Gilat Satellite Networks Ltd (GILT) 2006 Q2 法說會逐字稿

Good morning. My name is [Albis] and I will be your conference operator today.

At this time, I would like to welcome everyone to the Gilat Satellite Networks second-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

I would now like to turn today's conference call over to Ms. Andrea Priest. You may begin your conference, ma'am.

Good morning and good afternoon. Thank you for joining us today for Gilat's second-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 Limited 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.

Also during this presentation, references to financial measures will include non-GAAP financial information. We will provide a reconciliation between GAAP and non-GAAP information later in this briefing. For more information regarding our use of non-GAAP financial information, please see our most recent earnings press release on the Company Web site at www.Gilat.com, in the Investor section.

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. Good day, everyone.

On the agenda for today's call, we will go over our main business unit highlights, our key financial indicators, and then I will delve into some details about a few projects. After this, Tal will take you through the detailed financial results and I will summarize the quarter. Then we will open the floor for questions.

The market in second quarter of 2006 has been active with deals coming from enterprise and governmental segments. Gilat has had another strong quarter in 2006 with good results and improvements in all key financial indicators. Our financial results have improved once again compared with the second quarter of 2005.

In this past quarter, there were a number of press releases issued about Cisco's [reset] module. In today's call, I will go into further details on this initiative. In addition, Gilat continues to expand to additional market segments and I will highlight the success we've had with two such examples.

Looking at the financial indicator summary slide, you can see that our second-quarter revenues increased 19% to $61 million from $51.4 million in the second quarter of 2005. EBITDA increased by about 83% to $9.5 from $5.2 million in the second quarter of last year. Net income for the same period increased from the net loss of $1.1 million in the second quarter 2005 to a net income of $2.1 million and a non-GAAP net income of $3.1 million in the second quarter of 2006. Tal will go into more detail on our financials a bit later.

I will detail this quarter for you -- Gilat currently operates under three business units -- Gilat Network Systems, or GNS, an equipment provider to operators worldwide (indiscernible) service provider in North America and (inaudible) service provider, primarily in Latin America. Last quarter, we told you about some of the interesting activities in our business unit. This quarter, we going to focus on (indiscernible) GNS namely because of our newly announced relationship with Cisco, which we hope will have positive implications for both business units.

As we announced in June, Gilat has been designated a Cisco technology developer partner and our research and development team has been working on the Cisco project for some time now. I would like to spend a few moments detailing the Cisco-Gilat solution. As you know, Cisco published the sale of its VSAT network module. This VSAT is integrated into Cisco's routers and plugged into them just like any other network module. This module operates only with Gilat (indiscernible) units at the remote site and communicates only through Gilat's (indiscernible). In North America, Spacenet is the first Cisco research (indiscernible) service provider.

Let's look at the market for this Cisco solution. We see business continuing to (indiscernible) recovery as a major opportunity for satellite applications and in general and specifically for the Cisco VSAT (inaudible). An additional market for the Cisco VSAT is in applications where satellite solutions can offer advantages over terrestrial communications such as video and data (indiscernible) for quantum distribution, digital signage, etc.

To better understand these solutions, let me remind you of the concept of the standard VSAT, which is comprised of an IDU, or indoor unit, and an ODU, or outdoor units, which is attached to an antenna. These all connect to a hub via satellite. This is Gilat standard solution.

Do we have an issue here with the presentation or are we still -- (technical difficulty)? Okay.

Cisco is now offering routers which include a VSAT as a router modem. VSAT (indiscernible) connected to a Gilat outer unit and antenna and communicated with a Gilat (inaudible). The communications service is provided to the customer by a Cisco-certified hub (indiscernible) CHO using Gilat (indiscernible). Specifically, North America and (indiscernible) are the first operators to be certified as CHOs.

What does all this mean for Gilat? The purpose of this project Gilat has been designated a Cisco technology developer partner. We see this as an important milestone. With every (indiscernible) Cisco VSAT and install, we should see revenues from the sale of the Company and Gilat equipment. In addition, (indiscernible) sales in the North American Cisco VSAT market as a certified hub operator and service provider, giving rise to an additional potential revenue stream. If the Cisco VSAT is well-received, we hope that many of our SkyEdge hub operators will become certified service providers for Cisco VSAT. That said, this VSAT is provided by Cisco (indiscernible) Cisco's sales channels with typical sales cycles in our industry of 9 to 12 months. As such, Gilat's visibility into the size of this market and its future success will hard to estimate.

The first customer for the Cisco-Gilat solution is Valero, a leading energy company in the U.S. Valero's customer (indiscernible) since 2003 has recently chosen Cisco's VSAT complemented by services provided by Spacenet for its refineries. This solution adds another layer of protection to Valero's critical communication link and ensures that, in case of failure, the switch to a better satellite link will be quick and seamless.

This quarter, we see growth in sales at GNS, our equipment sales business unit, particularly in enterprise and world communications projects. All of these deals have been announced recently, including deals with (indiscernible), Angola Telecom, (indiscernible) and (indiscernible). In addition, GNS has expanded to new market segments and I would like to share two examples with you.

We see expanding mobile network in areas without (indiscernible) communication coverage creating demand for satellite solutions. For the mobile operators, which is a new market for Gilat, we have developed an efficient satellite GSM satellite network solution called SkyEdge. This application connects the satellite base station, BPS, the their base station controllers, BSC. As you can see in the bottom left of this slide, in standard technology implementation, these are point-to-point connections. With our SkyEdge solution in the bottom right, it's a point to market point connection where bandwidth is shared between all of the cellular antennas and allocated on demand according to the actual number of mobile calls in the cell. The SkyEdge has advanced traffic optimization, which reduces the amount of traffic (indiscernible) and the operating expenses of the model operator. It's important to note that SkyEdge is designed to support cellular equipment from all major vendors, including Ericsson, Nokia, Siemens (indiscernible) Alcatel and others. We have already received orders for this solution from customers in Asia, Africa, and Latin America.

Another example of GNS successes in [growth] penetration into enterprise market applications is a recently announced deal with Impsat. Impsat is one of Latin America's largest service providers, delivering integrated communications solutions based on fibre, wireless, Wireline, and satellite technologies to service providers and enterprises. Here, GNS has replaced existing point-to-point satellite modem links, or enterprises, with our VSAT solution. In this instance, the new profitability of our carriage ensures the service level agreement (indiscernible) customers require while also reducing [input] space segment operating expenses by operating in bandwidth On Demand access. We are pleased to be bringing this solution to Impsat and their customers. We see more customers like Impsat who operate large modem banks as well as VSAT networks. And it is satisfying to be able to offer them both applications from the same carriage platform.

(background noise) -- communications continues as a leading world telephone service provider in Latin America. (indiscernible) is on track with its operational and financial targets.

Our North American service provider, Spacenet Inc., continues to focus on the enterprise market such as retail of (indiscernible). As discussed earlier this quarter, Spacenet became the first North American operator to have been certified by Cisco to provide its customers with services for the Cisco VSAT. Also this quarter, Spacenet has launched its connect MCI service for business continuity.

Spacenet has been through other changes as well, as we have constructed a new management team. I would like to take this opportunity to welcome our new CEO of Spacenet, Mr. Andreas Georghiou. I've had the pleasure of knowing and working with Andreas for many years ever since Gilat purchased Spacenet from (indiscernible) Americom. Andreas joins us after a long and successful career with SES Americom, having most recently served as their Chief Commercial Officer. As part of [convert] management team, Glenn Kats has been promoted to Service Spaces President. Glenn will continue to serve as Chief Operating Officer and will be responsible for (indiscernible) sales division. Also joining Andreas' management team at Spacenet is David Myers as its Senior Vice President of Marketing and Business Department. David is an industry veteran who knows most recently served as Vice President of Marketing and Product Management CapRock. Together, these management changes complete the process of assembling a new Spacenet executive team with a clear experience and focus to successfully grow the business and drive forward new market opportunities. We look forward to these new additions and its forthcoming contribution to Spacenet -- (technical difficulty).

Now, I would like to hand over the call to Tal Payne, our CFO, who will go into more financial details of this quarter. Tal?

Thank you, Amiram. Good morning and good afternoon, everyone.

I would like to take a few minutes to discuss the results we published this morning. We are pleased to conclude yet another successful quarter. During Q2, our topline increased by 19% over last year's second-quarter results with a significant increase in our bottom-line results as well. As a reminder, our quarterly results for 2006 include the impact of FAS 123R, which is the inclusion of the non-cash stock-option expenses in the P&L.

In our press release, we are presenting GAAP and non-GAAP results and reconciliation tables which highlights these data.

Now, let me share with you through the financial details of the second quarter of 2006. Revenues for the second quarter were $61 million, compared to $51.4 million in the second quarter of 2005, an increase of 19%. The increase is related mainly to enterprise and rural communication projects with strong sales for GNS in Latin America, and (indiscernible) equipment revenues from (indiscernible) applications.

GAAP net income for the second quarter of 2006 was 2.1 million or $0.09 per diluted share, compared to a net loss of $1.1 million or $0.05 per diluted share during the Q2 last year. Non-cash stock option expenses accounted for $1 million is quarter. Non-GAAP net income, excluding non-cash stock-option expenses, was $3.1 million this quarter or $0.12 per diluted share, compared to a net loss of $1.1 million or $0.05 per diluted share in Q2 last year. On a non-GAAP basis, stock options were dilutive for the first time and hence included in the calculation of the non-GAAP diluted EPS.

Our gross margin is affected by our mix of products and services, the regions in which we sell, and the size of the transactions. Gross margin for the second quarter of 2006 was approximately 36%, up from 35% in the comparable period of 2005 and in line with our target.

Selling, marketing, general expenses were $15.6 million, compared to 15.1 million Q2 2005. Excluding non-cash stock option expenses, selling, marketing and general expenses were 14.7 million in the second quarter of 2006.

We continue to keep tight control over our operating expenses, which have been relatively consistent.

(indiscernible) operating income, excluding non-cash stock option expenses, were $4.3 million, compared to $0.4 million in the second quarter of 2005.

EBITDA was $9.5 million, an increase of 83% compared to $5.2 million in the second quarter of 2005.

Now, turning to the balance sheet, we finished the quarter with total cash balances of $126 million. We generated cash from operating activities of $13.4 million this quarter, compared to $4.6 million in Q2, 2005. Please note Gilat payments of principal and interest on loans in Q3 is expected to be approximately $8.8 million. Also in Q2, we benefit from strong collections of advances from customers.

Long-term debt was $117.7 million, including the net convertible loan due to [York] in the amount of $67 million. As a reminder, this loan is convertible through September 30, 2006 at $6.75 per share to approximately 31% of our outstanding shares. The conversion provision change as of October 1, 2006 to the greater of $7.50 per share or the market price plus 1% until June 30, 2007.

Our trade receivable at the end of the quarter was $39.2 million, representing DSOs of less than 60 days.

In our current liabilities, our Accounts Payable increased by $20 million this quarter. This increase is derived from strong collections of advances from customers and growth in our deferred revenues, payment terms and revenue recognition deferred between different types of customers and transactions. Hence, the increase is not an indication of a trend.

Shareholder equity increased by approximately $5 million to 94.1 million at the end of the quarter, mainly the result of our net income and exercise of options.

In summary, we see encouraging trends and results and we are pleased to conclude our third quarter in a row of increased revenues and improved profitability while maintaining our strong cash position. These results were driven from growing sales in our core markets while successfully achieving first orders in new market segments, as Amiram described in detail earlier.

That concludes my remarks, and I now turn it back to Amiram.

Thank you so much, Tal.

The overall VSAT market remains active. Q2 was a strong quarter for Gilat. We saw continued growth in our business and improvement in all our financial indicators. New markets, which we've been developing for some time, successfully achieved first orders. We gave two examples during this call. The first is a satellite back-haul market and the other is replacing modern banks with a VSAT solution for the enterprise market.

The relationship with Cisco significant. We hope it will open new opportunities going forward.

Now, with this summary, I'd like to open the call to questions.

(OPERATOR INSTRUCTIONS). Tom Watts, Cowen & Company.

Congratulations, Amiram and Tal. Could you just comment on orders and backlog during the quarter and how those compared to last quarter?

You know, Tom, backlog fluctuates between quarters and as such, it could be misleading and I guess (indiscernible). Our annual backlog figure is significant (indiscernible) a better indication of the business stability and growth potential. That being said, backward increased this quarter.

Okay. Then on the Cisco product, you've talked about the Valero example. What sort of visibility do you have on additional orders there? Are there other major contracts like that in process? How does the selling process usually work? Does Cisco typically bring you in early on in the process or is it later? Do you see significant -- you mentioned 9 to 12-month selling cycles. Does this suggests we are unlikely to see upticks in that before '07?

Probably not before '07, and you know, it might be but probably not.

In terms of orders, the way it works is that Cisco usually works with distributors and therefore, the sale is usually done from a combined Cisco and the distributor (indiscernible) if relevant in their mind, fairly early in the game, but obviously the sale is managed by them and they would (indiscernible) specifically in the U.S. obviously because, in case they need a service provider, Spacenet needs to come and present the service provider (inaudible).

Now in terms of how it will evolve, I would think that the U.S. is kind of more advanced than other territories in that regard, because Spacenet was the first one to be [THO] and there we have better visibility that in other areas in the world at this point.

Generally speaking, I would think it will first (indiscernible) could then -- or first orders could then be in the U.S. and then number two probably in Europe.

Then also a financial question -- Tal, we saw depreciation and amortization uptick this quarter a little bit after a long series of down-ticks. The 5.2 million, is that going to be representative for the next couple of quarters or will that even go up?

I think it should be representative. If I remember correctly, the increase was a few hundred to thousands, right? (multiple speakers)

Yes. (multiple speakers)

Yes, and it's relating to actually our success in Mexico, where, if you remember, we described the transaction that we had in Mexico where we -- the service is over five years in one of the regions there, so the equipment is part of the success (indiscernible) depreciated and the revenues is presented over that period.

Okay. Then in terms of CapEx for the remainder of the year, what sort of numbers should we look at there? You've been at 1.2, 1.3. Is that pretty representative? Also, you had extraordinary free cash flow this quarter. Is that representative going forward?

I would like first the second part, the cash flow. The cash flow was extraordinary this quarter. It was 30.4 million operating cash flow; it's very high. It's from ordinary course of business, but it's a shift between Q2 and Q3. As you recall, I just said it's relating to advances from customers, but you can see also in the liability side that the liability increasing 20 million is relating to advances from customers and deferred revenues. It helped us this quarter to increase the cash flow dramatically. Next quarter, it's going to be on the other side.

Okay. And on CapEx?

Just to conclude the first part, very (indiscernible) also but below the Gilat are paid first quarter and third quarters typically, while the third quarter is the highest as relating to the loan of Bank (indiscernible), which we paid $4 million principal a year in Q3, 2006 every year -- this year, 2006. So next quarter in this sense also, expect to have $8.8 million principal and interest payments, which also will have the effect to the other side as well next quarter.

As to the CapEx, it really depends on the projects that we have. On maintaining CapEx, we don't need a lot. You can see, over the last three years, we've invested between 5 to $10 million a year. If there will be a large project, it can change this number to the upper side.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS). At this time, there are no questions. Are there any closing remarks?

Okay, I think that we would like just to thank everyone who joined us today and I hope we will meet next quarter. Thank you, everyone. Good-bye.

Thank you for joining today's Network second-quarter earnings call. You may now disconnect.