Gilat Satellite Networks Ltd (GILT) 2011 Q3 法說會逐字稿

Welcome to Gilat's third-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 Mr. Rob Fink of KCSA to read the Safe Harbor statement. Rob, please go ahead.

Thank you, Rachel, good morning and good afternoon, everyone. Thank you for joining us today for Gilat's third-quarter 2011 results conference call. A recording of the call will be available beginning at approximately noon Eastern Time today, November 15, until November 17 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 states 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 whether as a result of new information, future events or otherwise. We expressly disclaim any obligation to do so.

More detailed information about the risk factors can be found in our reports filed with the Securities and Exchange Commission. With that said, on the call today is Amiram Levinberg, Gilat's Chairman of the Board and Chief Executive Officer; Erez Antebi, Gilat's new CEO Elect; and Ari Krashin, Chief Financial Officer. Amiram, the call is yours, please go ahead.

Thank you, Rob. Good day, everyone; thank you for joining us. During today's call we will review key business highlights, discuss in more detail our financial results and provide an update on recent corporate developments.

Before addressing these topics I would first like to highlight an announcement that was made yesterday regarding the signing of a strategic alliance with Ka-band development with Rostelecom's RTComm and with the Russian Institute for Technology and Media.

The agreements are part of government initiatives to expand broadband connectivity throughout the Russian Federation. We are very excited about this project and I will go into further detail later in my comments.

The third quarter was highlighted by strong financial performance in our core business. Quarterly revenues increased to $83.9 million compared to $58 million in the third quarter of 2010. Gross margins in the third quarter were 35% compared to 34% in the same period last year. And EBITDA was $8.1 million compared to $4.4 million in the third quarter of 2010.

On a non-GAAP basis our operating income for the quarter was $4.3 million, up from a non-GAAP operating income 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 third quarter led by Spacenet's commercial activity. We received new managed network services contracts from Goodyear, Boston Market and Cumberland Farms. These new managed networks are based on our award winning (inaudible) and other services provided by our newly acquired broadband provider, CICAT.

Spacenet also received a multi-year contract extension from Dollar General, its largest customer, as well as its customers in the gaming sector. Spacenet's TV and government and industrial division received a significant new SkyEdge II system order from a [prime] federal government contractor as well as new orders from CenterPoint Energy.

The third quarter also saw Spacenet finalize its rollout of SkyEdge networks for the Texas and Illinois lotteries. Spacenet Integrated Government Solutions, SIGS, received US government eligibility to offer its products and services to government organizations and government contractors. These include sale of subscription services as well as sale of satellite transponders and bandwidth.

The latest award is a Federal supply schedule under the future commercial satellite communication services acquisition, FCSA program. This contract follows recent awards for a blanket purchase agreement by the Naval Air Warfare Center Aircraft Division and a basic ordering agreement by the NATO Consultation, Command and Control Agency.

While these are all IDIQ, that is indefinite delivery indefinite quantity eligibility awards, they to further qualify us and we are hopeful that they will translate to contracts in the future.

Moving to our international VSAT business, this quarter we announced a major milestone winning a contract with SES ASTRA2Connect for the supply of Ka-band resets [and aps] to their consumer network in Europe. The use of our Ka-band plus form will allow SES to deliver significantly faster Internet and Voice over IP services to private households and small businesses across Europe. This was our first significant award in the Ka-band arena and we see strategic importance in our relationship with SES.

As a reminder, ASTRA2Connect currently 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. We are proceeding with the implementation for Optus for NBN Co First Release Satellite Services, FRSS.

As you may recall, the National Broadband Network, NBN is an Australian Government initiative to deliver a nationwide broadband network to 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 residents, small businesses and indigenous communities.

We were chosen to provide VSAT (inaudible) installation, have operations and services as part of the solution. We have already deployed our equipment in the three gateways and, though the service is not officially launched, pilot customers are already connected and their systems are operational. The feedback we have received so far is positive.

This quarter we also saw the demand from government enterprise and USO applications continuing including several -- several of our backhaul deals, both for our SkyAbis solution and SCPC modems. We announced a couple of deals in Russia with Synterra in the Far East and to Yakutia's Ministry of Finance.

An interesting award we announced, though we could not disclose the name of the customer, was for a network that provided video surveillance as well as command and control applications in order to secure various national assets in remote and difficult to reach locations.

Central [backhold] by the VSAT includes fixed quick deploy and mobile sources such as unmanned aerial vehicles, UAVs. The network will operate in a multi-stock configuration based on a hub in a central location a NetEdge Gateway in various geographically distributed sites.

As I discussed on our previous call, we were also selected to deliver Satellite on the Move communication solution as part of a security initiative aimed at combating internal and border threats. The project is valued at over $10 million and RaySat Antenna Systems will provide equipment and services including over 100 StealthRay Satellite on the Move antennas. We have begun delivery of the equipment and the implementation is proceeding well.

Finally, yesterday we announced a strategic alliance with Rostelecom RTComm and the Russian government's institute NIIR for Ka-band reset network in Russia. The Russian government has decided to make a significant investment in a constellation of three Ka-band multi-spot beam satellites. The constellation is designed to support 2 million subscribers and will provide Internet access throughout the Russian Federation.

Both of these subscribers are expected to be residential customers, but the network will also serve as the main enterprise and government users. The arrangement with NIIR and RTComm calls for the supply of gateways and terminals to RTComm and the sharing of manufacturing know how which will also enable local customization. Implementation of the agreement will begin this year.

For those less familiar with Rostelecom, according to published reports the Company has the largest backbone network and the most [landline] connections in the country and is a leading long-distance carrier in Russia. It announced consolidated revenues of RUB275 billion in 2010 which is about $9 billion. RTComm is a satellite arm of the group and operates one of the largest reset networks in Russia.

This award is another important achievement for us in the Ka-band arena. It is our second major recent award for Ka-band and the win strengthens our position as one of the leading Ka-band players in the industry today. Given the size of Russia and the capacity of Ka-band satellite, this project carries a potential even bigger than the two other recent consumer awards we announced, namely Optus NBN and SES ASTRA2Connect.

We see Ka-band multi-spot beam satellites as more than a new frequency. Ka-band satellites offer large amounts of capacity at lower price than current technology satellite. We therefore see this next generation satellite technology as driving significant future growth in the VSAT industry.

That concludes our business overview. Now before I turn the call over to Ari Krashin, our CFO, a few words on the corporate changes we recently announced, specifically the nomination of Erez Antebi as Chief Executive Officer of the Company effective January 1, 2012. As indicated, I intend to continue to serve as Chairman of the Board of Gilat and work closely with Erez and the executive team.

Erez currently holds the position of Executive Advisor for Ka-band solutions and he was instrumental in our being awarded ASTRA2Connect in Europe, Optus NBN in Australia and now for this latest Ka-band initiative in Russia. Previously Erez held for five years the position of Chief Executive Officer of our equipment business unit, Gilat Network Systems or GNS, including two years in which he also headed Spacenet's rural communications.

I've been working with Erez for many years since he joined Gilat in '91. I know him well. He has more than proven his leadership and operational skills and I'm confident he will lead the Company towards continuous growth and strong accomplishment. Erez, now your turn. Would you like to say a few words to our listeners on the call?

Thank you, Amiram. Having been part of the Company for over 17 years I'm really honored now to be appointed to head Gilat and I want to thank you, Amiram and the Board for their confidence.

Looking at the satellite market I see Ka-band technology and the expansion of satellite communications to defense applications as two major market trends that open up exciting new prospects. Gilat is focusing on these two segments and they're part of our growth strategy.

With a strong management team in a clear and defined growth strategy I look forward to leading the Company to further success and profitability. Thank you for your time today.

Thank you, Erez. Congratulations once again.

Thank you.

And now Ari will review the financials. Ari, please.

Thanks, Amiram. I would like to remind everyone that our financial results are presented both in GAAP and non-GAAP basis. 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 activities during 2010 and 2011, amortization of tangible and intangible assets resulting from the purchase price allocation 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 third quarter of 2011 grew by 45% to $83.9 million from $58.0 million in the comparable quarter of 2010 with approximately $[16] million attributed to Wavestream.

Excluding the revenues for Wavestream, our revenues increased by 17% year over year from $58 million in the third quarter of 2010 to $67.9 million. The increase in our revenues is mainly attributed to our strong performance in the international market and the increase in RaySat Antenna Systems revenue.

Our gross margin this quarter was approximately 35% compared to approximately 34% in the third quarter of 2010. On a non-GAAP basis our gross margin reached 37% compared to 35% last year. As we mention from time to time, our gross margin is affected quarter to quarter by the regions in which we operate and the type 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.

Gross R&D expenses were $8.4 million this quarter compared to $5.4 million in the same quarter of 2010. The increase in R&D expenses is primarily attributable to the costs associated with the consolidation of Wavestream. The increase in the R&D expenses is in line with our strategy and efforts to developing new products for new markets especially for the defense market.

As we continue to position ourselves as one of the leading ground segment equipment providers in the Ka market we are shifting some of our R&D efforts towards our Ka-band product with the intention of not increasing our current level of expenses.

Selling, marketing, general and administrative expenses for the quarter were $20.2 million compared to $15.4 million for the same quarter last year. The increase is primarily due to consolidation of Wavestream as well as higher level of (inaudible) expenses related to the growth in revenue.

Operating income for the third quarter of 2011 was $1.9 million compared to an operating loss of $0.7 million in the third quarter of 2010. On a non-GAAP basis operating income reached approximately $4.3 million in the first quarter of 2011 compared to an operating loss of one man dollars in the comparable quarter of 2010.

Our GAAP net income for the quarter includes approximately $4.4 million of other income representing additional portion of the settlement from last year received -- sorry, of the settlement from last year received this quarter and the last portion of gain from the sale of (inaudible).

Net income for the quarter on a non-GAAP basis was $2.3 million or $0.05 per diluted share compared to $0.6 million or $0.01 per diluted share in the same quarter of 2010. Our total cash balances including restricted cash net of short-term bank credit amounted to $50.6 million at the end of the second quarter.

Our trade receivables at the end of the period were $55.3 million representing DSO of 59 days and our shareholder's equity at the end of the quarter totaled $270.9 million. Now turning back the call to Amiram. Amiram?

Thank you, Ari. To summarize our call, in the third 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 a strong financial performance as well as our first major Ka-band award from ASTRA2Connect, new orders for Spacenet and significant new customer wins.

We made progress in our strategy with another major award for our Ka-band VSAT technology in Russia. We now have three major customers in the consumer segment, Optus NBN, SES ASTRA2Connect and this recent strategic alliance in Russia. We've also significantly expanded our sales of satellite on the move antennas to the defense market.

We said at the beginning of this year management's objective is to increase our revenue from $233 million in 2010 to $330 million in 2011 and our EBITDA margin from approximately 6% to 10%. We feel we are on track and believe we will be able to meet these objectives.

Before I conclude the call I would just like to say that this will be the last Gilat investor conference call that I will be heading. I hand over the reins confident that Erez Antebi will succeed and grow with the Company to new heights. And with that note we would now like to open the floor for questions. Operator, please.

(Operator Instructions). James Breen, William Blair.

Just a couple of questions, one with respect to some of the new business that you're adding. Do you think that, number one, does it change the margin profile at all of the Company. And then also will you start to see more revenue coming from government entities in the future? And then secondly, just an overall competitive environment, how does it look out there right now and have you seen any uptick in the competition? Thanks.

I don't think that we stopped working with governmental entities; I think that we've done lots of business with governmental entities in the past as well. And we have actually participated in major role-outs, usually governmental initiatives that brought telephony and Internet access into rural sites of countries.

The difference with this specific one is the project in -- both projects in Russia and in Australia are this time kind of bringing broadband rather than telephony, so the [phases] is on broadband. And specifically with the contract in Russia, the government has decided to dedicate a very significant budget for launching satellites in Ka-band and they're talking at this point of time on three satellites, two of which will be very heavy multi-spot beam satellites.

So it's a very important and big initiative towards bringing satellite capacity and accessibility via satellite, (inaudible) satellite, to many citizens. The goal the government has published is that they will be able to do that to 2 million citizens.

So we've been working with governments in the past. This is just a unique agreement because it's a major initiative. You know indirectly now that we are in difference we also work with government through selling equipment to integrate predominantly I would say.

I think you mentioned that the new contract, it seems to be more broadband than voice. Are there noticeable differences in terms of the financials associated with those products, are they more profitable than voice products are?

Even voice products now are all kind of IP-based, which means Voice over IP. Generally speaking I think that the profitability in these kinds of projects is not so much different, other than the fact that in different kind of points of time it's always dependent on the mix of products and we always say that half components for example will carry a little bit higher margins than the VSATs and issues like that.

Okay, and then secondly -- or I guess third -- on competition, are there guys bidding for some of these services that you're providing or is it really your opportunity to go out there and provide the service without a lot of competition in your way?

Well, in this case it's technology (inaudible), it's a competition not on services as such, but on selling our technology. And definitely there is strong competition in that regard. Ka technology exists within our major competitors, predominantly Hughes and ViaSat and in this case it was even a smaller competitor that participated in this competition. So, yes, it is always a tough competition.

So I guess lastly, as there is more competition in the Ka side, do you think there's room for consolidation within this industry further?

Okay, it's a question always being asked. As you know, there are only four kind of fairly big technology providers, namely Hughes, ViaSat, iDirect and us. There's always a potential for a consolidation in this market, but as far as I know there is nothing in specific at this point.

Terrific, thank you very much.

[Guenther Calger], [Calgary Group].

Yes, good morning. I just wanted to congratulate you on all your exemplary performance in the difficult (inaudible). Best of luck to you Amiram.

Thank you, thank you very much.

(Operator Instructions). [Leon Rachmann], Oscar Gruss.

Congratulations on the quarter. Can you give us some updates regarding the Wavestream business? Do you see any improvement in the military market in the DoD standing? And also regarding the commercial businesses they waved?

Okay. Thank you, Leon. I would say the following, first because we've been asked many times, we've said that this quarter [we're extremely] contributed to our revenue $[16] million. Generally speaking I would say the following.

As you know, there is some pressure on DoD budgets in the US. But when you dive into the details the Wavestream potential revenue and revenues are more kind of affected by I would say the micro-topographic of the situation. A major programs that Wavestream participated in is WIN-T.

WIN-T is going -- phasing into INCREMENT 2. In INCREMENT 2 the situation is that it's more initial purchases at this point of time which is called EIRP if you are familiar with this acronym, so it will take definitely some time until it will pick up.

At the same time Wavestream just announced a few days ago that they've introduced a new line of product that goes into aeronautics vehicles. And I see very high potential there because there are many initiatives now, both on defense and on commercial, to take satellite communication over airplanes and over UAVs, over airplanes predominately for the application of Internet access. And over UAVs naturally for transmitting video.

And Wavestream just announced two products in this line, we have the first customer which I cannot disclose at this point to these products and we see some revenue by now and lots of potential going forward from this direction.

Okay, that's very helpful, thanks. And regarding the Ka-band, can you give us some color regarding that market's expected growth for the future? What's the size of that market as you project it right now?

Okay, let me tell you what currently, generally speaking, exists in this market. First Ka-band is not just launching satellites in a new frequency band. In the past there were C-band and then Ku-band, C-band like 6 gigahertz, Ku-band like 14 gigahertz, and in Ka-band transmission to the satellite at 30 gig and then receiving from satellite at 20 gig.

But it's not just a change in the frequency as such, actually it is a new generation of satellite which is multi-spot beam satellites or you can achieve with this frequency band a much narrower beam that is going to and from the satellite. This generation of new satellites actually is quite optimal for (inaudible) type of communication rather than multi-customer broadcast.

So it would be good if you -- on the video world it would be good only for local to local television. But then for VSAT it's actually way more optimal than the regular "wide beam satellites". Currently there are a few satellites of this nature in the globe. In the US Hughes is using such capacity and also ViaSat via Wildblue. In Europe there is a satellite call KA-SAT that Eutelsat launched.

But there is a list of operators that are about to launch such a capacity going forward and a smaller capacity still narrow beam and small amount of capacity, still narrow beam and in KA in "regular satellite" is kind of piggybacked on other satellites.

So there will be a lot of this capacity. This capacity is optimized for VSAT generally speaking because it is optimized for unit cost. And just to give you a sense, a heavy multi-spot beam satellite is going to cost somewhere between $400 million and $500 million as compared to a regular satellite which costs like $200 million to $250 million which means lots of investment in capacity which should be translated into ground segment as well.

So generally speaking I think that the ground segments, the market for VSAT in ground segment from a macroeconomic standpoint has to grow once you have this kind of -- once people have invested in this kind of capacity.

Thank you very much. That's very helpful. Then the last question, Ari, regarding the OpEx, what can you tell us maybe for next year, how do you see that?

Well, obviously we have not decided yet or finalized our budget for next year, so there's not much I can share with you at this point. But I can safely say that obviously we've put a lot of effort and we -- it's very important for us obviously to maintain profitability and probably even improve profitability as we go further along the way. So we are monitoring the OpEx and obviously we will build the budget for next year accordingly.

Okay, guys. Thank you very much, good luck.

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 1-888-782-4291, in Israel please call 03-92-55-921. Internationally please call 972-392-55-921. 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, everyone, for joining us today. Good day and good bye.

Thank you. This concludes Gilat's third-quarter 2011 results conference call. Thank you for your participation, you may go ahead and disconnect.