Gilat Satellite Networks Ltd (GILT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Second Quarter 2011 Results Conference Call. All participants are at present in listen-only mode. Following the Management's formal presentation, instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the call over to Rob Fink of KCSA to read the Safe Harbor statement. Rob? Please go ahead.

Thank you Rachael. Good morning and good afternoon. Thank you all for joining us today for Gilat's Second Quarter 2011 Results Conference Call. A recording of this call will be available beginning at approximately noon Eastern Time today, August 10 until August 12 at noon.

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 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. 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 today 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, Rob. Good day everyone. Before going into our regular call agenda on reviewing the results of the second quarter, I would like to highlight a recent development.

On August 1 we announced the signing of a strategic contract with SES for ASTRA2Connect in Ka-band. This is a significant project which opens new opportunities for us in a rapidly growing segment of the market. We're excited about this project and I will go into further detail about this later in my comments.

The second quarter was highlighted by a strong financial performance in our core business. This quarter's revenues increased to $81.7 million compared to $51.8 million in the second quarter of 2010. Gross margin in the second quarter was 36% compared to 33% in the comparable quarter in 2010. And EBITDA was $6.6 million compared to $2.2 million in the second quarter of 2010.

On a non-GAAP basis our operating income for the quarter was $2.7 million, up from a non-GAAP operating loss of $1 million in the comparable quarter of 2010. Ari will provide you with further details on our quarterly results later in the call.

Our North American business was strong in the second quarter led by Spacenet commercial activity. We received orders in the energy sector from customers such as Conoco Phillips, Koch pipeline and Sunoco. And Spacenet also received extensions from its gaming and enterprise customers.

In the second quarter we also announced the acquisition of CICAT Networks, a US nationwide provider of broadband network solutions. This acquisition is part of Spacenet's strategy to expand its business into broadband (inaudible) network services market, and further leverage its core network management call center and field services capabilities.

We have begun the integration of CICAT Networks with Spacenet's enterprise business and have received significant orders for broadband connectivity. One such order for broadband connectivity was received from CICAT partner IBM for Advanced Auto Parts, a leader in the automotive market, and retail stores nationwide.

Wavestream contributed meaningfully to our revenue and profitability this quarter. However, the uncertainty and concerns surrounding the US government budget continue. We have been expanding Wavestream's business to new opportunities such as commercial satellite broadcast, digital satellite newsgathering and airborne communications.

During the quarter, Wavestream received orders for products that will be used in commercial airlines and in UAVs. In addition, Wavestream's expansion to the international market continues to progress.

Moving to our international VSAT business, this quarter we announced a significant contract with Optus to provide VSAT [hard] operations, installation and maintenance for a major network in Australia. Optus will provide broadband services for Australian consumers in remote areas as part of NBN Co's First Release Satellite Services, FRSS.

As a reminder, National Broadband Network is an Australian government initiative to deliver a nationwide broadband network for all Australians, with a planned investment of up to AUD43 billion over eight years. NBN initiated the FRSS as an interim solution to provide high-speed broadband connectivity to remote Australian residences, small businesses and indigenous communities. The first pilot customers have already begun receiving service and the initial feedback we received is positive.

This quarter we also announced a contract with HISPASAT for consumers' services focused on the residential market in Spain. We had strong demand for SCADA enterprise in USO applications including several (inaudible) backhaul deals both for our SkyAbis solution and FCBC modems.

We were also selected to deliver a satellite-on-the-move communications solution as part of a security initiative aimed at combating internal and border threats. As part of this initiative, valued at over $10 million, RaySat Antenna Systems will provide equipment and services including over 100 stealth ray satellite-on-the-move antennas. This is significant for RaySat Antenna Systems as it is one of its largest orders to date.

Last week we announced our selection by SES for the delivery of consumer Ka-band equipment for ASTRA2Connect. As part of this contract, we will provide Ka-band user terminals that enable download speeds of up to 20 Mb per second as well as delivery of the [armed] gateway equipment.

The user for our Ka-band platform will allow SES to deliver significantly faster Internet and voice over IP services to private households and small businesses across Europe. Currently ASTRA2Connect serves over 80,000 end users and is the largest satellite-based broadband network in Europe. SES is the second-largest satellite operator in the world.

The project including potential sales of research to SES and [ISP nominees] can reach a value of up to $70 million over the next five years. Usually in this type of project we sell gateway infrastructure to the satellite operator and the VSATs are resold by the ISPs. This award is an important achievement beyond its financial value. It is our first major VSAT award in the Ka-band arena, and as such, we see it as an important strategic milestone for us.

We see Ka-band multi-spot beam satellites as more than a new frequency. We see them as a next-generation technology that will drive significant future growth. Ka-band multi-spot beam satellites provide much more capacity than traditional satellites. As such, these new satellites enable more subscribers with higher data rates at competitive prices.

NSR, a leading industry analyst firm, believes that this technology will drive growth in the satellite industry in general, both in the consumer market and the enterprise market. According to the latest market research, service revenues for the entire broadband satellite sector are forecasted to more than double by 2020, increasing from $3.7 billion in 2010 to $8.1 billion in 2020.

In NSR's view, the growth in this market will come predominantly from satellite broadband access services using Ka-band high [super] satellite capacity. NSR projects that the number of subscribers for broadband access to quadruple, reaching some 5.8 million globally by 2020.

The SES ASTRA2Connect award is a strong acknowledgment of our Ka-band technology. And it represents an important opportunity for Gilat to be at the forefront of these next-generation satellite services, while providing consumer and businesses across Europe with variable improvements in their day-to-day broadband services.

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

Thanks Amiram. I would like to remind everyone that our financial results are presented both on GAAP and non-GAAP bases. The GAAP financial results include the impact of FAS 123r, the inclusion of stock-based compensation expenses in the P&L, expenses related to our M&A activity during 2010 and 2011, [a monetization] of tangible and intangible assets resulting from the purchase [price of location], and other one-time income.

The reconciliation table in our press release highlights this data, and our non-GAAP information is presented excluding these items.

Now moving to our financial highlights for the second quarter of 2011, our revenues for the second quarter of 2011 grew by 58% to $81.7 million from $51.8 million in the comparable quarter of 2010 with approximately [$30 million] attributed to Wavestream. Excluding the revenue from Wavestream, our revenues increased by 33% year-over-year from the $51.8 million in the second quarter of 2010 to $68.7 million.

The increase in our revenues is mainly attributed to our strong performance in the international markets and Spacenet's continued rollout of [sites] in connection with their recent win in the gaming sector.

Our gross margin this quarter was approximately 36% compared to approximately 33% in the second quarter of 2010. On a non-GAAP basis, our gross margin reached 38% compared to 33% last year.

As we mention from time to time, our gross margin is affected quarter to quarter by the region in which we operate and the types of deals we consummate. The improvement in our gross margin is mainly attributed to the higher portion of equipment sales which typically carry higher margin, and these margins are in line with our expectations.

Growth R&D expenses were $8.9 million this quarter compared to $4.7 million in the same quarter of 2010. The increase in R&D expenses is primarily attributable to the costs associated with the consolidation of RaySat Antenna Systems and Wavestream. As mentioned in previous quarters, this increase is in line with our strategy and effort to develop new products for new markets and to enhance our offering for existing segments.

Growth R&D expenses may continue to increase slightly throughout 2011 in connection with our recent award from SES for delivery of the consumer Ka-band equipment for ASTRA2Connect.

Selling, marketing, general and administrative expenses for the quarter were $21.6 million compared to $14.8 million for the same quarter last year. The increase is primarily due to the consolidation of RaySat Antenna Systems and Wavestream as well as higher levels of [viable] expenses related to the growth in revenue.

Operating income for the second quarter of 2011 was $0.2 million compared to an operating loss of $1.4 million in the second quarter of 2010. On a non-GAAP basis, operating income reached approximately $2.7 million in the second quarter of 2011 compared to an operating loss of $1 million in the comparable quarter of 2010.

Net income for the second quarter of 2011 was $0.9 million or $0.02 per diluted share compared to a net loss of $1.3 million or $0.03 per diluted share in the same quarter of 2010. On a non-GAAP basis, net income for the quarter was $2.6 million or $0.06 per diluted share compared to a loss of $0.9 million or $0.02 per diluted share in the same quarter of 2010.

Our financial position continues to be strong as our total cash balances including restricted cash, net of short-term bank credit amounted to $50.9 million at the end of the second quarter. Our trade receivables at the end of this year were $53.1 million representing DSO of 58 days. And our shareholders' equity at the end of the quarter totaled $266.4 million.

Now, I would like to turn the call back to Amiram.

Thank you Ari. To summarize our call, in the second quarter we saw a year-over-year improvement across all financial parameters as we increased our revenues, gross margin, EBITDA and operating income. The quarter was highlighted by our strong financial performance as well as new orders for Spacenet and significant new customer wins.

We made progress in our strategy to expand Spacenet's business in the broadband managed network services market through a strategic acquisition. We won a major contract in our international VSAT business. And last week, we received our first major award for our Ka-band VSAT technology.

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

(Operator Instructions) James Breen, William Blair.

This is Louis DiPalma on behalf of Jim Breen. Given that you guys have exposure to a lot of verticals, I know in the past you've seen strength for mobile backhaul, gaming, from the US Department of Defense and rural broadband deployment. Where did you particularly see strength in the second quarter?

I'm not sure I fully understood the question. You asked specifically about domestic US or what?

Just in general, what vertical drove the revenue increase in the second quarter?

I think the verticals that actually drove significant growth in this quarter were cellular backhaul. We're doing many implementations in cellular backhaul where you know that application pretty well. We were strong in lottery as a vertical in the US. We had quite a few implementations in energy and SCADA.

And we had significant activity in consumer in this quarter in Australia. And at the beginning of the third quarter we actually announced the transaction with SES. So I think you may say consumer is also a vertical.

Okay, and this quarter EBITDA margins declined a little bit. Would you attribute that weakness to overall US Department of Defense weakness, considering that Wavestream has higher margins than the overall Company?

Yes, to some extent. Well, A, to put it in perspective not only we grew the EBITDA from [2.22 to 6.6], we also grew EBITDA margin from 4% to 8%. So just to put it in perspective. But you're right, it's -- generally speaking Wavestream has nice margins. And there is some pressure in the US government and market at this point. So, yes, this is true.

As you mentioned during the call that you have been diversifying Wavestream and Spacenet away from the US Department of Defense, do you think that margins should remain stable at around this level going forward for the rest of the year?

Spacenet was not exposed significantly to US government in any event. Spacenet is working predominately with the private sector.

With regards to Wavestream, I would think that as long as we stay unique in the market, which we try to do because Wavestream really has unique technology, Wavestream as such will be able to maintain its regular margins, yes.

Okay. And overall, are the integrations going successfully for Wavestream, RaySat and your other acquired companies?

Generally speaking, definitely, yes. I mean we are -- it is kind of the beginning. But we are sending now Wavestream internationally; we just started.

Wavestream almost didn't have any presence in the international market and I'm sure we can do a lot there. We have started working now in 3-D (inaudible) offices and we are expanding to the others, taking the Wavestream products.

With regards to RaySat Antenna Systems, as I have just said in this call they have one very significant deal for them for more than 100 antennas which is in (inaudible). Remember is a pretty kind of expensive piece of equipment, plus services and additional equipment. And this is being done in combination with Gilat. So, the answer is yes.

Excellent, thanks for taking the question.

(Operator Instructions) Chris Quilty, Raymond James.

Congratulations on the SES award. That is clearly a big accomplishment. But as a follow-up to that, it looks like SES also made an announcement earlier this morning with Newtec which I think has been their traditional supplier for Ku-band technology.

Can you explain how you think that arrangement will work? Are they basically dual sourcing? And are they going to support dual gateway and infrastructure buildouts? Or eventually are they going to select a single supplier for their Ka-band infrastructure?

Hi Chris. I guess the Newtec publication is kind of synchronized with this call because the same publication out like a few months ago. So, a one to one copy of the same publication was published again today.

We are not exclusive with SES. If you read the publication, though, the technical specifications is somewhat different between the two products. And no, we're not exclusive.

We should do a better job and customers should prefer our products than the other product, which will most likely be in the market as well, if -- at least [as I said], if they stick to the publication as they put it a few months ago and today again, we should be much higher in terms of performance than the Newtec product. And therefore I think we should be successful in the market.

And do you know, has SES communicated to you in any way that they plan on acquiring discrete high throughput satellite dedicated to Ka-band in the way that Eutelsat has? Or are they looking at more of these sort of piecemeal adding a number of Ka-band transponders on their satellites in the way they have been doing currently?

Well, you should refer this question to SES. The one thing we definitely know it is these payloads that are currently planned on a few their satellites, which are not a single satellite dedicated to multi-spot being the way Eutelsat do that. If they have a plan on another satellite, well, that question should be referred to them.

Great. A separate question, switching gears onto I guess the Wavestream side of the business. It looks like the WIN-T program got some pretty good funding, at least in the preliminary numbers from the White House and the House, but not yet from the Senate.

Can you give us any indications of whether you have seen any disruptions in order activity coming from the customer, and what your expectations are for both market share on that program and perhaps the out-year growth potential?

I would say the following. Generally speaking, WIN-T is proceeding, but we saw some pressure I would say on savings and on this program as well.

The next phase of WIN-T is going to be Increment 2. And Increment 2 is in its stage which is called LRIP, which means it's a partial acquisition with kind of smaller numbers to be tested around beginning of Q2 next year. So this is the Increment 2 phase of WIN-T, and that will take them probably some period of time to make these tests, and they will go for full acquisition probably around Q3 next year when we talk about WIN-T in specifics.

The other programs generally speaking I would say that satellite communication is still kind of [fairly essential]. So we see orders on one hand, and on the other hand there is some pressure to cut budgets. And the uncertainty around the whole budget is somewhat a cloud I would say.

So on one hand, yes, you're right. The WIN-T budget has not been cut yet. And on the other hand, there's some question marks with regard to if there will be cuts and how much with regards to this procurement as well.

And I think you mentioned earlier on the call that you have now added an international customer for Wavestream. And I presume that was using the historic Gilat channel and leveraging that as a synergy. But can you comment, A, is that correct? And, B, was it a commercial customer or was this a pickup of a defense military customer?

We've just started, so we actually increased sales in one specific market which I don't want to refer to in specifics. And we have Gilat people that are now kind of dedicated to promote Wavestream and Wavestream products in three offices in Russia, Brazil and India. And currently we're more focused on the commercial market which is the video type of applications.

But as part of the bouquet of defense products which we started to introduce to the market, in this time we are including obviously the Wavestream products. So in some future, mostly in 2012 when we will go more and more vigorously, I would say, after this market, then Wavestream becomes part of our bouquet of products. And there I will see -- I would think that the potential with the military integrators in these countries is actually even bigger.

And you didn't mention a Latin American sales effort, which kind of surprises me given your strength there.

I have mentioned Brazil and we are very strong in Brazil, and I am pretty optimistic about this market.

But Brazil is sort of its own separate entity from the rest of the market there.

Yes, well, to some extent you're right. Probably the next country which we haven't opened in the Wavestream context is going to be Mexico. But we didn't start there yet.

Okay, great. Thank you.

There 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 039255901. Internationally please call 97239255901. 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?

Yes, thank you. Well, we know it's kind of turbulent times in the market these, days so we would just like to thank you all for joining us for this conference call. Good day and goodbye.

Thank you. This concludes Gilat's Second Quarter 2011 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.