Gilat Satellite Networks Ltd. (GILT) Q4 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat's Fourth Quarter 2008 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 February 17, 2009. I'd now like to turn over the call to Andrea Costa from Grayling to read the Safe Harbor statement. Andrea, please go ahead.

Thank you, Jonathan. Good morning and good afternoon. Thank you for joining us today for Gilat's fourth quarter 2008 results conference call. A recording of the call will be available, beginning at approximately 12:00 PM Easter Time today, February 17, 2009 until February 19, 2008 at 12:00 PM. Our earnings press release and website provides details on accessing the archived call. Investors are urged to read the forward-looking statements in our earnings release, which say 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 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.

Thanks Andrea. Good day, everyone. I would like to begin today's call with Gilat's fourth quarter results followed by more detail review of our business, during the quarter. Following the quarterly review, I'll highlight some of the main achievements in 2008. After this, I will take you through the detail financial results, and then I will share with you our management objective for the coming year and summarize. We will open the floor for questions right after this. Our first quarter ended relatively in part with the previous quarter in terms of revenues, and down from last year's revenues which was not unexpected to ask in the context of the current economic environment. On a positive note, I am pleased to report another good quarter for Spacenet, highlighted by the continued run out of large scale gaming network in the U.S. contributing to Spacenet's strong results and include market share in these segment. In the emerging market at the end of the quarter, we're now in the signing of new agreement with the Colombian Ministry of Communication. We expect the decline to stay in the development which enables us to start through release money from the restricted cash, and once again recognize recognition related projects. I would elaborate in detail. GNS activating nature in North America remain strong. One of the highlights for the quarter for the world a large network project in Brazil, which incorporates on a high performance SkyEdge II. Moving to first financial indicator of summary slide. Revenue for the fourth quarter of 2008 was $66.1 million, a slight increase compared to the previous quarter and down from $72.7 million with a comparable quarter of 2007. The decline of the last year's quarter is attributable to low GNS sales due to a longer sales cycle in the emerging market, and more conservative spending in the Telecom sector. For the year 2008, we recorded revenues of $267.5 million compared to $282.6 million for the comparable period in 2007. Net loss for the year 2008, was $1.1 million compared to net income of $10.1 million in 2007. The decline in our financial results compared to 2007 were mostly due to the inability to recognize the revenues for the Columbian government project, a difference dollar cycle exchange rate, and the longer sales cycles in our GNS. With that said, our backlog remains stabled compared to as of last years at approximately $197 million. I will discuss the Q4 and annual results in a more detail later in the call. Looking into a little more detail on our business during the fourth quarter, I'll begin with the developed markets. Spacenet's another strong quarter highlighted by the competitive rollout of networks for the gaming and enterprise segment in the U.S., using the both new networks, as well as expansion and technology refresh as well as existing network. For example, if developed markets evolve to Spacenet for an upgrade of satellite and hybrid data network, it referred more than 500 of developed market shift and locations across the U.S. In hybrid network and corporate restart for network backup in multicasting applications, including softer distribution, with DSL, EBDL and cable being useful primary application. The quarter was also highlighted by the receipt of several new orders for government agencies, including a two year extension contract for satellite broadband to over 5000 total service sites in the Continental U.S., Hawaii, Alaska and Puerto Rico. Focusing on a government segment, we recently introduced a FIPS 140-2 certified solution based on fiscal results in vital module. FIPS 140-2 is U.S. government computer security standard used to our credit network (ph) modules and our solution conserved U.S. Federal Agency having these security requirements. And finally, the emergency management sector continues to be an important market for Spacenet, H-E-B being one such example for this. H-E-B Disaster Support Unit provide emergency services for displaced residents, enabling them to receive medications, cash checks and pay bills among other necessary services during the fast hurricane season. Now turning to the emerging market. During Q4, we continued to see a diverse services and applications deals, and received major orders for these projects, including an USO (ph) in Brazil. USO projects typically provide telephony and broadband, Internet access services to the most recent, where terrestrial technology is lacking. While in the past, these were basic telephony services, now these projects also include cellular backhaul, broadband Internet access and other advanced services. One example of this new deal which we announced this quarter is the TCIL, Indian based telecommunications consultancy and engineering company to provide a broadband satellite communication network to Nepal Telecom. As part of the network, we are also providing Gilat's SkyAbis cellular backhaul solutions to extend the range of GSM and CDMA services. This is another example of high combination of satellite backhaul together with cellular technology is an excellent solution to provide telephony to remote regions. The quarter was also highlighted a several SkyEdge II deal, DCC, a long time Gilat's customer located in Nigeria, in deploying a new SkyEdge II network to serve hundreds of financial institutions. The network will be used to provide voice over IP and data networking services between blank branches, while meeting restrict liability requirements of the banking industry. SkyEdge II network to meet all these requirement. Moving on to the summary of the business activity in 2008. Spacenet revenues and profitability were higher than in the past six years. This year's Spacenet launched several large-scale deals in the U.S. gaming market, increasing our market share and positioning us as the leader in this market. Spacenet profitability in the business continuity emergency response sector grew, one example is calculative quickly deployed emergency network, which I have mentioned in the previous call. On the enterprise front, the year was characterized by a steady flow of refresh deals from SkyEdge and Orbit network to a variety of customers including convenient stores, restaurant chain, pipeline and regional chain. Internationally, I would like to highlight our activity in Asia, particular in India and in Latin America, which remains strong throughout the year. Leading all the large securing projects for USO, enterprise, government and verification (ph). We see a continued demand for satellite based on backhaul and enhanced several such deals during the year including the Mongolia, Bolivia and Italian. On the technology front, we successfully deployed our new standards based high performing platform SkyEdge II. With better efficiency and full of activities, for both the inbound and outbound channels, SkyEdge II provides high performance given third requirements of [inaudible]. SkyEdge II has enabled our expansions in the high-end VSAT segments such as nine times, oil and gas (ph) and other markets which required high speed abilities together invoice (ph). Today, we have received orders for 29 SkyEdge II networks from a diverse customer base. As discussed in our last call, at the end of the year we sign new agreement with the Colombia Ministry of Communication for the provision of services under the Compartel I, Compartel II and the Central, these are named also as PLC projects. Assuming, we need a new upgrade installation deadline and network requirement including new traffic indicators, we expect this most of the $24 million is currently having for the substitute Compartel II, TLC and TRC projects will be released during 2009 with any remained amount to be released in 2010. I would like to take a moment to share with you one of our very successful projects deployed this year. The Gujarat E-Gram network provided by Bharti Airtel based on Gilat's SkyEdge is one of the large e-government projects. It provides advanced communication services to over 13,000 villages in India of Gujarat based. Bharti Airtel deploys the network to deliver high quality and cost effective video, voice and data service in the area of agriculture, health and education to the rural population in Gujarat. You can see further from their official launch ceremony, headed last month, by the Chief Minister of Gujarat. It's an entire video conference between several villages was conducted during the satellite network with our technology. Bharti Airtel recently won a Best Project Management award for the Gujarat E-Gram project, as a voice communication award organized by Triton (ph) Telecom and held in late November. Needless to say, we are very proud to be cost reduction initiative. This concludes our business overview. Now, I would like to turn this call over to Ari Krashin, our CFO who will review the financials. Ari, please?

Thanks Amiram. Good morning and afternoon everyone. I would like to share with you all our fourth quarter and 2008 annual results and provide details of our whole financials. Before I go over the numbers, let me remind you that our GAAP financial results include the impact of FAS 123R, the inclusion of stock-based compensation expenses in the P&L, the impairment of asset and other related charges in Columbia, expenses in connection to the cost reduction initiative, expenses related to the major production and capital gain from the Brazil share (ph). The reconciliation tables in our press release highlight this data and our non-GAAP information is presented excluding these items. Now, let me share with you the financial highlights for the fourth quarter of 2008. Revenues for the fourth quarter were $66.1 million compared to $72.7 million in the fourth quarter of 2007. The decrease in our revenues comes mostly from Africa and Asia; partially offset by increased revenues in the U.S. and Latin America. Our gross margin for the fourth quarter was approximately 31%, compared to approximately 36% in fourth quarter of 2007. As mentioned in previous quarters, our gross margin in the second quarter-to-quarter by the regions in which we operate in a type of deals, we consummate. We also continued to see some aggressive pricing activities in certain regions of the world which is affecting our gross margin. Net R&D expenses increased from $3.9 million in Q4 2007 to $5 million this quarter. The increase is related to the devaluation of the U.S. dollars affecting our several expenses as severance packages for employees leaving the company. Our overall expenses this quarter related to the cost reduction initiatives which were related to budget adjustments referred by Amiram, total approximately $900,000. Approximately half of this amount was recorded in our R&D expenses. The describing in previous call, we incurred approximately... we incurred expenses and made investment in Q4 relating to implementation of the agreement we signed with The Columbia Ministry of Communication. As a result and in accordance with the guidance of FAS 144, due to a strong impairment of long lived assets and another charges in the amount of approximately $5 million. Due this quarter, we also have financial expenses in the amount of approximately $967, considering income approximately $2 million in the comparable quarter of 2007. The expenses this quarter were as a result of devaluation of the company's pension fund which was affected by the sharp decline in the capital market, and the significant decrease in interest rate was one. In addition, this quarter we sold approximately half of our 1.3% holding in GBT deal to a holding company. Our profit from this sale in the amount of approximately $1.8 million are recorded as other income. Now, let's look at our financial highlights for 2008. Our revenues in 2008 were $267.5 million compared to $282.6 million in 2007. Our GAAP net loss for 2008 was $1.1 million or a loss of $0.03 per diluted share compared to a net income of $10.1 million or $0.24 per diluted share for 2007. Geographic revenues distribution for the year 2008 was as follows: The U.S. accounted for $107 million or 40%, Latin America accounted for $74 million or 70.27%, Asia accounted for $40 million or 15%, Africa accounted for $35 million or 13% and Europe accounted for $12 million or 5%. In comparing 2008 figures to 2007, in absolute terms we seek growth in the U.S. and declining Europe, while all other remaining regions continues be stabled. At the end of the quarter, our cash and cash equivalent and multiple securities amounted to $136.9 billion. The decline this quarter of approximately $5 million was a result of our continuous financing of Gilat Colombia and the additional capital expenditure related to the new agreement. The quality of our portfolio remains solid and continues with our conservative investment policy. Our trade receivables at the end of the quarter were $59 million representing DSL's 80 days which you consider to be relatively average in the industry. This represents an increase of our 2007 when we benefited from favorable customer payments terms. The increasing is one of the factors that impacted our working capital and cash balances during 2009. Our shareholders equity at the end of the quarter totaled $230.2 million. Now, I would like to turn the call back to Amiram. Amiram?

Thanks Ari. I would like to take a moment to address the current financial market environment and the negative effect that it may have on the communications market. In the emerging markets, we have already seen that CapEx spending is more conservative and they obtained financing more difficult. In addition, we see the certain projects are being delayed. With the tight credit lines and consumer demand slowing, expectations of telecom budgets will decrease this year. In addition, during the past few quarters, I've noted that we are experiencing longer sale cycles in the emerging markets. We are not ignoring these signs. This quarter, we adjusted our budget in order to take into account the economic downturn. Every move onto our 2009 management reflects, we have taken into account the challenging market environment since long ahead. Given these challenges faced by us in the inflation market overall; we still review that we will be able to maintain or increase our consolidated net revenue levels while improving profitability. We've improved profitability, we expect to have positive free cash flow from our operation. We have seen a strong demand for universal projects and government funded quality initiatives and we will therefore for continue to focus on these types of projects in 2009. So these and other customers, we see the growing need to provide integrated solutions in turnkey projects. We have delivered a number of successful turnkey projects and we will continue to strive and provide more than just result (ph). Emergency response market continues to grow and we'll be focused in providing solutions to this market. Thus far this market is being less affected by the negative financial environment. With our high performing SkyEdge II platform, we will be focusing more on high-end market segment as more demanding requirement. We have also set an objective for 2009 to release a new product, targeting the new market. I think it is too early at this time to share more information about this product. And last, we will be focusing on entering into new market. The financial environment opens new opportunities and we are well positioned to gain by these events. Entering into a new market may include non-organic growth as well. Overall, our business remains steady and the company is in the strong financial position. We leverage a strong balance sheet carrying the sizeable amount of cash which may open for us interesting acquisition opportunities going forward. This concludes our review. We would now like to open the floor for questions. Operator, please. Jonathan Ho - William Blair & Company: Good morning, guys. Just wanted to get a sense from you in terms of the general environment for VSAT and maybe some greater clarity on your expectations for that top-line growth and sort of the improvement in bottom-line profitability. Can you just give us more detail on that front as well?

I'll suggest, Ari I'll start and then you can fill in if you like. Generally speaking as you know Jonathan, we have a fairly diversified business means we are diversified on that geographic basis, and we are diversified in terms of having the non-recurring and recurring revenues in our business as we are service organization and we also selling equipment to other service providers worldwide. When we look kind of the international market, not all areas suffer from the same economical situation, so that diversification means that in some areas people continue to invest in infrastructure and it is kind of... I should say easier but it is less difficult for us to maintain. In other areas, where the constraints are higher then like in many other communication areas it is difficult for us either. In the service organizations, the fact that we have non-recurring revenues is obviously helping us because that brings some stability to the business. It is difficult for me to tell you specifically in which regions we feel kind of more comfortable at this point of time, I would say those are the fact that we believe that we will be able to perform the new agreement with the Colombian government leads us to believe that we will have quite a significant revenue coming from the Colombian project which not only help our top-line but also significantly help our bottom-line, should we be able to recognize either for this, do you want to add anything else?

[Inaudible].

Okay. Jonathan did it gave you kind of the sense of the situation do I received? Jonathan Ho - William Blair & Company: Yeah I think that's good, in terms of the first further question and just in terms of maybe greater clarity in 2009 on the top-line and bottom-line profitability. Can you give any type of guidance or any type of maybe percentage type growth that you're looking for in the business?

No, I think I said it's kind of incremental increase deliberately to not to push people to believe that we can have a very significant growth the way we feel it now, because if the markets will continue the way we viewed them than I believe we will have some growth but not an enormous growth, and the main I would think reason for significant improvement in terms of profitability is again this... the projects in Columbia, because if you remember in 2008, we basically had rough numbers $15 million that we lack from both top-line and bottom-line. So it was all the way for bottom-line, since we believe that in 2009. It will look quite differentially then I think that would be a major improvement to the bottom-line results. Jonathan Ho - William Blair & Company: In terms of your backlog and sort of visibility into next year, I mean, I know there is clearly some visibility coming from Columbia, but apart from that business, how does the backlog and pipeline of opportunities look and can you talk about any potential from project cancellations, financing, is there any impact that you're seeing today for the business on that part?

Backlog is pretty much the same as the end of last year, end of last year it was like 201.7, end of this year about 197, they're about the same. We do not publish kind of the mix of the backlog. I can tell you that the bunch (ph) is more kind of some increasing backlog in Spacenet, some decreasing backlog in GNS, and that's kind of the mix of the backlog as it stands now. All in all, not a major change or quite as same as the end of last year. Jonathan Ho - William Blair & Company: Okay. And are you worried at all about any project cancellations or anything impacting that pipeline, especially, related to financing?

I think that the... I think the biggest concern is with regards to the ability to achieve de-central (ph), I would say, booking levels in GNS in certain territories and while in certain territories as I said, we don't sense that to match the economical situation in all that we do and that kind of the big question mark. We analyze it in all in all, we think we can... we will be able to grow the top-line number in 2009 as compared to 2008. Obviously, it wouldn't be easy. Jonathan Ho - William Blair & Company: Okay, just talking a little bit about the expense control side, can you talk a little bit about where you have some flexibility and is there an opportunity for you to sort of managing through a downturn if the economy sort of doesn't improve worldwide?

If the economy? Excuse me. Jonathan Ho - William Blair & Company: Does not improve or... use to worsen, just taking about your expense control?

I think we are ... the company generally speaking is very controllable in that sense, means, we have very strong control over the expenses side of the business and we understand exactly where we are. When we budgeted the year, we took some assumptions which we thought were very conservative and we adopted them accordingly. There is one element that is going to play, I would say, better for us in 2009, as compared to 2009 this is the exchange between the dollar and the shekel which is been improved. That would mean some improvement from our perspective if we compare 2009 to 2008. Since we have already hedged all our shekel expenses to the dollar, we know exactly what is news and we have hedged to an exchange rate of 3.92 shekel per dollar where ... on the average in 2008 the exchange rate was for us, I believe, 3.5 or so. So this is... I would say close to $4 million expense between 2008, 2009. Other than that, I think we have budgeted accordingly. We had some layoff in the company, I would say, shy of 5% in the last month or month and a half. And I think we are pretty much ready if we face the situation changing, we can always kind of re-visit the issue. Do you want add anything in this?

Yeah, as Amiram said, there was a layoff approximately 5% or less than... we hold and we feel that those budget trusts will help us save additional $3 to $4 million going into 2009. Jonathan Ho - William Blair & Company: Okay. And can you update us quickly on sort of the litigation situation, whether there has been any change on that part?

This is a very slow process. I think we can talk about this litigation situation once in a year be enough I think now and more seriously I think the other side now needs to present their affidavit by the end of March and that is kind of the next move at this point of time. They will think... there are four entities that we have sued; all of them will have to give their response by the end of March. And, of course, we will take it from there. But it really, I mean it's a very long process, that I can tell you. Jonathan Ho - William Blair & Company: Okay. My last question is on your comments on sort of the receivables. Do you see this trend reversing in 2009 or do you see it sort of continuing as far as sort of lengthening of the receivable cycle?

I'll tell you what I think then, Ari, you may think differently. I think that 80 days is relatively reasonable in this kind of business and I hope it will stay roughly the same. In the past, we used to have a worthy sell (ph) when customers were paying cash in advance, and we had lots of cash in advance in 2007 which were attributable to very specific geographical regions. In the current economically situation I guess people will do... will be doing what we are doing which means they will try to increase there account payable, and when they will successful in increasing very comparable rules with the kind of longer time for payments. 80 days I think is a relatively reasonable number. All right?

Well I agree, I think that's... we've seen in 2008, we hope that this will be transition year going from [inaudible] current 80 and maybe I think we represents ... with the average of the market 80-90 mortgage of this range (ph). Jonathan Ho - William Blair & Company: Great. Thank you.

Thank you, Jonathan.

Thank you. (Operator Instructions) The next question is from Rich Valera of Needham & Company. Please go ahead. Richard Valera - Needham & Company: Thank you. Good morning. Just trying to understand what incremental expenses might be associated with the Colombia deal in 2009. I think in your call you had on that night you mentioned $9 million of costs associated with your settlement there and its kind of that you're going to take some of them as the charge in the fourth quarter. But just wanted to understand a distribution of those expenses in 4Q '08 in 2009?

Hi Rich, this is Amiram. Richard Valera - Needham & Company: Hi.

To give you a sense, roughly speaking, we're going to have yet another roughly $4 million of investment quote, unquote in the network and then we'll see about the same level of expenses that we always have seen related to Colombia. It's a bit more sophisticated in there but to give you kind of a general picture that will be I think a good answer, which means that if you look at the financial results of 2009, we will see if you look at the difficult step between 2009-2008 is then... we will be able to see an increment was of the amount of money that will be relieved from the 12... 9 of the $4 million being the increment between 2009-2008 you can kick (ph) off, if you focus this into simplified of an explanation. But obviously in terms of the quarter himself if we look a little bit more refined than this, but to give you a sense this is how you will find it in 2009. Richard Valera - Needham & Company: Great. That's helpful. That's exactly what I was looking for.

Okay. Richard Valera - Needham & Company: On that one, and then...

I will continue that... and the beginning of those steps in Q2 onwards, I mean in spite of this would affect in Q1 and it will continue into Q2.

Mostly from Q2 because as the beginning of the year we are actually doing a very significant effort of refresh and operate of '05 as though we upgrade basically all the central sides in these budgets and we take out many of the telephony site and the existing telephony sites we equipped in more with abundance. It's a major flash for us as a beginning of the year and we'll see most of the revenue recognition coming from... starting from Q2, maybe, maybe some of looking Q1, but mostly in Q2. Richard Valera - Needham & Company: Great. So in absence it seems like you're going to benefit from a pretty huge sort of catch up revenue recognition in 2009. Can you give us a sense of what 2010 looks like, I know you expect to continue at least one of the contracts through 2010, but how we should think of the revenue profile from Colombia in 2010, assuming there are no new surprises here, that sort of you complete your upgrade as scheduled and there is no issues.

Obviously it's a bit too far, but let me tell you... first, some of the money would be result of revenues will be recognized in 2009 and some of it would be probably be recognized in 2010, depends on how fast we can release money from the slot. We're seeing mostly than most of the money will go out sort of to free cash in 2009, less it would be less for 2010. And if it is slower then you'll see more of it in 2010. They remind that we still need to serve Compartel I, until the end of 2010, while the obligation to serve TRC and TLC will end towards the end of 2009. And Compartel I does not carry with it revenues associated with it, because it's a very old obligation from '99. Having said that, I feel that we will kind of negotiate with the Columbian government through the year, if we... what is the destiny of these networks and it is very premature to say what would be the outcome of this discussion because we don't want to come with any complete proposal to the Columbian government before we see that we have completed the refresh if you like of the existing networks. And we started seeing the money coming out of the slots (ph). Only at this time, we go to have a discussion with the Columbian government Richard Valera - Needham & Company: Okay. That's helpful. Thank you.

Okay.

Thank you. There are no further questions at this time. Before I ask Mr. Levinberg to go ahead with his closing statement, I'd like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S, please call 1-877-332-1104. In Israel, please call 03-925-5947. Internationally, please call 9723-925-5947. Mr. Levinberg, would you like to make a concluding statement?

Thank you. I would like just to thank you for joining us for this conference call. Good morning to part of few, afternoon for the other part and good day.

Thank you. This concludes Gilat's fourth quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.