Gilat Satellite Networks Ltd (GILT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks Limited third quarter 2007 results conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms. 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 third quarter 2007 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, Ayelet. Good day, everyone. For today's call, I will go over our business highlights for the third quarter, key financial indicators and market trends. After this, Tal will take you through the detailed financial results, and then I'll summarize. We'll open the floor for questions right after this.

Gilat has had another strong quarter in Q3 2007 with good results and improvements in all key financial indicators. Looking at the snapshot of the quarter, we had several important achievements, which I will take you through briefly for now. I will elaborate on these later on in the call.

We had a strong quarter in the government sector. We provided a VSAT network for a leading online lottery system provider and equipment to a specialized service provider in the oil and gas industry. We also provided a custom satellite communications network for the U.S. Postal Service, covering over 5,000 Postal Service sites across the U.S.

We received an order for business continuity satellite services from a government agency in the U.S. Our subsidiary, Spacenet, was awarded a GSA-schedule contract for satellite communication products and services, essentially making it a certified vendor for the U.S. government.

In emerging markets, we had a strong quarter, especially in Russia and Latin America. And last, but not least, we have just announced our new product, SkyEdge II, and I will take this opportunity to elaborate on it.

Moving to the financial indicator summary slide, you can see a trend of sequential improvement in revenues and net income. Revenues increased from $63.8 million in the third quarter of 2006 to $71.5 million in this quarter, reflecting a 12% year-over-year increase. Our net income also significantly increased from $2.7 million in the third quarter of 2006 to $5.9 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 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.

Now delving into a little more detail on our business this quarter, I will begin with the developed markets. During the quarter, Spacenet signed a new multiyear contract with the leading lottery systems integrator to provide VSAT equipment and network management services for an online state lottery. Spacenet also signed a contract to provide two SkyEdge private network hubs and terminals to NPL, a data and voice service provider specialized in the oil and gas industry. NPL intends to use a second hub for disaster recovery. This is an example of Spacenet selling to other service providers, specializing in niche markets.

Now, moving to the U.S. government segment, we recently announced our U.S. Postal Service, or USPS, deal, a very significant contract in which Spacenet is working with Verizon business to deploy a custom satellite network for USPS. This recent win includes new site installation and new customer applications. While USPS is a longstanding customer, for this contract we went through a new tender process which took approximately two years to complete.

The new satellite network for USPS will provide high-performance broadband communications to over 5,000 newly installed Postal Service sites through the continental U.S., Hawaii, Alaska and Puerto Rico. In addition, the satellite network will support on-demand backup communications for a number of large USPS facilities, as well as portable communications for the U.S. Postal Inspection Service fleet of more than 20 incident response vehicles.

Spacenet is providing a fully managed satellite communications service based on the SkyEdge VSAT platform and utilizing a combination of individual Sky satellite modules and a router integrating Cisco VSAT network module. The USPS satellite network will support a wide range of applications, including an innovative video relay service, VRS, for deaf and hard of hearing Postal employees, multicast content delivery, real-time video broadcasting, voice-over-IP-based digital telephone services, as well as routine data transport and point of sale transactions. In the future, we see a potential to expand these networks to large Post Office sites for business continuity applications.

For over a year now, Spacenet has stepped up its effort to meet the demands of federal and civilian agencies and state and local government clients with the launch of new products and services and system integration capabilities. Recently, Spacenet also has been awarded a contract to build a custom satellite network for a large government agency with over 100 sites. The supportive services include both carrier-class voice and broadband data communications. The major focus of this new network is to support business continuity. It uses the Cisco IP VSAT network module in conjunction with Gilat SkyEdge VSAT system, including network operations and management by Spacenet.

As part of Spacenet's focus on the U.S. government segment, Spacenet has applied and recently received a GSA schedule. This new GSA schedule facilitates a simplified ordering process which enables government customers and agencies at all levels to have easy access to Spacenet's high-performance commercial off-the-shelf satellite communication services and equipment. We believe that the GSA schedule contract will lead to enhanced activity in this segment.

Now turning to emerging markets, in Russia, we announced three important deals this quarter. We continue to provide technology which assist in bridging the digital divide among citizens and announced in this context that Global-Teleport is deploying a broadband satellite communications network for the Russian Ministry of Education based on Gilat's SkyEdge system.

Initiated by the Russian government, the education project guarantees broadband Internet access for Russian schools. Gilat has approximately 6,500 SkyEdge IP VSATs under deployment in Russia's remote schools in the Siberian far east and other remote regions in Russia, which are providing two-way broadband Internet access, multimedia applications, video conferencing and voice over IP support for future use.

Another equality project we announced is a USO expansion project for North-West Telecom, one of Russia's largest telecommunications companies. North-West Telecom is expanding its Gilat SkyEdge satellite network to bring telephony and broadband Internet sources to four new regions, Murmansk, Karelia, Komi and Vologda. North-West Telecom originally deployed the SkyEdge VSAT network earlier this year to serve the [Akangarst] region.

North-West Telecom's deployment of the SkyEdge VSAT network is creating (inaudible) USO to meet the modern communications requirements of rural communities. We also announced a strategic project with Russia's largest electric utility company, FSK, which serves more than 140 million Russian citizens. In that we're deploying the SkyEdge broadband satellite communications network for FSK. FSK will use the SkyEdge VSAT network for supervisory control and data acquisition, SCADA and satellite telephony applications, initially at 650 locations nationwide.

In addition, the network will be used for VPN applications, enabling secure network services to be transmitted between FSK's electric facilities. VSAT technology provides FSK and other utilities distinct benefits over terrestrial alternatives. These benefits include unique, high-speed connectivity, rapid network rollout and very high network uptime, all while reducing telecommunications cost.

Now moving to Africa, we are experiencing growth and enhanced activity in Africa and we are currently implementing a variety of projects following a diverse customer base. I hope to be able to provide more information on these projects in future calls.

We also had a strong quarter from GNS in Latin America. The strongest sales were Brazil and Mexico. In Brazil, we continued to enhance our operation with Telesp, Telefonica Sao Paulo, whose customer is rolling out a large network project based on our technology.

In addition to increased GNS business in Latin America, in the aftermath of Peru's earthquake in August, our Spacenet Rural business unit contributed to the country's disaster recovery efforts by deploying a SkyEdge VSAT network and offering free telephone services. Spacenet Rural worked closely with the Peru Civil Defense Institute to deploy Gilat's VSAT system on the army bases of the country's affected zones and in the central office in Lima.

Phones connected to the army's VSAT network provided the primary communications channels in the days following the disaster and are being used up until now. In addition, in the days following the earthquake, all Spacenet Rural telephony services were free for use throughout the country and remained free to citizens in the country's affected zone for weeks afterwards.

In Colombia, most of our Spacenet Rural activity consists of operational subsidized projects for the government. As far as these projects, the Colombian government has transferred approximately $70 million to trust accounts. The money is released from the trust based on a schedule of payments and meeting certain operational milestones.

Until now, roughly $61 million has been released from the trust to Gilat. Currently an amount of approximately $7 million has not been released from the trust as Gilat Colombia hasn't fully met certain operational milestones imposed by the government. The Colombian government and the Company have recently agreed to renegotiate certain terms of the contracts, including the operational milestones for the period going forward so that they better reflect the current telecom and business environment in Colombia.

The government has informed us that until such negotiations are complete, it will grant us partial payment based on certain formulas. Since the partial payment has not yet been received and the amended contract has not yet been signed, we have deferred a portion of the revenue from this project, as will be described in a short while. We continue to work closely with the Colombian government and anticipate to have the matter settled in the coming months.

One of our most significant highlights this quarter is the introduction of SkyEdge II, an advanced VSAT platform based on next-generation technology, with high efficiency and full adaptivity for both the inbound and outbound channels. Designed for diverse environments, including enterprises, [world] network, cellular backhaul and government network applications, it is an excellent solution for broadband IP networks with high [period] inbound requirements providing inbound data rates of up to four megabits per second and outbound bit rates of up to 135 megabits per second.

Other benefits of the system include reduced pay segment costs through a high efficient design that features outbound modulation of up to 32 VSATs, inbound modulation of up to 8 VSATs. Full modulation and coding adaptivity for both inbound and outbound channels, resulting in bandwidth savings of more than 50% compared to previous implementations. It's based on next generation technology, including DVB S2-ACM for the outbound channel and DVB-RCS for the inbound channel, both are standards.

The system is based on the Gilat SkyEdge unified platforms which supports multiple services and VSAT sites on the same hub. As a fully scalable system, SkyEdge II is suitable for small networks numbering dozens of sites, which have small initial space segment requirement [starting]. It is also suitable for very large networks, up to 32,000 VSATs, which require a full saturated transponder.

We believe SkyEdge II creates new opportunities for us going forward. We have already received first orders for SkyEdge II from leading service providers in Asia, Europe, Latin America and Africa.

That concludes our business overview. Now, I would like to hand over the call to Tal Payne, our CFO, who will review the financials.

Thank you, Amiram. Good morning and afternoon, everyone. I would like to share with you our third quarter results and provide details of the financials. As I go over the numbers, let me remind you that our GAAP financial results include the impact of FAS 123R, the inclusion of stock-based compensation expenses in the P&L. In our press release, which has been posted on our website, we are presenting GAAP and non-GAAP results and reconciliation tables which highlight this data.

Now let me share with you the financial highlights for the third quarter of 2007. Revenues for the third quarter were $71.5 million, compared to $63.8 million in the third quarter of 2006, an increase of 12%. This increase comes mainly from [most] regions, specifically from Africa, Latin America, Russia and North America.

GNS business unit experienced significant growth in Africa, Latin America and Russia, while Spacenet Inc. enjoyed growth resulting mainly from the implementation of the USPS network.

Business risks were somewhat offset by the reduced revenues of Spacenet Rural Colombian projects [Comitel]. This quarter, as a result of the conditions in Colombia described by Amiram, we deferred revenues from the projects in the amount of $2.7 million, ensuring that accumulated revenues recognized from the projects will not exceed the accumulated amounts released from the trust.

GAAP net income for the third quarter of 2007 was $5.9 million, or $0.14 per diluted share, compared to a net income of $2.7 million, or $0.11 per diluted share for the third quarter of 2006. Non-cash stock option expenses accounted for $300,000 in this quarter, compared to $700,000 in the comparable period of 2006. This decrease represents our tendency to replace option grants with monetary incentives.

Non-GAAP net income, excluding non-cash stock option expenses was $6.1 million in this quarter, or $0.15 per diluted share, compared to a net income of $3.5 million, or $0.13 per diluted share, for the third quarter of 2006.

Our gross margin for the third quarter was approximately 36%, an increase from approximately 35% in the third quarter of 2006. As a reminder, our gross margin is affected by our mix of products and services, the regions in which we sell and the size of the transactions.

Net R&D expenses increased from $3.2 million in Q3 2006 to $3.6 million in this quarter, as a result of headcount growth and reduced grants. On an annual basis, we anticipate to maintain the same level of grants as in 2006.

Our operating income for the quarter on a GAAP basis totaled $4.8 million, up from $3.7 million in the third quarter of 2006, representing a 31% increase. Our net financial income and other for this quarter were $1.1 million, compared to financial income of $60,000 in the same quarter of 2006. This significant increase is attributed mainly to [Yop's] conversion of its loan on September 30, 2006, and the increase on our cash balances.

At the end of the quarter, our cash balances, including marketable securities and restricted cash, amounted to $189.1 million. During this quarter, the Company paid $4.6 million in principal loans. Also this quarter, our deferred revenues decreased as a result of recognition of revenues from which the collection occurred in previous quarters. Our trade receivables at the end of the quarter were $43.5 million, representing DSO of less than 60 days.

The increase in account receivables is attributed to the significantly stronger GNS sales this quarter. Our inventories were reduced to $20.6 million, down from $21.5 million at the end of the previous quarter.

Our shareholder equity continued to increase from $224 million at the end of the second quarter to $232 million at the end of the third quarter.

Well, that's it for me, and now I'll turn the call back to Amiram.

Thank you, Tal. Before I conclude, as you probably recall, in our conference call in May we confirmed that we had received an offer from Mivtach Shamir and I stated that our Board of Directors was considering its options. I will preempt questions on this subject by telling you that our Board of Directors has spent considerable time on this matter with our consultants and continues to evaluate what it considers in the best interest of our shareholders and the Company.

I expect that our Board will have reached conclusions on this network fairly soon and at latest by year end. That concludes our review of the quarter. We would now like to open the floor for questions.

Operator, please?

(OPERATOR INSTRUCTIONS)

Our first question is from Tom Watts of Cowen & Company. Please go ahead, sir.

Congratulations on the solid quarter, Amiram and Tal.

Thanks.

Thank you.

Coming into the year, you had expected that we could see lower gross margins based on some large bids that you'd expected. And, in fact, we've actually seen very good gross margins in a couple of the quarters. But could you just comment on what's driving the margins and if the expected margin pressure in large bids is still likely to materialize, or could we see continued margin improvement?

Yes, when we budgeted for the year, Tom, we thought that natural erosion would kind of drive gross margins down. In reality, because the proportion of GNS in our revenues has slightly increased, and because GNS has been operating in geographical areas, or was successful in geographical areas that enabled it to grow sales on one hand and at the same time, with very good margins, the total gross margin was affected by that. So I think this is really most of the contribution.

Going forward, if you like, when we had budgeted for 2006, we thought that that would be the trend in gross margin and eventually it went quite okay. When we budget for 2007, it was the same. If you ask me for 2008, I would still think that the competition should drive gross margin down and I hope that next year I will again positively be surprised.

Okay, then just one other question. I know you don't provide orders and backlog, because you don't think those are good indicators of your future results, but it seems like you've announced a lot of major contracts. Was it a much bigger order quarter here and how does that affect your outlook? And how quickly should we see that work through the income statement.

Generally speaking, we don't publish the backlog on a quarterly basis and I would think that this was a fairly conventional quarter in that sense. I don't see any special kind of -- any specialty in this quarter in specifics. The general trend, as I've said since the beginning of the year, is that GNS is kind of stronger and it's kind of the major driver I would say for financial results of the Company. That would be I think the major trend. Other than that, I don't think I can comment.

Okay, thanks very much.

Okay, thanks, Tom.

The next question is from Larry Harris of Oppenheimer Please go ahead, sir.

Yes, if I could add my congratulations for the quarter. If you could just go over, again, Colombia, the situation that resulted in the $2.7 million in revenue deferrals, and could this also affect the level of revenues for the fourth quarter? Thank you.

Hi, Larry, thank you. Let me kind of remind you what our activity in Colombia is, and then if you want you can ask me a follow-on question. It was that the government has transferred approximately $70 million into a trust, and this trust is now managed by a committee composed of government people and our people. The government cannot pull this money back to its own budget, and at the same time, in order for us to receive and to free this cash, we need to fulfill certain time schedules and operational milestones.

Now, until now, approximately $51 million has been released from this trust. Currently, an amount of approximately $7 million has not been released from this trust and we haven't fully met certain operational milestones imposed by the government. We are in discussions with the government and the government is actually acknowledging the fact that these operational milestones, as well as other parameters of the system, should be amended, should be changed. Let me give you one example of that thought.

In quite a few areas, where we supply telephony, these areas are already covered by cellular phones. From our perspective, it makes it more difficult to maintain a system which is not really needed at that point. From the government's standpoint, it doesn't give them a lot, so maybe we can give them something else going forward and they give up on these points.

The government has actually initiated this kind of discussion and the government wants to change these operational milestones and things like that. And the government has also informed us, because they understand that at this point in time, from our perspective, we need the money in order to continue operating the network, so the government has agreed in principle to release partial payments based on a certain formula.

Because we didn't receive the partial payment before this release of financial results, we decided to treat it the way that Tal has described. We continue to work closely with the Colombian government and anticipate that the matter will be settled in the coming months.

I understand. Thank you very much for that clarification. That's very helpful.

And then, in terms of the contract with Verizon and the U.S. Postal Service and the large government agency, I guess both involving the Gilat Cisco solution, as a result of those orders, do you think you'll see increased demand for the solution that you've worked on with Cisco, that with those orders in hand you'll be able to use that to win additional orders from other customers?

In USPS, actually, the majority of the sites are primarily communication, not business continuity. And it is done with quote-unquote regular SkyEdge VSATs. They also have [certain sectors] with portable units that we supply with the Cisco equipment, but this is only like 20 sites, and then you may view that as a disaster recovery type of solution.

The other system which unfortunately we're not allowed to reveal details -- this is a very, very kind of interesting deal, but I kind of walk carefully here because we didn't have the permission to release all details, is with the government agency, and there it's really a business continuity, high-speed business continuity, Cisco routers. So this deal is more like what you kind of alluded to and we have other prospects which we are in discussions with with regards to the Cisco solution for business continuity.

In the past, in places like that, eventually most of the big systems ended up having a SkyEdge regular quote-unquote solution, because the Cisco solution was more expensive. In the case I just described to you, it ended up with the Cisco routers and with the other opportunities still pending, I wouldn't really know. This summertime we talked to Cisco. Later down the road, it might still be with the SkyEdge regular quote-unquote VSATs.

I understand. Well, thank you very much and congratulations, once again.

Thank you very much.

The next question is from George Iwanyc of CIBC. Please go ahead, sir.

Let me extend my congratulations, as well. Following up on that, could you kind of go into the U.S. government growth opportunity a little bit more and would you still look at possible M&A in that area?

We can possibly look at M&A on this area, but I could not say anything more on this one, but we think it's a very interesting market from our perspective. The one deal I've described, actually we won before having the GSA, which caused us some difficulties. Now that we have the GSA, I think it will be easier. It's a new market from our perspective.

Postal is a longtime customer of us, but with the exception of Postal, we are not trying to be active in U.S. government projects. We think it's a very interesting market. We are looking at ways to work more on this market. We think that once we finish deployment with this one government agency it will become a reference customer for us and it could enable us to do more deals at [breakthrough] with similar agencies. And in addition to that, since we have already discussed it in other forums, we are looking into the DOD and we are looking into ways of how to approach DOD and to that network. And we said it before, I can say it again, this is one of our growth areas and we are considering our alternatives with regards to potential acquisitions in these areas.

With regard to the timing there, how should we look at it? Not on M&A, but just on the growth opportunities.

I think we will see some significant activity as soon as next year, so it's very high on our focus.

Okay, and can you give us an update on how you see the WiMAX opportunity?

Yes, in WiMAX, we provide our own, if you like, technology for backhaul, but the idea was to provide backhaul to the field, to the market which we already operate in, which is the rural market in some sort. It's an OEM agreement. We have announced one OEM agreement with Proxim, found out a little bit later that they would be more suitable for the nonstandard. People tend to call it all WiMAX but in reality it's broadband wireless access divided into standard and nonstandard.

I would say that our cooperation with Proxim will work best for the nonstandards, and with regard to the standard, we will come up with another strategic alliance probably pretty soon.

Okay, and just one final question, and I know you touched upon it already, but with potential buyers, can you give any other color on how the bidding process might be unfolding?

I'd love to hear, which bidding process?

Just with potential buyers looking at the Company.

Not really. The only thing I can say that I know it has been hanging there for quite some time, and as I said, I expect with our Board we'll have reached conclusions on this matter fairly soon and it's slated by year end.

Okay, congratulations again and thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time. Before I ask Mr. Levinberg to go ahead with his closing statement, I'd 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 1-877-456-0009. In Israel, please call 03-925-5937. Internationally, call 97239255937.

Mr. Levinberg, would you like to go ahead with your concluding statement?

Once again, I'd like to thank you for joining us for this quarter's call. Good day, and goodbye.

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