Gilat Satellite Networks Ltd. (GILT) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the Gilat Satellite Networks First Quarter 2012 Results Conference Call. All participants are at 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 May 23, 2012. I’d now like to turn the call over to Rob Fink of KCSA to read the Safe Harbor statement. Please go ahead.

Thank you. Good morning and good afternoon everyone. Thank you for joining today for Gilat’s first quarter 2012 results conference call. A recording of this call will be available beginning at approximately Eastern Time today at May 23, and run until May 25, 2012 at noon. Gilat’s earnings press release and website provide details on access of archived call. Investors are urged to read the forward-looking statements in the company’s earnings releases which state that statements made on this earnings call which are not historical fact maybe 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 contain views 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 these forward-looking statements that are as a result of new information, future events or otherwise, company expressly disclaims any obligation to do so. More detailed information about the risk factors can be found in the company’s report filed with the Securities and Exchange Commission. With that said on the call today is Erez Antebi, Gilat’s CEO; and Yaniv Reinhold, Chief Financial Officer. I’d now like to turn the call over to Erez. Erez the call is yours.

Thank you, Rob. Good day everyone. I’d like to begin by providing a high level overview of the first quarter and then offer a more detail review of some of the business initiatives we are focusing on. I will then turn the call over to Yaniv, who will walk you through the quarter’s financial results; I’ll then summarize and open the call for questions. The first quarter was highlighted by several key contract win, particularly in our commercial business. our financial performance which was somewhat softer this quarter was impacted by the implementation timing of specific contract in our Services division as well as lower than expected revenues in our Defense business. Despite the shortfall, we remain confident in our business and are reaffirming our annual management objective. Revenues in the first quarter decreased to $76.6 million compared to $80 million in the same period last year. On a non-GAAP basis, our operating loss was $0.3 million in the first quarter of 2012 compared to an operating income of $3.9 million in the comparable quarter of 2011. Yaniv will provide you with more details on our quarterly results later in the call. Operationally, we continue to implement the organizational changes we discussed on our last call which separated our business into three divisions; Commercial, Defense and Services. Within these three business divisions, we continue to work to improve efficiencies and reduce operational expenses. As an example, in the Defense division we continue to integrate Wavestream and VSAT antenna systems into Gilat. By consolidating operational systems and IT infrastructure, we believe we can recognize further synergies within the business. We expect overtime that leveraging this structure will allow us to better deploy resources and drive revenue growth into 2012 and beyond. With this as a backdrop, I’d like to discuss some…

Thanks Erez and hello everyone. I’d like to remind everyone that our financial results are presented both on a GAAP and non-GAAP basis. The GAAP financial results include the effect of non-cash stock option expenses as per ASC 718, one-time operating income, expenses related to our M&A activities during 2010 from 2011, and the motivation of intangible assets resulting from the purchase price allocation. The consolidation table in our press release highlighted this data and our non-GAAP information is presented excluding these items. Now moving to your financial highlights for the first quarter of 2012. Revenues for the first quarter of 2012 were $76.6 million, compared to $80.0 million for the same period in 2011. As Erez stated this decline is primarily attributable to a lower level of revenue contribution from our Services and Defense division. The decrease was partially offset by a higher level of revenues from our commercial segment reflecting recent wins. Our gross margin this quarter was approximately 32% compared to approximately 36% in the first quarter of 2011. On a non-GAAP basis gross margin reached approximately 34% compared to approximately 39% in the comparable period last year. As we mentioned 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 recognized. The decrease in our gross margin this quarter was primarily due to lower level of revenues from our Defense division that usually carried a higher level of margins. Gross R&D expenses were $8.2 million this quarter compared to $8.9 million in the same quarter of 2011. Our R&D level of expenses reflects our continuing effort of pursuing our strategy in Ka and [VSAT technology]. Selling, marketing, general and administrative expenses for the quarter remained relatively constant at $19.1 million compared to $19.7 million for…

Thank you, Yaniv. Before we conclude today’s call and turn to your question, I’d like to reiterate our long-term view of the market. As I said in our previous call, Gilat is focused on two main growth engines, Ka-band broadband services and Satellite-on-the-Move applications for the Defense industry. We believe both of these markets present long-term growth prospect. Although, not a significant revenue contributor in 2012, we continue to see Ka-band technology as one of the biggest drivers of growth in the VSAT industry for years to come. We strategically invested resources to position the company to take advantage of this growing opportunity. To highlight this, market analyst predict that over the next two years the number of dedicated Ka-band satellite launches will triple with more than 25 new launches currently planed through 2014. We believe we are well positioned to take advantage of the expected market demand for Ka-band ground infrastructure and [TP] associated with some of these launches. Looking at the Defense market we continue to see launcher prospects and the growing needs of Defense and security institutions for Broadband-on-the-Move application primarily for land and airborne uses. Again we believe that our differentiated product offering positions us well in this market. That concludes our review we would now like to open the floor for question. Operator please.

Thank you. (Operator Instructions) The first question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Just a couple of quick questions here. Could you give us a little bit more detail on the gross margin, why it was down compared to prior quarters?

As we said the decrease in gross margin was down mainly because of the mix of revenue lower than anticipated revenues from the Defense division which most of the time carried higher margins, that changes the mix and therefore our gross margin went down.

What’s your expectation here that margins are going to get better or is it going to get back to the prior mix?

Yes, we expect when the revenue s of Defense will go up the gross margin will go up together with it and it will change for the rest of it.

Sure. And then from the OpEx perspective, I mean it looks like you gave in the guidance to squeeze some savings out in the first quarter. Is the first quarter, is how you view your run rate going forward or do you think there is still some more synergies and get some savings going forward?

We still continue to work on savings and efficiencies in the organization or we expect to go even better this year.

Okay. And just generally from a higher level perspective, I know it's not material but as you guys start bidding on projects and what not. I mean how do you guys view the competitive landscape more competitive than your historical land satellite business more competitive less competitive. How you look at that?

I think in general everything is competitive and it doesn’t get much easier that said. I think the competitive environment goes different between our different sectors. In the commercial segment that we operate in, we are basically a mature market with our competition that we are used to competing with for quite a few years such as (inaudible) and such. In the Ka-band this is a very new market, there has not been many deals in Ka and we have announced some recent win on that as you are aware like with [VSAT] and RTComm where we proved to be proved to be very competitive. In the Defense segment our positioning is very different, here I think we have a significant technological advantage versus the competitor that we have there such as antenna manufacturers, other amplifier manufacturers, (inaudible) manufacturers and so on. And I think that in itself gives a different been to the way we handle the competition and why we believe we are better positioned. So, different answers to different segment.

The next question is from James Breen of William Blair. Please go ahead.

This is Louis DiPalma on behalf of Jim Breen. At the beginning of the call you indicated that you expect that you will still be able to achieve the company’s full-year financial target. Does that apply to both your revenue and your full-year margin target?

Yes, it does.

Great. And I was wondering if you could provide more commentary on the Department of Defense weakness. Do you think that weakness is more longer term issue with government spending or have you already witnessed a rebound considering that you are able to reiterate your full-year guidance?

First I’d say, I know that we didn’t say, in our management objectives for the full-year we didn’t specify which part will constitute what out of the total blend. We reiterate into total blend and not any specific part of it. Regarding Department of Defense, actual spending has not yet picked up and hence the weakness that we indicated in our Defense revenues in the first quarter but longer term we see that in spite and this I take this from comments that were made by the Secretary of Defense and by other. We see that in spite of the cut in the overall DoD spending, there is an increase in spending associated with ISI, Intelligence, Surveillance, on-the-move commutation, things like that. And we provide into that segment of the DoD, so definitely longer term our expectation is that DoD spending will pick up in the relevant areas and programs that we require into. Even though in general DoD spending will probably go down.

Great. And I was wondering if you could comment on your backlog figure, I believe last quarter you indicated that your backlog finished up 14% year-over-year?

We indicate our backlog number only at the end of the year.

Okay. Great. And in terms of the commercial vertical, can you talk some of your contract wins in that space, because that segment appears to be doing very well.

I couldn’t repeat what we said about the contract win that we announced, not sure exactly.

Can you talk about like pricing been increasing on those contract wins and are you seeing these contracts across all of the geographies or are they concentrated in a particular area?

We gave example of contract wins from Asia, from South America, from other geographies; it's not from Russia so we see business in all of the geographies that we operate in. I’d say in terms of pricing, I think over a period of many years, there is of course like anything else in cell communication there is a steady but not very fast decline in pricing which we match with continuous work on reducing their cost to maintain our margins.

(Operator Instructions) There are no further questions at this time. I’d ask Mr. Erez Antebi 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 U.S. please call 1-888-295-2634. In Israel please call 03-925-5921. Internationally please call 972-3925-5921. Mr. Antebi please go ahead with your concluding statement.

I actually gave the concluding statement before the Q&A session. So, I’d just like to thank you all for dialing-in, listening to the call and thank you for your questions. And that said thank you very much and good bye.

Thank you. This concludes the Gilat Satellite Networks first quarter 2012 results conference call. Thank you for your participation, you may go ahead and disconnect.