Gilat Satellite Networks Ltd. (GILT) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Fourth 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. Good morning and good afternoon. Thank you for joining us today for Gilat’s fourth quarter and full-year 2011 results conference call. A recording of this call will be available beginning at approximately noon Eastern Time today, February 22 and will be available until February 24, 2012 at noon. Gilat’s earnings press release and the website provide details on accessing the archived call. Investors are urged to read the forward-looking statements in our earnings press release which states that statements made on the 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 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. With that said, I would now like to turn the call over to Gilat Management. Joining us on the call today are Erez Antebi, Gilat’s Chief Executive Officer; and Ari Krashin, Chief Financial Officer. Erez, the call is yours. Please go ahead.

Thank you, Rob. Good day, everyone. Thank you for joining me for this call, my first as CEO. Well the purpose of today’s call is to review our fourth quarter results and our overall performance in 2011. I would also like to take this opportunity to share with you a few thoughts and perspectives as I begin my role as CEO of Gilat and where I expect the company is heading in the long-term. First, I will begin today’s call with a snapshot of our fourth quarter and full year results, followed by an update on recent organizational changes and will then provide you with some more detailed review of our business during the quarter. Following my review, Ari will take you through the financial results in more detail. After this, I will summarize 2011 and share with you our objectives for the coming year and then we will open the floor for questions. The fourth quarter of 2011 was characterized by a very strong financial performance coupled with several important contract wins. Revenues for the fourth quarter were $93.6 million, compared with $83.9 million in the previous quarter and $66.1 million in the comparable quarter of 2010. For the full year 2011, we recorded revenues of $339.2 million compared to $233 million in 2010. On a GAAP basis, we recorded a net loss of $5.9 million for the year compared to a net income of $30.6 million in 2010. Our loss this year included a onetime not-cash impairment of goodwill related to the acquisition of Wavestream as well as other restructuring charges in the total amount of $19.5 million. Ari will discuss the impairment and the comparison to this 2010 results in more detail. On a non-GAAP basis our net income for the year 2011 was $15.9 million compared…

Thank you, Erez. Good morning and good afternoon everyone. Our financial results are presented both on GAAP and non-GAAP basis. The GAAP financial results include the impact of non-cash stock option expenses as per ASC 718, formerly SFAS 123(R); expenses related to our M&A activities during 2010 and 2011; impairment of goodwill and restructuring costs, amortization of intangible assets resulting from the purchase price allocation; and certain onetime income. The reconciliation table in our press release highlights 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 2011. Revenues for the fourth quarter of 2011 increased by 42% to $93.6 million compared to $66.1 million in the fourth quarter of 2010. The increase in revenues this quarter is attributable mainly to our strong international growth specifically in Latin America and Europe and due to increase of Wavestream and Raysat Antenna Systems product sales mainly in North America. Our gross margins for the fourth quarter increased to 36% compared to 35% for the same period of 2010. As we continued to mention every quarter, our gross margin is affected by the number of factors including the regions in which we operate and the type of deals we consummate. Each of these factors can result in variation in the gross margins. This quarter, as in previous quarter our equipment sales which typically carry higher margins were the main drivers for the level of gross margins which is in line with expectations. Our gross R&D expenses for the fourth quarter of 2011 were $9 million compared to $7.3 million in the same quarter of 2010. The increase in gross R&D relates mainly to the cost associated with the consolidation of Wavestream and the continuing business in the Ka-band…

Thank you, Ari. Before we continue to our closing statements and your questions, I would like to thank Ari for his tremendous leadership as CFO over the past four years. I am glad you will be continuing to serve as the member of the executive team, dedicate his time to strategic aspects of the business. Yaniv Reinhold who has been working closely with Ari over the past four years in his capacity as a VP of Finance will be taking the CFO rank on March 1. I am confident that the two of them will continue to work well together. And now let’s move to the macro operating environment and how I see the markets. I believe the satellite communications market is facing changes that present long-term growth prospects in three main areas. One, Ka-band broadband services; two, satellite-on-the-move broadband services for Defense and Homeland security; and three, managed network services. I would like to elaborate on how I see each of these markets and Gilat’s position in them. In our Commercial Satcom business, we plan to continue to invest in product leadership in 2012 building a differentiated product line that best addresses as our customers’ needs and concerns. In our traditional VSAT business, we see growing demand for more than just technology products. Many of our customers are seeking end-to-end and complete integration solutions. We believe we are well positioned for these type of solutions, and will continue to provide them. As for Ka-band, we see this next generation satellite technology as driving significant future growth in the VSAT industry as it offers significantly higher satellite capacities and substantially lower cost of transmission. To give you some perspective, according to a NSR market research report, Ka-band broadband services are forecasted to grow from $1.1 billion in 2010 to $4.6…

Thank you. Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions) Please stand by while we poll for your questions. The first question is from Gunther Karger of the Discovery Group. Please go ahead. Gunther Karger – Discovery Group: Yes, good morning and good afternoon. Actually excellent quarter, and excellent year and congratulations. Having said that, the company is definitely very much alive but the stock remains dead, no matter what great news and great progress of the company is making and definitely to me, seems to do well (inaudible) become aware of. Any commentary on how this is going to be improved?

Gunther hi, it’s Ari. Basically I mean the investor is the one that’s taking the stocks with another one to invest in big companies share. As management, we focus mostly on growing the business and increasing profitability, whether or not this method is being (inaudible) so it’s a very different issue but eventually we’re not focusing on the share price, we are focusing on the business. Gunther Karger – Discovery Group: All right, yes, I have a follow-up, I understand that but it’s been quite a while of corporate recovery on the progress and at some point the equity needs to be following the corporate progress, and otherwise the interest gets lost the cycle keeps searching [ph] itself. That’s my final comment.

Gunther, we appreciate that we obviously understand that and taking that into consideration, as you know we are doing all the best we can in the IR perspective as well. Hopefully it will show in the future results as well. Gunther Karger – Discovery Group: Thank you.

The next question is from Andrew Uerkwitz of Oppenheimer. Please go ahead. Andrew Uerkwitz – Oppenheimer: Hi, guys, thanks. I may have missed it, because I came to call a little late, could you – on the guidance, first of all, will you give revenue cost of sales breakdown for the new three divisions and then if not, could you give us some color on how those three kind of mix in to the guidance, because the way – when I first looked at this, I thought like it seems like something is getting cut short this year on the growth side, I was just trying to kind of flush what that is?

Hi Andrew, it’s Ari again. First of all, the three divisions, we have not started working this way in 2011. Andrew Uerkwitz – Oppenheimer: Okay.

This is basically the stages that we are doing right now and it will start to reflect in 2012. Therefore we are not also publishing any guidance in respect to three different divisions. Now so again I mean I would probably as Erez relates to the (inaudible) that we said for next year but we have few projects in obviously growth in some. Andrew Uerkwitz – Oppenheimer: Yes, Erez so those are my, as far as I guess my question because if I remember correctly you said without Wavestream and Rayset you had, I think 20% growth. So I am curious if some of the defense stuff is still lagging behind or still declining in the kind of the legacy stocks is going to hold off well or if that’s also slowing down, you see where I am getting at?

Yes, let’s put it in decent way, I mean the way as Erez mentioned looking at what’s going on in the economic environment specifically in Europe and other regions this might be affected. We wanted to make sure that we can still grow the business, either it’s going to come from business or other areas of the company. Now just for an example as you remember, we published that we won an extension of Columbia and the school projects obviously we are seeing some growth coming from Latin America. In the international business we’re seeing some growth as well coming from the Ka and hopefully other markets as well. Now in regards to business, we’re still seeing growth, we’re seeing very high potential from new products and new markets that we can penetrate within defense, overall consolidated to more or less kind of the focus that we’re expecting right now, not the focus the objectives. I cannot – I would like the one specific area in which we think that there is going to be a decrease but it’s kind of a moderated increase on across the business unit as we see then going into 2012. Andrew Uerkwitz – Oppenheimer: Perfect, I appreciate the commentary, good. I don’t want to say negative because you guys did a great job in 2011 to hit your targets despite the global macroeconomic concern. So I was a little surprised, but I am positive you guys will continue to execute on. So I appreciate. Thank you.

Thank you.

The next question is from James Breen of William Blair. Please go ahead. James Breen – William Blair & Company: Yes, thank you. It looks like you’ve had some significant activity in Latin America over the course of 2011. I was wondering if you could help us think about how big those opportunities are, such as the Columbia schools contract was for $18.5 million, can you give us a sense of how long that contract is and then also the other two with the post office and the Columbian Ministry of Information Technology?

Yes, I’ll try and help you out but it seems that you know the numbers. The Columbia school project is over an 18 months period. If the extension, as we’ve said is for nine months period. We didn’t make public specific numbers or deal sizes for the other deals that we’ve done. But you’re right in your analysis that Latin America is the strong region for us. We see a lot of growth there in quite a few different countries. We’ve been seeing that not only in 2011. We’ve seen that in the years previous to that and I would expect that the Latin America will continue to be a strong market for us. James Breen – William Blair & Company: Can you give us a sense of how much Latin America region grew as a whole in 2011 over 2010?

I think it’s all in all, it grew by few percent and not significantly growth. I believe that again it’s kind of offsetting the Columbian operation that we are seeing with other aspect of the business but all in all absent number, I don’t think that it was significant increase in revenues, probably a few millions. James Breen – William Blair & Company: Thank you. And then in regards to the fourth quarter specifically, could you quantify the foreign exchange impact?

The foreign exchange impact is not significant for us. 90% of the revenues and I’m just picking a number 90% but the vast majority of our revenues are generated in U.S. dollars. So they are not affected by the currency exchange. On the expense side, as you know we tried to hedge upfront for the expense in Israel shekel versus the U.S. dollar. And more or less, it would be hedged throughout 2012, so budget is also built on the expectation from the hedging, the expense – the exchange fluctuation – the exchange rate fluctuation does not impact our results in the demographic way [ph]. James Breen – William Blair & Company: Great, thank you.

Thank you.

(Operator Instructions) Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Antebi to go ahead with his closing statements, I would 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 1-888-782-4291. In Israel please call, 03-925-5921. Internationally, please call, 972-392-55921. Additionally, a replay of this call will also be available on the company’s website, www.gilat.com. Mr. Antebi, would you like to go ahead with your concluding statement?

Thank you operator. I’d like to thank everyone for your time today. We appreciate your joining us on the call. I hope we were able to give you a good understanding of the results of Gilat, and also leave you with some insights as to how we see the market shaping up in the near and longer term. Good afternoon and good bye.

Thank you. This concludes Gilat’s fourth quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.