managing their site proactively, identifying problems before they arise, monitoring historical, as well as real time activities, and managing a host of integrated solutions. Perhaps in recognition of the good work Spacenet is doing, InterContinental recently extended the contract with us through 2008.

Now I'd like to turn the call over to Tal Payne who will discuss the quarterly results in more detail and then we will open the call to your questions. After the question and answer session, I will make some brief concluding remarks.

Tal?

Thank you, Amiram. Good morning and afternoon everyone. I am pleased to be able to share with you the results of the quarter and provide some more detail on the financials results.

Commencing the first quarter of the fiscal year 2006, Gilat implemented the Statement of SFAS 123R, "Share-based Payments," which requires companies to expense the fair value of grants made under stock option programs over the vesting period of the options beginning on January 1, 2006. The expense is a non-cash transaction. Gilat will report its net income and earnings per share during 2006 on both GAAP and non-GAAP, in order to provide meaningful period-to-period comparisons. In our press release, we are presenting GAAP and non-GAAP results and reconciliation tables, which highlight this data.

Let me share with you the financial details for the first quarter of 2006. Revenues for the first quarter of 2006 were $58.6 million compared to $53 million in the first quarter of 2005.

These results can be attributed to a steady supply of small deals coupled with some new large transactions, and strong sales to the enterprise, governmental and rural communication sectors.

GAAP net income for the first quarter of 2006 was $1.2 million or $0.05 per diluted share compared to net loss of $1.9 million or $0.09 per diluted share in Q1 last year.

Non-cash stock option expenses accounted for $1.5 million in this quarter. Please note that this expense does not appear in the parallel quarter. Non-GAAP net income, excluding non cash stock option expenses, for the first quarter of 2006 was $2.7 million or $0.12 per diluted share compared to the net loss of $1.9 million or $0.09 per diluted share in the first quarter of 2005.

Gross profit for the first quarter of 2006 increased to 37%, up from 34% in the comparable period of 2005. This was as a result of the change in the mix of products and services sales this quarter and the improvement in our cost structure.

Selling, marketing and general expenses were $15.9 million compared to $14.5 million in Q1 2005. The difference is attributable mostly to non-cash stock option expenses, which are included for the first time this quarter as a result of adopting SFAS 123R. Excluding non-cash stock option expenses, selling, marketing and general expenses were $14.6 million, similar to Q1 last year.

Total operating income, excluding non-cash stock option expenses, was $3.7 million compared to operating loss of $700,000 in the first quarter of 2005.

Non-GAAP EBITDA was $8.7 million, an increase of 85% compared to $4.7 million in the first quarter of 2005.

Total cash balances at the end of the quarter were over $114 million. Long-term debt was $119 million, including the convertible loan due to York. We generated cash from operating activities of $2.4 million compared to $5.4 million cash used in Q1 2005. Total cash flow generated was $2.0 million, compared to $7.4 million cash used in Q1 2005.

Our trade receivables at the end of the quarter were $35 million representing DSO of less than 60 days.

Shareholders' equity increased to $89 million at the end of the quarter mainly as a result of our net income and the capital surplus recorded for stock option compensation as per SFAS 123R.

In conclusion, we see encouraging trends and results, we have taken our first steps in getting back to steady profitability in 2006 and we've made solid progress toward achieving our 2006 management financial objectives.

And now I'd like to turn it back over to Amiram.

Thanks Tal. Before I provide my closing remarks, let's take some questions. Operator?

(Operator instructions). Your first question comes from Tom Watts.

Hi Tom.

How are you?

Fine thank you.

Congratulations on the great progress.

Thank you.

In terms of the - how should we think about 2006 unfolding? Is this a quarter - are these quarterly results some sort of thing that should be continue to be achievable throughout the year and what other types of catalysts should be looking for? Is this - are you more comfortable with the growth that we're looking, that we can see in the remaining quarter?

Well generally speaking I would think that - as I've said before Tom, we are on track with - we don't view that as an exceptional quarter for this year and as I've said before, we are cautiously optimistic that we will make the management objectives through the year. We definitely see a strong market for us at this point of time and in the market that we are focused on you know we're not in the consumer, we're not focused in the consumer business but we are definitely focused in the enterprise rural telephony and government subsidized projects and we see a strong market there. So in part it is reflected in this quarter and we think that we are fairly well positioned for the continuation of the year.

Okay, and in terms of your share holding and the securities that they hold, do they - have you discussed with them any plans for monitizing their shares or any way of returning capital to them?

Well York has an option to convert the debt, approximately $70 million into shares for $6.75 per share. And they have this option until the end of September. So by the end of September I guess we all know what their plans are right?

Right. Okay, thanks very much.

Thank you Tom.

Your next question comes from Bob Sales.

Hi, congratulations on the progress. Couple of questions. In shear count with the convertible debt, does the shear count, given that you were profitable in the quarter, is the diluted, for diluted share count include the conversion of that debt?

No, the convertible notes are included in the shares only when it's empty - only when it's diluted. Since the interest payment divided in the shares that York will be able to receive is higher than the EPS that we published its not included in the calculations.

Got you. Okay. And then with respect to - just one question on the balance sheet. There was a - the other current assets 27 million at the end of December and then 29 million now. What is that - what is that in that bucket?

Other current assets include many items, for example you have these prepaid expenses, short term, you have a capital lease short term, deferred charges, VAT, tax assets and so on.

Okay got you. So it's a mixed bag. And then how has the shift been or the - as you look at your business sequentially over the last 2 to 3 quarters, has there been a trend, a continued trend towards more GNS revenue or hardware sales or has that begun to stabilize at a mix that its been over the last quarter or so.

We don't publish it the way that we've separated between the business units only once a year.

Right.

But I can tell you, yes you're right GNS enjoys good flow of deals, which in part are large deals and more complicated. Means these are the kind of the deal that we don't just ship VSATs but we do more than that and actually as we have explained in the previous call, due to revenue recognitions rules, some of these deals are recognized over a period of time if there are multiple elements which are - for example include a service component which will be recognized over a period of time then the entire deal is kind of recognized over a longer period of time.

Okay, but in general would you expect '06 to have a higher portion of GNS revenues versus '05, just like '05 did over '04?

I would think it's a bit too early to say.

Got you.

And in any event I don't see a major change there. That reminded me - you know the service organizations have more perpetual kind of revenues so in nature its kind of more stable, even so we also have projects and they also have some equipment sales coming in from time to time.

Okay, I'm going - I have a couple more questions but I'll get back in queue and let someone else ask some.

Okay.

You next question comes from Kelly [Pan].

Hi, yes.

Hi Kelly.

Could I ask about all these debt issues that you have and that are held by trustees and customers and as well as assets that sound similar. What are these things and what generated them?

Could you be a bit more specific? I'm not sure I follow you that we can express what is this with respect to cash if you're interested that in?

Well there are long term advanced from customer held by trustees, there are also long term-restricted cash held by trustees.

Yes, I will try to explain it, to simplify it. In the liability side - when the cash flows into the trustee, maybe we start from the beginning. All of these restricted cash in the long-term advance in the liability side, all of this related to Compartel 2 projects in Columbia. Now the mechanism works in a way that the government gets all the cash in the trustee account, which we manage. When this cash goes in the trustee account we put it in our restricted cash in the short term and long term and the split between the short term and long terms is basically - based on the timing when we expect to release the cash from the trust into our cash and cash equivalents.

These are 2 deals for Spacenet and where?

Spacenet Rural, which is in Columbia.

Okay.

On the liability side, when we receive the cash naturally we don't recognize revenue since it's a sservices contract to operate the network over 5 years. Therefore we record it as advances from customers and recognize it as revenues over the life of the contract, which is the period where the services are rendered.

I see, it's a 5-year contract?

Yes.

And what are the currencies and the credit of those things?

Most of our transactions, including, this transaction is in Dollars so the cash went into the trust 75% was in dollars, 25% was in local currency and all of this is now in dollar currency.

And who pays - who committed the capital to do this? Do you have a credit issue at all in dealing with these developing countries?

No, we work with the government of Columbia, the cash went into the trust, we released 60% of the cash already, so it was parallel to our expenses to build the network. So no, it didn't require cash needs from Gilet.

So you're not funding any of these projects, they are funded by the governments.

This specific one is a government project funded by the government, yes.

And you are - you are -

Excuse me, sometimes we do finance projects but not in this governmental projects where the government supplies the subsidy to build the network.

I see. How much of your business do you actually fund versus being paid by others? Paid by customers.

A very minimal portion at this point.

And is that the policy going forward?

Yes, we try not to finance deals. The only type of deals which sometimes we do finance is when there is a combination of equipment and service in the long term, like 3 to 5 years deal. Sometimes we do finance the equipment if the deal is a right one and the credit of the user is the right one.

But all in all, I would say that this is a very small portion of our deals.

Great. Thank you.

Thank you.

You have a follow up question from Bob Sales.

Just trying to understand announced wins versus revenue recognition because I think you've alluded on a couple sequential calls that these are more complex projects and there is longer term revenue recognition but just to focus in on this Mexican classroom project where there's 15,000 VSATS was there any - how much of that revenue has been recognized already and if not all, over what period do you think you'll recognize it. I'm just using that as an example because it's fresh.

Usually we don't like to refer to specific deals but in this case I can tell you that almost none of it has been recognized by now.

And overall what -

Bob, I don't know if you have mentioned, you kind of bundled them all together, but basically there are 2 different customers and 2 different deals all together. One of them is more kind of an equipment type of deal where we supply not only the VSATs but also the monitoring equipment. Which is interesting in itself because it's a more complicated deal from a technical point of view and also from the type of equipment we supply. And the other one is more kind of a service deal. We supply actually the service to the (inaudible) contractors in Mexico where we supply the VSAT as well. It's a more complicated deal. From another angle if you'd like.

Okay, I got you. But in a - the vanilla, in the first deal let's say where you have VSAT and monitoring equipment, what is - over how - what period of time generally are these roll outs and revenue recognition and do you expect in the types of deals that you've been announcing in the last several months that the customer will come back for additional purchases within 6 months or a year or some other period of time?

That's a really good point again. To your first question, equipment deals in nature are kind of shorter term. Means if you have just a deal which is basically equipment and you need to ship the equipment and then you collect and then the deal is done. So, this is my general answer to your first question.

The second one there is a perpetual order by the customers. In this specific one the customer is an integrator that has won a few regions in Mexico to implement its project. So if this specific one will win in other regions for the continuation projects and the government has said they intend to issue additional projects, then we stand, I would say, a fairly good chance of working with integrated in the future if we do a good a job by supplying the integrator with the equipment first round. This is kind of again a specific situation in Mexico. Usually when we do equipment sales we team with several providers, the operators. In many many countries. And once an operator acquires a hub in a certain region, again, if you do a good job and the operator is successful then as much as the operator expand his business it buys more equipment from you.

Good. And then when you look at some of this international satellite spending, which appears to be where the growth is in satellite spending in the globe. My observation is that Hughes has pulled in a little bit on the international front and I'm curious how competitive are the deals now versus lets say 3 or 4 years ago and who is your primary equipment competition that you see regularly whether the deal is in China or Latin America or wherever?

I wouldn't say that we're such a big difference from 3 or 4 years ago in the sense that we still see HNS, we still see Viasat from time to time we will see IDirect as well. It is true that I guess each and every company is more focused in the business segment or in a specific territory. In some territories HNS is a service provider itself so they are less in the equipment business, but its really very specific. All in all I would say that it was competitive and it remains competitive.

Okay, thank you.

Thank you Bob.

(Operator Instructions). We do have another follow up question from Bob Sales.

I'll take the floor if no one else is just because this is a great window. Would you care - you've kind of sailed into the first quarter and what I anticipated as potentially a seasonally weaker quarter, and I guess you're sticking to your guns and managing our expectations to what I would say is rather modest and that is net income profitability on the year. But have you considered giving thought to kind of a longer term operating income profitability level that we might look forward to as business continues to track along double-digit growth. And my point is if you get to the out quarter of '05 - of '06, anniversary the nice momentum you had at the end of '05 then you're going to be seeing a lot nicer profitability than just a percentage point or so on the bottom line.

As you've said Bob at the beginning of your question, we stick to our guns. So -

Well I thought I would try anyways.

Well I know you by now.

Yes, congratulations. You're doing a great job, very impressed.

Thank you. I think with that said, if anyone still wants to answer questions fine then if not I'll just try to summarize.

There are no questions in queue at this time.

Okay. Looking ahead through the rest of 2006, we are seeing a steady flow of small network deals and a proportional increase of large transactions. All in all, we believe we are on track with our 2006 management financial objectives of double-digit revenue growth and net income profitability.

Our financial indicators continue to improve and our business continues to grow. We maintain our focus on Enterprise, Government and rural communication markets and we are gaining ground in all three segments.

Last, our commitment to selling value-added services and solutions is gaining traction with customers and at the same time, helping to improve our margins. Overall, I believe we are well positioned for continued growth throughout the year.

On that note, I'd like to thank you all for participating in this call. I apologize again for not having the webcast in [parlant] to this discussion but assure you that you'll see the presentation on the site.

I'd also like to thank everyone at Gilat for their hard work and contributions to the success of the company. Thank you for your participation and we look forward to you joining us again next quarter. Thank you.

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