Gilat Satellite Networks Ltd. (GILT) Q4 2014 Earnings Report, Transcript and Summary

Welcome to Gilat's Fourth Quarter and Year End 2014 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 February 18, 2015. I would now like to turn the call over to Philip Carlson of KCSA to read the Safe Harbor statement. Phil, please go ahead.

Good morning and good afternoon everyone. Thank you for joining us today for Gilat's fourth quarter and year end 2014 results conference call. Recording of this call will be available beginning at approximately noon Eastern Time today, February 18 until February 20 at noon. Our earnings press release and web-site 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 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 and uncertainties, 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.

Thank you, Phil, and good day everyone. I would like to begin with a brief summary of our annual and Q4 results followed by a high level business review. Following my remarks, Yaniv will discuss our financial results in greater detail. I will then summarize and open the call for questions. 2014 ended with a strong fourth quarter showing increased revenues and profitability over the fourth quarter of 2013. Overall, it was a good year for Gilat and a significant improvement over the previous year. Although the $235.1 million in annual revenues for 2014 are similar to the $234.9 million recorded in 2013, we significantly grew our EBITDA which reached $23.4 million or 10% of revenue for 2014 compared to $16.3 million or 7% of revenue in 2013. We improved our profitability primarily in our commercial and defense divisions as a result of higher gross margins and a significant reduction in expenses especially COGS and G&A. Yaniv will discuss the financial results in greater detail afterwards. I will now present a business overview for the year along with some quarterly highlights to emphasize our achievements. Overall, 2014 was a very productive year for Gilat. I’d like to start the discussion by reminding us all of the four major trends in satellite communications industry that we believe will drive growth over the next several years. The first trend relates to lots of supply HTS or High-Throughput Satellite capacity. We believe that the consequent bandwidth price reduction will make many broadband, cellular and mobility applications economically viable over satellite. The second trend is the ever increasing demand for broadband internet worldwide. The third trend relates to cellular coverage. In developing countries, we see the need to increase cellular coverage in rural areas and the resultant growth of the small cell market. In the developed regions, we see the need for rapid deployment of LTE backhaul solutions. And last but not least, the fourth trend is the projected growth of Satellite-on-the-Move applications especially on airplanes and possibly trains as well as defense related. We view these industry trends as business opportunities, opportunities that we intent to capitalize on in 2015 and beyond. In line with this goal, we have focused our R&D resources to develop products that target these opportunities. During 2014, we released a number of significant new products most notably SkyEdge II-c Capricorn for backhaul of LTE cellular traffic over satellite using patent pending acceleration achieving up to 200 megabit per second, the world’s fastest CDMA VSAT; CellEdge, the turnkey small cell over satellite solution that extends 2G, 3G cellular networks to unserved rural areas; SkyEdge II-c Libra our satellite/cellular hybrid terminal for broadband delivery which sells at about half the price of a regular VSAT. We also released the range of smaller BUCs for greater flexibility in addressing different types of on-the-move and on-the-pause applications, and RaySat SR300 antennas with an advanced flat panel array for installation on small vehicles and marine vessels. To make sure we are on the right track, we conducted a review of our strategy during 2014. As a result, we have updated our strategy somewhat by reaffirming most directions and modifying others. We continue to see HTS as a major driver with its many satellites and reduced prices. We are seeing worldwide demand for HTS applications in a wide range of markets such as consumer, cellular backhaul mobility, government and enterprise applications. We believe that our SkyEdge II-c which supports new multi spot-beam satellites as well as traditional wide-beam satellites is the right platform outside of North America because it supports multiple applications not just the consumer. In Q4, we signed an agreement with JCP Brazil for an HTS network to provide high speed internet access. JCP which recently acquired five Ka-band spot beams totaling 2.3 gigahertz of capacity intends to use its new network to provide broadband internet service to consumers at present and to enterprise, mobility and airborne markets in the future. The agreement call for a SkyEdge II hub with multiple network segments, VSAT terminals and related equipment, roll out is beginning these days. We are also providing JCP with cloud-based NOC management services in addition to just technology platform. This is an example of how we leverage the NOC, Network Operation Centers, we have in Peru and Australia and provide outsource operations for Satcom network owners like Optus for NBN, Inmarsat and Telstra. We won this deal after competitive bidding with major players in the industry. This reaffirms the fit of our total solution to demands for HTS around the world. We continue to see new plans for HTS satellite launches over the world and we are bidding for a number of new HTS based services worldwide, and we are confident as we look ahead. Moving on to the cellular area, we continue to see cellular coverage for rural areas in cellular backhaul as major drivers and believe we provide superior solutions to address the needs of mobile network operators or MNOs. For cellular coverage extension into rural areas, we have developed CellEdge, our integrated small cell over satellite solution. CellEdge enables MNOs to extend their 2G or 3G cellular coverage into unserved rural areas both quickly and affordably. It also delivers high bandwidth efficiency and transmission power with very low power consumption making it a viable solution for even the most outlying areas where remote sites are powered by solar energy. In the fourth quarter, we were contracted by RuralCom, a new cellular carrier headquartered in Vancouver to provide satellite based 3G coverage of the 1,000 mile long Alaska Highway and British Columbia Coast. To make the service affordable to people in the region, the operating cost had to be extremely low so we provided a turnkey CellEdge 3G network with our hub located in Intelsat's teleport. Our solution allows RuralCom to provide mobile services to both the subscribers as well as customers of other cellular operators. The network recently went live with its first site with roll out expected throughout 2015. For a quick LTE backhaul deployment, we have developed SkyEdge II-c Capricorn. To remind you, Capricorn is the world’s fastest CDMA VSAT designed to answer the need for quick 3G LTE deployment in the developed world. It enables MNOs to quickly capture additional market share. The operators are expanding their LTE networks in developed region to keep up with the growing demand for more data delivered at higher speeds. Handsets on LTE networks can accommodate very fast download speeds and must be supported by a reliable high speed backhaul infrastructure. We are seeing serious interest on the part of the mobile network operators in our SkyEdge II-c Capricorn high bandwidth LTE backhaul solution. We already have initial orders from a Tier I operator in Asia. Going forward, we see broadband on the move as a major driver but have shifted our focus to concentrate on commercial markets more than on defense markets. The defense market continues to grow and we see it as a very significant source of revenues, but it is not growing at the pace we would have liked. We see commercial airborne as the fastest growing mobility market opportunity. We therefore have shifted our focus to concentrate more on commercial mobility application and to reflect this change we have renamed our defense division to mobility division. This division will continue with the same mobility technologies with low profile antennas and SSPAs with low size, weight and power. We will continue to sell through the defense market, but the future growth emphasis has changed. In general, we believe we have competitive advantages in the mobility market because we offer smaller lighter and lower power terminals. In 2014, we saw growing interests in our airborne transceivers or BUCs in our on-the-pause manpack and on-the-move solutions. We continue to aggressively pursue opportunities in the airborne market with more and more airlines committed to having Wi-Fi on board. We believe we have a unique advantage in size, weight and power, experience, and cost and are working to have a technically compliant full airborne terminal within a year. Over the course of the year, we have supplied Wavestream BUC to T-Com and AeroSat for in-flight connectivity served by Global Eagle and Gogo and we’ve supplied to Honeywell for the Inmarsat GX network. Outside of the U.S., we are seeing a strong demand for our SatTrooper on-the-pause manpack, which are available in both Ku and Ka bands. SatTrooper is one of the smallest and lightest ultra-point terminals in the market. A primary reason for this is its very low power consumption, which reduces the weight of the energy pack. At the same time, it enables very high-speed transmission such as video. In 2014, we provided SatTrooper manpack to government agencies in India and Myanmar. We also delivered Wavestream BUC for various on-the-pause applications to our long time customers L3 and General Dynamics among others. The fourth quarter saw an expanded presence of our X-band ground on-the-pause solutions in the U.S. through systems integrator Gator Technologies. We believe we are gaining strength against the competition by providing the best BUC with maximum reliability and minimal size, weight and power. We have cooperated with Accelus to develop and deliver our first ground on-the-move low-profile antennas. The newly developed triple band antenna is part of the SR-300 family and features an advance flat panel array, which covers both receiver and transmit band. Its minimal size, weight, power allow for installation on small vehicles, as well as on marine vessel. Our BlackRay solutions for the on the move unmanned platforms are based either on our whole profile panel antennas or our new small light weight parabolic antennas. Available in both Ka and Ku bands BlackRay’s relatively small size and weight extends the operational range of UAZ, while increasing mission payload capacity. In Q4, two new UAV platforms decided to start evaluation of our terminal. Overall, Q4 was a very busy quarter for the mobility division with a lot of diverse activity underway. Turning now to our services division, the two large projects in Columbia and Peru, which were successfully rolled out over the course of the year generated greater revenues in the third and fourth quarters of 2014. The 1900 digital kiosks for the Kioscos Digitales project in Columbia are operational and the key performance indicators are being met. This is a very challenging project due to the remote locations and many logistics and other difficulties. The roll-out of the Peruvian project, Amazonica was also completed in 2014. To remind you, the aim of the initiative was to enable internet and telephony services in some of the most remote sections of the Amazon River. This project requires the installations of 12 towers between the heights of 80 meters and 120 meters for microwave communications and 59 towers for distribution of services to the communities. The implementation of the project was achieved ahead of schedule despite the difficult condition. This project is entering into the operational space during which we will maintain and operate the network for an additional ten years. In Q4, we also received an expansion order for this network. We expect the government of Peru to issue similar biz of this type during this year and next. Both projects in Columbia and Peru are a testament of the capabilities we have to operate in remote locations anywhere around the world. That concludes our business and strategic review. I would now like to turn the call over to Yaniv Reinhold, our CFO who will review the financials. Yaniv please.

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 effect of non-cash stock options expenses as per ASC 718, amortization of intangible assets, resulting from the purchase price allocation, restructuring costs and net income or loss from discontinued operations. The reconciliation table in our press release highlights this data and our non-GAAP information is presented excluding these items. Comparing 2014 to 2013 although revenues are similar, we significantly improved our loan [ph] profitability because of higher margin deals and significant cost reduction that was implemented. Looking at the quarterly and annual financials, revenues for the fourth quarter of 2014 was $73.1 million compared to $55.7 million for the same period in 2013. Our revenue for the fiscal year of 2014 was $235.1 million, compared to $234.9 million for the same period in 2013. Revenues remain at the same level, mainly due to an increase in our revenue from the Defense and Mobility and Services division, which was offset by a decrease in revenues in our commercial division, due to the NBN project that was not further expanded. Our growth margin for the fourth quarter on a GAAP basis was 35%, compared to 36% in the comparable period last year. Our growth margin for 2014 on a GAAP basis was approximately 36%, as compared to 34% for 2013. The higher gross margin is mainly due to deals with high margins in the commercial division and the cost reduction in COGS. On a GAAP basis, gross R&D expenses for the fourth quarter of 2014 was $6.8 million, compared to $7.6 million in the fourth quarter of 2013. Gross R&D expenses for 2014 on a GAAP basis were $27.6 million, compared to $29.5 million in 2013. Net R&D expenses for 2014 on a GAAP basis were $25.2 million, compared to $27.9 million in 2013. The decrease in annual net R&D expenses is related to reclassification, of course to COGS for certain projects and also to reduced cost due to our integration of efforts and growing synergies within the division in addition to higher R&D grants. We are continuing to invest substantial funds in R&D in support of our strategy in HTS, Cellular and Mobility products as Erez discussed. Moving to selling, marketing, general and administrative on a GAAP basis, expenses for the quarter were lower at $14.1 million, compared to $14.9 million for the fourth quarter of 2013. Selling, marketing, general and administrative expenses for 2014 on a GAAP basis were $53.4 million, compared to $55.3 million in 2013. Selling, marketing, general and administrative were lower due to reduced fixed expenses and reversal of contingencies accrued related to the settlement of a number of tax cases in Brazil. On a GAAP basis, operating income was $5.5 million in the fourth quarter of 2014, compared to an operating loss of $2.7 million in the comparable quarter of 2013. Operating income for 2014 on a GAAP basis was $5 million, compared to operating loss of $4.1 million in 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 for 2014 was $13.1 million, compared to an operating income of $4.4 million in 2013. On a GAAP basis, net income for the quarter was $2.4 million or $0.06 per diluted share, compared to a net loss from continuing operations of $3.6 million or a loss from continuing operations of $0.09 per diluted share in the same quarter of 2013. On a GAAP basis, net loss from continuing operations for 2014 was $0.7 million or $0.02 per diluted share, compared to a net loss from continuing operations of $9.6 million or $0.23 per diluted share in 2013. As of December 31, 2014, our total cash balances including restricted cash, net of short-term bank credits and short-term loans was $53.5 million compared to $46.7 million as of September 30, 2014. Our shareholders' equity at the end of 2014 totaled $225.1 million. We entered 2015 with a backlog of $173.9 million compared to $228.2 million in 2013. The difference is primarily due to the reduction in services division as we recognized revenues from the Amazonica and the MINTIC projects. Our trade receivables at the end of 2014 were $57.7 million representing a DSO of 71 days. This concludes our financial review for the quarter and I would now like to turn the call back to Erez. Erez?

Thank you, Yaniv. Before we turn to your questions, I’d like to summarize a few closing remarks. 2014 saw a significant improvement in profitability over 2013. We believe that our strategy is directly aligned with the growth segments in the market and we believe that we have competitive products and capabilities that support the strategy. Looking forward, we are very optimistic on the growth opportunities for Gilat. We expect that we will continue to grow in 2015 with our management revenue objectives between $250 million and $260 million, and EBITDA between $26 million and $28 million for the year. As was in 2014, we expect the second half of 2015 to be significantly stronger than the first half. This is due to a combination of seasonality in our business and the expected timing of deals. That concludes our review. We would now like to open the floor for questions. Operator, please?

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Gunther Karger of Discovery Group. Please go ahead.

Yes. Good morning everybody. I got it late on the conference call. I couldn’t hear through much. If you’ve covered this already I apologize. The question is the defense business, it would seem to me that given the increased unrest worldwide in the defense area particularly focusing on special forces mobile type operations, why was the defense business not be as robust as had been previously expected?

First of all, good morning, Gunther. I think that the defense business is doing well and it’s growing for us, but I think that what we are seeing is that there is faster growth in the commercial area. Couple of years ago, most airlines were not committed regarding Wi-Fi onboard. That has changed dramatically. So the market simply has shifted now. The defense business continues to grow and we continue to sell there and we’ll continue to work there, but it’s not growing as fast as we see other segments and that’s why while we are not leaving the defense at all, we will continue to sell and work there. We are shifting the emphasis to see where the faster growth is.

Thank you. It sounds like it’s a resource optimization on a location. That’s very good. Thank you so much.

You’re welcome.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Erez Antebi to go ahead with his 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 1-888-326-9310; in Israel, please call 03-925-5900; internationally, please call 972-3-925-5900. Mr. Antebi, would you like to make your concluding statement?

Thank you, operator. I’d like to thank everyone for your time today. We appreciate you are joining us on the call. I hope we were able to give you a good understanding of the results that we have and our directions. We appreciate your continued support. So I would like to just say thank you and good afternoon.

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