Gilat Satellite Networks Ltd (GILT) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks Limited fourth-quarter 2006 results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded February 13, 2007.

I would now like to turn the call over to Miss Ayelet Shaked, Gilat's Director of Investor Relations. Please go ahead.

Good morning and good afternoon. Thank you for joining us today for Gilat's fourth-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 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. Good day, everyone. For today's call, we will go over our business highlights for the fourth quarter, our key financial indicators, our [managed inventory in] 2006, and then I'll discuss our growth strategy. After this, Tal will take you through the detailed financial results, and then I will summarize. We will open the floor for questions right afterwards.

Gilat has had another strong quarter in Q4 2006, with good results and improvements in all key financial indicators. This is our fifth consecutive quarter of improved financial results. Our SkyAbis solution is continuing to gain traction in the satellite [vertical] market, and we have also announced this quarter that our SkyAbis CDMA product has been chosen by a leading African telecom operator.

SkyAbis CDMA is [teaming up with our] SkyAbis solution for GSM networks. SkyAbis CDMA provides traffic optimization and dynamic bandwidth allocation to CDMA technology, and is a competitive alternative to a fixed satellite link or (indiscernible) link. Having a solution for CDMA networks as well as GSM networks means that we can expand our addressable market to more operators who require satellite backhaul.

What is interesting about this deal is that while this is CDMA technology, it is being used for a fixed telephony application rather than for a mobile network. We are increasingly seeing CDMA being used for rural telephone projects, and the SkyAbis CDMA solution provides satellite backhaul for rural deployment.

This quarter, we saw continued demand for USO projects. Many governments that aim to improve the quality that we [deliver on] rural populations require telecom operators to provide communication access through universal service obligations to underserved communities. We had a handful of USO deals in Eastern Europe this quarter. These are projects where, in order to reach their USO obligations, operators choose to deploy our SkyEdge VSATs at remote community [standards] throughout their countries, providing citizens with telephony, fax and broadband Internet access.

We have also seen continued deal flow from government projects. One such example is the second phase of the Enciclomedia program in Mexico. Enciclomedia is a computer-based program which integrates federal education resources such as textbooks, digital content and virtual activities to enrich the students' classroom experience, encourage students' participation and enhance learning outcomes in Mexico.

The initial program was for 140,000 fifth- and sixth-grade classrooms, and the next phase is for 42,000 middle-school classrooms. After the successful deployment of the initial phase with over 16,600 VSATs, we have recently been awarded two additional contracts comprising almost 8800 VSATs. The VSATs for this project typically serve between one and four classroom [systems].

On the business continuity side, we also [installed] more deal flow, and this is mainly in the U.S., obviously. One such deal which we recently announced is a technology refresh for Sunoco. This type of offering is being provided to many of our customers that are using our legacy products and whose contracts are up for renewal. Technology refresh proposals provide excellent opportunities to increase value to our customers, such as higher bandwidth and managed network services.

The Sunoco contract is one of a few technology refresh deals signed recently. This network is a hybrid based on a mix of terrestrial and satellite sites, with Spacenet, our subsidiary, managing the entire network and providing connectivity for point-of-sale and other enterprise applications.

During the quarter, we have completed a public offering of approximately 8 million of our ordinary shares at a price to the public of $8.50 per share. Of [that] shares, approximately 5 million ordinary shares were issued by Gilat and approximately 3 million shares were sold by selling shareholders. The underwriters exercised their overallotment option in full. Gross profits from the offering totaled approximately $68 million, and net profits to Gilat from the offering were approximately $40 million.

Looking at the financial indicator summary slide, you can see a trend of sequential improvements in our two main financial indicators, revenues and net income. Revenues increased from $56 million in the fourth quarter of 2005 to $65.4 million in this quarter. Net income increased from $1 million in the fourth quarter of 2005 to $4.5 million in the present quarter on a GAAP basis. Tal will go into more details on our financials a bit later.

Summarizing 2006, we have had a good year both in terms of financial and business milestones achieved. Revenues for 2006 increased to $248.7 million, representing a 19% year-over-year increase. And net income was $10.5 million compared to a net loss of $3.7 million in 2005. We finished 2006 with a strong balance sheet, with approximately $183 million in cash balances, and a total debt of approximately $45 million.

While revenue increased, our backlog remained stable with that of last year at approximately $208 million. Our backlog is comprised from [the state] of our three business units. While GNS backlog increases as we expand our business across the value chain, Spacenet's backlog would decrease as demand for service contracts is typically being reduced market-wise from five to three years. As such, we do not expect any major changes to this number in 2007.

SkyEdge, our latest VSAT platform, has received very good market acceptance and currently represents more than 90% of our total VSAT sheet. We had significant wins on the emerging market side with USO projects in Latin America, Europe and Asia. A few examples include COTAS Bolivia, China Unicom and Enitel Nicaragua.

We increased our proportion of value-added solutions based on the SkyEdge platform for specific market segments and continued to move across the value chain with end-to-end turnkey solutions and projects. Among the components that go into turnkey projects are (indiscernible) integration with the existing operator's infrastructure and various third-party equipment, together with our SkyEdge VSAT network. Examples are Telefonica Brazil, Angola Telecom and Enciclomedia in backhaul solutions, which I mentioned earlier on.

On the service front, in 2006 we planted the seeds for our entrance into the business continuity and disaster recovery market. We have been implementing these applications using our Gilat product, as well as through our cooperation with Cisco. We saw an increase in the proportion of deals in which we provide more than connectivity, including hybrid and managed network services.

One such example announced in the previous quarter, is AGB, a leading U.S. retailer, where we provide a satellite backup system to (indiscernible). We also provide our manage network services, which includes monitoring, controls and performance measurement services to enhance network reliability.

As we have detailed each quarter for you, Gilat currently operates under three business units -- Gilat Network Systems, or GNS, an equipment provider to operators worldwide; Spacenet Inc., a service provider in North America; and Spacenet Rural, a service provider primarily in Latin America. In 2006, 46% of our annual revenues came from GNS, 38% were from Spacenet Inc. and 16% from Spacenet Rural.

We're looking ahead at 2007 and beyond with plans for future growth. In our existing market, one growth driver, we've continued to be in [the growth of] service projects in emerging markets. Many governments in emerging markets either require telecom operators to provide communication access through universal service obligations, as already mentioned before, or providing funding via Universal Service Funding, USF, to subsidize the provision of these services.

At this time, according to the 2006 GSM Association Universal Access [we polled], available worldwide USF funding is estimated to be $4.4 billion. VSAT-based communication networks provide a high-quality, cost-effective alternative to terrestrial wireless and [satellite] systems, and we hope to continue to leverage our existing channels and market expertise in order to offer solutions that will assist in providing these services and equipment.

The second driver in our existing markets is business continuity. As I already described above, we're addressing the growing area of business continuity and disaster recovery applications by providing the secondary networks for continued operations during network failure or natural disasters. We believe that in the U.S., business continuity will become a growth driver as businesses increasingly demand backup solutions for their main communication needs.

This year, we also plan to target certain new segments that we believe will contribute to our long-term growth. We plan to identify new segments in the government market. This market is characterized by significant government budgets, allocated for either social equality projects or for national security projects. These are very different types of projects, showing a common denominator of unique communication requirements and a significant budget.

We already implement government projects worldwide such as projects serving the Russian postal services, large projects of the governments of Peru and Colombia. Given our experience in the field and the potential growth in the number of these projects worldwide, we see future growth for Gilat's penetration into new governments in other regions.

An additional new driver for our growth is broadband wireless access. Broadband wireless access, or BWA, is a developing technology that also solves the last (indiscernible) connectivity problems facing many who are in remote locations. Service providers are using BWA systems to provide a link between end user and communications networks. We already have significant operations in emerging markets and have established sales and distribution channels in many of those remote locations. We will leverage our distribution channel expertise and presence in rural areas to provide BWA solutions, which will complement our present offerings.

After evaluating the market segments and opportunities mentioned above, we set our 2007 management goals for double-digit revenue growth. We reaffirm our 2007 management objectives to see operating income and net income growing accordingly, somewhat offset by expenses incurred due to entering into the areas mentioned above.

Specifically, we intend to increase our net R&D budget to strengthen our core VSAT technologies, as well as to support our new growth drivers. In the core VSAT technology, our R&D will work to enhance [space] segment efficiency, (indiscernible) continuity platforms and improve Internet user experience. We will also integrate our VSAT technology with non-satellite wireless technologies and customize wireless solutions for our existing customers --.

All in all, we plan to see our operating income grow while maintaining its ratio relative to revenue. The new opportunities which I mentioned have been carefully selected to enable us to leverage our core competencies and marketing programs towards other lucrative markets. We believe we will reap the fruit of these investments in 2008 and beyond.

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

Thank you. Good morning and afternoon, everyone. I would like to share with you our strong fourth-quarter results, a recap of the year 2006, and also provide details of these financials.

During the fourth quarter, our top line increased by 17% year over year, from $56 million to $65.4 million, and we improved our bottom-line results as well, with a net income of $4.5 million, up from $1 million during the same period last year. As a reminder, our quarterly results for 2006 include the impact of FAS 123R, which is the inclusion of non-cash stock option expenses in the P&L.

Now let me share with you the financial highlights from both the fourth quarter and 2006. Revenues for the fourth quarter were $65.4 million compared to $56 million in the fourth quarter of 2005, an increase of 17%. Just as was the case last quarter, this increase is attributed mainly to strong sales for GNS, this quarter coming mostly from Latin America.

GAAP net income for the fourth quarter of 2006 was $4.5 million or $0.12 per diluted share compared to a net income of $1 million or $0.04 per diluted share for the fourth quarter of 2005. Non-cash stock option expenses accounted for $0.6 million this quarter. Non-GAAP net income, excluding non-cash stock option expenses, was $5.1 million in the quarter or $0.14 per diluted share.

Our gross margin for the fourth quarter was approximately 37%. As I've mentioned many times before, our gross margin is affected by our mix of products and services, the regions in which we serve and the size of the transactions. For the full year of 2006, our gross margin remained 36%, consistent with last year's figures.

Net R&D expenses increased from $3.5 million in Q4 2005 to $3.7 million this quarter as a result of important headcount growth, offset by an increase in grants. SG&A expenses for the quarter were $16.1 million compared to $15.6 million in the comparable quarter in 2005. The increase is attributed mainly to non-cash stock option expenses in the amount of approximately $0.5 million, not included in the comparable quarter in 2005.

Our operating income for the quarter on a GAAP basis increased to $4.3 million, or on a non-GAAP basis to $4.9 million, from an operating income of $2.2 million in the fourth quarter of 2005.

Our EBITDA in the quarter reached $10 million, an increase from $6.6 million in the fourth quarter of 2005. Our financial income this quarter was $0.8 million compared to financial expenses of $0.8 million in the same quarter in 2005. The transition from financial expenses to income is attributed mainly to York's conversion of its loans on September 30, 2006, and the increase in our cash balances.

Now let's look at our financial highlights for 2006. Our revenues in 2006 were $248.7 million, an increase of 19% year over year. When looking at our revenue breakdown by geographic regions for the year 2006, we can see that both Latin America and the United States continue to be of primary importance to us. Specifically, this year, 29% of our revenues came from the U.S. and 32% from Latin America.

When comparing these figures to our 2005 revenues breakdown, we see growth in all regions. Specifically, we experienced a 28% growth in revenues in Latin America, a 41% growth in revenues in Africa and a 70% growth in Europe. This growth is attributed mainly to increased sales by the GNS business unit, up from 39% of our consolidated revenues in 2005 to 46% in 2006.

Our GAAP operating income for 2006 was $13.4 million compared to $1.4 million for 2005. Non-cash stock option expenses accounted for $3.8 million this year. Non-GAAP operating income for 2006 was $17.2 million. Our GAAP net income for 2006 was $10.5 million or $0.38 per diluted share, compared to a net loss of $3.7 million in 2005 or $0.17 per diluted share.

Now turning to the balance sheet, we finished the year with total cash balances, including restricted cash, of $182.6 million, up from $112.9 million at the end of last year. During 2006, we generated $74.6 million of cash and cash equivalents, which includes $38 million from operating cash flow, $40.2 million from our offerings, offset by $8.7 million of principal payments of long-term loans.

As we mentioned in previous quarters, we benefited from unusually strong collection of advances from customers this year. Our collection level varies depending on the deals at hand. Looking ahead for the cash flow for 2007, we expect a continued positive cash flow, but not at the same levels we experienced this year.

Our trade receivable at the end of the quarter was $29.6 million, representing DSO of less than 60 days. During 2006, shareholders' equity increased by approximately $126.6 million, reaching $212 million at the end of 2006, reflecting our annual net income of $10.5 million, the offerings and York's conversion of its loans.

Before I conclude, I would like to note that the fourth-quarter EPS fully reflects York's loan conversion from September 30, 2006. On the other hand, it only partially reflects our December offering, the full effect of which will be seen in the first quarter of 2007. The number of issued and outstanding shares at the end of December 2006 totaled approximately 38.8 million shares.

That concludes my remarks. Now I would like to turn the call back to Amiram.

Now for a brief summary. We concluded a strong year, both in terms of business milestones and financial achievements. We continued to see sequential improvements in all our financial indicators for the fifth quarter in a row. Overall, our financial position has substantially improved. We met and exceeded our management objectives for the year 2006. We're looking ahead at 2007 and beyond with plans for future growth, as we discussed. With proven solutions, a wide growing customer base and a strong financial position, we're well positioned to face the opportunities ahead.

Now, if there are any questions, we would be happy to answer them.

(OPERATOR INSTRUCTIONS). Thomas Watts, SG Cowen.

Congratulations. Just a couple quick questions. You mentioned the tech refresh on the Sunoco network. Could you just confirm that they were a previous client and you're replacing your old equipment, and also, do you have a number of contracts coming up this year where you would have similar tech refresh opportunities?

Yes. Sunoco was a customer of ours for quite a few years. Having said that, this is kind of an interesting network, because basically, some of the Sunoco sites which we had VSATs from before we replaced with new VSATs, with SkyEdge. And some sites which we didn't have VSATs, we still have access to because we will control the communication in these sites using some sort of equipment which I would call poor man's router, if you like, which we call a prism box, which will be installed in these sites. Some of those sites, the DSL sites which they have, we will still manage. Some we still had from before, and we replace technology and offer them with some additional management services.

As to your second question, yes, we have technology refresh prospects for 2007 as well. And any time that a contract is due, I think we see that as an opportunity to provide new technology and other services to these customers, and sometimes, as in the Sunoco example, we will expand it to other services, even in sites where we do not have satellite communication by VSAT.

Is there a bandwidth change, and when you do these technology refreshes, can you increase revenue per site to you?

Usually, we do. Not always, but usually, we do. On one hand, there's always kind of pressure in the market to take it down. On the other hand, we try to sell additional services and to serve additional sites, which we hadn't done from before. And we try to take the management of the entire network even for the sites which are not satellite based, as in the example I gave you.

And secondly, could you just comment on possible uses of your cash? Would you look at acquisitions? And particularly in the broadband wireless access market, there had been some talk that maybe you might look at some broadband wireless access technologies to complement the VSAT sites. Is that something that you would consider, and is that something that would be a dilutive -- would that, or any other acquisition you're looking at, be dilutive or accretive?

Yes, in the two new markets which we said we're looking into, which are broadband wireless access and new government applications, which we have mentioned, we are looking for potential acquisitions as well. And the criteria we established for these acquisitions is that it doesn't have necessarily to be accretive day one, but it does necessarily to be -- is it a profitable company or a company that will become profitable very, very soon. So the general idea is not to make dilutive deals, but to go for accretive deals either immediately or within a short period of time. Specifically on broadband wireless access, we have created a division in GNS which has started working on this subject. And I guess we will be able to update you within a few months, maybe as early as the next call, on some development in this area.

And just a final question, on the acquisitions, is there a chance that you could do an acquisition that would allow you to access U.S. government, become a U.S. government contractor?

Is there a chance or -- I can't really refer specifically. But as a general statement, yes. But we're looking fairly widely into this. So obviously, this is an alternative, but one of many.

Bill Benton, William Blair.

Congratulations. Just quickly, I guess -- I missed the backlog figure. Did you say it was flat with last year, around 208?

Yes. It was kind of flat. I mean last year it was 206; this year, it was 208. And what we said is that there are two phenomena here. On one hand, the more we go up the value chain in GNS, we will see more backlog because we take bigger projects, which take some time to implement, and revenue will be recognized over a longer period of time. While in the past from GNS, we used to receive orders for equipment, ship it right away, recognize, and GNS didn't used to have backlog in the past, or almost no backlog. Now we see backlog for GNS.

This is one trend that pushes the backlog up. On the other hand, the service deals that we do in Spacenet tend now to be shorter term. So from typical five-year deals, deals will go down to typically three-year deals. And that in itself is not just -- almost all our customers are staying with us. When that has been translated into the backlog, you see a backlog which is going down for Spacenet. So the mixture of them both, I would say I don't see big changes in the backlog due to these two trends.

That was actually one of my follow-up questions, was you had talked about it, the three-year deals from five-year deals, and it was more of an industry phenomenon. Can you tell me what may be driving some of that, in your view?

Yes. When we talk to customers in the U.S., they are more concerned now that the technology is going to change on them. They say, well, what if within two or three years, there will come new technology and I will kind of stick behind? And they're not signing to long-term contracts anymore on any of the outlook communication alternatives which they have. When they sign for [friendly bay] or MPLS or any of the other alternatives, they always sign for a very short period of time.

We are in quite a unique position here, because we sign for much longer deals, even when we sign for three years. We sign for much longer deals, which are three years now and used to be in the past five years. Having said that, one might view that as an opportunity as well, because it is true that when the period is over, we need to discuss with the customer again, well, what is next? Is he willing to stay with VSAT, or does he wish to move to another technology? But our statistics see that vast majority of the customers stick to us and stick to the technology, and actually it gives us an opportunity to do a technology refresh and offer them new services. So I would view that more as a positive than as a negative, generally speaking. Even so, when you look at the backlog, the backlog goes down due to that.

Within that backlog, I know you guys have talked to seeing a bigger increase on the GNS side. Is that a similar situation -- when we see the K, are we going to see the kind of breakout there and see that that product side maybe growing a little bit faster, and being a bigger portion?

Could you repeat your question, please?

I know you guys have talked about on the GNS side the backlog has improved, while the service side is -- products and services there -- the service side might be getting lower because of your three-year [five-deal thing] -- five-year situation you're talking about. So when we see the breakout that you guys provide in terms of the backlog when you file your 10 -- when you file your annual statement, are we going to be able to see the GNS portion increasing significantly?

Yes, you'll be able see that in the 20F.

And then just quickly, on a couple small items -- the D&A dropped sequentially. I wondered if Tal, you could provide some color on that. Are you able to offer us the dollar sales for the segments that you will be reporting in the 20F?

I think Amiram mentioned the percentage of each business unit. From the total of $249 million this year, we said 46% was GNS. Give me just a second.

16%, but it's a [238% business].

That's actual numbers.

I'll just use the percentage, okay. And then the D&A question?

D&A?

Depreciation and amortization have declined sequentially. I'm just trying to get a little color into why that may have declined sequentially on a dollar basis.

It's not a significant decline. The total for the year was $20.7 million, and the quarter was $5.1 million. So there's a small decline, no, not a phenomena, really. We expect it to maintain the same levels or even a slight increase for next year.

That's great. Thanks, guys. Congrats again.

Larry Harris, Oppenheimer.

Looks like there was a good improvement from the September quarter in terms of inventory turnover, receivable, DSOs coming down. I was wondering what contributed to it. Could we see that improvement continue going forward?

I would say the following. The increase last quarter had to do with a forecast for shipment of VSAT, some of which was not shipped in Q3, but actually in Q4. So I wouldn't take it as a systematic issue. This quarter, we had a larger shipment of VSATs, which reduced the levels of the inventory, but I would expect it to stay in this range for the short future period.

I understand that. That's great. As you look at your level of revenues, and I guess some of your other competitors haven't reported yet, do you think that you gained share during 2006, and if that's the case, were there any particular product lines or geographic areas where you may have gained share?

I would say the following. Generally speaking, I think that the market was good, the total market is growing. Having said that, I think that we have improved our market positions and we have gained share specifically in the international market, and specifically for equipment in the international markets. And I think we had a very good year. SkyEdge has been received very well in this market, and we gained a lot. The competition I think was more focused in the consumer, and both big companies, HNS and ViaSat, have done quite well during the year in the consumer market, and specifically in the U.S., ViaSat turning to WildBlue and HNS with their own initiatives. So I think this is kind of the main drivers in the industry this year.

James McIlree, Unterberg, Towbin.

For 2007, do you expect any specific geography to be the major driver of your growth?

Not really. I think that I would say the following. Generally speaking, [the domestic] GNS was the major driver this year. We expect that GNS will still be the major driver for next year as well. It means we're talking here mainly about selling equipment in the international market. And if you would have looked into the international presence we currently have, the proportion of the different territories in the international market has not changed significantly for us, but all the regions have grown during the year. It means we're grown in any territory worldwide. And so we had a very good year in Latin America, in Africa, in Asia, even in Australia -- had a very good year in all the international markets. So I think that in 2007, most of the growth will still be coming from GNS means selling equipment to operators worldwide.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Before I ask Mr. Levinberg to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-254-7270. In Canada, please call 1-866-500-4953. In Israel, please call 03-9255-948. Internationally, call 9723-9255-948. Mr. Levinberg, please go ahead.

Really no further comment. I would like to thank you for joining us for this quarter's call. Good afternoon and goodbye.

Thank you. This concludes Gilat Satellite Networks Limited fourth-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.