Gilat Satellite Networks Ltd. (GILT) Q4 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Fourth Quarter 2010 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 22nd, 2011. I would now like to turn over the call to Marybeth Csaby to read the Safe Harbor from KCSA. Marybeth, please go ahead.

Good morning and good afternoon everyone. Thank you for joining us today for Gilat’s fourth quarter and full-year 2010 results conference call. A recording of the call will be available beginning at approximately 12 PM Eastern Time today, February 22nd, 2011, until February 24th, 2011, at 12 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 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 today is Amiram Levinberg, Gilat’s Chairman of the Board and Chief Executive Officer; and Ari Krashin, Chief Financial Officer. Amiram, please go ahead.

Thank you, Marybeth and good day everyone. I apologize for the confusion in the telephone numbers for those who are trying to call from the U.S. So, sorry for that and that’s the reason for the delay in the start of this call. Anyway, Marybeth, welcome and I would like to welcome the KCSA team, is our newly appointed Investor Relations consultant in the USA. I would begin today’s call with a snapshot of our fourth quarter and annual results, followed by a more detailed review of our business during the quarter. After the business review, I will take you through the financial results. I will summarize 2010 and share with you our objective for the coming year, and then we will open the floor for questions. Moving to the financial indicators’ summary, revenues for the fourth quarter of 2010 were approximately $66 million, an increase over the previous quarter and the comparable quarter of 2009, which were $58 million and $57 million respectively. For the full year 2010, we achieved revenues of $233 million compared to $222 million in 2009. Net income for the year 2010 was $30.6 million compared to net income of $1.9 million in 2009. This is mainly due to two events during the year, the first is the settlement of litigation related to the termination of the 2008 merger agreement, and the second is the sale of our shares in Axolotl. On a non-GAAP basis, our net income for the year 2010 was $0.7 million compared to a non-GAAP net income of $0.4 million in 2009. Our backlog grew from $180 million at the end of 2009 to approximately $232 million at the end of 2010. Ari will discuss the quarterly and annual results in more details later in the call. Let us now look…

Thank you, Amiram. Good morning and good afternoon everyone. Our financial results are presented both in GAAP and non-GAAP basis. The GAAP financial results include the impact of SFAS 123(R), the inclusion of stock-based compensation expenses in the P&L, expenses related to our M&A activities during 2010, amortization of tangible and intangible assets resulting from the purchase price allocation, the income related to the settlement agreement in connection with our merger agreement, and the capital gain from the sale of our holding in Axolotl. The reconciliation table in our press release highlights these 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 2010. Revenues for the fourth quarter of 2010 increased 16.7% to $66.1 million compared to $56.6 million in the fourth quarter of 2009. The increase in revenue this quarter is attributable mainly to Spacenet’s rollout of sites in connection with the recent wins in the gaming sector, the consolidation of Wavestream for the first time since November 29th, and the expansion of our product line including the communications-on-the-move technology and related sales to the U.S. defense market and to the international markets. Our gross margin for the fourth quarter increased to 35.4% compared to 33.2% for the same period of 2009. As we continue to mention every quarter, our gross margin is affected by the number of factors including our mix of equipment and services, the size of our deals, and the timing of the transactions. Each of these factors can result in variation in our gross margins. This quarter, we benefited from higher proportion of high margin products in equipment segment due to the inclusion of Wavestream and RaySat Antenna Systems. Our net R&D expenses for the fourth quarter of 2010 was…

We stated at the time that the budget allocation would probably not have a substantial contribution to our sales in 2010, but we believe it would in 2011 and mainly onwards. We also stated that we intended to enter the defense market through inorganic growth utilizing our free cash to acquire companies that are in the sector. During 2010, we acquired RaySat Antenna Systems and Wavestream. These acquisitions bring us advance technology, which is already being used by Defense and Homeland Security customers. To summarize, we said we would increase our investment in organic growth and we did. We said that we would invest in M&A to enter the defense market, and we did. As we move on to our 2011 management objectives, we intend to continue and execute strategy with that. We will continue to focus on the Defense and Homeland Security markets for future growth. This includes the U.S. DoD and international defense agencies. We will continue to focus also on the commercial SATCOM markets, especially in the international markets where we see the biggest potential for growth. Our budget enrollment support this strategy. We have set our financial management objective to increase our annual revenue to more than $330 million and despite significant investments in future products to increase our EBITDA margin to 10%. That concludes our review. We would now like to open the floor for questions. Operator, please.

(Operator instructions) The first question is from James Breen of William Blair. Please go ahead. Louie DiPalma – William Blair: Hi, guys. This is actually Louie DiPalma for James Breen. Thank you for taking my question. I was wondering when, you consider your guidance for $330 million of revenue for 2011, and that implies 41% growth. What growth would that be on an inorganic basis, meaning assuming that you guys had Wavestream and RaySat at the beginning of the year?

Let me say the following. We have said that Wavestream revenues for 2010 were approximately $70 million. Wavestream is, in our numbers, only to a very minimal extent due to the only one month, December that we have consolidated Wavestream. RaySat Antenna Systems, when we acquired, the company had fairly minimal sales. We never quoted the exact numbers, we said that the revenues of RaySat Antenna Systems were fairly minimal. When we talk about revenue, goal of revenue is more than $330 million, that means that we expect Wavestream to grow, but we also expect the other businesses, RaySat Antenna Systems, organic businesses within Gilat, including Spacenet to grow. So, it’s kind of a growth across the board from our perspective. Louie DiPalma – William Blair: Okay. Thanks. And with backlog increasing from $180 million to $232 million and you guys highlighted that some of that strength was attributed to excesses in the gaming market. And I, yes continue.

Yes, Louie, if you follow kind of what we have early announced, yes, to your question, yes. Some of it is attributed by the recent successes in lottery business. We have also announced the extension of the contract in Colombia. This extended contract actually is bigger in size than the previous one that we have signed back in January 2010 – for 2010. So, there are a few reasons to them, lottery being one of them. We also announced, I don’t know if you have noticed, but we also announced in January a deal that was not included in our backlog at the end of 2010, which is related to Illinois, also lottery a fairly substantial deal, basically we announced Texas and Illinois together. Only Texas happened at the end of 2010, Illinois happened at the beginning of 2011. The aggregate number of terminals in both these systems is 27,000. Louie DiPalma – William Blair: Okay. And along that point, considering that the gaming sector seems to be doing really well, are you guys also divesting in this industry in addition to the defense sector and international market?

Lottery business is a business we are in for many years. Actually, I think we were the first in this category. We were the first company to work at the time with GTECH, and we were the first to implement VSAT network in a state lottery. Currently, I would say it’s a fairly popular application in the U.S. and outside the U.S. and there are reasons why VSAT is actually a good solution for that. What I should say about the lottery business specifically in the U.S. that it is kind of a fluctuating business in the following sense. These states are signing with service providers such as the GTECH, Scientific Gaming and Intralot, long-term contract, it will take seven, eight and sometime even more years. And in terms when this term is over, then there is a rebid, and obviously sometimes we place the communications equipment including the VSAT and we try to beat for these projects, and so that makes it kind of a seasonal effect if you like. So, it happened to be that towards the end of 2010 beginning 2011, there were a few major transactions and were lucky enough to getting them. Louie DiPalma – William Blair: I see. So, in other words, you don’t – you think that we have reached sort of the end of the growth cycle for the lottery sector, but you think that it’s going to begin again in a few years?

If you look at that, it’s kind of a fairly, on one hand, fluctuating, on the other hand, deterministic in the following sense. You know what states are going for rebid at every year, and so it happen to be traditional is that for the VSAT, if you look at it from a VSAT perspective, because we are more interested about states which are suitable for VSAT and carry many number of terminals, then once every two, three years, you have kind of a strong year for VSAT, and then we are not alone in this game. We re-compete and sometime we win, sometime we lose. This time, we were, as I said, more lucky and we won more. I should also mention that since the contracts are long-term contracts, it comes with equipment that you see as a short-term revenue, because we sell equipment in these kind of deals, but also with a long-term service contract that comes in each and every deal and that takes for quite many years. Louie DiPalma – William Blair: Excellent. Thank you very much.

Thank you.

The next question is from Chris Quilty of Raymond James. Please go ahead. Chris Quilty – Raymond James: Good morning or I guess afternoon, gentlemen. I was just looking through the defense budget, it looks like at least the proposal for the President’s FY12 budget has a pretty nice bump for the WIN-T program about doubling the revenues there. And if I am correct, that’s reasonably important program for Wavestream. Do you think that implies a possible pickup here, and how do you feel about your competitive position on that particular program.

Hi Chris, this is Amiram. Yes, Wavestream is selling into WIN-T, Increment One, and we sell kind of the leading product. We have the 50W Ka Power Amplifier that’s being sold to Increment One. With regards to the budget, I don’t think we know at this point of time what would be the kind of resolution with regards to budget in general and WIN-T budget in specific. As you know, budget is still going on a continued resolution basis. So, at this point of time, there is no clear budget for 2011. So, I think it’s too soon to say. Chris Quilty – Raymond James: Have you seen any impact from the continuing resolution at this point?

No, not at this point. At this point, Wavestream is continuing to operate the way we saw it before. Generally speaking, we expect growth for Wavestream for the year 2011, and that would be and our assessment is actually based not so much on the defense market, but on them selling more to the international market, which was very small for them, and selling more to a new market which is a broadcast market. In that case, they sell a Solid State Power Amplifier, big power amplifiers like 600 watts power amplifier to replace TWT. These account are the wave tubes that are being used by the broadcaster, and it’s a very new kind of market for them. It looks quite promising from my perspective. Chris Quilty – Raymond James: Great. And regarding your acquisitions, are you still actively looking for additional acquisitions, and are we still talking primarily U.S. or international?

Well, first, we continue to look. I should say specifically that if you look at the Spacenet business, then we are focusing – I don’t know if you have noticed, but we are deploying Regis which is like more than 7,000 sites, then the emphasis there is actually around ability to give managed network service and Regis is actually a terrestrial network. Sometimes in the future, we might have some of the sites by satellite, but at this point of time, it’s solidly terrestrial, and we have a network appliance which is called Prysm Pro and all that. We have the intention to enhance the managed network service activity for Spacenet and in that specific area, we are actively looking at the possibility of making an acquisition, not necessarily a big one, but to anchor activity in that field. Chris Quilty – Raymond James: Okay. The announced acquisition of Hughes by EchoStar, your thoughts on how that impacts your business, I mean, I guess specifically the Spacenet business in the U.S.?

Come on, Chris, you are the specialist. You should educate me. Well, offsite we might chat on it, but no, I don’t think we have any comments on this. Chris Quilty – Raymond James: Okay. Fair enough. And the growth you are looking for this year in 2011 in the core enterprise VSAT business, are there particular verticals or applications that you think are most promising, whether it’s straight enterprise VSAT, cellular backhaul applications or others?

I would think that the most interesting parts are cellular backhaul from our perspective with many implementations around this. We have a few new products that we are introducing into the market in this year which we think are fairly interesting, and combination of TDMA and SCPC products that we are introducing this year. This will grow to cellular but also to other applications and multi-star network configuration called NAPG [ph]. This is also interesting and if you remember, this network appliance that we are using in the U.S. called Prysm Pro, we intend to take to the international markets as well. Chris Quilty – Raymond James: Great. And final question, any developments in terms of your KA-band strategy or a need to develop products for that market?

Generally speaking, strategically I would say, it’s a huge market and a very important one. And we are dedicating lots of R&D activity around this subject. Generally speaking, I think that as much as that there would be many KA-support initiative in these coming years, to mention a few of them, NBN in Australia, a new initiative in Russia, a new initiative, Telefonica considering in Latin America, there are many, many of them in these coming years. So, I think KA-support has been very important. I think generally speaking it is good news for whoever is implementing VSAT, because it is satellite capacity which is optimal for unicast type of communication rather than multicast. It means good news for VSAT vendors. It means we get to – we have to get our stuff ready. So, we are working a lot on it, and I am sure that we will find our way in this area, which is very interesting. Chris Quilty – Raymond James: Great. Thank you very much.

Thank you, Chris.

The next question is from Gunther Karger of Discovery Group. Please go ahead. Gunther Karger – Discovery Group: Yes, thank you for taking the call, and a very good performance. I only have one question. Given all the good performance that you deliver with, how is this going to get translated shareholder value? It seems like the liquidity continues to remain very low, and anything that’s going to be done differently during the current year to address this particular issue?

Very good and fair point, Gun. Let me say the following. We definitely want to work in this area. We understand where you are coming from. We think the liquidity of the share is too low. This year, we intend to communicate with the market a lot more significantly than before. The historical reasons to that is the issue of the Gilat acquisition that eventually never happened and took off-road in that sense, but in any event, we will try to be way more active in this area. We just introduced in this call KCSA as our new IR company in the U.S. We will talk more in conference. Ari Krashin, our CFO has moved to the U.S. and he will talk to the financial community more closely and more frequently. Hope you would eliminate this echo in any event, but operator, you may try and help us here.

Mr. Karger, are you listening to the webcast at the same time? Gunther Karger – Discovery Group: Hello?

Yes, you are listening to the webcast at the same time, Mr. Karger. Can you please switch off the webcast when you ask your question? Hello Mr. Karger? Gunther Karger – Discovery Group: Hello?

Okay, thank you very much. Sir, please continue.

Gun, did I answer your question? Gunther Karger – Discovery Group: Yes, thank you very much. I appreciate it. That’s good.

Thank you. Okay, sorry Gunther.

The next question is from Lione Rockman [ph] of ASCA Group [ph]. Please go ahead. Lione Rockman – ASCA Group: Hi guys. Can you give us a breakdown in revenue from Wavestream and RaySat this quarter?

Hi Lione, it’s Ari. Basically, I mean, Wavestream, we weren’t that significant. I can show it with you for the last month, this was $4 million, that basically what they gave us. And the second, RaySat, basically, we are really past like six months integration [ph]. Their sales people selling Gilat equipment, our sales people selling their equipment. So, we will always be pretty much integrated and we don’t distinguish any more. So, it’s not a number we even look after. So, basically, for your information, Wavestream did contribute $4 million, but Wavestream is already pretty much integrated into the Gilat numbers – I am sorry, RaySat. Lione Rockman – ASCA Group: Okay. Fair enough. And Wavestream gross margin in 2010, how much was it?

It was in the 14 [ph]. Very similar by the way, if you look at the financial statement that we provided, it’s very similar to the equipment portion of the business, which we call internationally, which used to be something like 41%, 42%, but it’s very similar to this investment. Lione Rockman – ASCA Group: Okay. And one housekeeping question, expected OpEx as a percentage of, say from revenue for the next year? Is it supposed to be around the same percent like 2010 or is it going to increase more?

Basically, I mean, if you look at it from the other side, we look at the EBITDA, okay, so it should give you like the other side of the equation. If you look at 2010 numbers, EBITDA was roughly $14 million [ph] with revenues of $233 million, which is roughly 6% of EBITDA. So, obviously going into 2010, anticipation is going to be 10% of EBITDA, which is rough numbers, just taking the calculation like $33 million, obviously we do expect as a percent of what would be smaller going forward. Lione Rockman – ASCA Group: Okay. Thank you very much, and good luck.

(Operator instructions) Before I ask Mr. Levinberg to go ahead with this closing statement, I would like to remind participants that a reply of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-326-9310; in Israel, please call 03-925-5901. Internationally, please call, 9723-925-5901. Additionally, a replay of this call will be available in the company’s Website www.gilat.com. Mr. Levinberg, would you like to make your concluding statement.

I just like to thank everyone for joining us for this quarter’s call. Good afternoon and good day.

Thank you. This concludes Gilat’s fourth quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.