June Filingeri - Comm-Partners LLC Yona Ovadia - Chief Executive Officer Adi Sfadia - Chief Financial Officer.

Martha Masiarz - Wells Fargo Gunther Karger - Discovery Group.

Please go ahead..

Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's third quarter 2016 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, November 15, and will be available on our Gilat Web site until November 17 at noon.

The webcast also will be archived on the Gilat Web site for a period of 30 days.

Also please note that investors are urged to read the forward-looking statements in Gilat's earnings releases, 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 which 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 introductions. On the call today are Yona Ovadia, Gilat's CEO; and Adi Sfadia, Gilat's Chief Financial Officer. I would now like to turn the call over to Yona Ovadia. Yona, we are ready to begin..

Thank you June, and good day, everyone. Thank you for joining us. We are pleased today to report that Gilat achieved positive third quarter results as our growth strategy continues to gain traction.

Our progress can be seen both in our top line as well as our bottom line performance, with growth across key markets and as highlighted by two important business wins this quarter. In total, third quarter revenues were $78.6 million, up 16% quarter-over-quarter. Year-to-date revenues reached $199 million.

This quarter will report a profitable third quarter with a trend of improving profitability as the adjusted EBITDA increased to $5.2 million in Q3 compared to $763,000 in Q1 and $2.4 million in Q2.

And with a non-GAAP operating income of $3.3 million and GAAP operating income which is near breakeven at negative $200,000, and a non-GAAP net income of $1.4 million.

Further, this was achieved despite an accrual of about $4.6 million we had to take this quarter for bad debt of a government customer in Venezuela and Adi Sfadia, our CFO, will elaborate later.

We remain committed to the trend of improved profitability and we believe that we will see yet better results in Q4 towards our goal of profitability on a GAAP basis. My review today will cover three topics, our growth engine, our technology leadership, and our financial objective. First our growth engine.

We have progressed this quarter in all five of our growth pillars including our large projects in Peru. In this call, however, I would like to focus on two major areas, cellular backhaul and mobility, both are part of our broadband based growth strategy. Let met begin with broadband and 4G LTE cellular backhaul.

Gilat technology by now is well recognized as providing the world's fastest satellite based LTE backhaul, enabling mobile operators to provide connectivity both at speeds and cost comparable to terrestrial networks. A major highlight of the third quarter was the selection by Sprint in the U.S.

of Gilat's satellite backhaul solution to rapidly extend its service to underserved metro edge and rural areas, as well as for onsite special event, mobile emergency response across the United States. We are particularly pleased with this win for several reasons. First, entry into North America. This is our first LTE cellular backhaul win in the U.S.

and a major entry for us in the North American market, a market which is characterized by strict demand for service levels [affordability] [ph] and high speed broadband availability. Second, the purpose. Sprint will use our solution not only for backup disaster recovery and special event, but also for mainstream day to day cellular backhaul.

And last, the location. As I mentioned, our solution will be deployed not only in rural regions but also in metro edge and for specific applications in dense urban areas. This success comes on the heels of a major tier 1 backhaul win with Softbank in Japan added this year, with Everything Everywhere in the U.K.

in the last quarter, and further we see a strong pipeline of global opportunities in 4G cellular backhaul, including with additional tier 1 telecoms worldwide.

So in summary, these consecutive wins in the developed world represent in our opinion important worldwide endorsement of satellite LTE as a mainstream solution and reinforce Gilat's leadership in the area of satellite based cellular backhaul for rural, metro edge and even metro areas. In the mobility market, we are focusing on two attractive markets.

One is in-flight connectivity and mobility solutions for trains and we made important progress in the third quarter in each. In the in-flight connectivity market, our superior technology solution, the Taurus modem, is proving to play an integral role in the strategy of Gogo.

The strategic role of our in-flight modem for Gogo's future plans was brought to home last month in Gogo's analyst day presentation of the next generation network. Our solution is the new modem they said they are planning to install on their next generation airplane to enable the network to deliver speeds of 100 plus megabits per second by next year.

That is well within the capability of our modem which can delivery speeds of up to 400 megabits per second, as we have discussed in the past. Regarding trains, Gilat has established a leadership position in the mobility solution for trains.

In our last call, we noted that our terminal antenna was certified by CRRC, a customer in China and the world's largest railway transportation supplier. As an update, the next phase of vigorous testing by CRRC is underway for testing with full satellite communications system.

Gilat's advanced system has been factory-installed on some of CRRC new generation high-speed trains and the result to date has been very positive on trains moving at speeds of 350 kilometers per hour with extraordinary high bit rate while on the move.

This test also verifies the real time [indiscernible] broadcast system with our solution, showing very stable video quality and showing eight high quality TV channel on the move at the same time. CRRC remains an exciting opportunity for us. Although as noted, it is a longer-term opportunity.

But meanwhile, in parallel with our progress with CRRC, I am pleased to report another major milestone in the mobility for trains. Gilat's On-The-Move antenna was chosen by a consortium of leading local players to enable Internet broadband connectivity for passengers on Renfe's high speed trains throughout Spain. Deployment is already underway.

It's important also to note that our antenna has now passed the most stringent European certification [EN 5155] [ph] following the tough certification in China for CRRC. Moving on to technology, let me switch now to the second topic, our innovative technology.

Gilat prides itself on its technology leadership and we are committed to continue our significant investment in innovation in support of our strategy. I would like to shed some light on a few of our achievements and plans going forward.

I have already discussed our Taurus modem for the IFC market which has been chosen by Gogo, and our Capricorn modem for LTE cellular backhaul. Capricorn is already deployed in Softbank, Everything Everywhere, Sprint and many others account as we described.

In addition, we believe that there is another significant underserved market for broadband, the consumer broadband market. There are still billions of people around the globe who are not connected. Some of them want an affordable and reliable broadband connection to the home.

This is a significant market, yet sensitive to the price of the customer premise equipment, also know known as CPE. I am pleased to report that Gilat is first to market with a terminal that lowers the cost barrier for delivering high-speed broadband services via satellite to residential customers and small businesses.

Our innovative, VSAT-in-a-box also called Scorpio, was launched this quarter with very positive customer feedback and with first deployments already expected in the coming months. Another technological innovation was achieved with our evolutionary small-cell-over-satellite solution, the CellEdge SDR.

This solution expands 3G and 4G cellular coverage over satellite to rural areas in both the developed and the developing world. This innovative solution includes a small cell that supports both 3G and 4G and is tightly integrated with our cellular backhaul solution that I mentioned earlier.

It has already been adopted by Optus, a tier one telecom in Australia. Optus selected our small cellular satellite solution to quickly and cost effectively extend 3G coverage to major highways in the northern territory and the western territory of Australia.

And finally, due to satellite backhaul in growing mainstream, a need arose for simplified operational practices in heterogeneous terrestrial and satellite networks. To address this need, we are first to provide MVNO, layer II functionality with [GTP] acceleration for large scale networks.

This gives MNOs the required high operational efficiency with true LTE speed. So in summary, our success in new markets and in winning top tier customers is founded on our innovation and technology leadership. We plan to continue to invest in technology and innovation, aimed specifically at addressing unmet needs of markets we target.

And lastly, for the financials in brief. Our management targets for 2016 as reported in today's earnings release, reflect a positive first quarter for Gilat. We expect full year 2016 revenues to range between $290 million to $310 million and adjusted EBITDA to range between $18 million and $24 million.

Based on these objective, you can see that we are expecting strong revenue growth and further improvement in profitability in the fourth quarter. With that, I would like now to turn the call over to Adi, or CFO, who will review the financials. Adi, please go ahead..

Thank you, Yona, and good morning and good afternoon, everyone, I would like to remind everyone that our financial results are presented both on 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, litigation expenses related to trade secret claim, and net income or loss from discontinued operations.

The consolidation table in our press release highlights this data and our non-GAAP information presented excludes these items. I will now move to our financial highlights for the third quarter of 2016. Our results were in line with our 2016 plan.

Revenues for the third quarter of 2016 were $78.6 million, a 95% increase compared to $40.3 million in the third quarter of 2015, a 16% increase compared to the previous quarter. This reflects quarter-over-quarter and [indiscernible] growth in all segments.

Our commercial segment includes revenues from our project in China, for China SATCOM and Synertone, as expected more than offset lower revenues in Latin America where the economic conditions continued to be challenging.

This is especially true in Venezuela where recent bond swap by its national oil company caused S&P to downgrade the corporate debt to selective default, which is expected to further pressure the government's dwindling external reserve.

In contrast, Peru's economy is in growth mode and we have increased revenues from our project in Peru for FITEL, which are included in our service segment revenue. In addition, we saw growth on our mobility segment revenues led by revenues from in-flight connectivity product.

In the third quarter of 2016, our GAAP gross margin increased to 30% of revenues compared with 24% in the same quarter of last year and 22% in the previous quarter. The increase in our gross margins is mainly due to different product mix.

Total R&D expenses on a GAAP basis were $6.4 million, compared to $6 million in the same quarter of last year and $6.2 million in the previous quarter. We continued to invest substantially in R&D to support our strategy in HTS and mobility, especially IFC solutions.

Sales and marketing expenses were $6.2 million compared to $6.1 million in the same quarter last year and $5.9 million in previous quarter. G&A expenses were $11.3 million compared to $5.2 million in the same quarter last year and $5.7 million in the previous quarter.

In the third quarter of 2016, we increased our [indiscernible] account, mostly with respect to an outstanding [bar] [ph] of $4.6 million from a governmental customer in Venezuela due to the recent credit downgrade in that country, continuous limitation of payments for important goods in dollars and our unsuccessful effort to collect it to date.

We will continue our efforts to collect this amount despite the [accrual] [ph]. In addition, G&A expenses in the third quarter include $2 million of legal expenses due to a trade secret claim filed in the U.S. by Gilat against former employees.

Those legal expenses totaled $300,000 in the third quarter last year and $1.4 million in the previous quarter. Excluding these allowances of [bad debt] [ph] and these legal expenses, G&A expenses were $4.7 million compared to $4.9 million in the same quarter last year and $4.3 million in the previous quarter.

Total operating expenses on a GAAP basis were $24 million compared to $38.6 million in the same quarter last year. In the third quarter of 2015, we incurred $21.4 million of goodwill impairment and restructuring cost. Excluding those items, total operating expenses in the third quarter of 2016 were $17.2 million.

Total operating expenses in the previous quarter were $17.7 million. The GAAP operating loss for the third quarter was $229,000 compared to an operating loss of $29.1 million in the same quarter last year including the aforementioned goodwill impairment and restructuring cost, an operating loss of $2.5 million in the previous quarter.

The GAAP loss for the third quarter was $2.2 million or a loss of $0.04 per diluted share, compared to a loss of $32.4 million or a loss of $0.73 per diluted share in the same quarter last year, and a loss of $3.7 million or a loss of $0.07 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 mainly exclude the effect of stock-based compensation, amortization of purchase intangibles, restructuring expenses, litigation expenses related to trade secret claims, impairment of goodwill and long-lived assets, and net income or loss on discontinued operations.

On a non-GAAP, operating profit for the third quarter was $3.3 million compared to an operating loss of $5.5 million in the third quarter last year. Non-GAAP operating income for the previous quarter was $525,000.

Non-GAAP net income for the third quarter was $1.4 million or $0.02 per diluted share compared to a non-GAAP loss of $8.6 million or a loss or $0.20 per diluted share in the same quarter last year. The non-GAAP loss for the previous quarter was $586,000 or a loss of $0.01 per diluted share.

We are presenting adjusted EBITDA as a non-GAAP measure for the first time due to a significant increase in the litigation expenses relating to the ongoing trade secret litigation in the U.S. filed by Gilat against former employees.

The adjusted EBITDA excludes these litigation expenses of $2 million for the third quarter of 2016, $300,000 in the same period last year and $1.4 million in the previous quarter. Adjusted EBITDA for the third quarter of 2016 was $5.2 million compared to an adjusted EBITDA loss of $3.1 million in the same quarter last year.

Adjusted EBITDA in the previous quarter was $2.4 million. As of September 30, 2016, our total cash and equivalent including restricted cash net of short-term bank loans credit, was $126 million, a decrease of $4 million on the previous quarter.

DSOs which exclude receivables and revenues of our service segment, decreased to 83 days compared to 115 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled $205.7 million compared to $206.6 million at the end of the previous quarter.

That concludes our financial review for the quarter and now I would like to turn the call over to Yona.

Yona?.

Thank you, Adi. So in summary, we achieved continued progress in this quarter in our mobility and broadband pillars as we witnessed with the two wins we announced. As well as progress in our journey to profitability.

Looking forward, we are optimistic about final quarter of the year, both for growth engine as well as continued improvement in profitability. And this concludes our review. Thank you for your attention and I would like to open the call now for questions. Operator, please..

[Operator Instructions] The first question is from Martha Masiarz of Wells Fargo. Please go ahead..

Just a couple of questions around that.

The first off is, how big is the potential cellular backhaul work in the U.S., do you believe?.

In general, I think it's a big market. We don’t have the exact amount and we have increased pipeline and preliminary order we received from Sprint is significant. And we expect to achieve more orders in the future but we don’t have yet the exact potential market..

Okay. Great. And just another question following up on that. Do you see an opportunity in Europe and do you think it's likely the careers in Europe adopt satellite backhaul..

The answer is definitely, yes. We already have one major project in Europe in the U.K. with Everything Everywhere. And this project is already bigger than the initial intent as they see the benefit of our technology and we see increased interest around Europe as our project is being deployed and they see the actual results in the field.

So, yes, there is a lot of interest and I think we will grow as we move forward with the implementation in the U.K..

Great.

And is this a KU or a KA antenna?.

It depends on the project. We support both. Depending on the technology the carrier prefers to select, depending on the conditions under which the network will operate, depending on the territory, the availability of spec segments. In the EE it is KA, if that was what you referred to.

But we are agnostic, we can do both, but the EE specifically is a KA, I am sorry..

Okay. Wonderful.

Just another thing, how many backhaul installations will you be doing for Sprint?.

In terms of....

In terms of number, like is it ten or is it 100s. Trying to get perspective..

Well, I can't give the exact number of course, but in the many 100s..

[Operator Instructions] There are no further questions at this time. One moment, we have a question from Gunther Karger of Discovery Group. Please go ahead..

Question has to do with the in-fight Internet services. Where are we on the implementation with regards to, a, global express, and b, on the Gogo project..

We are working closely with Gogo on the project. We have delivered several large portion of the equipment. We expect that we launched the service later on in 2017 and currently part of it is in certification process..

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 within two hours after the conference. In the U.S. please call, 1888-782-429. In Israel please call 03-925-5904. Internationally, please call 972-392-55904. Mr.

Ovadia, would you like to make a concluding statement?.

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

Thank you. This concludes Gilat's third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect..