Gilat Satellite Networks Ltd. (GILT) Q3 2015 Earnings Report, Transcript and Summary

Welcome to Gilat's Third 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, November 18, 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.

Thank you. Good morning and good afternoon everyone. Thank you for joining us today for Gilat's third quarter results conference call. A recording of this call will be available beginning at approximately noon Eastern Daylight Time today, November 18, until November 21 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 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 can 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 Adi Sfadia, Chief Financial Officer. Dov, please go ahead.

Thank you Phil and good day everyone. Let me start by saying that Yuval Ronen has decided to step down as CFO. He has been replaced by Adi Sfadia who comes to Gilat with strong CFO experience, most recently from Starhome-Mach and previously from Radvision. I would like to thank Yuval for his contribution to Gilat during his term and wish him success in his future endeavor. Now, I would like to provide business summary for the third quarter and discuss our outlook for the fourth quarter. Following that, Adi will discuss our financial results and I will then conclude and open the call for questions. In terms of management objective for the year, we reiterate our revised revenue target of $210 million to $220 million and an EBITDA target of $6 million to $8 million for fiscal year 2015. This target represents an expected very strong fourth quarter for 2015. We are witnessing transition in our activities, which presents Gilat with significant opportunity; while on the other hand, our results in the third quarter have been weaker as anticipated. The industry shift to HDA in some cases, the expanse of the traditional enterprise equipment sales represent an opportunity for large end-to-end deals and substantial growth for Gilat. Given the significant technological advantage we have with our ex-architecture, coupled with our service offering. Moreover, we experienced a shift in demand for some of our defense-related activities to civilian market, mainly to in-flight connectivity, IFC. The main reason for additional impairment of our Wavestream goodwill. This shift require changes to our Wavestream production lines and procedure which are currently undergoing, we do see business catching up with significant commercial airborne orders and deliveries in the fourth quarter and beyond. Furthermore, our results have been adversely impacted by the strong devaluation of the Brazilian real and Colombian peso. We are confident in our ability to improve our business in Q4 2015 and into 2016, given the progress of our Fitel projects in Peru and the large demand we see for our Wavestream airborne transceivers. I will now review some of our Q3 business highlights. To remind you, our strategy is to focus our business on the following four growth engine, HTS, the High Throughput Satellite, Airborne, mainly in-flight connectivity, broadband, end to end turnkey solution as well as our special focus on China. So let me review each one of them. First, the HTS. As the demand for HTS around the world continues to grow, we intend to continue forging meaningful partnerships with HTS, satellite operator, by leveraging our technology, our technology leadership position with our new X-Architecture for SkyEdge II-c platform and by offering a broad range of services from deployment to operation. We recently launched our new cloud-based distributed X-Architecture for SkyEdge II-c. With X-Architecture, satellite operator can dynamically support multiple fixed and mobility application as well as multiple business models such as VNO all from a single platform. X-Architecture is the only platform on the market capable of realizing the full potential of HTS. In fact, it has already enjoyed early success in major builds with leading satellite operators and telcos in China and Latin America. The second growth engine we see is in-flight connectivity. In the third quarter, we signed an agreement with a major satellite broadband provider for development and supply of high performance dual Ka/Ku-Band Terminal for in-flight connectivity on commercial aircraft. The new terminal leverages our existing product and technology, involved airborne transceivers and advanced mobile terminals including UAV. Gilat third area of growth is in the rural broadband. We have few ongoing long-term projects for rural broadband in addition to the Fitel Peru projects. Our goal is to bridge the socioeconomic digital divide by working with government, IST and NGO. Our project is Fitel project is progressing according to the plan and within budget and we expect to participate in additional significant Fitel base in the near future. Our fourth growth engine is in providing turnkey solution. We believe that providing end-to-end turnkey solution to telco and large enterprises will lead us on a path to more profitable growth. In addition to one-time equipment sales, the provision of such services fosters long-term relationship with customers and brings them more value. In the third quarter, we continue to see orders from some of the largest telco in Latin America and Asia Pacific on a wide variety of projects, including international school, cellular backhaul and enterprise communication. As an example of our interest, in fastest growing emerging markets, we closed three significant deals in Myanmar, two for cellular backhaul and one for broadband Internet connectivity at a major bank. As a matter of fact, we are speaking at satellite communication forum there today and present our end-to-end SATCOM solution for telco and large enterprise. Finally, we intend to put a lot of focus on China, an important market for us because it encompasses all of the four growth engines I just discussed. On the heels of partnership with the major Chinese satellite operator announced last quarter, we've been seeing a lot of interest in Gilat solution for both fixed and mobility applications. In order to achieve all these objectives, we have and will continue to implement our strategy by adjusting our organizational structure accordingly while pursuing greater operational efficiency. This concludes our business overview. And I would like now to turn the call over to Adi Sfadia, our CFO who will review the financial aspect. Adi, please.

Thank you, Dov and good morning, 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 stock-based compensation, amortization of purchased intangibles, goodwill impairment, 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. Moving to our financial highlights for the third quarter of 2015, revenue for the third quarter of 2015 were $40.3 million compared to $57.1 million for the third quarter in 2014 and $44.3 million in the previous quarter. As Dov mentioned, these results are a product of the transition we are witnessing in our markets to HTS and the shift of demand from defense to In-Flight Connectivity. Our gross margin on a GAAP basis was 24% compared to 33% in the same quarter last year and 25% in the previous quarter. The decrease in our margins is mainly due to reduced revenues and lower profitability in the Colombian Kioscos project as well as [indiscernible] defense-related sales. R&D expenses excluding rents were $6.1 million compared to $6.7 million in the same quarter of last year. Sales and marketing expenses decreased to $6.1 million compared to $6.9 million in the same quarter last year. This is mainly due to a decrease in variable expenses resulting from lower revenues. G&A expenses were $5.2 million compared to $4.3 million in the same quarter last year. Last year we benefitted from reversal of accruals related to tax settlement for several tax cases in Brazil. During the third quarter, the company recorded non-cash goodwill impairment charge of about $20.4 million mainly due to the decrease of our defense related forecast of revenues and EBITDA. As a result of the impairment test, we wrote down our Wavestream reporting unit goodwill. This non-cash accounting charge will not impact the company’s liquidity, cash flow compliant with debt covenants or any future operations. In addition, we recorded this quarter restructuring expenses of about $1 million which include mainly contractor managing costs. As a result of the goodwill impairment and the restructuring cost, total operating expenses on a GAAP basis was $38.6 million compared to $17 million in the same quarter last year and $18.3 in the previous quarter. GAAP operating loss was $29.1 million compared to an operating income of $1.5 million in the same quarter last year. GAAP net loss was $32.4 million or a loss of $0.73 per diluted share compared to a net income of $200,000 in the same quarter last year, and net loss of $9.1 million or a loss of $0.21 per diluted share in the previous quarter. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and to make operating decisions. We believe these non-GAAP financial measures provide consistent and comparable measure to help investors understand our current and future operating performance. Non-GAAP financial measures exclude mainly the effect of stock-based compensation, amortization of purchased intangibles, restructuring expenses and goodwill write-downs. Operating loss on a non-GAAP basis was $5.8 million compared to an operating income of $3.6 million in the same quarter last year. Operating loss for the previous quarter was $5.2 million. Non-GAAP net loss was $8.9 million or a loss of $0.20 per diluted share, compared to a net income of $3 million or $0.07 per diluted share in the same quarter last year. Net loss for the previous quarter was $7.1 million or a loss of $0.16 per diluted share. EBITDA loss for the third quarter was $3.4 million compared to EBITDA of $6.4 million in the same quarter last year. EBITDA loss in the previous quarter was $2.6 million. As of September 30, 2015, our total cash and equivalent, including restricted cash net of short-term bank loans and credits was $88.4 million, a decrease of $7.5 million from the previous quarter. DSOs decreased to 86 days compared to 103 days in the previous quarter. Our shareholders’ equity at the end of the quarter totaled to about $183 million. That concludes our financial review for the quarter and now I would like to turn the call over to Dov. Dov?

Thank you, Adi. We are encouraged by our expectation for a strong fourth quarter and continued growth in 2016 given our significant business opportunities in HTS, In-Flight Connectivity, rural broadband and China. This concludes our review. We would now like to open the floor for questions. Operator, please?

Thank you. [Operator Instructions] The first question is from Gunther Karger from Discovery Group. Please go ahead.

Good morning. One question, with respect to the outlook for the fourth quarter and in relationship to the reiteration of approximately $210 million to $220 million, is that close to an estimate of approximately $85 million for the fourth quarter? Is my calculation approximately correct?

Yes, it’s simple arithmetic. I agree.

Thank you. And a follow-up question. The margins for the fourth quarter, are they anticipated to be approximately similar to what they were particularly in the third quarter or are they expected to change relative to the increased revenue?

Adi, please.

The margin should stay more or less the same as the previous quarter.

Thank you very much, Dov.

Thank you, Gunther.

[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 US, please call 1-866-276-1485. In Israel, please call 039255940. Internationally, please call 972-3-9255940. Mr. Baharav, would you like to make your concluding statement? Yes. I want to thank everyone for joining and listening in on the call. I hope to be in touch with you sometime soon or on our next call. Thank you very much. Good evening. Good day.

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