Gilat Satellite Networks Ltd (GILT) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's first-quarter 2009 results conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded May 11, 2009. I'd like to now turn the call over to Mr. Tom Watts of Watts Capital Partners to read the Safe Harbor Statement. Tom, please go ahead.

Good morning, and good afternoon. Thank you for joining us today for Gilat's first-quarter 2009 results conference call. A recording of the call will be available beginning at approximately 12:00 p.m. Eastern Time today, May 11, 2009, until May 13, 2009, 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 in our earnings release, which state that 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, either 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 Securities and Exchange Commission. That said, on the call this morning is Amiram Levinberg, Gilat's Chairman of the Board and Chief Executive Officer and Ari Krashin, Chief Financial Officer. Amiram, please go ahead.

Thank you, Tom. Good day, everyone. I would like to welcome Tom, who joined our team recently. Tom is probably well known to you all as a veteran analyst of our industry. I'm sure we can use his (inaudible) knowledge and I'm glad he is with us.

I would like to begin today's call with a snapshot of our first-quarter results, followed by a more detailed review of our business during the quarter. After this, Ari will take you through the detailed financial results, and then we will open the floor for questions. Our first quarter ended lower than the comparable quarter in 2008. Taking into account the current economic environment, this is not unexpected. In general, we continue to feel the negative effects of the financial situation from the telecom market and this effects the satellite communication markets as well.

On a positive note, we have started to release money from the restricted cash held by the trustees in Colombia and once again are able to recognize revenues from our Colombian operations. This is a good development and in line with our expectations, as discussed with you in our call in January 2009, when the new agreements were executed.

Recent results were on par with the results from the comparable quarter in 2008. Statements had several extensions of existing contracts, as well as expansions for additional services, predominantly based on the traditional enterprise and gaming customers. During the quarter, we announced that Cumberland Farms signed a contract to operate its data network. In general, though, the recession in the US is having an effect on Spacenet's business and we are seeing longer sales cycles and a reduction in investment by the commercial sector.

In the development regions, we announced several new contracts, Netcom in Nigeria, Nera Tel Group in Southeast Asia and Banco de la Nacion in Peru. Activity in Latin America remained strong in the quarter and we have won every September by a leading regional telecom operator. Though in other regions we see the market conditions becoming more challenging and this had a negative effect on our results. We continue to see [UFO] type projects and government-funded initiatives that are well suited for satellite communications around the world, usually in the developing countries.

Recently, there have also been several such initiatives in the developed world, as part of a global stimulus package to help the economy climb out of the recession. One such example is the $7.2 billion stimulus package proposed by President Obama in the US. Another is the EUR1 billion plan by the European community to provide broadband connectivity to 100% of Europe's population. While we think that much of these funds will be used to develop the welfare infrastructure, this may provide opportunities for the satellite industry, as well.

Satellite technology is well suited for providing cost-effective broadband connectivity to remote regions. It is too early to say if and how we can benefit from these opportunities, but these are interesting developments.

Moving to the financial indicators summary slide, revenues for the first quarter of 2009 were $60.8 million, a decrease compared to the comparable quarter in 2008. The decline over last year's quarter is attributable to lower GNS sales in the emerging markets and more conservative spending in the telecom sector. Ari will discuss the Q1 2009 results in more detail later in the call.

Getting into a little more detail on our business during the first quarter, I will begin with the developed remarks. Spacenet results this quarter were on par with the results in the comparable quarter last year. However, we are seeing the economic environment in the US become more challenging and Spacenet sales cycles are lengthening.

Spacenet has had several extensions and expansions in the past quarter. These were both from enterprise customers and networks in the gaming sector. This has continued to be a cost-effective solution for customers requiring high-availability connections, as well as backup for terrestrial networks in cable serve failure. We continue to see the bundling of both terrestrial and satellite technology together as an attractive offering and well suited for many customers.

The Cumberland Farms [extension] I mentioned earlier is one such example. This contract includes both an upgrade to SkyEdge VSAT for faster speeds and higher functionality, together with terrestrial technology, such as DSL, cable and EV-DO. In addition to the commercial customers, Spacenet also serves government customers at the municipal, state and government level. For these customers, communications for emergency response is a growing requirement and something Spacenet is focused on providing.

Now turning to the emerging markets. As I mentioned before, we have started to release funds from our restricted cash, held by trustees, relating to the Compartel project in Colombia, and once again recognized revenues from these operations. During the first quarter, $2.6 million of restricted cash was released from the trust accounts. In accordance with the amended agreement signed with the Ministry of Communications in Colombia, we have begun the upgrade of Internet services in 550 telecenters, and the installation of 93 new military centers. We expect to continue with further upgrades and installations in the second quarter, [prior] to removal of thousands of telephony sites which are not being used, all as agreed with the Ministry of Communications.

We are investing intensive effort in these projects and we are proud they enable so many people in rural Colombia access to broadband Internet and telephony services. Thus far, the feedback of the governing entities in Colombia and users in the rural villages on our new upgraded services is very positive. As we accomplish the upgrade and complete the installation phase, we will enter the operation phases of the projects and additional restricted cash is expected to be released during 2009, subject to compliance with performance indicators.

Having said that, our past experience teaches us that projects like the ones in Colombia can take unexpected turns and so we continue to be conservative and recognize revenues only after guidance are released.

For GNS, the market conditions had a negative effect on our results, though we continue to see universal sales obligations and government projects mostly in Asia and Latin America. We also continue to see projects for service providers that are focused on the enterprise and corporate segments.

I mentioned briefly before that we have won [a piece] of tender by a leading regional telecom operator. The tender was for countries in Latin America and Gilat took several of these. Following this tender, orders would be placed in the respective countries. I hope to be able to give more details of this in the coming few weeks. I also mentioned earlier that we announced that NeraTel is deploying our SkyEdge II for a Southeast Asian customer. This network includes our new mesh capabilities. For those less familiar with satellite network technology, I would like to just give a short explanation.

Most VSAT networks are based on a hub-and-spoke topology, where each terminal communicates only with the hub. We commonly call these star networks. Mesh capabilities enable terminals to communicate to each other directly and not with the hub, this brings several advantages to the user, but most significantly [low space-saving cost] and better user experience.

Our mesh capabilities in the SkyEdge II enable high throughput for both voice and data traffic with up to six-megabit-per-second channels, which can be applicable for telephony networks, corporate customers, military applications and more. A notable aspect of NeraTel's network is that the VSATs carry end-to-end MPLS data, which includes converged services such as broadband IT, voice, video and multi-customer.

Also this quarter, GNS has released in addition to the SkyEdge II family of VSAT called the SkyEdge II Pro. This is a modular high-performance VSAT targeted for various segments, such as telecom, military and other high-end markets requiring high-speed IP capabilities, usually together with voice. The Pro VSAT has slots for four add-on parts that provide additional functionality to the VSAT, such as embedded telephony ports or mesh capabilities. This enables the service providers to customize the VSAT to the specific requirements of each end user. These cards can be installed by the customer, so the VSAT can be upgraded in the field.

That concludes our business overview. Now I would like to turn the call over to Ari Krashin, our CFO, who will review the financials. Ari, please?

Thank you, Amiram. Our revenues for the first quarter of 2009 were $60.8 million, compared to $70.5 million in the first quarter of 2008. The decrease comes mostly from GNS sales in the emerging markets, mainly in Africa, and local services spending in the telecom sector overall. The decrease in our revenues was partially offset by revenues from our Colombian operations. This quarter, as mentioned earlier by Amiram, $2.6 million of restricted cash was released from the trust account in Colombia, enabling us to recognize this amount as revenue.

As more restricted cash is to be released during 2009, we expect our revenues from the Colombian operation to increase accordingly throughout the year. Our gross margin for the first quarter was approximately 30%, compared to 36% in the first quarter of 2008. The decrease in our gross margin is attributed mainly to the decrease in the GNS portion of revenues, which typically carries higher margins compared to [specific] (inaudible). Net R&D expenses decreased from $4.3 million in Q1 2008 to $3.8 million this quarter.

The decrease is a result of the decline in our gross R&D expenses, reflecting the effect of the headcount reductions at the beginning of the year and the increase in the grant received from the Office of the Chief Scientist in the amount of $0.2 million.

This quarter, we incurred third-party expenses in the amount of approximately $250,000 relating to the (inaudible) transaction. These expenses are included in our operating expenses and as such affect our operating income. As we mentioned in previous calls, during 2008 those expenses totaled approximately $2.4 million.

Since we do not expect these expenses to continue to be significant going forward, we are including them as part of our ongoing legal expenses in the general and administrative expenses. Our operating income for the quarter decreased by approximately $4 million compared to the first quarter of 2008, reflecting a decrease in our revenues and gross margins.

This decrease was partially offset by the reduction in our operating expenses due to the headcount reduction. In addition, there was a positive impact of the foreign exchange rates, arising for the increase in the value of the US dollar versus the Israeli shekel. Our net financial income for this quarter was $0.3 million, compared to a financial income of $0.8 million in the same quarter of 2008. This is mainly due to the low level of interest rates worldwide. Our GAAP net income for the first quarter of 2009 was $0.2 million, or $0.01 per diluted share, compared to a net income of $4.6 million, or $0.11 per diluted share, for the first quarter of 2008.

Our financial position continues to be strong, as our cash and cash equivalents and marketable securities amount to $133.4 million at the end of the quarter, with a low level of debt, in the amount of $34.3 million. The [noteworthy] decline in our cash balances this quarter of approximately $3.5 million was a result of our expenses related to the new agreements in Colombia, the severance payments to employees leaving the Company as a result of the headcount reduction. Our trade receivables at the end of the quarter were $57.5 million, representing DSO of 85 days, which is in line with expectations and is considered to be relatively average in the industry.

Our shareholders' equity at the end of the quarter remained steady and totaled $227.8 million. Now I'd like to turn the call back over to Amiram. Amiram?

Thank you, Ari. To summarize, while we had a decline in revenues this quarter, we were able to remain profitability predominantly due to the steps we took to adjust our cost structures. We have started to release money from the restricted cash held by trustees in Colombia and once again are able to recognize revenues from our Colombian operations.

In the previous quarter, we adjusted our budget and we will reevaluate our expenses again at the end of the second quarter, taking into account the economic environment. Overall, the Company is in a strong financial position, with $133 million in cash and having only modest amounts of debt. While the economic situation is difficult, we believe that we can still meet our objectives that we have defined for 2009.

That concludes our review. We would now like to open the floor for questions. Operator, please?

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) The first question is from Jonathan Ho of William Blair. Please go ahead.

Good morning, guys. My first question is, can you talk a little bit about what you're seeing in the first month of the second quarter and whether we're seeing sort of a pickup in the enterprise VSAT space?

Hi, Jonathan, this is Amiram. I wouldn't say we can see a pickup. I don't see -- I read papers, much like everyone, so I understand that the bad period is over, but what is ticking in the field, I don't see any dramatic change. The funding is good on one hand, and on the other hand it's fairly difficult to close deals.

So can you talk a little bit about maybe the customer environment there? Is this more a situation where they're taking longer to make decisions and so a push out to the right, or are you seeing more sort of cancellations? Just can you talk about what's happening there?

Don't see cancellations almost at all, but in reality what happens is that when you see longer and longer sales cycles, you practically just sell less, or you have less bookings, and this is a phenomenon we currently face. And looking at that, Spacenet we see again longer sales cycles, but it's more mitigated because we have a significant service component.

In Colombia, if we are successful doing the implementation or continue to be successful in implementation, then we should see actually an upside coming from this region and then the main question is really GNS. And in GNS, if we start seeing deals that are in the funnel for quite some time closing faster then it's going to be good. Then if it continues this way, it will continue to be a bit tougher during this period of time.

Okay. Just taking a look at sort of the pricing environment, have you seen any shifts there in terms of maybe more pricing pressure or customers pressing for that?

I wouldn't say that this is specifically any different than I would say regular days or the situation a quarter or two before. No, I don't see that.

Okay. In terms of this Obama and the European stimulus that you guys were mentioning, can you give us a little bit more color on maybe the potential opportunity there and maybe the timeframe that you see something flowing out of that opportunity?

With the stimulus in the US, the rules of the game are not clear. So at this point in time there are so many people that give suggestions and comments and show up in front of the different committees and we are part of this process. In part, we are cooperating with other companies in our industry and in part, obviously, at the end of the day different companies will come with different applications.

We are not at the application stage at this point of time as the rules of the game are not completely clear at this point, but with definitely lots of effort, lots of activity, by many people, including ourselves. In Europe, the stimulus for broadband is somewhat smaller. Not that it is small money, but it's somewhat smaller. It's EUR1 billion. And I have to say that because, unlike the situation in the US, where we have a subsidiary on the ground, namely Spacenet, in the US our activity is somewhat more remote because we need to get connected with local service providers so we're a bit more remote from the situation in Europe.

Okay, and my last question is on the litigation for the breakup fees. Has there been any change in the status there? Can you just give us a quick update?

Sure, I see on the -- it's going to be interesting for a few of the people. With regard to this issue, over the past months we agreed to discuss a potential settlement through a mediator, and this takes some time. If these discussions do not lead to an acceptable resolution of the networks, we will revert to the Israeli courts. And we understand the urgency of proceeding there and we do our best for the interest of shareholders to do any achievement via this mediation or as a result we (inaudible), which each and every one of them has a life of its own. So I don't really want to commit myself to time schedules. The court process in itself, as you know, in Israel takes quite a few years.

Great, 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 would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the US, please call 1-877-332-1104. In Israel, please call 03-925-5947. Internationally, please call 97-23-925-5947. Mr. Levinberg, would you like to make your concluding statement?

Yes, thank you. I'd like to thank you for joining us for this relatively short [quarterly] call. Good afternoon and goodbye.

Thank you. This concludes Gilat's first-quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.