Gilat Satellite Networks Ltd (GILT) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks Limited first quarter 2007 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded May 14, 2007.

I would now like to hand the call over to Mr. 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 first quarter 2007 results conference call. Before we get started, I would like to remind everyone that today's call contains forward-looking statements. Such forward-looking statements involve risks and uncertainties. Actual results may differ materially from such forward-looking statements. Gilat Satellite Networks does not undertake publicly or privately to 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, Ayelet. Good day, everyone. For today's call I will go over our business highlights for the first quarter, key financial indicators and market trends. After this, Tal will take you through the detailed financial results and then I will summarize. We will open the floor for questions right after this.

Gilat has had another strong quarter in Q1 2007 with good results and improvement in all key financial indicators. This is our sixth consecutive quarter of improved financial results.

This quarter we saw continued demand for investment service projects. Many governments that aim to improve the equality between the [Oban] and the world populations require telecom operators to provide communications to underserved communities, either through universal service obligations or through investment service [funds]. We had several USO deals in Eastern Europe this quarter. These are projects where in order to meet their obligations, operators choose our SkyEdge VSAT for telephony, fax, and broadband Internet access.

In the developed markets, we had a steady quarter with enterprise deals, business continuity and government transactions in the United States, Europe and elsewhere. In line with our strategy to expand our product portfolio for our customers, we have recently announced a new line of broadband wireless access solutions. I will elaborate about this step shortly.

Looking at the financial indicators summary slide, you can see a trend of sequential improvement in revenues and net income. Revenues increased from $58.6 million in the first quarter of 2006 to $68 million in this quarter, reflecting a 16% year-over-year increase. Our net income also significantly increased from $1.2 million in the first quarter of 2006 to $4.9 million in the present quarter on a GAAP basis. Tal will go into more details on our financials a bit later.

Just as a reminder, Gilat currently operates under three business units -- Gilat network systems on 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.

Now I would like to elaborate on our recent entrance into the broadband wireless access market. First, a few words of introduction. Broadband wireless access or BWA, is a developing technology that provides (inaudible) broadband connectivity. The technology is in the process of being standardized under the name WiMAX. This is a large and growing market. Internet and WiMAX are often complementary solutions with satellite providing a backhaul to connect the WiMAX space stations to the Internet, and wireless technology providing the connections for the end user to these base stations.

The last objective is to focus on providing fixed BWA applications from carriers, governments and other service providers in emerging markets -- the primary applications on our Internet access and Voice over IP for world communities, business and consumers. In some networks, we also anticipate a demand for video.

We believe that we have an excellent basis for bringing BWA to our customers. We bring to this market our knowledge of satellite wireless communications, our global market presence and our wide customer base, in addition to our system integration and turnkey project capabilities.

As we recently announced, we have entered into a purchase and global marketing agreement with Proxim Wireless Corporation. In order to properly serve our customers for this new product line, we have established a wireless solutions department within GNS that will market the wireless products. We recently received our first broadband wireless access order from AsiaInfo, an Internet service provider in Kyrgyzstan. Gilat will provide AsiaInfo with an [end to end] solution which will include a broadband wireless access and wireless backhaul solution.

The solution will enable AsiaInfo to deliver broadband wireless services for businesses and consumers throughout Kyrgyzstan's capital, Bishkek. AsianInfo is an existing Gilat customer that recently deployed a SkyEdge satellite network.

In the emerging markets, we saw continued demand for USO and USF projects. We are active in this market both through GNS as an equipment provider and through Spacenet Rural as a service provider in Latin America, primarily in Peru and Columbia. We had many such projects worldwide last year and we see continued opportunities for growth. This quarter we provided our solutions in Eastern Europe. We are also seeing strong market demand in Africa. We received orders from leading operators in Tanzania, Ethiopia and Nigeria. In Nigeria, [we simply] had a few interesting projects, which I would like to elaborate on.

We were chosen by WIN TSS to provide a broadband satellite communications network and outsource network services of the recent national elections in Nigeria. WIN TSS to provide a broadband supplied communications network and outsource network services for the recent national elections in Nigeria. WIN TSS used our SkyEdge VSAT network to provide a reliable, high speed backbone between the national (inaudible) headquarters and the headquarters in 36 state capitals, and all of the local government area sites nationwide. The total number of network nodes once fully deployed is over 1,000.

Also announced this quarter is our deal with Hyperia, one of Nigeria's leading Internet service providers, to which we provide a (inaudible) and satellite arm. The hub is based in London and is initially serving several hundred VSAT terminals. The VSAT network enables Hyperia to expand its services in west Africa and to provide marketable services such as broadband, IP, telephony, and video [communications].

The third transaction in Nigeria was with DDC Satellite. DCC is expanding its network with our SkyEdge platform to serve corporations, financial and government institutions, manufacturing plants and other businesses in Nigeria. As part of their network solution, Gilat will also provide DCC with a redundant SkyEdge hub, that will be installed in a separate location to ensure business continuity and backup in case of natural disaster.

In the developed market, we announced the deployment of a broadband satellite network, which includes more than 3,000 VSAT in one of Europe's large retail chains. The network is based on Gilat's SkyEdge Pro VSAT will enable cost-effective and reliable growth and communications to thousands of the chain stores located throughout Europe. The network will be used for point-of-sale applications, ATM services and video and audio streaming.

As part of this project, Gilat's SkyEdge Pro VSATs are embedded with multimedia cards which will enable digital and signage applications such as targeted advertisements and installed video clips and background music. Based on IP TV technology, these solutions provide efficient audio, video multicasting including advanced video standards such as MPEG-4 and multi-language support for the stored different [console] locations.

As we described in previous quarters, we are addressing the growing area of disaster recovery applications by providing secondary networks for continuous operations during [macro] failure or natural disasters. A few examples include projects in Nevada, Oklahoma and Washington. Typical customers for disaster recovery are local and state government municipalities and institutions. The project is a portable unit, usually installed in a SUV, which is quickly deployed on-demand.

That concludes our business overview. Now I'd like to hand over the call to Tal Payne, our CFO, who will go into more financial details of this quarter. Tal?

Good morning and afternoon, everyone. I would like to share with you our positive first quarter results and provide details of the financials.

Our first quarter results were driven by healthy business performance and marks a good start for 2007. Before digging into the numbers, let me remind you that our GAAP financial results include the impact of FAS 123R, the inclusion of equity based compensation expenses in the P&L, in our press release which we have posted on our website representing GAAP and non-GAAP results, and our reconciliation tables, which highlight these data.

Now let me share with you the financial highlights for the first quarter of 2007. Revenues for the first quarter were $68 million compared to $58.6 million in the first quarter of 2006, an increase of 16%. The strongest regions continue to be emerging markets, this quarter coming mostly from East Europe and Latin America.

GAAP net income for the first quarter of 2007 was $4.9 million or $0.12 per diluted share compared to a net income of $1.2 million or $0.05 per diluted share for the first quarter of 2006. Non-cash stock option expenses accounted for $0.4 million in this quarter compared to $1.4 million in the comparable period of 2006. This decrease represents our tendency to replace options with monetary incentives.

Non-GAAP net income, excluding non-cash stock option expenses, was $5.3 million in this quarter or $0.13 per diluted share compared to net income of $2.7 million or $0.11 per diluted share for the first quarter of 2006.

I would like to note that this is our first quarter EPS fully reflects the first -- sorry. I would note that our first quarter EPS fully reflects for the first time December offering of 5 million shares.

Our gross margin for the first quarter was approximately 36%, essentially the same as last year. As I have mentioned many times before, our gross margin is affected by our mix of products and services, the regions in which we sell, and the size of the transaction.

Net debt R&D expenses increased from $3.6 million in Q1 2006 to $4 million this quarter as a result of headcount growth offset partially by the increase in grants. SG&A expenses for the quarter were $17.1 million compared to $15.9 million in the comparable quarter in 2006. The increase is attributed mainly to sales expenses corresponding to increased revenues.

Our operating income for the quarter on a GAAP basis totaled $3.8 million, up from $2.2 million in the first quarter of 2006. I want to note that the recent declines in the U.S. dollar versus the Israeli shekel has not affected us this quarter and is not expected to affect us in the upcoming quarters of 2007, since we took steps to mitigate this risk by hedging against the U.S. dollar fluctuations several months ago.

Our financial income and other expenses in this quarter were $1.5 million compared to financial expenses of $800,000 in the same quarter in 2006. The transition from financial expenses to income is attributed mainly to Europe's conversion of its loans on September 30, 2006, and the increase in our cash balances due to December public offering and our positive cash flow.

Cash collection continues to be good in the first quarter. We generated cash flow from operating activity of $7.9 million. Our cash balances, including the marketable securities and restricted cash, at the end of the quarter were [$190] million. Please note that this quarter we started to invest part of our cash balances in short-term and long-term marketable securities according to our cash management policy of maintaining liquidity by maximizing the rate of return with a high rated portfolio.

Our trade receivables at the end of the quarter were [$54] million, representing DSO of less than 60 days. Our inventories reduced to $22.4 million, down from $26.4 million at the end of Q4 2006.

All in all, we are pleased with the financial results reported this quarter. The top line strength allows us to meet our objectives of balancing the need for investments to maintain our growth with the need to continue improving our operating and net income while maintaining operating margin.

That concludes my remarks. And now I will turn it back to Amiram.

Thank you so much, Tal. And now for a brief summary.

We concluded another good quarter and we are off to a good start this year. We continued to see sequential improvement in all our financial indicators for the sixth quarter in a row. The increasing momentum in our markets described above is encouraging for us.

Before I open the floor for questions, I can confirm that the Company has received a nonbinding letter from Mivtach Shamir and a third party indicating their interest in examining the possibility of acquiring the outstanding shares of the Company. Mivtach Shamir is a public company traded in Israel was required under Israeli law to issue a report with the Israel security authority announcing the fact that they had issued this letter. As a public company, our Board of Directors is obligated to take this letter into consideration in constituency with our advisors. I am sure it is not a surprise to you and I apologize in advance, I have been advised not to make any further comments on this matter at this time.

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

(OPERATOR INSTRUCTIONS). Thomas Watts, Cowen and Company.

Congratulations on the quarter, Amiram and Tal. Just a couple of clarifications. One, you'd previously indicated that we might see lower gross margins this year due to some of the larger contracts. The gross margin [high] actually was less than we've been expecting. Is this gross margin level indicative of the remainder of the year or could we see additional pressure as we move throughout the year?

It's not a kind of science. So it fluctuates a bit. It could move a percent here and percent there. So I think that generally speaking, we saw the number we have said kind of fall along for quite a long period of time is kind of the number and really depends on the mix of product. The 36% I think continues to be kind of indicative.

And then also in terms of contract backlog. I know you've discouraged investors from looking at that because it's volatile and not indicative of the business. But could you comment on the backlog this quarter?

I try to discourage you but you keep on asking me this question. I think that we had fairly good bookings this quarter. That's the only thing I can say. I really don't like to quote the backlog on a quarterly basis, because it is misleading. And then I keep on saying that every quarter, I can't say, well, it still increased a bit or decreased a bit. No, please do not tempt me to do this, this quarter. We had good bookings this quarter.

And then you also commented on some of the disaster recovery contracts from the quarter. To what extent has the Cisco product contributed to that? Is that something that you see -- you feel has momentum, particularly in the U.S. market?

First, yes. We've seen these deals basically in the U.S. And disaster recovery deals are kind of smaller deals, very lucrative in terms of the service itself. But it's way smaller deals.

When it comes to business continuity, I think we saw most implementations using our solutions rather than the Cisco solution. Disaster recovery we saw only as the Cisco solutions, smaller deals, lower number of terminals, higher margin part of the deal but the volume of the deal is smaller.

And then finally, just on the Mivtach Shamir front, some of the press reports we saw said that they had only bid for 50% of the Company, but your comments suggested that it was for the entire Company. Can you just clarify that point?

Yes, actually, that I can say because it was actually part of the file. The file said that Mivtach Shamir came to us. They have 50% and they have another partner which carries the other 50%. So in total the proposal was for 100% of the shares.

Jonathan Ho, William Blair.

Great quarter. This first question I have is, can you give us a little bit of color on what's happening with the tax rate and what we should be looking for kind of for the balance of the year?

Yes, Tal will take this one.

I would say the following -- in Israel and in the U.S. we don't pay taxes since we have NOLs for quite many years to come; assuming we will not lose them as a result of a change of control according to the U.S. law.

Putting that aside, if it will become profitable in the U.S. and Israel is already profitable, we have enough NOLs. So the only factor we actually see in the P&L at this point is for countries in which we have profit and no NOLs to pay back, and hence, we have to pay taxes.

So the future taxes are affected by the regions there where we make the profits and specific countries in them. We already said in Q4 that we expect this year's taxes to be similar to last year's taxes. I would just add one comment -- which means around $2 million or so.

When I'm looking into the future I would say that as you know, according to accounting rules if you become profitable for a certain period of time, there comes a point where you need to write a tax asset in the tax income to present the deferred taxes. And then you will see income in one quarter and then expenses in the future quarters. And I believe that moment is approaching us, I would say. Obviously it doesn't affect anything on the cash level. It's not cash payments of tax [in] just the P&L accounting, recording of tax expenses.

With regard to the revenue growth rate, can you comment a little bit on the sustainability of this? One thing that intrigues us is whether this Nigeria election -- is this going to be just for one quarter or is this going to be spread throughout a number of quarters, in terms of the recognition?

I would say that Nigeria is a fairly short time in nature. Even so, there is a service component that we operate (inaudible) that in terms of revenue recognition, it will take some time as our commitment is not for a long time of operation. I alluded to this one just because -- we pick the example, if you like, of Nigeria. And since we had some activities in Nigeria so we put some projector on Nigeria in specific. And we talked about this big project in Nigeria, more to put some color into this dry, usually, conference call. We have quite many deals of that sort. I wouldn't put too much of an importance on this one, specifically.

And as far as the sustainability of the current year-over-year growth rates?

Could you repeat this one to me?

Just in terms of the year-over-year growth rate is kind of this 16% range -- is that what we should be looking for, for the rest of the year? Or anything that you guys can comment on, on that side?

I guess we would like to stand to our management goals the way we have phrased them towards the beginning of this year. We said double-digit revenue growth. We still want to maintain the operating margin; obviously the operating income and net income will increase. The reason that we kind of try to point towards maintaining the operating margin is to enable us investing into two new directions -- one is wireless in general, involving wireless in specific. The other one is going after new government markets.

And we really haven't changed that -- these goals. If we will perform better, we will perform better. The only -- just generally speaking, you know that we have a fluctuation component in our business. One thing I can say that as much as there could be some quarter-to-quarter fluctuation in the context of [we are] I think in the context of the general upward trend. That's the only thing I can say of that.

Another question would be, in terms of the selling expenses, should we consider this to be pretty much linear with the growth in revenue?

In terms of what? What was the question?

The selling expenses -- should it be in line with the revenue growth, an equal rate?

It really depends on the nature of the deals. Because some deals you pay more commissions; it depends on the way you structure the deal. Some deals you pay less. As a general trend, obviously, if your revenues go up, the S component of the SG&A goes up as well. But if not, S (inaudible) as linear. It really depends on the geographical area, on the nature of the deal. So it will go up but it's not kind of a very simple, linear [format].

Larry Harris, Oppenheimer.

If I could add my congratulations for the results for the quarter. Could you provide maybe some additional flavor with respect to revenues by geography or trends in the quarter? And any comments you might have upon overall demand in the U.S. market?

By geography I think we've said that the major increase really came from Eastern Europe, let me put it this way. The Western Europe was very strong for us. (inaudible) get a few examples from Africa, which was also good. But the major growth came from Eastern Europe. And seems to be in Eastern Europe we sell equipment, then you know, when you are successful in that region it gets translated quite immediately into a growth in revenue. And that's what happened this quarter.

I've mentioned one big project in developed countries. It's a retail chain which I've mentioned in Western Europe. And then less of universal service activity I would say in Eastern Europe. I hope that within not a very long time we will be able to elaborate a bit more on these projects as well.

In addition to that, we saw some growth of activity in Latin America, specifically this quarter, which was growing as well. So this is really the summary of the major changes when it comes to the geography. When it comes to the U.S., then into the U.S. we are a service provider. Even if we win a big contract, usually does not get translated very sharply into the revenue. So this is more kind of a stabilized side of this business.

And there are a few examples, sporadic examples, I would say that we service equipment in North America on the U.S. specifically, but predominately we do services. And this tends to change to a very long pace.

Thank you very much. And once again, congratulations on the results.

Ittai Kidron, CIBC.

This is actually [Sudhir Maheshwari] subbing in for Ittai. A question I had was on the Proxim Wireless agreement. I was just wondering what type of incremental financial opportunity do you believe that could be for this year and possibly in 2008?

Well, generally speaking, I would say that going into broadband wireless access is somewhat an investment on our side. And we have created a department within GNS that will take care of this. So we are investing quite a lot in this direction. But it's constantly the results of this activity, I would expect to see a few million dollars worth of revenue coming this year, and hopefully quite significantly more next year. But it's our first step into this new market. And as much as we are entrenched very well into the market in the sense that we work with so many operators that have an interest in this kind of product, we have not done it before. So the sale we've just announced I think a week ago is really our first step and still a bit too premature to say. Only now, kind of a few million dollars, that would be my expectation for this year.

And would that be incremental to your guidance?

We remind you we haven't supplied guidance. We've just got management goals, but it was definitely part of our goals. Because when we have decided where we want to put our efforts and we have described this quite solidly, even in the offering in December, we definitely stand that we are taking this direction. We are establishing this department within GNS. We are going to others to work with alliances in this business. And so it is definitely in the plan.

(OPERATOR INSTRUCTIONS).

Any further questions?

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. I repeat, 1-888-254-7270. In Canada, please call 1-866-500-4953. In Israel, please call 03-92-55948. Internationally, call 972-392-55948. Mr. Levinberg.

Well, as a conclusion, I believe it was a good quarter for us. I would like to thank you for joining us for this quarter's call. Good afternoon and good bye. Thank you all.

Thank you. This concludes Gilat Satellite Networks Ltd. first quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.