Gilat Satellite Networks Ltd (GILT) 2009 Q4 法說會逐字稿

Welcome to Gilat's Fourth Quarter 2009 Results Conference Call. All participants at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded February 16th, 2010.

I would now like to turn over the call to Tom Watts from Watts Capital Partners to read the Safe Harbor statement. Tom, please go ahead.

Thank you. Good morning and good afternoon. Thank you for joining us today for Gilat's Fourth Quarter 2009 Results Conference Call. A recording of the call will be available beginning approximately 12.00 p.m. Eastern time today, February 16th, 2010 until February 18th, 2010 at 12.00 p.m. Our news 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 statement regarding future financial operating results involve risk, 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 that are 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 begin today's call with a snapshot of our fourth quarter results followed by a more detailed review of our business during the quarter. Following the quarterly review, Ari will take you through the detailed financial results. After this, I will summarize 2009 and share with you our management objectives for the coming year. We will open the floor for questions right after this.

In the fourth quarter, we continued to increase our free cash position and saw a significant improvement in bookings compared to the previous quarter of the year. Revenues also increased slightly compared to last quarter, but declined compared to the comparable quarter in 2008. We finished the quarter with a small operating profit.

Summarizing the year 2009, this was a challenging year in general. The harsher market environment has impacted our business. We have taken measurable steps to offset the reduction in revenues during the year and in this way, offsets most of the negative impact on our financial results. We will go into more detail in the 2009 summary a bit later.

In the fourth quarter, US market conditions remained challenging and continued to affect Spacenet revenues which declined compared to the fourth quarter in 2008. The quarter ended with the award of significant contract from Regis Corporation, a global leader in beauty salons. Up until now, Spacenet was mostly being used doing managed network services for customers using both satellite and terrestrial technology.

What is special in this deal is there is no satellite component and there are only terrestrial links. Spacenet has been selected solely due its capability in managing huge complicated enterprise networks and due to our unique Prysm Pro product. We see this as an important achievement that may open large opportunity for us in the managed network services market. I'll expand on it a bit later.

In line with our strategy to focus on government sector, we established six Spacenet integrated government solutions divisions led by Ms. Susan Miller, an industry veteran with over 20 years of experience in the telecommunication and satellite sector. During the quarter, we were awarded several government sector deals which were not yet significant in size and significant to our effort to branch into this sector and further expand our offering.

We had a very strong quarter in Latin America. Revenues increased this quarter compared to the comparable quarter in 2008 and we received several very substantial contract awards in this region. We announced two universal service obligation-type projects in the region -- Telefonica del Peru and an extension in Costa Rica with ICE. This is a segment where Gilat continues to be very well positioned.

Following our successful fulfillment of the new arrangement with the Colombian government during 2009, the Ministry of Communication in Colombia extended and amended the agreements for the provision of services under the Rural Communitarian Telephony (Compartel II) and Telecentros projects for an additional one-year term through December 2010.

The current extension for continued service provides for a government subsidy of approximately $1 million per month, which is dependent upon making certain installation schedules, performance indicators, and providing similar services to those provided over the past year.

The operations in Colombia continue to have a positive impact on our business this quarter. We continue to release money from the restricted cash held by trustees in Colombia and therefore recognized more revenues from our Colombian operations. Our success in Latin America was offset by weaker results in some of the other regions where we continued to witness a slowdown in business. While our bookings increased significantly this quarter compared to previous quarters, it is still too early to determine whether the market conditions are improving or expected to improve in the coming quarters.

Moving to the financial indicator summary slide, revenues for the fourth quarter of 2009 were approximately $56.6 million, an increase over the previous quarter and a decrease compared to the comparable quarter of 2008. This quarter, we again were able to balance our financial results by maintaining cost control, finishing the quarter with a slight profit while increasing our free cash balance's position.

For the year 2009, we recorded revenues of $228.1 million compared to $267.5 million for the comparable period in 2008. Net income for the year 2009 was $1.9 million compared to net loss of $1.1 million in 2008. The decline in our revenues compared to 2008 can be attributed to the tougher market environment in 2009. Our backlog remained steady compared to that of last year at approximately $181 million. I will discuss the Q4 2009 annual results and the annual results in more details later in the call.

Getting into a little more detail on our business in the developed market, one of the highlights of the quarter and full year was a word of the Regis Corporation contract. Regis, a global leader in beauty salons, hair restoration centers, and cosmetology education is using Spacenet managed network services and Prysm Pro network management top lines to provide integrated support and management for its business communication infrastructure.

This infrastructure includes DSL 3G data over cellular, analog and digital voice, Wi-Fi and VPI networking at its beauty salon stores. Spacenet will provide its Prysm Pro network appliance to over 7,000 Regis Corporations in North America locations. The Prysm Pro announced earlier this year provides support for automatic hybrid switching between wireline and wireless technologies for network backup, integrated Wi-Fi hotspot services for customers, Integrated Analog Telephony Adapter, ATA, for voiceover IP functionality, and point of sale hardware for retail applications.

The new award reflects our strategy to strengthen our position in the managed network services market, irrespective of the communication technology. As I mentioned earlier, we are focused on expanding our expenses within the government sector and, to this end, we have established our six business units.

During the quarter, we made progress in our effort to expand our services to government customers at the municipal, state, and federal levels, mostly for emergency response. We also received another small contract for the DoD, so we are seeing progress in expanding our business in this sector. The year was also highlighted by new deals in the gaming sector, which continues to be an important market for us in the US.

Now, turning to the emerging markets. Latin America remains a very significant market for us. The year was highlighted by a mix of large-scale contract awards in the region including project for USO, enterprise government and energy sectors. We announced two more USO projects in the region this quarter.

For one of these projects, Gilat is providing a 3,500-site SkyEdge II network to Telefonica del Peru to enable the delivery of broadband internet services to remote areas in the country. This contract is part of Telefonica Latin America's initiative to deploy broadband services across the region and Gilat was chosen as a supplier of broadband satellite communication network for several Telefonica subsidiaries.

Instituto Costarricense de Electricidad, ICE, Costa Rica's national telco is another example. In this case, we were chosen to provide a 500-site expansion to meet the requirements of ICE's universal service obligation. In addition, we were chosen to provide SkyEdge II network to serve ICE's corporate customers in Costa Rica.

Similarly, the SkyEdge II network which Gilat is delivering to STL Ghana is another example of the benefits of this platform for the corporate sector. The new 1,000-site SkyEdge II network will be used to provide broadband satellite-based services to STL's enterprise healthcare and financial services customers in West Africa.

During the quarter, we also deployed two additional government defense agency contracts in Asia. We were awarded several defense agency contracts in Asia in 2009 and we view this as an important step in expanding our government and defense-related business. SkyEdge II continues to gain traction in this sector as it is well suited to mission-critical application requirement of the corporate and financial service industry.

During 2009, we continued to strengthen our SkyEdge II platform and released new feature and capabilities. SkyEdge II is a leading platform in terms of performance and bandwidth efficiency, providing the best total core performanceship to satellite service providers. One such project that is using SkyEdge II is GESAC in Brazil, where we -- our technology -- the Ministry of Education is serving about 11,000 public schools and internet centers throughout Brazil.

GESAC is the Brazilian Ministry of Communications program for digital inclusion and calls for the delivery of broadband internet services to underserved public institutions. Our customer, Embratel, is using the new SkyEdge II network to deliver broadband internet services to thousands of schools and public internet centers, telecenters, in more than 4,000 cities nationwide.

Bandwidth efficiency was one of the most important factors for this project and we see SkyEdge II excelling in this effort. As I said before, we are always proud to participate in these types of projects that have substantial and lasting effect on the communities, improving not only their quality of life today, but also enabling future generations of children to have a springboard for their future. During 2009, we were also chosen by Telefonica in their original beat and by Optus, a [contender] for their next generation [visa] platform. We think all of these are encouraging signs regarding our technology leadership.

We have made two recent announcements regarding our technology. The first was that we have deployed, in two Asian networks, a bandwidth optimizer product or BWO. This solution uses noise cancellation technology to save satellite capacity and is suitable for both of SkyEdge and SkyEdge II platforms.

The second announcement was that we are the first to receive certification for the latest DVB-RCS Version 1.3 requirement. DVB-RCS is an open ETSI standard for two-way communication defining an optimized return channel supported by multiple VSATs and hub system suppliers. It has been mandated by many government and institutions around the globe.

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

Thanks, Amiram. Good morning and good afternoon, everyone. Revenues for the fourth quarter were $56.6 million compared to $66.1 million in the fourth quarter of 2008. Our revenue this quarter reflects the continuing effect of the slowdown in the markets we experienced during the year. In comparison to the third quarter, we had a slight increase in revenues, which is attributed mainly to the higher level of booking during the second half of the year and particularly during Q4.

This quarter, we were able to release $6.2 million of restricted cash in Colombia, which is reflected in our revenues. In 2009, we released the entire $24 million in restricted cash that was held by trustees at the beginning of the year. Following the successful implementation of the amendment completed projects, last month we signed an additional extension for the remainder of 2010. We expect that this will contribute approximately $10 million to $12 million in revenues in 2010 should we meet the operational indicators.

Our gross margin for the fourth quarter was 33.2% (sic - see slides), reflecting an increase on the 30.7% in the comparable quarter of 2008. The improvement in our gross margin this quarter reflects our continuing effort to improve our profitability, both through managing the type of transaction we have and through a focus on cost and budget control. As we continue to mention every quarter, our gross margin is also affected by the mix of equipment and services, the size of our deals, and the timing in which transactions are consummated. Each of these factors result in the variation in our gross margins.

Net R&D expenses decreased from $5 million in the fourth quarter of 2008 to $3.4 million this quarter. Selling, marketing, general and administrative expenses decreased from $17 million in the fourth quarter of 2008 to approximately $15.2 million this quarter. The overall decrease in our operational expenses reflects the effect of headcount reduction we had at the beginning of the year and the cost cutting measure we took at the end of the second quarter of 2009.

Going into 2010, in support of our strategy, we intend to increase our budget by approximately $7 million to $8 million. Approximately half of this we allocated to R&D and the remainder will be allocated to other activities in the Company. This increase in budgets will be gradual over the year. Our operating income for the quarter was approximately $200,000 compared to an operating loss of approximately $6.8 million in the comparable quarter of 2008. On a non-GAAP basis, we had an operating income of approximately $400,000 this quarter compared to a loss of approximately $1.6 million in the comparable quarter of 2008.

The improvement in our operating income this quarter, despite the reduction revenues compared to last year was achieved mainly through the higher level of gross margin combined with the reduction in expenses. Our GAAP net income for the quarter was $300,000 or $0.01 per diluted share compared to a loss of $6.5 million or a loss of [$0.15] per diluted share in the same quarter of 2008. On a non-GAAP basis, net income for the quarter was $600,000 or $0.01 per diluted share compared to a loss of $1.3 million or a loss of $0.03 per diluted share in the same quarter of 2008.

Now, let's look at our financial highlights for 2009. Our revenue in 2009 were $228.1 million compared to $267.5 million in 2008. As mentioned earlier, the decrease in our revenues year-over-year reflected the continuing effect of the slowdown in the economy, the decline in the markets in which we operate, and the relatively low level of bookings we had during the first half of 2009.

During this year, we took some cost cutting measure in order to balance our operating expenses with a lower level of revenue. The steps we have taken enable us to remain breakeven despite our revenue decline. Our net income for the year was $1.9 million or $0.04 per diluted share compared to a loss of $1.1 million or a loss of $0.03 per diluted share in 2008. On a non-GAAP basis, during 2009 we had a net income of $2.8 million or $0.06 per diluted share compared to a net income of $4.6 million or $0.11 per diluted share in 2008.

Geographic revenue distribution for the year was as follows. Latin America accounted for $89 million or 39%. The US accounted for $85 million or 37%. Asia accounted for $36 million or 16%. Africa accounted for $11 million or 5%. And Europe accounted for $7 million or 3%. When comparing 2009 figures to 2008 in absolute terms, we see growth in Latin America mainly due to our revenues on the Colombian operation and the release of the restricted cash, while other regions experienced a revenue reduction.

During the fourth quarter, we continued to increase our cash balances by approximately $7.5 million. At the end of the year, our free cash balances totaled $154 million. Our trade receivables at the end of the quarter were $45.6 million, representing DSO of 73 days. This represents an improvement from 2008, mainly as a result on our efforts to manage our working capital in focus and payment terms. Our shareholders equity at the end of the quarter totaled $232.3 million.

In summary, 2009 was a year of tight cost control and expenses reduction to ensure that our business remains strong financially, even in the face of challenging market environments. During 2009, we increased our free cash by approximately $17 million and reached approximately $154 million in free cash with only $30 million in debt, which gives us a solid foundation to build the business in 2010 and onwards.

Now, I'd like to turn the call back to Amiram. Amiram?

Thank you, Ari. Before moving to our 2010 management objectives, I would like to give you a short overview on how we see the markets. 2009 was not a good year for the [business] markets. We estimate that the total business market declined in terms of revenues last year compared to 2008. This is as a result of a mix of reasons, but we think primarily it is a result of the global financial crisis and shortage of satellite capacity over certain regions.

Looking at market analyst reports, we see estimates stating that the economic crisis, while still not over, is showing some signs of improvement. Market analysts also estimate that satellite capacity will increase, but we believe that the pent-up demand will bring a return to market growth. For this reason, we will increase our investment and budget in the reset market to be able to benefit from the growth when it comes, which we estimate will start in 2010 and likely to be more significant in 2011 and onwards. This investment will be both in the core markets where we are active today and in entry to military markets.

Regarding the increase of budget for activities in our core markets, our focus will be to improve our competitiveness, especially in market segments where we are less active today, such as small and high-end networks. You may recall our announcement of the net edge targeting just these segments. Another example is the expansion of our managed network services to satellite -- hybrid satellite terrestrials and even to all terrestrial networks.

This budget allocation will probably not have a substantial impact on our sales in 2010, but we believe it will in 2011 and onwards. The second area I said we want to focus on is the military market. We think the military market for our product base will continue to grow in the future. We will therefore be allocating a significant budget towards this market.

Already, we have established SIGS and we recruited Ms. Susan Miller to head this activity. We have also had some very small successes in 2009, both in the US DoD market and in the international defense market. And you may recall several announcements relating to this market in the past year.

The investment in the DoD market is longer term and we expect to see substantial revenue coming from this organic initiative only in 2012 and onwards. We are also targeting non-organic growth and are looking for potential candidates. As I'm sure you remember, we have over $150 million of free cash, very low debt, and several alternatives for financing, if needed, and we will strive to generate growth to our business through our many activities as well.

As we move onto our 2010 management objectives, we have taken into account the market environment that lies ahead in 2010 and we will increase our budget for our core market activities and for entry to the military market. We have set our financial management objectives to increase our 2009 revenue level and to improve profitability.

To summarize our call, while we had a year-over-year decline in revenues this quarter, we were able to significantly balance it by maintaining cost control. We finished the quarter with a sequential increase in revenues, a small operating profit, and had a sequential increase in cash. This also is a summary of 2009 with a decline in revenues compared to 2008, but with only a small loss and with a significant increase in free cash.

Looking at 2010, we have a clear vision of where we want to be. We have excellent technology, SkyEdge II, is the leading research platform in the market and the Prysm Pro is a unique product. We want to strengthen our position in the market as well as focus more on the higher end segments. We also want to focus on the defense market, which includes the US DoD and International Defense Agency. Our budget and roadmap have been adjusted to support this strategy. We have a strong balance sheet to finance M&A activity, which supports our strategy.

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

Thank you. (Operator Instructions). There are no 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 1-888-269-0005. In Israel, please call 03-925-5921. Internationally, please call 9723-925-5921. Additionally, a replay of this call will also be available on the Company's website, www.gilat.com.

Mr. Levinberg, would you like to make your concluding statement?

No, I'd just like to thank you, everyone, for joining us for this quarter's call. Good afternoon and good-bye.

Thank you. This concludes Gilat's Fourth Quarter 2009 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.