Gilat Satellite Networks Ltd.
Q2 2014 Earnings Call Transcript

Published: 13 Aug 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Second Quarter 2014 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. For operator assistance during the conference, please press star, zero. As a reminder, this conference is being recorded August 13, 2014. I would now like to turn the call over to Philip Carlson of KCSA to read the Safe Harbor statement. Philip, please go ahead.

[Philip Carlson:]

Good morning and good afternoon everyone. Thank you for joining us today for Gilat’s second quarter results conference call. A recording of this call will be available beginning at approximately noon Eastern daylight time today, August 13 until August 15 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 releases which state that statements made on this earnings call which are not historical fact 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 risk factors can be found in our reports filed with the Securities and Exchange Commission. With that said, on the call today is Erez Antebi, Gilat’s Chief Executive Officer, and Yaniv Reinhold, Chief Financial Officer. Erez, please go ahead.

[Erez Antebi:]

Thank you, Phil, and good day everyone. I would like to begin by providing a high level overview of the second quarter results and then discuss the business. Following my comments, Yaniv will discuss our financial results. I will then summarize and open the call for questions. Our revenues for the second quarter of 2014 were $54.1 million compared to $50.9 million in the first quarter of 2014. The revenue increase is attributable to our three divisions which have all performed better in the first quarter. We are continuing to see the results of the cost-cutting efforts implemented last year. Our commercial and defense divisions improved their profitability when compared to the first quarter of 2014; consequently, our non-GAAP operating income increased to $1.5 million in the second quarter compared to $0.5 million in the first quarter of 2014. GAAP operating loss for the second quarter of 2014 was $0.5 million as compared to an operating loss of $1.5 million in the first quarter of 2014. Our EBITDA also improved to $3.9 million in the second quarter compared to $2.8 million in the first quarter of 2014. As we have mentioned before, the second half of 2014 should show progressive improvement and end with a strong fourth quarter. Management reaffirms the 2014 objectives for annual revenues of $240 million to $245 million and EBITDA margin levels of approximately 9%. I will now discuss some of our business highlights for the quarter. Let’s start with the commercial division. Addressing the strategic market for high throughput satellites and Ka- band, which provides broadband access to consumers and businesses, we signed two additional internet service providers in Europe for the SES broadband service network. One of these ISPs is Swisscom, the leading teleco operator in Switzerland. Swisscom is our first ISP in Switzerland. We are happy to see the distribution channels for the Ka-band services continuing to expand. We also received our first orders for VSATs for use with the IPSTAR satellite in Indonesia with Thaicom. We previously announced an agreement with IPSTAR last year and announced the commencement of service earlier this year. We have started some marketing activities and these results are the fruit of this. We have received an expansion order from (indiscernible), which provides wholesale services to ISPs in Spain over a Ku satellite. The expansion is with our rated SkyEdge II-c product and is targeting residential consumers and small enterprises in suburban regions. The ISP for this expansion is Euskaltel for the Basque region. In Australia, we are continuing to operate the network and provide services, including field maintenance for the NBN project. At this stage, we do not expect an expansion of the FRSS service to include additional sites. Looking forward, we see a healthy pipeline of HDS networks that are planned for launch. We are working to be the ground equipment provider for many of these opportunities. A few of these could still be decided in 2014. We intend to continue to pursue the opportunities we see in this market going forward. Moving to a different market segment, cellular backhaul continues to be an important application in the market. We have awarded a deployment of cellular backhaul networks around the world; for example, one of these is for replacing SCPC modems with our TDMA VSAT in Asia. Another network in the (indiscernible) is to provide backhaul connectivity for CDMA cell in remote regions. These networks currently network 2G and 3G cellular technologies. Going forward, we believe that as data will become a bigger driver for mobile networks, we will see a bigger move to 4G as well. As we mentioned previously, we launched two products this year relevant for the cellular backhaul market

[Yaniv Reinhold:]

Thanks Erez, and hello everyone. I would like to remind everyone that our financial results are presented both on a GAAP and non-GAAP basis. The GAAP financial results include the effects of non-cash stock option expenses as per ASC 718, amortization of intangible assets resulting from the purchase price allocation, with restructuring costs and net income (indiscernible) from discontinued operations. The reconciliation table in our press release highlights this data and non-GAAP information is presented excluding these items. Now moving to our financial highlights for the second quarter of 2014, revenues for the second quarter of 2014 were $54.1 million compared to $61.9 million for the same period in 2013. The difference is mostly attributed to the decrease in revenue in our services division. The MINTIC project in Colombia which started to bring initial revenues in the second quarter will generate increased revenues in the third and fourth quarter. We will also generate revenues from the IAL project in Peru beginning of the third quarter. On a GAAP basis, our gross margin this quarter reached approximately 35.7% compared to approximately 32.3% in the comparable period last year. As we have mentioned over the past few quarters, our gross margin is affected by the regions in which we operate and the types of deals we recognize. The increase in our gross margin this quarter was primarily due to two reasons. The first is due to the mix of deals with high margin in the commercial division, and the second is due to our cost reduction in COGS. Gross R&D expenses on a GAAP basis were $6.9 million this quarter compared to $7.1 million in the same quarter of 2013. The decrease in R&D expenses reflects a reduction in fixed expenses which was offset by the negative effect of the shekel-dollar exchange rate. The shekel significantly appreciated in value over the last year against the U.S. dollar. This has caused an increase in our expenses in dollar terms. Moving to selling, marketing, general and administrative expenses, on a GAAP basis expenses for the quarter remained relatively constant at $13.5 million compared to $13.4 million for the same quarter last year. We experienced higher variable expenses which were offset by a reduction in fixed expenses. Operating loss on a GAAP basis was $0.5 million in the second quarter of 2014 compared to an operating loss of $0.1 million in the comparable quarter of 2013. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. We believe these non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating cash flow performance. On a non-GAAP basis, operating income was $1.5 million in the second quarter of 2014 compared to operating income of $1.9 million in the comparable quarter of 2013. On a GAAP basis, net loss from continuing operations for the quarter was $1.4 million or a loss of $0.03 per diluted share compared to a net loss from continuing operations of $2.9 million or a loss of $0.07 per diluted share in the same quarter of 2013. As of June 30, 2014, our total cash balances including restricted cash net of short-term bank credit decreased to $59.3 million. This was mainly due to our investment in the IAL project in Peru and the MINTIC project in Colombia. Our shareholders’ equity at the end of the quarter totaled $224 million. That concludes our financial review for the quarter, and now I would like to turn the call back to Erez. Erez?

[Erez Antebi:]

Thank you, Yaniv. To summarize, we are seeing progress across all of our divisions as we continue to execute our plan and growth strategy in the second quarter. Our cost-cutting measures implemented in 2013 continue to bear fruit as we have seen an increase in profitability. In our commercial division, we see significant market potential in high super satellites and cellular backhaul applications, and we believe we have the right solutions to expand upon our growing global footprint. We have several deployments of our cellular backhaul networks around the world that included our newest and fastest TDMA VSAT in the market today, SkyEdge II-c Capricorn, and CellEdge, our small cell solution over satellite. Our defense division has improved given the increased visibility from DoD programs. We are beginning to see an improved sales pipeline and were recently awarded contracts for defense agencies in Latin America and Asia. We expect to see continued growth across this division as we believe we hold a significant advantage over our competitors when it comes to small, lightweight and low-power terminals. In our services division, our IAL project in Peru is on schedule and our internet services project in Colombia has started to generate revenues with more significant revenues expected in the second half of 2014. For these reasons, we believe that the second half of 2014 will be stronger than the first half of the year. We feel confident we are on track to meet our 2014 objectives for annual revenues of $240 million to $245 million and EBITDA margin levels of approximately 9%. That concludes our review. We would now like to open the floor for questions. Operator, please?

[Operator:]

[Operator instructions] The first question is from Gunther Karger of Discovery Group. Please go ahead.

[Gunther Karger:]

Yes, good afternoon everyone. Great report. Just one question regarding the aviation industry. (Indiscernible) in that sector, the aviation airline-type of business.

[Erez Antebi:]

I’m sorry – you were breaking up, Gunther. Did you ask about the aviation sector business?

[Gunther Karger:]

Yes sir, aviation, the global express, that sort of thing.

[Erez Antebi:]

Yes, you’re right – I didn’t discuss it in the call. This is continuing business. There hasn’t been any significant developments. We’re continuing to sell into that sector. I continue to view that as a growth area for us, especially when the global express Constellation comes online and we’ll start providing terminal—sorry, units to Honeywell to serve airlines on the Immarsat global express. It continues to look good and it’s, I would say, business as usual for now.

[Gunther Karger:]

Thank you. My second question, if I could, with regards to the defense sector, I know you announced continuing growth in that area, but the current unrest worldwide, particularly in the special operations-type of business, do you think that what’s happening now globally is increasing your outlook in that sector, or the results that you’ve reported reflect what you had originally anticipated?

[Erez Antebi:]

I don’t think that we see anything that is immediate—as an immediate result of very recent developments of the past few weeks, but I would say that in general over the past year, what we are seeing is that there are heightened tensions in various conflict areas around the world, in eastern Asia, in eastern Europe, in other areas, and we see an increasing requirement and even starting to see budgets and programs in other countries that perhaps two years ago we didn’t see having programs in satcomm for their special forces.

[Gunther Karger:]

Thank you very much, Erez.

[Erez Antebi:]

Sure, you’re welcome.

[Operator:]

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with his closing statement, (indiscernible) replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-326-93101-888-326-9310. In Israel, please call 039255937. Internationally, please call 972-3-9255937. Mr. Antebi, would you like to make your concluding statement?

[Erez Antebi:]

Yes, I just want to thank everyone for listening in on the call. I appreciate your time and I hope to meet you on the next conference call, if not earlier. Thank you very much, and good morning or good afternoon to all. Bye bye.

[Operator:]

Thank you. This concludes Gilat’s second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.