Gilat Satellite Networks Ltd (GILT) 2010 Q2 法說會逐字稿

Welcome to Gilat Satellite Networks' second-quarter 2010 results conference call. All participants are 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, August 10, 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 second-quarter 2010 results conference call. A recording of the call will be available beginning at approximately 12 pm Eastern Time today August 10, 2010 until August 12, 2010 at 12 pm. 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 that say that statements made on this earnings call which are not historical fact 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 report 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 highlights of the quarter which include corporate updates of the settlement agreement, a run down of our second-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. We will then open the call for questions.

In the second quarter revenues decrease compared to the second quarter 2009 and we finished with a loss of $1.4 million. During the period we continued to increase our R&D expenses as planned. The effect of this was somewhat offset by the improvement in the gross margin which grew compared to the respective quarter in 2009.

Today we also published a press release announcing that we signed a settlement agreement with each of the purchasers against whom we had filed a lawsuit in 2008. You will recall the lawsuits were filed against the parties that had guaranteed the payments of approximately $47 million as a termination fee under the merger agreement that was approved by the Company's shareholders in July 2008.

Under the terms of the settlement agreement the investors will pay Gilat in aggregate of approximately $20 million, over half of which will be paid by October 1, 2010 and the remainder to be paid in installments ending in October 2013. The settlement agreements were reached as part of remediation proceedings that began in April 2009.

The agreements have been signed though certain formalities, such as filings in the Israeli court, still need to be completed. As is common with such settlement agreements, we are bound by the terms of confidentiality and so I trust you will appreciate that I can't provide details beyond our press release on this matter.

The quarter was also highlighted by the completion of the acquisition of RaySat Antenna Systems, this is following the announcement we had we on March 17 that we reached an agreement to acquire the company. As a reminder, RaySat Antenna Systems provided low profile and lightweight antennas as well as complete system solutions to the rapidly growing SatCom on the move market.

These antennas are critical in meeting the stringent requirements of the US DOD which is already a customer of RaySat Antenna Systems. The product portfolio includes different size antennas to meet varying customer requirements.

Following the closing of the acquisition on July 1 the US operations of RaySat Antenna Systems now operates under Spacenet Integrated Government Solutions, SIGS, as the international business operates within Gilat's worldwide operations. SIGS was established during 2009 to provide fully integrated end-to-end communications solutions for defense, intelligence, homeland security, public safety, federal and civilian government agencies.

As part of the RaySat Antenna Systems deal we also entered into a definitive agreement to acquire from its sister company, RaySat, a research and development center in Bulgaria in addition to certain intellectual property rights. The R&D center will continue to focus on the development of state-of-the-art low-profile antenna systems for KU, KA and X band for the SatCom on the move market and as award-winning low-profile antenna design team with over 60 skilled engineers out of approximately 100 employees in total.

This second acquisition is almost completed, waiting for certain approvals required in Bulgaria. We are very excited about the acquisition and expect this move to assist us in expanding our penetration of the defense and government sectors worldwide.

The market condition in the US continues to be challenging and there was a decline in second-quarter revenues from the US compared to the comparable quarter in 2009. Having said that, we continue to sign new contracts and extensions to existing contracts during the quarter.

Spacenet announced actually today that we signed a contract with Valero to serve as a provider for managed network services and offer connectivity to its nationwide blended (inaudible) locations. I will talk a bit more about this and the managed network services market later in the call.

On the international front, we announced several new contracts in Africa and Asia during the quarter, VTI in Vietnam, ETC and Ethiopia and a deployment of satellite network for defense and homeland security applications in Asia.

Revenues in Africa grew this quarter compared to the comparable quarter in 2009, though this was offset by lower results in the other regions. Our operations in Colombia and in Peru are stable; we are also meeting the operational parameters in our Colombian operations and receiving the subsidy in a timely manner.

Moving to the financial indicator summary slide, revenues for the quarter -- for second quarter of 2010 were $51.8 million, a decline compared to the $56 million we had in the second quarter of 2009. We continue to increase our gross R&D expenses by about $700,000 which is in line with our plans for 2010. We were able to improve our gross margins this quarter to 32.6% compared to 30.4% in the second quarter of 2009.

Our cash balances also increased by close to $10 million this quarter mainly due to exceptional collection. We had a growth in bookings this past quarter and these increased both sequentially compared to Q1 and compared to Q2 2009. This is a good sign for us looking forward and we hope this is an indicator regarding business for the second half of 2010. I will discuss the Q2 2010 results in more detail later in the call.

Getting into a little more detail on our business during the second quarter, I will begin with the developed markets. In Q2 Spacenet signed extensions to existing gaming contracts covering three states. This continues to be an important market for us in the US. Our relationship with the US gaming industry also opened opportunities in the international market as these game players often offer services in other markets.

Emergency response and disaster recovery also continues to be an important market for us. This startup application is seen in federal, state and local governments as well as enterprises and telcos. An example of this type of deployment is an extension contract we received this past quarter from AT&T for management and control of their switches as part of their Fastar service. Fastar is the fast automatic restoration of voice and data service network elements to an area affected by a disaster, be it natural or man-made.

In the second quarter of 2010 we had several contract extensions as well as new enterprise customers. Some examples of these include (inaudible) and CenterPoint Energy. In some of these cases this was for prime connectivity or where the VSAT is always being used to provide the communication network. Just for reference this is what we typically provide for the gaming industry.

Just today we announced that we signed a contract where we will serve a broad and managed services provider for Valero's nationwide wholesale locations. This will be for primary retail applications and there for backup at up to 4,000 locations. Spacenet will be offering to these sites managed network services with hybrid DSL and satellite connectivity based on the present core platform.

Application in these sites include intranet, Internet access, point-of-sale and credit/debit transactions, ATM transactions, automatic tank gauge, ATG, WiFi (inaudible) programs and video security. Valero is a long-time customer of Spacenet satellite connectivity and we are very happy that our managed network solution has been chosen by them as well.

This leads me to the managed network services market in general. The US telecom landscape is highly fragmented with particularly no single entity able to provide nationwide connectivity on wholly owned wireline infrastructure. There is also a large number of telco operators with one report stating over 270 such operators.

For these reasons many enterprises prefer to have managed network services where a single entity manages their connectivity to the branches or enterprise sites. In most cases there is broadband connectivity to these sites but at various levels of reliability and managing the multiple communication providers is a complex task.

Spacenet has been entering this market space usually together with satellite technology providing a hybrid solution often based on our [present core] product. During 2010 we have expanded our offering to also provide connectivity based on pure terrestrial technology, even without satellite. In the beginning of the year we announced such a deal with Regis for over 7,000 sites.

We see this market as adjacent to Spacenet's assisting market and we have many of the core strengths needed to succeed in it. As I have mentioned before, Prysm Pro is one of these being an enabler to provide such services. The recent award of the innovation product of the year for the DC area by SmartVideo is an indication that this product is perceived as a satellite -- not only as a satellite -- a satellite only product, but rather as a solution for the mainstream managed network services market.

Now turning to the emerging markets. During the quarter we announced several new projects and activities in Africa and Asia for a variety of applications. We saw new networks deployed for enterprise, gaming, government and defense applications. As I said before, we had a relatively strong quarter in Africa compared to the second quarter of 2009.

One of our announcements was for the sale of satellite network equipment to Ethiopia's SchoolNet project. This is an expansion of an existing deployment and we are proud to be part of initiatives such as this. We also had another large deployment in Africa for gaming this quarter. In this case it was a turnkey project for about [1,000] sites to be deployed within three months. It was a difficult project to deliver on as it was in a very challenging environment. We were still able to complete it successfully and on time.

We also announced several deals in Asia this quarter. In Vietnam we are deploying a SkyEdge II network for Vietnam Telecom International, VTI, a subsidiary of VMPT, Vietnam's national telecommunications service provider. This network will operate on VINASAT-1, the first Vietnamese communication satellite, and will provide a wide range of applications such as broadband, Internet access, GSM backhauling and private leased circuits.

Government [start] times choose to launch national satellite as a means to initiate better telecommunications services and especially broadband connectivity in their respective countries. We have seen several such initiatives, such as Vietnam, and continue to see these national satellite projects in other regions as well.

For those of you with the presentation in front of them, you can see another deployment in Asia. The picture is from Gorak Shep which is the last village in Nepal on the Everest track before the Everest base camp. It's over 5,100 meters elevation. The Gorak Shep VSAT installation is one of the highest in the world. The site which enables calls from mobile phones and fixed telephony into any location worldwide hosts numerous visitors year long and is part of Nepal Telecoms larger Gilat network deployment announced last year.

We also announced that we will be providing networks for defense and homeland security in another Asian country. Because of the nature of these deals we cannot disclose the name of the country. We have been seeing for the last year or two more demand for defense and homeland security from the international market and this is an encouraging sign. So while the US defense market is largest in the world, we see the growth for defense applications outside the US strong.

That concludes our business overview. Now before I turn the call over to Ari Krashin I just want to give a small update. Ari will be relocating to the US while continuing to act as our CFO. This will enable us to increase our efforts to focus on the US DoD market and especially looking for M&A targets. This also means that for the US investors he will also be easier to meet and on the same time zone as most of you. I am sure you will enjoy your new location, Ari, and now let's review the financials.

Thank you, Amiram. For the second quarter of 2010 Gilat's revenues totaled $51.8 million, a year-over-year decline from Q2 2009's $56 million and a quarter-over-quarter decline from Q1's $57.1 million. On a more positive note, our quarter-over-quarter and year-over-year bookings have increased, so we are hopeful that revenues will be stronger in the second half of the year.

Gilat maintained its planned investment program in the quarter with gross R&D at $4.7 million, similar to the first quarter but up from the Q2 2009 $4.1 million. The projects that we are investing in are augmenting the capabilities of our current products as well as creating new products that will expect to begin contributing to revenue growth as early as 2011.

In addition to internal R&D Gilat's acquisition of RaySat Antenna Systems plus RaySat advanced research facilities in Bulgaria should further extend Gilat's product pipeline over the next 12 to 24 months.

Despite the revenue decline in the quarter Gilat's margin remained robust. Gross margin of 32.5% increased from Q2 2009's 30.4%. Gross margins always vary quarter to quarter based on our mix between equipment and services revenue. However, the gross margin trend that Gilat has achieved throughout the economic cycle underscores our commitment to financial discipline and cost control.

Last quarter we indicated that we incurred over $350,000 of legal and professional fees in connection with the definitive agreement we signed [voltage] RaySat Antenna System in RaySat Bulgaria. In Q2 we incurred additional transaction-related expenses of approximately $200,000 to close the acquisition. These expenses should not continue into Q3.

Overall we were able to reduce SG&A in the quarter to $14.8 million from Q1's $15.1 million. However, SG&A still increased year over year from Q2 2009's $14.4 million. This was mainly as a result of the legal and professional fees mentioned above. GAAP operating income for the quarter came in at a loss of $1.4 million, deterioration from both Q2 2009's loss of $500,000 and Q1's breakeven level. Given our cost controls during the quarter, the increased loss was due almost solely to the lower revenues in the quarter.

Our GAAP net income for the quarter was a loss of $1.3 million or $0.03 per diluted share compared to Q2 2009's loss of $1.2 million or $0.03 per diluted share. On a non-GAAP basis net income for the quarter was a loss of $0.9 million or $0.02 per diluted share compared to a loss of $1 million or $0.02 credulity share in the same quarter of 2009.

Gilat's cash position further reinforces our focus on financial discipline. Cash balances in Q2 rose to $154.6 million due to positive cash flow of operations of approximately $7.9 million as a result of exceptional collection during this quarter.

Our cash balances at the end of the third quarter are expected to decrease, affecting the closing of RaySat Antenna Systems and RaySat Bulgaria transaction in an aggregate amount of $[30] million and the repayment of the loan from (inaudible) in the amount of $4 million in accordance with the repayment schedule.

Our trade receivables at the end of the quarter were $43.9 million representing DSO of 76 days. This represents an improvement from previous quarters mainly as a result of our efforts to manage our working capital and focus on payment terms. Our shareholders equity at the end of the quarter totaled $231.7 million. Now I would like to turn the call back to Amiram. Amiram?

Thank you, Ari. To summarize our call, we had a year-over-year decline in revenue this quarter. We continue to increase our R&D spending as planned. We improved our gross margin this quarter compared to Q2 2009. Our balance sheet remains strong and this quarter we had an increase in our cash.

We signed a settlement agreement with each of the purchasers against whom we had filed a lawsuit in 2008. This will enable us to now focus all of our management attention to implementing our strategy and on our ongoing business.

The quarter was highlighted by completing the acquisition of RaySat Antenna Systems. This acquisition is part of our focus on the defense and military markets. We experienced challenging business conditions in most of the world's regions, but there are signs that economic activity is improving and that satellite capacity in some regions is becoming less scarce.

Our bookings increased this quarter, so looking into the second half of 2010 we are cautiously optimistic that the business will be better than the first half. That concludes our review. We would now like to open the floor for questions. Operator, please.

(Operator Instructions). James Breen, William Blair.

Thanks for taking my question. Just with respect to the business trends, obviously you saw revenue down a bit this quarter. Can you talk about the combination of things that caused that? And then where you see the momentum building in the second half? Is it -- did you see price pressure on existing products or is it just competition from other providers? Thanks.

No, I don't think that it's competition from other providers and it's certainly not pressure on price as we saw where gross margin actually increased. It's more kind of economical situation in many parts of the world. Having said that, bookings have actually increased both in the US and in the international market. So -- and that applies for both Q1 and also for the whole half of the year.

We also saw where a couple of millions slip into Q3 results, no good reason just kind of end of the quarter issue. But as a trend I would say that bookings are higher in the first half this quarter as compared to the previous and second quarter as compared to the comparable. So, as I've said, we'd like to be cautiously optimistic that second half of the year should actually look better than first half of the year.

And did you see any large adverse effects, just the currency fluctuations within the quarter?

Not really. The currency fluctuations did not have a significant effect on us. And basically we have lots of expenses in Israeli shekels. However, we used to hedge kind of half a year ahead of time. Obviously most of our revenues are in US dollars. So expenses -- most expenses in Israeli currency called shekel, most revenues in US dollars. And we try to hedge usually half a year down the road. So, no, I wouldn't say that the fluctuation in currency has a lot of effect on us at this point in time.

And then just one last question. With respect to your different business lines, where are you seeing the most momentum right now or the greatest amount of sales going forward?

I would think that Latin America is I think most of the momentum. Africa is kind of relatively small, so the momentum is there also; however, it is not a very big portion in our [point].

Great, thank you very much.

(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 1-888-295-2634; in Israel please call 03-925-5930; internationally please call 9723-925-5930. Additionally, a replay of this call will be available on the Company's website, www.gilat.com. Mr. Levinberg, would you like to make your concluding statement, sir?

Yes, I would just like to thank you all for joining us for this quarter's call. Good afternoon and goodbye.

Thank you. This concludes Gilat Satellite Networks' second-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.