Gilat Satellite Networks Ltd (GILT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks Ltd. fourth quarter and full year 2007 results conference call. (OPERATOR INSTRUCTIONS)

I'd now like to turn over the call to Ms. Ayelet Shaked, Director of Investor Relations. Please go ahead, ma'am.

Hi, good morning and good afternoon. Thank you for joining us today for Gilat's fourth 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 fourth quarter, key financial indicators, and I'll summarize 2007. After this, Tal will take you through the detailed financial results, and then I'll provide the management objectives for 2008 and summarize our presentation. We will open the floor for questions right after this.

Gilat has had another strong quarter in Q4 2007, with solid revenue growth, enhanced non-GAAP profitability and an increase in our cash position to $200 million. We have reached several important achievements during this quarter, which I will take you through briefly and I will elaborate on later in the call.

Before delving into the details, let me address what I know is on many of your minds. While I am unable to provide details, our Board continues to evaluate a strategic transaction for the Company. I expect that our Board will reach resolution in the coming weeks.

Having said that, let's review our fourth quarter highlights. In the developed markets, there was widespread activity in the U.S. enterprise and lottery markets, as well as a new deal with a Department of Defense system integrator.

In the emerging markets, we experienced increased activity, mainly in India, Latin America and Africa. A few examples include two major contracts in India for a total of approximately 17,000 VSATs, the successful completion of phase one and award of phase two for a major cellular backhaul project in Brazil and a contract for a SkyEdge network to a retail store chain across seven countries in Latin America.

On another note, in this fourth quarter we are recording a non-cash impairment of long-lived assets in the amount of $12.2 million, relating to our networks in Colombia. I will elaborate on this later in the call.

Moving to the financial indicators summary slide, quarterly revenue increased from $65.4 million in the fourth quarter of 2006 to a five-year record of $72.7 million in this quarter, reflecting an 11% year-over-year increase.

The net income for this quarter, excluding the impairment, increased to $6 million, compared to $4.5 million in the comparable quarter in 2006. Tal will go into more details on our financials a bit later.

The slide shows a trend of sequential improvement in both revenue and net income. Just as a reminder, Gilat operates under three business units -- Gilat Networks 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. As of February 1st, Erez Antebi, GNS's CEO, has also taken over the role of CEO for Spacenet Rural, replacing Rocio del Campo, who is leaving Gilat to pursue other business opportunities.

Delving into a little more detail on our business during the fourth quarter, I will begin with the developed markets. In Spacenet, we received two noteworthy orders which relate to hybrid networks and business continuity. The first is a hybrid satellite/terrestrial network solution for Goodyear. The order completes the hybrid upgrade of Goodyear's corporate-owned stores. As part of our solution, we are also providing DSL connectivity.

The second order is for the SkyEdge refresh for a major hotel chain in the U.S., which includes several thousand sites. In addition, during the quarter, Spacenet continued its penetration into the U.S. government market with a new deal with a Department of Defense system integrator.

Spacenet also received a healthy number of additional enterprise orders throughout the quarter, some of which I can mention. The first is Petron, a China partner. We are providing Petron with a hub to support communications for oil rigs. We also received orders to provide solutions for two leading lottery system integrators, as well as a digital signage application project in the automotive industry.

Now I'd like to turn to the emerging markets. For GNS, there was diverse activity in Latin America this quarter, including cellular backhaul and various retail projects. We completed the first phase of a turnkey satellite network solution for Vivo, a customer of Telecom Participacoes de Sao Paulo, Telesp. Telesp is the largest subsidiary of Brazil's Telefonica Group and Vivo is Latin America's largest mobile network operator.

Vivo recently deployed a major GSM network; and Telesp is using Gilat's SkyAbis technology to provide cost-effective backhaul and trunking, DCME, to remote Vivo sites in the north, northeast and central west of Brazil, including Rio Branco, Salvador, Campo Grande and Brasilia. After successful completing the first phase, which includes both our SkyAbis cellular backhaul solution and an SCPC solution, we recently received a new order for phase two of the project.

Another significant project in the fourth quarter was a Mexican retail and financial service company, Elektra, a longtime customer of Gilat. For the new project, we are providing a SkyEdge network which covers approximately 2,000 sites across Mexico, Guatemala, Honduras, Peru, El Salvador, Panama and Argentina.

The network, based on Gilat's SkyEdge IP VSATs, will enable cost-effective and reliable broadband communications for point-of-sale data management, fast credit card processing, software downloads, high-speed Internet access, corporate communications, and terrestrial backup connectivity.

In Colombia, Gilat is currently renegotiating with the Colombian government certain terms of the contracts relating to its networks, including the operational milestones criteria, in a manner that better reflects the economic and social conditions in the areas in which service is provided.

In accordance with the guidelines of FAS 144, the quarterly results include a non-cash impairment in the amount of $12.2 million, relating to all the long-lived assets of the Company's networks in Colombia. Tal will go into this in further detail shortly.

Moving to Asia, the first quarter was marked by heightened activity in India. We have been operating in the Indian market for several years and we are witnessing increasing demand for broadband satellite solutions. We are actively providing our solutions to the SMEs, several enterprise and government segments.

A few orders we recently announced include Bharti and Tatanet. For Bharti, India's leading telecommunications operator, we are supplying a new broadband satellite network which will comprise approximately 13,500 SkyEdge IP VSATs. The new networks will use the -- offer information and communication services to meet the requirements of the local citizens of India's Gujarat state.

For Tatanet, one of India's leading satellite service providers, we were chosen to deliver a new broadband satellite network that will serve the small-medium enterprise, SME, and industry vertical market segment in India.

The new SkyEdge network for Tatanet, which will comprise two satellite hub stations and up to 13,000 VSATs, will enable the delivery of cost-effective and reliable global communications to India's rapidly growing industrial economy.

These applications include high-speed Internet access and corporate data and video communications. Gilat has received an initial order for 3,500 VSATs under the new agreement.

We also received an upgrade order from India's National Stock Exchange for a SkyEdge hub and 1,500 VSATs.

We are experiencing growth and enhanced activity in Africa, and we are currently implementing a variety of projects serving a diverse customer base. Unfortunately, we cannot provide more detailed information on these projects at the moment.

In summary, the quarterly and annual results show a thriving core business, with record quarterly and annual revenues. We met our management financial objectives for 2007 with double-digit revenue growth of 14% and, excluding the non-cash impairment, an expansion of our operating margins to 6.2% and net income margins to 7.9%. Our backlog remains stable with that of last year at approximately $201 million.

As we have mentioned in the past, we are focused on the international rural and enterprise markets. According to the recently published 2007 COMSYS report and Company estimates, Gilat is the leading VSAT vendor in the international market in terms of VSATs shipped, with approximately 30% market share. Gilat has also maintained its leadership in rural telephony solutions with about 83% in the market in terms of VSATs shipped.

With respect to our 2007 highlights, our GNS business unit has grown by winning large projects in Africa, Latin America and Eurasia. In the U.S., Spacenet has successfully penetrated the government market with new deals in this sector, as well as in its core customer base of enterprise.

We expect this strong customer base to [engine] our continuing growth in our existing markets, through additional Universal Service projects, the provision of turnkey projects and business continuity solutions.

In our new markets, our growth drivers also include the broadband wireless access and SCPC segment. We will leverage our well-established distribution channels in emerging markets, as well as our expertise and presence in rural areas to provide broadband wireless solutions and SCPC satellite modems, which will complement our present offering. Gilat is already providing solutions based on SCPC technology, usually as a turnkey network and often complementing our TDMA VSAT implementations.

In addition, and perhaps most importantly, during the fourth quarter we introduced our SkyEdge II, an advanced VSAT platform based on next-generation technology. The product has already begun receiving high market acceptance and enhanced our technology leadership in the market.

Based on these technology platforms, our strong position with international markets and our successful penetration into new markets in the U.S., we are well positioned to continue our growth and meet our management financial objectives for the coming year, which I will go into after Tal's financial discussion.

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

Thanks, Amiram. Good morning and afternoon, everyone. I am pleased to provide you with an analysis of the financial results for the fourth quarter and the fiscal year 2007. Revenue for the fourth quarter reached a five-year record of $72.7 million, up 11% from $65.4 million in the fourth quarter of 2006.

Revenues for the full year reached $282.6 million, representing an increase of 14% over $248.7 million in 2006. Geographic revenue distribution for the year 2007 was as follows. The U.S. accounted for $96 million, or 34%. Latin America accounted for $76 million, or 27%. Asia accounted for $40 million, or 14%. Europe accounted for $36 million, or 13%. And Africa accounted for $35 million, or 12%.

The major contributors to our year-over-year revenue growth were Europe, with 103% growth, mainly from Russia, and Africa, with 86% growth. Most of our growth in 2007 is attributed to the GNS business unit, with an increase in revenues of 32%, reaching $153 million in 2007, up from $116 million in 2006. GNS growth derives mainly from projects in Eastern Europe, Africa and India, as Amiram mentioned in detail earlier.

Spacenet revenues increased to $96 million, reflecting growth in the enterprise markets, partially offset by reduced business in the consumer market in line with our business strategy to focus on the high end of the markets. Spacenet Rural revenues reduced from $39 million to $34 million this quarter as a result of the conditions in Colombia described by Amiram.

We continued to defer revenues from the projects in the amount of $3.7 million, ensuring that accumulated revenues recognized from the project will not exceed the accumulated amounts already released from the trust. On an annual basis, we have deferred revenues of approximately $6.4 million.

In accordance with the guidance of FAS 144, accounting for impairments or disposal of long-lived assets, we performed an impairment review of our long-lived assets. As a result of this review, we concluded that the carrying amount of our long-lived assets in Colombia exceeds their fair value and recorded a non-cash impairment of all these assets in an amount of $12 million.

GAAP loss for the fourth quarter of 2006 was $6.2 million, or $0.16 per share. GAAP net income for the year was $10.1 million, or $0.12 per diluted share. These numbers included the non-cash impairment of the long-lived assets.

Excluding the impairment, on a non-GAAP basis, the net income for the fourth quarter of 2007 increased to $6 million in the quarter, or $0.14 per diluted share, from a net income of $4.5 million, or $0.12 per diluted share for the fourth quarter of 2006.

The net income for the year 2007 increased 113% to $22.3 million, or $0.54 per diluted share, from a net income of $10.5 million, or $0.38 per diluted share, for the year 2006.

During 2007, we generated $22.7 million in cash from our operating activities, finishing the year with total cash balances of $200 million, up from $182.6 million at the end of last year. Just as a reminder, our cash balances definition includes cash and cash equivalents, held-to-maturity marketable securities, restricted cash, and restricted cash held by trustees, less short-term bank credit.

Our trade receivables at the year end and at the end of the quarter were $43.7 million, representing DSO of less than 60 days. Our inventories increased to $24.8 million, up from $21 million at the end of the previous quarter. The increase relates to a specific project in Africa.

Our shareholder equity at the end of the quarter totaled $228 million. And that's all for me. I'll turn the call back to Amiram.

Thank you so much, Tal. Our 2008 management financial objectives are, one, double-digit revenue growth.

Two, to increase our R&D investment by approximately $3 million. This expense aims to reducing our hub costs and expanding our portfolio with the new product offerings. We expect to have fast return on this investment.

Three, operating and net income margin expansion. This objective takes into account the increase in our operating expenses due to the devaluation of the dollar against the Israeli shekel and the lower interest income as a result of the reduction in interest rates.

I believe that based on our new SkyEdge II product line, our strong position in the international markets and our successful penetration into new markets in the U.S., we are well positioned to continue our growth and meet our management financial objectives for the coming year. That concludes our review. We would now like to open the floor for questions.

Operator, please?

(OPERATOR INSTRUCTIONS) The first question is from Jonathan Ho of William Blair. Please go ahead.

Hey, guys, for the increase in R&D expense, can you talk a bit about where you're investing and where I guess you see the product portfolio I guess heading in terms of those increases in expenses?

Yes, hi. It will go mainly into two projects. One of them is aimed at cost reduction in our hubs through a different implementation which we intend to do in house, a few ideas that we have.

And the other one is going to expand our VSAT into a niche in the market which we're not actively in. I cannot really elaborate what the specific idea is; but we believe we have found an interesting niche and an interesting technology idea that will enable us to implement an interesting system here.

We believe that both these R&D projects will have a fairly fast return on the investment of like 18 to 24 months.

My second question would be, can you give us a little bit of color on what you're seeing in terms of this reception of the SkyEdge II and whether you think this could maybe lead to a faster growth opportunity in 2008 relative to 2007, coming from either market share gains or competitive gains?

Generally speaking the VSAT vendors come up with a new product every like, I would say on the average, three or four years, and kind of at the beginning of a life cycle of a new model, then you leverage by being a leader from a technology aspect. I would think that this would probably be our situation in 2008.

At the same time, the new product line still doesn't cover the full area of products that was covered by the previous product. So in reality you kind of keep the two models to run together for about a year or a year and a half. And then I would expect that SkyEdge I will slightly go down, SkyEdge II will pick up and SkyEdge II will reach the position that SkyEdge I has in our portfolio now.

Okay, and final question is just with regard to Mivtach Shamir and I guess the acquisition. Is there any other color or anything else that you guys can kind of say regarding that situation?

I'm sorry to disappoint you, but I'm really unable to provide details. I've said that our Board continues to evaluate a strategic transaction for the Company, and I expect that our Board will reach resolution in the coming weeks.

We have to try. Thank you.

Okay.

(OPERATOR INSTRUCTIONS) The next question is from Jennifer Adams of Cowen & Company. Please go ahead.

Hi, this is Jennifer Adams, on behalf of Tom Watts. Congratulations on the great quarter. Can you hear me?

Yes, yes, Jennifer. Hi.

Okay, great. One thing I'd like to get a little bit more color on. I know in '07 you saw a bit of a gross margin decline due to larger contract sizes. And in '08 you're guiding to improvements in operating margin and net income margin.

If you could just give a little bit more flavor how we should think about gross margins. Do you expect them to still decline a little or hold stable? That would be very helpful. Thank you.

I will take that one, Jennifer. Hi, Jennifer. No, we saw that the main growth driver this year for the revenues came from GNS. And Spacenet increased as well, slightly, with an average margin for all the business of 36%. I would expect to see it remain the same, slightly increasing in 1% or so. That would be my expectation at this moment.

Okay, so you think there might be a 1% improvement as GNS continues to grow.

Yes, we believe that at this point.

Great, great. Thank you.

Okay.

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 in two hours after the conference. In the U.S., please call 1-877-456-0009. In Israel, please call 03-925-5937. Internationally, call 972-3925-5937. Mr. Levinberg, would you like to make your concluding statement?

I would just like to thank you, everybody, for joining us for this quarter's call. Good afternoon and good day. Goodbye.

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