Gilat Satellite Networks Ltd. (GILT) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Second Quarter 2016 Results Conference Call. All participants are at present in listen-only model. [Operator Instructions] As a reminder, this conference is being recorded, August 10, 2016. I would now like to turn the call over to June Filingeri of Comm-Partners to read the Safe Harbor statements. June, please go ahead.

Thank you, Noah. Good morning and good afternoon, everyone. Thank you for joining us today for this conference call and webcast on Gilat's second quarter 2016 results. A recording of this call will be available beginning at approximately noon Eastern Time today, August 10, and will be available on our Gilat website until August 13 at noon. Also please note that investors are urged to read the forward-looking statements in Gilat's earnings release, with a reminder that statements made on this earnings call, that are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such 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 may cause actual results to differ materially from anticipated results. Gilat is under no obligation to update or alter these forward-looking statements whether as a result of new information, future events or otherwise. The company expressly disclaims any obligation to do so. More detailed information about risk factors can be found in Gilat's reports filed with the Securities and Exchange Commission. With that said, let me turn to introduction. On the call today are Yona Ovadia, Gilat's CEO; and Adi Sfadia, Gilat's Chief Financial Officer. I would now like to hand the call over to Yona Ovadia. Yona, we are ready to begin.

Thank you June, and good morning everyone. Thank you for joining us. I will begin our call today with a review of business highlights for the second quarter as well the recent development opportunities for Gilat. Then Adi will review our financial results. After we conclude our prepared remarks, we will open the call for your questions. We are pleased with the results of the second quarter in which we witnessed revenue growth of 53% year-over-year and 29% quarter-over-quarter and a positive EBITDA. The positive EBITDA is despite headwinds in Latin America caused by the economic and political conditions as exemplified when Oi, a leading Brazilian telecom operator recently filed for judicial reorganization, not without adverse impact to us. Adi will discuss this further in his remarks. I would like also to stretch that returning to full bottom-line profitability remains the main priority for Gilat's team and is expected in the second half of 2016. Last month market research firm, NSR, described the satellite industry being 'in the midst of fee change threatening to all the channel operators speaking to the status-quo'. And at the same time they also pointed to 'billion dollar opportunities for those able to successfully change within time'. And they also said that HTS capacity created the opportunity for more than $7 billion in new revenues according to their forecast. Our five pillar strategy and our continued investment in technological innovation are aimed at capturing the opportunities presented by this fee change. As discussed in the last call, our new strategy is focused on increasing profitable revenues through our five growth pillars of growth and network, mobility, HTS, China and rural internet connectivity. Overall, these growth engines are bearing fruit evident by our progress to-date and the reiteration of our target. I would like to start my review of our strategic pillars with both the networks very promising growth engine for us. Delivery of broadband to end users throughout the globe, no matter where they are located is a major objective as well as a challenge being addressed by many, if not all six satellite operators, as well as leading corporations worldwide as Facebook and Google. With dramatic increase in capacity in the coming years, satellite communication is the most viable solution to provide internet reach, not only to the most remote areas but also to metro-edge, villages and suburb. Leveraging HTS capacity abundance, and based on our technological advantage, our strategy is to provide broadband access services as well as satellite backhauling for LTE cellular network with quality and cost comparable to the retro [ph] network. I'm pleased to report that due to our proven technological excellence providing through LTE over satellite performance, we were chosen this quarter by EE, also known as Everything Everywhere in [ph] to play a key part in enhancing the resilience of the EE network, one of the most advanced LTE network in the world. EE, which now is part of BT, is the biggest digital communication company in the UK. This exciting range follows our success last quarter in providing LTE backhauling over satellite to Softbank, Japan at unprecedented speed. With this momentum, we are solidifying our dominance in this market. Mobility is the second major strategic pillar for Gilat with In-Flight Connectivity or IFC being our most major focus and strong contributor to our growth in the second quarter which is the major milestone in our IFC strategy earlier this year when Gilat was selected to provide global net generation model system and we see healthy stream of ordered from Gogo and from other customers to our IFC components. Gilat brings technology leading products to the IFC market including the new SkyEdge to see tallest modem delivering speeds of upto 400 megabit per second to the aircraft, our wave strength [ph], the defector industry started for IFC, and our dual band Ku/Ka antenna which enables switching between regional Ka coverage and Transatlantic Ku coverage during flight. With this expensive product portfolio, Gilat is well positioned in IFC and we're optimistic that we will capture additional IFC bill before the end of this year. In addition to IFC we are focused on other on-the-move markets such as connectivity for trains. I will discuss our progress in this area in the context of China and other strategic pillar for the company. And indeed, our focus on China as the third growth pillar is based on the huge potential where for HTS solutions for rural as well as mobility application. We have already began trading this market in China, so back wins with China SATCOM which is building the first Ka band, HTS satellite for China and bring the high-speed and fixed -- and mobility services throughout the country and with Synertone which is establishing a new level of satellite coverage in China. Our project for both China SATCOM and Synertone are on-track and we expect them to contribute to our revenues in the second half of 2016. I'm also pleased to report that we made important progress in China in the second quarter with CRRC the world's largest railway transportation supplier. And our challenging schedule and after rigorous testing, our terminal end antenna were approved by CRRC. The next phase is on the move testing as the line feat including based on performance. Although CRRC is a longer term opportunity for Gilat, this is very exciting opportunity in the global railway sector. Our strategic focus on HTS opportunity and our partnership with top broadband level providers are our first growth pillar continues to bear foot in the second quarter with successful implementation and a related pipeline of new orders. In our project for Eutelsat to power a new range of broadband services in Western Russia, our courage to see how is now installed in the RSCC satellite center in Dubna near Moscow and we have already received orders from service providers that will be using the Eutelsat services. Similarly, we installed the SkyEdge to see how SES in Luxembourg this quarter to support Facebook's initiative to deliver broadband internet access throughout Africa. We also received initial orders for remote side equipment from Facebook's designated partners in several African countries. Our fifth strategic pillar, rural internet connectivity, continue to be a major growth engine for Gilat in the second quarter as a result of our multi-year projects in four regions in project for Fitel, Telecommunication Investment Fund. These are the rest of the broadband connectivity projects that are massive, complex and in challenging remote areas. To-date, we have successfully completed nearly one-third of the installation including cyberoptics, power and nodes in three regions and it is currently getting underway in Cusco, the latest region we won. Based on our experience and proven track record with FITEL, we are optimistic about our ongoing opportunity in Peru and its important contribution to Gilat. Finally, let me note that as of June 15, Gilat satellite networks was included in the TA-100 Index which is one of Tel Aviv Stock Exchange leading indices and consist of the largest 100 companies listed on Tel Aviv Stock Exchange based on market capitalization. We are pleased that our strategic plan is gaining traction and we would like to thank our shareholders for their continued support. I would like to turn the call over to Additional Sfadia, our CFO, who will review the financials. Adi, please.

Thank you, Yona, and good morning and good afternoon 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, impairment of goodwill and long-lived assets, restructuring cost and net income or loss from discontinued operations. The consolidation table in our press release highlights this data and our non-GAAP information presented excluding these item. I will now move to our financial highlights for the second quarter of 2016. Our results were in line with our plan for 2016 on both, GAAP and non-GAAP basis. Revenues for the second quarter of 2016 were $67.9 million, a 53% increase compared to $44.3 million in the second quarter of 2015. The growth was driven mainly from increased revenues in our service segment, reflecting revenue from our project for Fitel in Peru. In addition, we saw growth in our mobility segment, offset in part by slow revenues in our commercial segment due to the soft economic condition in Latin America. In comparison to the previous quarter, our revenues were 29% higher. This was due to sequential growth in our segments. In the second quarter of 2016, our GAAP gross margin decreased to 22% of revenues from 25% in the same quarter last year as expected. The decrease in our gross margin was as expected and is mainly due to different product mix and due to the fact that revenues from the Fitel project in Peru have a lower gross margin compared to our commercial and mobility segment. Our gross margin in the previous quarter was 24%. Total R&D expenses on a GAAP basis were $6.2 million compared to $6.4 million in the same quarter of last year and $5.8 million in the previous quarter. We continue to invest substantially in R&D to support our strategy in HTS and mobility, especially IFC solutions. Certain marketing expenses were $5.9 million compared to $6.4 million in the same quarter last year, and $5.1 million in the previous quarter. G&A expenses were $5.7 million compared to $5.5 million in the same quarter last year, and $4.4 million in the previous quarter. The increase in our G&A expenses is primarily attributable to increased legal expenses due to a trade secret claim filed by Gilat. Total operating expenses on a GAAP basis were $17.7 million compared to $18.3 million in the same quarter last year, and $15.4 million in the previous quarter. GAAP operating loss was $2.5 million compared to an operating loss of $7.2 million in the same quarter last year, and an operating loss of $3 million in the previous quarter. The GAAP loss was $3.7 million or a loss of $0.07 per diluted share compared to a loss of $9.1 million or $0.21 per diluted share in the same quarter last year, and a loss of $4 million or a loss of $0.09 per diluted share in the previous quarter. We regularly used supplemental non-GAAP measures internally to understand, manage and evaluate our business and to make operating decisions. We believe this non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating performance. Non-GAAP financial measures mainly exclude the effect of stock-based compensation, and motivation of purchase intangible restructuring expenses, impairment of goodwill and long-lived assets and net income on this continued operations. On a non-GAAP basis the operating loss for the second quarter was $849,000 compared to an operating loss of $5.2 million in the same quarter last year. Non-GAAP operating loss for the previous quarter was $1.4 million. Non-GAAP loss was $2 million or $0.04 per diluted share compared to non-GAAP loss of $7.1 million or $0.16 per diluted share in the same quarter last year. Non-GAAP loss for the previous quarter was $2.4 million or $0.05 per diluted share. EBITDA for the second quarter of 2016 was $1 million compared to an EBITDA loss of $2.5 million in the same quarter last year. EBITDA in the previous quarter was $537,000. As Yona mentioned earlier in his remarks, Oi, one of the leading and largest telecomm operator in Brazil filed for judicial reorganization on June 20. As a result, during the quarter we deferred related revenue and accrued for related bad debt. The combined effect of the cost of the related deferred revenue and bad debt in the quarter on the EBITDA was about $1.7 million. Oi is planning to present restructuring and credit plan no later than September 29. We are following the Oi situation closely and considering our next steps. As of June 30, 2016, our total cash and equivalents including restricted cash, net of short-term bank loans and credit was $130 million, an increase of $8 million from the previous quarter. In the second quarter, we received about $20 million from the rights offering. DSOs which exclude receivables and revenues of our service segment decreased to 115 days compared to 137 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled to about $206.6 million compared with $191 million at the end of the fourth quarter. That concludes our financial review for the quarter. And I would like to turn the call over back to Yona. Yona?

Thank you, Adi. In summary, we are pleased with the Q2 results as we continue to make progress with our strategy across all our pillars, especially in In-Flight Connectivity and broadband networks. We see opportunities in this industry and we are focused on winning those opportunities. The last five pillar strategy is focused on winning the global markets unlocked by the demand for broadband and the increasingly abundant HTF capacity based on our advanced solutions and our ongoing investment in technological innovation. Looking forward, we are optimistic about the second half of 2016. We expect to set a stronger second half of 2016 and beyond. That concludes our review. Thank you for your attention. I would like to open the call now for questions. Operator, please.

Thank you. [Operator instructions] There are no further questions at this time. Before I ask Mr. Yona Ovadia to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin two hours after this conference. [Operator instructions] Sorry for the interruption, I see we have a question. Are we taking it?

Yes.

Okay. The next question is from Kevin Dede of H.C. Wainwright. Please go ahead.

Thank you. Sorry for chiming in late. I apologize for that. The name is Kevin Dede. I'm just curious on the China opportunity. Your relationships on the ground there and your confidence in being able to work with your relationships there.

As I mentioned, we have already established relationships with China SATCOM and Synertone. Obviously, China SATCOM is a key player in the market and we have not only, I would say very good relationships with them, but we are delivering on the existing contract we have in the second half of 2016 and so we see the contract materializing into actual revenue and profit in the second half of this year. On top, we have built multiple relationships in China. One of them is TLRC. They are interested in our product twofold -- one for broadband connectivity for the passengers of those trains that they'll be manufacturing, but secondly and maybe initially more importantly for the telemetrics, so far in other words for the own use. To our best knowledge, this is the only viable solution for them to provide this connectivity and therefore they are as keen as us to say that the test process, which is long and meticulous complete successfully some time first half of next year. The fact of the matter is that we moved from Phase 1 into Phase 2 which is a test drive with our equipment as a line feed and as we see it right now, the only obstacle to reaching a contract and actual deployment is going through this rigorous testing process and completing it successfully -- which we fully of course intend to support and achieve. Our ongoing relationship with CRRC is very good. They have really taught us here, we have are visiting them there, and that technical teams are working very closely. Finally, we can see its progressing well and it depends, I wouldn't say only, but mainly on us completing the testing, which is very lengthier, very rigorous. But as I said, we're optimistic.

So are you designing a special VSAT transceiver for that application and I guess given the telemetric application for a train and do you feel that the IP and your transceiver is secure?

These are two different questions. Do we design specific equipment? The answer is no. Our mobility modem and our antenna are the standard antenna that we offer in the marketplace, so it's not a unique equipment. Regarding IP, it's a very good question, which is relevant to all our dealings with China. I think that without going into too many detail, I would say this is a topic of constant watch. We are consulting regularly with others who are in similar relationship with China and we are monitoring the situation all the time we're aware of that question and we believe that we have deployed the best practice technologies to make sure that our IP is protected.

In the deployment of the UK, given there's much more cellular cover though, what do you see is the opportunity?

Actually there are two types of opportunities. One is to provide a satellite-based LTE connectivity in rural areas, the territories where they see the deployment of territorial solution as non-economic and first let's call it first wave of the agreement, but secondly, they're also considering positively our equipment also to provide LTE to train however not in the fashion of line phase as the Chinese which we discussed we're doing, but putting it along the rail outside of the train, on the ground, six LTE along the rail. This was discussed in public by everything, everywhere a while back and later on we can provide you with the documentations and the statements they made with the degree. It's twofold; one rural area where the rest is non-economic; and the second wave will be LTE along the rail, not within the train itself but fixed on the ground along the railways.

Okay, but obviously what cellular frequencies?

That will depend on the capacity that we'd provide, I would assume, well, let me be a bit more cautious. That depends of course on the capacity that would drive from our consent of work either ways. With the current deployment it's Avanti, so it's Ka with the future, we're indifferent. But they will have to make that selection on their own.

Right. Is there a GL [ph] synchronous satellite available for you to leverage in that deployment?

Again, on the first part, they are going with Avanti, so the answer is Avanti. On the second one, PBD.

Okay. Well, again, I apologize for requesting the opportunity to ask a question late. Sorry about that. But thank you so much for taking my questions. I appreciate it and congratulations on the growth.

Thank you.

Thank you.

[Operator instructions] There are no further questions at this time. Before I ask Mr. Yona Ovadia 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. [Operator instructions] Mr. Ovadia, would you like to make a concluding statement?

Yes, thank you. I want to thank you all for joining us on this call and for your time and attention. We hope to see you soon or speak to you on our next call. Thank you very much and have a great day.