Gilat Satellite Networks Ltd (GILT) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks Ltd. second quarter 2008 results conference call. All participants are present in listen-only mode. Following managements formal presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, August 25, 2008. I would now like to turn the call over to Amiram Levinberg, CEO of Gilat. Mr. Levinberg, please go ahead.

Good morning.

Yes. This is Andrea Costa, I'm going to do a brief introduction. Good morning and good afternoon. Thank you for joining us today for Gilat second quarter 2008 results conference call. A recording of the call will be available beginning at approximately 12:00 p.m. Eastern time, August 25, 2008 until August 27, 2008, at 12:00 p.m. Our earnings press release and website provide details on accessing the archived call. Investors are urged to read the forward-looking statements language in our earnings release but essentially it says statements made on this earnings call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements including statements regarding future financial operating results involve risks, uncertainties, and contingencies, many of which are beyond the control of Gilat and which may cause actual results to differ materially from anticipated results. Gilat is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise, and we expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our reports filed with the SEC.

That said, on the call this morning is Gilat's Chairman of the Board and Chief Executive Officer, Amiram Levinberg; Ari Krashin, Chief Financial Officer; and also joining us is Rachel Prishkolnik, the Company's General Counsel. Amiram, please go ahead.

Thank you, Andrea. Good day everyone. I will start by giving you a short update on the status of the merger transaction, then I will go over our business highlight for the second quarter, key financial indicators and elaborate about our different market segment. After I this, Ari will take you through the detailed financial results and I will summarize. We will open the floor for questions right after this.

As we have announced last week, the Company has met all conditions precedent to close the merger transaction. We informed the purchasers of our ready net to close the transaction on August 5, 2008. Unfortunately, the purchasers have verbally informed us that they will not close the merger transaction at the agreed upon $11.40 per share price. The purchasers made a number of new verbal proposals which were substantially different from the definitive agreement. These proposals were rejected by the Company's Board. The purchasers also belatedly raised the claim which antitrust clearance was required from the German authorities and then failed to act promptly to obtain such clearance. In any event such clearance is not condition precedent in the merger agreement. The Company has informed the purchaser that they have 72 hours to complete the definitive merger transaction. If these conditions are not met, Gilat shall seek all remedies at its disposal including legal action.

As you know, the merger agreement was entered into on May 31, 2008, by a consortium of investors, comprised of Gore Group LLC, Mivtach Shamir Holdings, companies affiliated with Roy Ben-Yami, Ami Lustig and Eytan Stibbe and DGB Investments Inc., a company affiliated with Douglas Bergeron. The merger agreement contains a guarantee by each of investors that secures a termination fee in the aggregate amount of $47.3 million, payable to Gilat in the event of an intentional breech of the agreement by them.

I am of course very disappointed that the members of the consortium after 11 months of intensive due diligence and negotiations have chosen not to honor their obligations to complete this transaction. I hope that the consortium will meet its obligations without delay so we need not take legal action to enforce the undertaken set forth in the agreement.

I will turn now the review toward our review fourth quarter. Our financial results for this quarter were lower than second quarter 2007 mainly due to the continued delay in revenue or commission from the operations in Columbia, but also to some extent due to the lumpiness in GNS business. While we have a healthy funnel of deal we have seen delays in many pending large projects throughout the world. On the other hand, Spacenet had a great second quarter.

Regarding Columbia, I am pleased to report that we have made progress in the negotiations with the Columbian government for a revised agreement which will enable us to get back on track and recognize revenue. We believe that we will be able to sign a new agreement by as early as the end of the third quarter. Should this new agreement be signed we will be able to perform under the newly negotiated indicators and then starting in Q4 we will once again will be able to recognize revenues (inaudible). In the developed markets we saw strong activity in the U.S. with significant deals to the enterprise and gaming sector. These include both new deals and technology refreshers for existing customers. We also see growth in the emergency management market and announce that a number of state agencies have chosen our satellite services.

Regarding GNS product sales I have often stated the inherent lumpiness market of this market, especially for product sales. In the second quarter this lumpiness reflected GNS more than in previous quarters. We primarily attribute this lumpiness to lengthened sales cycles which we are seeing in many regions of the world. As I previously said, while we have a healthy family of large transactions, many projects have been postponed by governments operators and other customers. Our new SkyEdge II platform is continuing to gain market traction and we announced this quarter that Alldean has chosen to deploy SkyEdge II for the East African market. This quarter we also signed our first large integrated WiMAX/VSAT deal. If you remember, we announced last quarter that we are (inaudible) for WiMAX products. I will discuss all of these issues in more detail a bit later.

Moving to the financial indicator summary slide, quarterly revenues were $65.6 million in the second quarter of 2008, compared to $70.3 million in the comparable quarter of 2007. The net income for this quarter excluding $200,000 of merger related transaction expenses was $1.5 million compared to $5.5 million in the comparable quarter of 2007. The effect of our inability to recognize the revenue of our Columbian operations in Q2 results was $3.7 million in revenues, operating income, net income, and EBITDA in comparison to Q2 2007. Ari will provide more in depth presentation of our financials a bit later.

Delving into a little more detail about our business during the second quarter I will begin with the developed market. Spacenet had a strong quarter obtaining good results in bookings and profitability. Spacenet saw enhanced activity in the gaming segment in Q2 with major turnkey VSAT solution roll out for state lotteries. Spacenet, currently working on a number of state lotteries roll out that have over 25,000 sites. On the enterprise front, Spacenet signed a number of contracts with existing clients for technology refresh as well as contracts with new customers. The recent award include a major hotel chain, a big box retailer and a restaurant chain for a total of over 10,000 sites.

Another growth area in the developed markets is emergency management. Spacenet has recently launched a new product for this market called ION. It is a ruggedized suitcase size product that provides a satellite network in a box, and it is designed for emergency response personnel. ION can be with integrated into a mobile command vehicle and support coverage voice, video and high speed data services. Two separate state agencies, Missouri Hospital Association and Missouri Department of Transportation are using our satellite service as part of its emergency response network. Both networks were deployed by one of Spacenet's long time channel partners, Orbital Data Net and provide high speed satellite links to support critical data and voice communication, radio back haul and VPN Internet access in case of a disaster or terrestrial connectivity failure.

Now I'd like to turn to the emerging markets. As I have mentioned, GNS product sales are deal sensitive and it is hard to forecast the exact timing of such deals. Since many of the deals that our sales teams work on are relatively large projects their overall effects on the specific order are quite significant. In the first month we have seen much longer sales cycles and many more developing projects on the part of governments and operators. One such example is a large education project that was scheduled to close in the first quarter, then delayed to the second quarter, and now we hope to bring good news regarding this project in the third quarter.

As a general rule, we do not see cancellation of projects or most intensity in our competition in our final results. As SkyEdge II continues to gain market traction, SkyEdge II high performance enables us to reach new high volume markets that require high bandwidth and more throughput, in addition, SkyEdge II is a very efficient in terms of satellite sources which translates to a better return on investment for our customer service providers. We have customers for SkyEdge II in the Americas, Europe, Africa and Asia. This quarter we received our first large integrated WiMAX deal which includes both integration with satellite technology and turnkey network roll out. This is the first phase for a even larger government project to provide Internet access to schools. We see this as a positive sign for synergy between the two technologies, WiMAX and satellite as well as a vote of confidence for our core strength in rural regions which is relevant to WiMAX network (inaudible).

That concludes our business overview. Now I would like to turn call the over the call to Ari Krashin, our new CFO who will review the financials. Ari has been with Gilat for the last eight years, in his last position he held the last Director of Finance, I want to take this opportunity to congratulate Ari for his new position in the Company. Ari?

Thank you very much, Amiram. Good morning and afternoon, everyone. I would like to provide you with our second quarter results as well as offer some details on the quarterly financials. Before I get 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 we are presenting GAAP and non-GAAP results as well as reconciliation tables which highlight this data.

Revenues for the second quarter were $65.6 million compared to $70.3 million in the second quarter of 2007. A decrease of approximately 6.7%. This decrease in year-over-year revenues is related mainly to the continued deferral of revenues, relating to the projects in Columbia. Revenues of approximately $3.7 million were recognized in the same period last year. As mentioned in previous quarters while we are not presently recognizing revenues from deposits in Columbia, we continue to record related expenses. Our gross margin for the second quarter was for approximately 32% compared of 36% in the second quarter of 2007. As a reminder our gross margin is affected quarter to quarter by the mix of equipment and services. The region in which we operate, the size of our deals and the timing of which results are consummated. As such we are subject to lumpiness in our business which can lead to quarter to quarter fluctuations.

This together with the expenses risked to operation in Columbia has a negative impact on our gross margin this quarter. In addition we are seeing more aggressive pricing activity in certain regions of the world. Gross R&D expenses increased slightly from $4.4 million in the second quarter of 2007 to $4.6 million this quarter. This, the increase was primarily due to additional head could which was in the quarters with the Company's plan to focus on targeted investment in R&D. Operating income for the quarter was $0.7 million compared to $4.4 million in the second quarter of 2007. Operating income for the quarter reflects the impact of our Columbia operation, the foreign exchange impact for the decline in value to U.S. dollars versus the Israel shekel, as well as the decrease in revenues in gross margin.

During the quarter, the effective decline in revenue of U.S. dollars versus the Israel shekel accounted for approximately $1.7 million. Our international income for the second quarter was $0.9 million compared to financial income of $1.3 million in the same quarter of 2007. The reduction is attributed mainly to the decrease in the interest rates. Our GAAP net income for the second quarter of 2008 was $1.3 million or $0.03 per diluted share compared to a net income of $5.5 million, or $0.13 per diluted share for the second quarter of 2007.

At the end of the quarter our cash balances including marketable securities and restricted cash net of short term back credit amounted to $182.2 million. Our trade receivable at the end of this quarter were $58.1 million. The increase from the previous quarter is a result of longer payment [terms], primarily in small number of transaction with well established customer in certain regions. Our inventories at the end of the quarter were 24. -- sorry. $24.5 million. The increase in our inventories is attributed mainly to (inaudible) that will be deployed during Q3 and Q4 2008. Our shareholders equity at the end of the quarter totaled $237.7 million. Now I'd like to turn the call back to Amiram. Amiram?

Thank you, Ari. To summarize, we are disappointed in the difficulties we faced in close the merger agreement but I hope the purchaser will honor their commitment. Our Spacenet in the United States is experiencing positive trends evidenced by strong momentum in the second quarter. We believe that we will be able to sign a new agreement with the Columbian government by as early as the end of the third quarter. Our (inaudible) is healthy and bookings in Q2 will double the bookings in Q1 and I estimate that all of these factors will bring a positive impact on our business beginning in Q4 2008. That concludes our review. We would now like to open the floor for questions. Operator, please.

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

Good morning. When you say that the (inaudible) you received were materially different, can you talk about how far apart we are talking about here?

Hi Jonathan.

Morning.

Hi, good morning. On the advice of our litigation counsel I cannot provide you with any specifics at this time. But I can tell you that until yesterday we were engaged in a verbal dialogue with no firm proposals. The offer that has been raised orally were very far from what the Board was willing to recommend to our shareholders. Rachel, you can feel free if you want to add anything here.

No, I think that's enough.

Okay. In terms of, if the deal closes or doesn't close, do you think there are still sort of other interested parties, I mean given the process that you guys went through to basically look at all of the opportunities, how do you think about that going forward?

Well, in this process, Jonathan, there were a few companies that has expressed interest, and there was a very orderly process that concluded a long due diligence process by these companies and by the consortium that eventually signed the definitive agreement we got. I think it is immature to say at this point and the only thing I would like to say is that for, I would expect the investors consortium to honor the definitive agreement that they signed.

Did they give any specific reason as to why they won't close the deal? You had mentioned the German Competitive Board. Can you give us more detail on what they specifically site as reasons why they don't think all of the conditions have been met?

It is, I don't really want to speak for them. The German one I just referred to, okay. And I don't think, anything more on this. Unless Rachel you can put some color here on some more detail if you like, but other than that, no coherent kind of message that came from them, up to this point, kind of obviously a mixture of comments and allegations on what the new one, I really don't want to speak for them.

Okay. I will hop back in the queue then.

Thank you. The next question is from [Eric Marzuko of Domenic and Domenic]. Please go ahead.

Good morning, good afternoon. I guess my questions are similar I guess we are trying to get a better understanding of what the Buyer is claiming, I guess they said there's some critical data they're referring to that wasn't presented or some terms that the Buyers asserted that you guys did not meet. Can you mention anything in regards to that?

I -- generally I have no idea what the materials they are referring to, to somebody has showed me, in one of the newspapers just ten minutes before I walked into this room, I don't know, but to gather some perspective, as a part of this due diligence which the due diligence itself took many, many months and there was, they were using professional advisors and we have built an electronic state as part of this process, that have met management, not only CFO, CEO, but management, they have done the Company, and they have done lots of work and in that work, they have more asked for more material which we added to the data, it was a very due long and tiring I would say process. So, generally I don't know what they're referring to.

On the Columbia contract, you said you guys are making progress there and you hope to have something signed by the third quarter can you talk a little bit about the difference of, I guess this quarter you made, the last quarter in regards to Columbia as opposed to now and what has really changed? Are you in a much better place than you were, a much better position than you were last quarter or?

I think that, I think there is a change. The change is that it is negotiations that go between us and the government and I would think, like any negotiation that we are in a fairly final stage. So I hope that we can sign the agreement with them as soon as the end of September.

Thank you. Is this, I mean this, is it the mean issue with the Buyer that is the Columbia contract or?

When they first showed up with their hesitation to close they talked a lot about Columbia, I don't know what they talked about now I can't think of any material data that we didn't give them, not only in the due diligence part, you have to understand we were in contact with them not only this tedious decisions but also after the, after the agreement has been signed they kept fairly close contact with the Company, we have updated them as per the agreement and I would say development of the Company. So, I have no idea what, where they're coming from.

How strong do you guys believe your case is?

Rachel is my lawyer, she's on the line. I think that our case is very strong.

Yes, we feel confident that we have met all conditions precedent in answer to your question and that the agreement needs to be closed and that any decision not to close the agreement will constitute a breech, an intentional breech in the purchasers agreement.

Thank you. Then I guess the last question, just I just noticed in the release there was you mentioned 72 hours, three days, is that number based on anything? Does that come with the merger agreement, is that strategy or?

It is not part of, basically that is consumed all those times, but, since the, if we want to work on a feeder with them, we want to present them the best chances to close a deal, if they change their mind. If they face some difficulties, maybe in financing or whatever, we want to give them all of the best chances to still come back and close the deal. So, that is the reason why we actually have given them some additional time if they needed this extra time in order to come and close the transaction.

Right. You are still in active discussions or?

I think we have been in active discussions up until today. Today I have one telephone call. We have one person from the investor group. I don't know how it will evolve from now on in the next few days. We have been in continuous dialogue with them the last, I would say two weeks.

I see. And another one of their issue was that there were the headquarters that were possibly for sale. Is that still, are you guys going to go ahead with that or was just the Buyer going to go ahead with that post transaction?

Are you talking about the real estate now, excuse me?

The real estate, yes.

Sorry, I will clarify. The real estate was not for sale. I know there were rumors in the paper that the real estate was for sale and there may have been intentions on the part of the purchaser, but nothing like that came out of the, out of the Company and the Company hasn't put the facilities up for sale at any point.

Okay. Thank you very much.

Thank you.

There are no, excuse me--. (OPERATOR INSTRUCTIONS) Please stand by while we poll for more questions. The next question is from [John Art of Kauffman Fund]. Please go ahead.

Hi, good morning. I am wondering if you could go over divisional revenue and compare it with the March quarter so we know specifically where the revenue shortfalls were? Perhaps you can start with rural and talk about when the last time revenue from Columbia was recognized?

I have thought and then I can fill in the blanks. The last time we recognized in part revenues from Columbia was in Q3. In Q3, we didn't recognize in full, the full 3.7, we recognized just part of it. And then in Q4 of '07, we did not recognize the full amount of $3.7 million. And that was the case with Q1 and Q2.

And what is the expense in Columbia?

I would say roughly this -- Ari?

I would say roughly between 1, plus minus 1.5.

No, it is roughly the same, 3.7 slightly more than that, I would--.

Per month.

No, no, the quarter.

The quarter is approximately 3.7, right.

Exactly.

So it is a break, Columbia is a break even proposition?

Correct.

And could you talk about how rural and SpaceNet did compared with the March quarter?

How space net rural.

How the rural business of space net U.S. did compared with March quarter and revenue and earnings contribution?

We -- it's not that we don't provide on a fair business unit basis I guess you refer to SpaceNet 2 and not to SpaceNet?

No, I was referring to both, yes.

To both. Ari, will you take it please?

Again I don't (inaudible) usually this is information that we provide -- I think we can see some kind of a slight increase in good quarter for (inaudible) the U.S. with this high revenue, stronger bookings, better impact of the profits, and the price more like the same as Q1, nothing significant changes there.

So the entire $5 million quarter to quarter decline from March would be entirely ascribed to the GNS operations?

Significant portion of if you want to compare to the previous quarter I would say that a significant portion of it comes from GNS.

And are you willing to discuss backlog compared with year end?

We generally don't think that -- we don't discuss backlog on a quarter to quarter basis. The only thing I can tell you is that backlog end of Q2 has increased from the backlog end of Q1. We usually do not say but Ari has already said that bookings were double those compared to the bookings in Q1. What I will say but I really don't want to reveal the numbers. I think that generally speaking, measuring these quarter to quarter is somewhat misleading because it is too short of a period of time.

Okay. And can you, I guess one of the questions, was there any 10% customers in the quarter?

Hold just a second. We don't think so but want to verify the answer.

Okay. Lastly can you discuss the WiMAX project in more detail, which is what do you think the total potential size of the WiMAX deal is?

We didn't say the magnitude of this deal, and we at this point don't have an authorization to put up this press release with the name of the customer but which we might have down the road. It is an educational project in Latin America and it starts with a combination of research and WiMAX and it is scalable even now, but it could scale out like probably ten times down the road if further phases reduce project will develop.

Great. Thank you.

Thank you, Jonathan.

The next question is a follow up from Jonathan Ho of William Blair. Please go ahead.

Hi, I'm back. A quick question in term of your cash, you guys have a substantial number -- amount of cash on the balance sheet right now, do you intend to do anything with it in terms of share buybacks or anything moving forward?

We don't have a share buyback program at this point in time, Jonathan. At this point in time we don't have such a program.

Just in terms of the balance sheet, taking a look at your inventories, and also accounts receivable we have seen an increase on that side quarter-over-quarter, just wanted to get a sense of maybe what is happening on that side?

I have got it then Ari you can fill in. Generally speaking it is change in type of customers if you like. Last year we had many customers which are coming from specific regions of the world which were kind of pay in advance type of customers which obviously skewed the -- the cash to have lots of cash even before you recognize the revenues. This year we are kind of back to normal, customers are good solid customers, we don't have doubtful accounts in any meaningful way. So, it just, a change in working capital due to the fact that we have more regular if you like customers that are playing in net plus 45 or net plus 60 or anything like that. Then as we pay our suppliers, and that is the main reason for the increase in AR, if they're good customer, they will pay, it is not doubtful account in any way. With regard to inventory, I would just say almost arbitrarily depends on us being prepared for shipments, so you saw it, end of last year, at the same level it is now, then it went down at the end of Q1 and then it went up at the end of Q2 to the level it was at the end of last year. Not very meaningful in my opinion.

With regard to your comments about the bookings doubling in Q2 versus Q1 can you talk or give us a little more color on where you are seeing strength and whether that trend is continuing into the third quarter?

As a general comment, I would say that generally speaking, SpaceNet is doing well, and when it comes to G&S and the regions we feel at this point in time we have kind of, the final is strong generally speaking, if I would have to categorize, I would think that Latin America is stronger at this point in time.

And with regard to the trend in bookings into Q3, how do you she progressing?

I would think that going in for Q3 and the Q3 status now we have a strong family, the only question in my mind is (inaudible) the cycle and considerations like that I think we have a very strong funnel at this point.

Great. Thank you.

Thank you.

Thank you. The next question is from [Jonathan van Orden of Domenic and Domenic]. Please go ahead.

Good morning and good afternoon.

Good morning.

In the event of the Buyer Group breeches and this actually goes to litigation, will the damages you seek be limited or capped at the $47 million termination fee or would it be possible for the court to assess more for the intellectual breech, intentional breech?

I will answer that. Obviously we will assess all of our remedies with strong litigators in israel and in the United States if it comes to that. And we will do everything we can to recover all damages to the Company to the extent doable.

Sure. And is it possible for shareholders to have third party beneficiary rights?

We will obviously look into that as well. It is a little early to comment on the specifics.

Thank you very much.

My pleasure.

The next question is from Paul Glazer of Glazer Capital Management. Please go ahead.

Yes. Thank you. I don't know if there's any truth but we have read in the paper over the past week or two that the Buyer was talking floating a $10.90 acquisition price, down from the $11.40 that had been agreed upon. I have no idea if that's true or not but I did want to comment that that's less than a 5% discount and it is not necessarily clear that that would be substantially different than the $11.40, it is, it is a judgment call. And it is noteworthy that it is 40% higher than where your stock is trading right now. I just wanted to make that comment.

Okay. Rachel, to you want to add anything about that?

No, I don't think we should comment on rumors in the market if that's okay.

Okay.

Thank you. The next question is a follow-up from John Art of Kauffman Funds. Please go ahead.

Yes. Could you comment as to what reasons the Buyer Group gave for breeching the clause and what viable reasons they would have under the MAC clauses of your purchase agreement and whether the quarterly results in anyway might be construed having a down sequential quarter as being such a MAC clause?

I will respond to that, Jonathan. We don't, first of all we haven't been given specific reasons by the Buyers Group. Second we are of approximate opinion that there is no MAC and that the financial results of this, of this quarter would not constitute a MAC and I think you can all look at the agreement and it is part of the proxy and it has been filed with the SEC and see that for yourselves.

Great. Thank you. So would we expect that if 72 hours pass that litigation would begin fairly shortly thereafter?

Our litigators will decide on the timing obviously.

But Jonathan, the answer to that is yes, I mean if we -- if time time passes, it is some location, I know how it works it in English, here in Israel it takes a little bit more time but other than that, yes, I mean we will take all legal steps as we said.

Great. Thank you.

Thank you. 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 1-888-326-9310. In Israel, please call, 03-925-5947. Internationally please call 9723-925-5947. Mr. Levinberg, would you like to make a concluding statement?

I would like to thank you for joining us for this quarters call. Good afternoon and good day.

Thank you. This concludes the Gilat Satellite Networks Ltd. second quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.