Gilat Satellite Networks Ltd. (GILT) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Gilat Satellite Networks second quarter 2012 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, August 15, 2012. I would now like to turn the call over to Philip Carlson of KCSA to read the safe harbor statement. Philip, please go ahead.

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's second quarter 2012 results conference call. A recording of this call will be available beginning at approximately noon, Eastern Time today, August 15, until August 17, 2012 at noon. Our earnings press release on the website provides details on accessing the archived call. Investors are urged to read the forward-looking statements in our earnings releases which state 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 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 Erez Antebi, Gilat's Chief Executive Officer and Yaniv Reinhold, Chief Financial Officer. Erez, please go ahead.

Thank you, Phil, and good day everyone. I would like to begin by providing a high level overview of the second quarter and then offer additional insight on some of the strong progress we have made this quarter. Following my comments, Yaniv will discuss our financial results for the quarter. I will then summarize and open the call for questions. The second quarter was a solid one for Gilat, a marked improvement over the first quarter of the year and we are optimistic about our prospects going forward. Our financial performance was strong with revenues increasing 11.4% from $76.6 million in the first quarter to $85.3 million this quarter with EBITDA reaching $8.6 million or 10.1% of revenue. Operationally, our organizational changes continue to bear fruit as we work to improve efficiencies and reduce operational expenses. On a non-GAAP basis, our operating income was $4.8 million in the second quarter of 2012 compared to an operating loss of $0.3 million in the first quarter of this year. I am also pleased to report that I the second quarter we generated cash from operations o f$3.2 million. Yaniv will provide you with more details on our quarterly results later in the call. I will now discuss some of our business highlights for the quarter, starting with our commercial division. Our commercial division continued to perform well and revenues are on track for the year. We have seen in this quarter a stronger than expected rate of implementation at NBN Co in Australia. As a reminder, last year we signed and an agreement with Optus Networks to provide hubs, VSATs, site installation and network operation for the Australian government, NBN Co interim satellite service. We are pleased to announce that Gilat has successfully completed the deployment of the first 10,000 VSATs. The…

Thanks, Erez, and hello everyone. I would like to remind everyone that our financial results are presented both on a GAAP and a non-GAAP basis. The GAAP financial results include the effect of non-cash stock option expenses as per ASC 718, one-time other income, expenses related to our M&A activities during 2010 and 2011, and the motivation of intangible assets resulting from the purchase price allocation. The reconciliation table in our press release highlights this data and our non-GAAP information is presented excluding these items. Now, moving to your financial highlights for the second quarter of 2012. Revenues for the second quarter of 2012 were $85.3 million, compared to $81.7 million for the same period in 2011. The increase is primarily due to a strong quarter for our commercial division driven by the higher level of revenues from the NBN project in Australia. Our gross margin this quarter was approximately 32% compared to approximately 36% in the second quarter of 2011. On a non-GAAP basis our gross margin was approximately 34% compared to approximately 38% in the comparable period last year. As we have mentioned in the past, our gross margin is affected quarter-to-quarter by the regions in which we operate and the types of deals we recognize. The decrease in gross margin this quarter was primarily due to the mixture of deals involving system integration that were closed by our commercial division. We expect the gross margin to improve over time. Gross R&D expenses were $8.4 million this quarter compared to $8.9 million in the same quarter of 2011. The decrease in R&D expenses reflects our integration effort in growing synergies within the divisions. We are continuing to invest substantial part in R&D in support of our strategy in KA and defense. Selling and marketing expenses for the quarter…

Thank you, Yaniv. Before we conclude today’s call and turn to your question, I would like to reiterate our view of the second quarter performance and our prospects going forward. As I mentioned previously, our performance in the second quarter was solid and marked improvement both over the first quarter of 2012 and over the second quarter of 2011 in terms of revenue growth, operating income and cash generation. We continue to improve efficiencies and reduce operational expenses with tight spending controls in place. Our commercial division is doing well and we expect this trend to continue throughout the second half of the year and beyond. In addition we are optimistic from the traction we are seeing in the defense division and the solid pipeline they have developed. We are confident about our prospects going forward, especially given the fact that historically the second half of the year is typically the strongest period for Gilat. These factors give us confidence that we will achieve our stated objectives for 2012. 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 James Breen of William Blair. Please go ahead.

Just a couple of questions. Just about the business and the margins going forward. Based on the guidance for EBITDA for the year, it seems that you are going to see some margin expansion in the back half. Can you just talk about what feeds into that? Is it a combination of better revenues in conjunction with what seems like R&D, expense were down a bit and is that something to think about?

I think what we would expect to see in the second half of the year, we probably expect to see typically in the second half, we will see higher revenues that we see in the first half of the year. We would expect on the expense that we would expect to see continue to work again on the integration and efficiencies. So I would expect to see some improvements there as well.

Okay, and then, generally in the third quarter, do you see a rebound from the department of defense of how Wavestream sells just because it’s the year end for the government?

While I don’t want to comment specifically as a third quarter versus the fourth or something like that but I think, in general, you have to bear in mind in the food chain, when the government will typically buy from proved programs of record from system integrators and those system integrators will flow orders onto us. We have one site where government did not say and therefore we have a little less visibility on both timing and on the exact amount.

Okay, great, and then, just lastly. On the R&D, it seems like R&D expenses were down a little bit. Do you think this will continue or is it more seasonal?

I don’t think there is much seasonality here. It's really like Yaniv said during our call. We are doing some efforts to integrate both the RaySat antenna systems and Wavestream and Gilat R&D and in doing that, we are achieving efficiencies.

The next question is from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Just two quick ones here. First, you seem to be incrementally more positive on the defense side, and obviously so but how do you weight that against some of the potential budget pressures that the U.S. could see by the end of the year?

Well, there is no doubt that the overall defense budgets are under pressure from the government and we have seen reductions in those but I think that we have both heard from secretary of defense and we have seen that in the various provision that one of the areas that is probably not going to hurt and actually it is planned to be increased as everything that’s related to ISR, Intelligent Surveillance and Reconnaissance and everything that has to do with Special Forces. That is the target area that where we fit into the defense programs. So I think that actually as the military moves more funding into those areas we should see actually an improvement over time.

Great, thank you, that’s helpful. Around the Australia deal, you shipped 10,000 satellites, I think, as the press release indicated, and that’s a long term deal. From a revenue perspective, or contract perspective, can I do a simple 10,000 divided by number of expected satellites times the expected deal size, that’s where you guys booked or how do I look at that deal going forward?

Well, it's probably a bit more complex than that. I think just to correct you a bit. The deal we have done with NBN is where we provide Hubs and VSATs, not the satellites themselves, of course, but the CPE terminals and we do also do the installation of the CPEs and we also do the network operation. And what we have announced is that we have achieved the milestone of installing 10,000 sites and obviously that network is continuing to grow. Now, we have said in the past, that we would expect that the network could potentially grow up to 48,000 sites and that’s over multiple years that should or could present a revenue potential to Gilat of $120 million. So this is not exactly linear but I think you can do perhaps some extrapolation from that.

The next question is from Gunther Krager from Discovery Group. Please go ahead.

The question has to do with the overall world economics as it evolves, it looks like it is so far the weak, would it be a fair statement to make that the offerings that Gilat has offered an opportunity for increased efficiencies therefore not being impacted that much, in fact not even being improved because of the overall worldwide economic situation.

I don’t think I would go so far as to say that. I think that the offerings that we have, in our commercial business they present an alternative to terrestrial broadband where that does not exist and therefore in our commercial business, we are seeing most of our revenues coming from more developing areas of the world, Latin America, Asia, (inaudible) et cetera which have I think, a very robust economy. On the defense side, like I said, its our main technological advantage is mostly around a big technical advantage or technological advantage over our competition in Satellite-on-the-Move which, as I mentioned previously is actually an area of the U.S. defense budget that is not being hurt and perhaps even growing. So I wouldn’t tie it to specifically that efficiencies of some kind in our equipment are going to do better because of economic downturn worldwide. I would look at it a bit different.

Your next question is from Mike Cikos of Sidoti & Company. Please go ahead. Mike Cikos - Sidoti & Company: Just a question, wanted to follow up on the NBN. So you delivered 10,000 VSATs at this point? And you are saying that could grow to 48,000 sites which would provide an opportunity of about $120 million for you guys. Would the $120 million then be received by, I think in the press release you said that 48,000 sites would be deployed by late 2015, would you see the $120 million by then as well? Or would it come in later based on service or maintenance?

No, I think, if the network were to grow to that size and there is no assurance that it will but if it were to grow to that size I would expect that the major portion of the $120 million we would be able to recognize that by around 2015 but it would be gradual and rate is not predetermined and we can't really forecast that. Mike Cikos - Sidoti & Company: And at this point, you have deployed 10,000 of the VSATs which is why we saw the stronger than expected implementation for NBN and commercial in the second quarter. What makes you believe that the commercial will continue to do well in the back half of 2012?

Well, historically, the second half of the year was always stronger for Gilat and we are looking at the pipeline of deals that we are seeing that we are working on right now. So both of these together make us feel that the second half should be stronger. Mike Cikos - Sidoti & Company: Can you provide any more color on the pipeline that you are currently looking at?

I am afraid I can't. Mike Cikos - Sidoti & Company: Okay, and then just one more question on the operating expenses. Are you looking to reduce your cost further from where you are now or is it more that they will just be a smaller percentage of revenue as sales continue to grow?

We are looking to reduce this. I mean, first of all, you bear in mind that some of the operational costs are fixed and some are variable. We are looking to reduce our fixed costs to the extent that we can without hurting the business of course and we are looking to do that further. Variable cost will behave according to revenues. It is all related to the integration of the various businesses that we have bought. The RaySat antenna systems and Wavestream and the more we integrate, I believe we can achieve more synergies and reduce our costs as we go into 2013.

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with a 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 U.S., please call 1-877-456-0009. In Israel, please call 03-925-5921. Internationally, please call 972-3925-5921. Mr. Antebi, would you like to make a concluding statement?

Thank you, operator. I would just 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 at hand. We appreciate your continuous support. Thank you and good afternoon.

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