Gilat Satellite Networks Ltd. (GILT) Q2 2015 Earnings Report, Transcript and Summary

Welcome to Gilat's Second Quarter 2015 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 12, 2015. I would now like to turn the call over to Phil Carlson of KCSA to read the Safe Harbor statement. Phil, please go ahead.

Okay. 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 Time today, August 12, until August 14 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, 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 could be found in our reports filed with the Securities and Exchange Commission. With that said, on the call today is Dov Baharav, Gilat's Interim CEO and Chairman of the Board; and Yuval Ronen, Chief Financial Officer. Dov, please go ahead.

Thank you, Phil, and good day everyone. I would like to provide a business summary for the first quarter and discuss our future business for 2015 and beyond. And then Yuval will discuss our financial results. I would then conclude and open the call for questions. Our second quarter results, a bit weaker than expected. We reiterate our management objective to revenue target of $250 million to $260 million, but modified down our EBITDA target to $20 million to $21 million for fiscal year 2015. The result of this quarter and of 2015 are negatively impacted by two manufacturers, the first is the weaker than expected performance of our defense sector, mainly resulting from delayed order from the US DOD and other clients, coupled with lower than expected margins. The second factor is the weaker than expected performance of Colombia Kioscos project, to which we remain committed due to number of factors, mainly additional planed revenue leveraging our network, which will not materialize coupled with the sharp devaluation of the Colombian Peso. As we shift to second half of the year, we expect improvement in our business, which will accelerate in Q4 due to the growth in all sectors, mainly in our projects in Peru and in alignment with our strategy and growth driver. As the market turns to High Throughput Satellite, HTS, Gilat is well placed to become a strategic partner of satellite operators. In addition, we are seeing a growing market interest of our Cellular Backhaul offering that includes our SkyEdge II-c Capricorn and Satellite Solution, similarly bringing broadband internet to rural areas to present promising opportunities. Finally, our F-14 airborne mobility started to generate good results with the Wavestream offering and we anticipate even further growth with the wall house of full terminal in the future. I will now review some of the deals in Q2. As the demand for HTS around the world increases, our multi-application SkyEdge II-c platform maintains its position as the most exact solution in the market. Demonstrating this, we are happy to announce a few important deals for Gilat. First and foremost, I am happy to update that Gilat is partnering with leading China Satellite Communication Companies for their first HTS multi-spot beam satellite. This is a major milestone for us at Gilat. We are entering into unique partnership with Space Star Technology Co. In which Space Star and Gilat will jointly provide the satellite communication network for ChinaSat 16, which is the first KA HTS multi-sport being satellite in China. According to the agreement, Gilat will provide multiple network segments and VSAT terminals using Gilat SkyEdge II-c technology. The SkyEdge II-c network will enable high speed fixed and mobile satellite broadband services to be delivered including airborne, maritime, train and land mobility throughout China. We are excited about this major opportunity to develop a long-term relationship with our new partners in China, which present us with the large potential for future business in this important market. Gilat is already in unique position HTS market with a technology edge and with the capability to provide end-to-end solution to support HTS Satellite operator. Our unique position is being demonstrated in this partnership, as well as with other leading HTS satellite operators. In Q2, we have also experienced more opportunities in brining full end-to-end solution to our plan. One such is with a major mobile group network operator in Latin America, who had signed this quarter a main services agreement with Gilat for a nationwide satellite network. Gilat was selected to provide turnkey solution, including this platform space segment and mail services for all satellite site. This would include the installation and maintenance of VSAT network delivering high speed internet services to 2,500 schools and now that the momentum execution in rural areas throughout the county. Moving on to cellular market, we continue to see whole cellular expansion and backhaul has major driver. We provide superior SATCOM solution for mobile network operators. Just recently Gilat has awarded a tender in a major emerging market in Asia for a full turnkey solution to supply, install, commission, and operate the company’s cellular backhaul sites across the country. The customer selected Gilat, given our field proven solution and our exact technology. Gilat has also secured this quarter an important CellEdge small cell deal with Optus in Australia to become the company’s technology provider for remote area cellular backhaul over satellite. Our solution which can be deployed rapidly in any trend will enable Optus to provide media connectivity in remote areas with minimal CapEx and OpEx investment. Gilat’s long term partnership with Optus and its ability to offer an optimized and integrated small cell over satellite solution was instrumental in Optus decision. While we saw the year delayed in the defense sector in the second quarter, we continue to concentrate on the high growth market of in-flight connectivity for the commercial airborne market. Our Wavestream, Aerostream transceivers remain unmatched in airborne environment in terms of efficiency and performance. Overtime, Wavestream products have become the defect of industry standard meeting the requirements of Boeing, Airbus and almost all major aircraft manufacturers. In Q2, Gilat received new orders for major system integrator for its specialty design [indiscernible] unit for their airborne terminal. We believe our exact solution for in-flight connectivity hold great promise for the company moving forward. Moving on to internet broadband in rural area, in Q1 we announced that Fitel, a governmental agency in Peru awarded Gilat a $285 million regional telecommunication infrastructure project. The beginning for this project was due in Q2 and the roll out is well underway. We may even see additional opportunities to expand our business from this and China project through 2016 and beyond. This concludes our business overview. I’d like to turn the call over to Yuval Ronen, our CFO, who will review the financial. Yuval, please.

Thank you, Dov, 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 result include the effect of non-cash stock options expenses as per ASC 718, amortization of intangible assets resulting from the purchase price allocation and net income and loss from discontinued operations. The reconciliation table in our press release highlights this data and our non-GAAP information is presented excluding these items. Now moving to our financial highlights for the second quarter of 2015, our revenues for the second quarter of 2015 were $44.3 million compared to $54.1 million in the second quarter of 2014. The decrease is mainly due to weaker performance of our defense sector and delayed orders in our commercial division. In the second quarter, we saw a decrease in our GAAP gross margin to 24.9%, down from 35.7% in the same period of 2014. The decrease in profitability is mainly due to reduced revenue and to lower profitability in the Columbia kiosk project as well as in some defense related order. Gross R&D expenses on a GAAP basis were $6.6 million this quarter compared to $6.9 million in the same quarter of 2014. Moving to selling, marketing, general and administrative, on a GAAP basis, expenses for the quarter decreased to $11.9 million compared to $13.5 million for the same quarter last year. Selling, marketing, general and administrative were lower due to reduced variable expenses. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decision. 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 loss was $5.2 million in the second quarter of 2015 compared to operating income of $1.5 million in the comparable quarter of 2014. Our GAAP operating loss for the second quarter was $7.2 million as compared to an operating loss of $0.5 million for the same period in 2014. On a GAAP basis, net loss for the quarter was $9.1 million or a loss of $0.21 per diluted share compared to net loss of $1.4 million or a loss of $0.03 per diluted share in the same quarter of 2014. EBITDA for the second quarter of 2015 was a loss of $2.5 million compared to an income of $3.9 million in the comparable quarter of 2014. The decrease is mainly due to lower revenues and gross margin, partially offset by lower operating expenses. As of June 30, 2015, our total cash balances including restricted cash net of short-term bank credits increased to $95.9 million compared to $53.5 million as of December 31, 2014. This increase is mainly due to payment received for the Fitel project. Shareholder equity at the end of the quarter totaled $215 million. That concludes our financial review for the quarter and now I would like to turn the call back to Dov. Dov?

Thank you, Yuval. We expect to see growth in profitability and in revenue in the second half of the year which would accelerate in Q4. Our bid in China which substantiate our strategy as well as the issuance of our growth driver performance give us the confidence in Gilat’s profitable growth during 2016 and beyond. That concludes our review and we would like to open the floor for Q&A.

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 or good afternoon. What is the basic reason for the shortfall in business from the United States Department of Defense?

Okay, it’s Dov. We work usually as a subcontractor to major integrator. We will advice and notified by some of our system integrator that some of the orders from the DoD have been delayed. So why they have been delayed? Whether they will reappear, we don’t know. So the only information that we have is that, they have been delayed.

Thank you.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Dov Baharav 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 1-877-456-0009. In Israel, please call 039255921. Internationally, please call 972-3-9255921. Mr. Baharav, would you like to make your concluding statement?

Yes. Thank you for everyone participating in this call and listening to us, and hope to see you and talk to you next quarter. Thank you.

Thank you. This concludes Gilat’s second quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.