Welcome to Gilat's Fourth Quarter 2016 Results Conference Call. All participants at present are in a 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 14, 2017.

I would now like to turn the call over to June Filingeri of Comm-Partners to read the Safe Harbor Statement..

Thank you, Sara. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's fourth quarter and full year 2016 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, February 14, and will be available on our Gilat website until February 17 at noon.

The webcast also will be archived on the Gilat website 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 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. Good morning and good afternoon everybody. Thank you for joining us. I am pleased to report strong fourth quarter for Gilat with revenues of $80.3 million and adjusted EBITDA of $10.8 million.

Fourth quarter GAAP operating income was $6.5 million, non-GAAP operating income was $9 million and net income was $4.5 million on a GAAP basis and $7 million on a non-GAAP basis. These results bring 2016 annual revenues to $279.6 million and adjusted EBITDA to $19.2 million.

GAAP operating income for 2016 was $0.8 million and non-GAAP operating income was $11.7 million. On a GAAP basis the loss for the year was $5.3 million. On a non-GAAP basis net income reached $5.6 million.

Adjusted EBITDA for 2016 was within the range of our management objective even though full year revenues were approximately 3% below management objective due to continued headwinds in Latin America and slowdown at year-end of our Peru project.

Our management objective for 2017 are for revenues of between $280 million and $300 million, GAAP operating profit of between $4 million and $8 million and adjusted EBITDA of between $20 million and $24 million meaning that our 2017 objective are continuation and acceleration of our achievements in 2016.

This objective reflect high management priority on profitability in parallel with continued focus on our broadband and mobility growth engine via maintaining product innovation and leadership. Please let me provide some business highlight. On the ground our land based broadband strategy is include with our leading cellular backhaul solution.

We have made significant strides forward with several global Tier 1 customers as they have implemented their LTE cellular network based on our leading cellular backhaul technology as the provider of world's fastest satellite based that is comparable with LTE cellular backhaul where enabling connectivity at speed, cost, and user experienced that this comparable with terrestrial network they brought without needing went may by forward with you and then implement it into my network as a provider won't like that and you settle up where the cost and user experience that is comparable with the terrestrial network in many cases.

This brings Gilat solution into the mainstream addressing metro edge and at times even metro as well as emergency and backup need. We are quite positive about our LTE satellite backhaul penetration and we are pleased to say that we have secured additional customers this quarter, received follow on orders and have more opportunities in our pipeline.

We have also taken additional steps this quarter in developing broadband to consumers. We have previously reported our unique VSAT-in-a-box Scorpio designed explicitly to lower the barrier of entry for consumer broadband market.

This is an example of how we invest in technological innovation to enable business innovation by creating affordable connectivity opportunities to serve the billions of underserved communities where the terrestrial infrastructure is not sufficiently developed.

And indeed we are pleased to report the significant win with Tricolor TV, the largest DTH provider in Russia that is now equipped to also broadband to their subscriber base across Western Russia. This solution is planned to include our innovative consumer broadband Scorpio VSAT while the HDS capacity is provided by Eutelsat.

In the air we have seen progress in our IFC growth engine as well. Last month reported that we have formed the partnership with Air Media a subsidiary in China Air Esurfing to deliver broadband connectivity throughout China.

This partnership also Gilat to provide a complete IFC terminal including our dual Ku/Ka antenna and our ultra high performance towers modem and for Air Esurfing to serve as a distribution channel. This partnership is the intersection of our two strategic growth engines.

Our focus and commitment to the Chinese market on the one hand and our growing involvement in the fast growing in-flight connectivity market on the other. To this point we have also leveraged our past engagement with China SATCOM as incumbent Ka band capacity to address the opportunity in the Chinese in-flight connectivity market.

In Peru, our project experienced some delays during year-end however we estimate that we will complete the project in line with the project timetable. From a technology innovation point of view I am pleased to update on the following achievement.

We will awarded a joint R&D project with Airbus for the development of a fully integrated Electronically Steerable Antenna or ESA aero terminal brings us closer to our future commercialize IFC terminal.

Gilat was selected by the European Commission Horizon 2020 Clean Sky Joint Undertaking to build a fully embedded airborne antenna that is based on our leading face away technology. In summary, Gilat made progress in 2016 and has move forward with our profitable growth strategy.

We're focusing on broadband for both cellular backhaul as well as consumer broadband and the mobility market, as we have set forth in the beginning of last year. Our management objective for 2017 are a continuation and accelerations of our achievements in 2016.

With profitability improvement remaining a high management priority, we will continue in parallel to focus on our broadband and mobility growth engines in 2017. I would like now to turn the call over to Adi, our 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 the financial results are presented both on a GAAP and non-GAAP basis. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and to make operating decisions.

We believe this non-GAAP financial measure provide consistent and comparable measures 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, litigation expenses related to trade secret claims, impairment of goodwill and long-lived assets, and net income or loss on discontinued operations.

The consolidation table in our press release highlights this data and our non-GAAP information presented excludes these items. I will start with some brief highlights on our 2016 full year results. Total 2016 revenues were $279.6 million compared to $197.5 million in 2015 about 42% increase.

We are reporting full year operating income of $755,000 compared to an operating loss of 43.7% in 2015. The GAAP loss for 2016 was $5.3 million, or $0.10 per diluted share compared to a loss of $52.3 million or $1.19 per diluted share in 2015.

On a non-GAAP basis, we are reporting full year operating income of $11.7 million and net income of $5.6 million or $0.11 per diluted share compared to a non-GAAP operating loss of $3.4 million or a loss of $11.08 or $0.27 per diluted share in 2016. Moving to our financial highlights for the first quarter of 2016.

Revenues for the first quarter were $80.3 million compared to $67.7 million in the same quarter of 2015, and $78.6 million in the previous quarter. In the fourth quarter of 2016, we had lower than expected revenues in the FITEL projects in Peru mainly due to the temporary delays in the project implementations.

Our GAAP gross margin in the first quarter of 2016 were 30% of revenues compared with 15% in the same quarter of 2016, which included impairment of long-lived assets. Excluding the impairments the gross margin that quarter were 30%. It was the same in the previous quarter.

R&D expenses were $6.5 million compared to 3.7 million in the same quarter of 2015 and $6.4 million in the previous quarter. During the first quarter of 2015, we recorded about $2 million of R&D grants as an outcome of approval of additional R&D projects by the office of the Chief Scientist in Israel.

Sales and marketing expenses remained at $6.2 million, the same level as in the same quarter of 2015 and as in the previous quarter.

G&A expenses were $5 million compared to $3.4 million in the same quarter of 2015 and $11.3 million in the previous quarter, which included an allowance for Doubtful Accounts for $4.6 million with respect to a governmental customer in Venezuela.

In addition, G&A expenses in the third quarter of 2016 included $2 million of legal expenses due to a trade secret claim filed in the U.S. by Gilat against former employees. Those legal expenses amounted to $900,000 in Q4, 2016 and $100,000 in Q4, 2015.

Total operating expenses on a GAAP basis for the fourth quarter were $17.7 million compared to $13.8 million in the same quarter 2015 and $23.9 million in the previous quarter.

GAAP operating income was $6.5 million in the fourth quarter compared to an operating loss of $3.4 million in the same quarter of 2016 and operating loss of $222,00 in the previous quarter.

GAAP net income was $4.5 million or $0.08 per diluted share compared to net loss of $5.2 million or $0.12 per diluted share in the same quarter of 2015 and net loss of $2,2 million or a loss of $0.04 per diluted share in the previous quarter.

On a non-GAAP basis operating income for the fourth quarter was $9 million same as the fourth quarter of 2015. Operating income for the previous quarter was $3.3 million.

Non-GAAP net income was $7 million or $0.17 per diluted share for the fourth quarter of 2016 compared with to net income of $7.1 million or $0.16 per diluted share in the same quarter of 2015. Net income for the previous quarter was $1.4 million or $0.02 per diluted share.

Adjusted EBITDA for the fourth quarter of 2016 was $10.8 million compared to an adjusted EBITDA of $11.2 million in the same quarter of 2015. Adjusted EBITDA for the previous quarter was $5.2 million.

As of December 31, 2016 our total cash and equivalent including restricted cash net of short-term bank loans and credit was $111.6 million, a decrease of $14.5 million on the previous quarter. DSOs which exclude receivables and revenues of our service segment, increased to 89 days compared to 83 days in the previous quarter.

Our shareholders' equity at the end of the quarter totaled about $210 million. That concludes our financial review for the quarter and now I would like to turn the call over to Yona.

Yona?.

Thank you, Adi. In closing with HDS and down the road [indiscernible], the industry is going through a change which will only accelerate as we move forward. We believe that this change is set our ground for innovators like Gilat.

We will continue to focus on the new open opportunities mainly in broadband and mobility market that are unlocked due to the change. We're focused on winning these opportunities through our continued investment in product and technology innovation while giving in parallel high priority to improve profitability. That's concludes our review.

Thank you for attention and I would like now to open the call for questions. Operator, please..

Thank you. [Operator Instructions] The first question is from Andrew Spinola of Wells Fargo. Please go ahead..

Hi.

Thank you, I think you referenced in your prepared remarks that there you have some temporary delays in the Peruvian project, can you elaborate a little bit further on what's happening there and why those delays are temporary?.

Yeah, we have experienced, to say, delays December delays they were due to holidays which were we are hoping to achieve more, but holidays slowed us down in a more significant fashion than we thought.

And secondly, as we are preparing to deliver apart from the project back to Peruvian government we -- it took us more time than we anticipated in order to complete the final tuning of those components that we’re handing over in order to bring those to position where they could expect the project.

So as a result, we achieved less than what we thought, but this is nothing substantial we still believe that we will complete the project on time and we will recover from those delays, as I said delays related to holidays and final tuning of the deliverables we need to give to the government.

So essentially the timing of the recognition of the revenue not -- nothing more material..

Exactly, so and so yeah..

Got it. I recall when you announced your initial dual-mode customer when it was unannounced customer.

And I am wondering if the Esurfing customer in China was -- was that customer and is this your one customer or do you have multiple customer wins now with the dual-mode aviation antenna?.

This is not the customer we referred as the first one. The first one is a North American one. This one is a wholly subsidiary of our media, which is a Chinese entity. So this is the second customer for the antenna. And basically, they are in a distribution channel and an integrator.

So they have the potential of bringing more than one airline into the partnership. And lastly, I would invite you and everybody else to see the actual antenna that we will be presenting and exposing to everybody in Washington DC next month..

All right. Good. Once more question on the aviation. Have you seen any change in the market, I mean is -- you're traditionally it's been mostly KU-band services out there, some of KA-band or have been vertically integrated. Are you seeing increasing interest in your dual-mode products, you think the market has may be shifting in that direction..

We definitely believe so. We see the demand, first of all in China where planes flying in and out of China and within China itself.

We will need this capability, we believe so and we see more and more and more realization in the America that you can stick to either KA or KU and you need the dual-mode to operate effectively when you roam and you switch satellite. So we believe that is growing interest in this antenna.

And I just want to remind everybody that other than VSAT it does not market its product. We are the only provider out there of KU -- KU, KA antenna. So as time moves on we are progressing with our development of the antenna. We see increased interest in this product..

Great. And just one last one from me. On the win with Tricolor in Russia, I guess Eutelsat obviously has historically used the different provider. I am wondering just to try to understand maybe your competitive position with clearly you probably won on a mix of performance and cost or price of your product.

But is there any one thing or couple of things that really drove the win there because it's a pretty nice contract..

It is, I think that the driving factor in my opinion as a rule of thumb across the world is a -- that the barrier to entry cost of the CPE and then there is at the cost of the spec segment but that is a competitive situation.

I think that we were able to introduce -- I would finally say competitive product, self installable and brand new technology which assured quality of the service and I think these were the factors that help keep this guys in our favor.

Price which is really a major step forward in overcoming the barrier to entry, self installable that's another, you know, between $50 to $100 one time but still you could save and the quality of the connectivity that the device provide..

Helpful. Thank your much..

The next question is from Kevin Dede of Rodman Renshaw. Please go ahead..

Thanks. It's Kevin Dede. Hi, Yona. You didn't -- you didn't speak much to the train opportunity in China that you were looking at fairly favorably last time we talked. So I was wondering, if you might offer some insight on that..

I -- correct that did not refer to the trends in China this time. When I talked about this in -- with you and with in previous quarterly results I said, I was optimistic but I am also noted that this will take time to mature and I am basically of the same position.

I think we are progressing with our testing with CRRC and we are quite certain that we will complete offsetting positively. We hope, I don't want no guarantee but we hope to announce something in the first half of 2017. No promises but we hope so. But again, I beg everybody's patience because these things in China take time.

It is not about testing the antenna. The antenna is being tested as part of the whole new type of train that they are manufacturing. So it takes time to test everything in one ecosystem. Therefore I apology for not referring to it but we are continuing, we are optimistic. We do believe we will get an order. But it -- it's going to take time..

Fair enough. When you talk about having something to say about it later this year, what do you think, you'll speak to.

Specifically just the outcome of some of the testing or where you think they are in the development phase?.

No, no way..

When they might possibly launch or--?.

No, thank you for the clarification. What we expect, is to be announce that we have been selected as the provider of a broadband connectivity for the fast trains. The fast trains that they will be manufacturing.

I will remind you and maybe everybody else that we're talking about fast trains because this is where our technology and [indiscernible] brings an advantage and what we intend to achieve sometime this year hopefully first half of this year is in agreement with CRRC that we are the selected technology for any buyer of the fast trains that will want broadband connectivity on the trains..

It's essentially same technology use in -- right in your aviation model, right it's a phased array Electronically Steerable Antenna?.

No. It's a different antenna, it's a same antenna that we used in Spain in our announcement in Spain. But it's a different antenna based of two components. One is for two way and one for the bigger broadcasting..

Okay. So thank you for offering expectations in the topline for this year. I was wondering if you could be a little bit more specific on how you see certain aspects of your business developing to the course of the year. Particularly 280 to 300 million, how much do you think might be cellular. How much do you think might be related to aviation.

Perhaps some insight on what, what you expect to come Scorpio, is there anything you could -- could offer on that perspective..

Hi, Kevin. Its -- unfortunately this is information that we are not disclosing at this moment. Sorry for that..

No, fair enough. Okay. Thank you very much for taking my questions, gentlemen..

Thank you..

Thank you..

[Operator Instructions] The next question is from Gunther Karger of Discovery Group. Please go ahead..

Yes. Good morning and coastal afternoon. So any comments regarding any defense business. I know the small part of the business but regarding 12 [ph] trends, I thought it, important to have some, some notational that..

I undertook the nothing special regard the first business. As you said, it's relatively small part of the business, it's not the strategic part of the business. We will continue to have sales efforts and this will have something unique or specific will amount but currently it's a small nice business, nothing specific.

Thank you..

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. In the U.S. please call, 1888-782-429. In Israel please call 03-925-5901. Internationally, please call 972-392-55901. Mr.

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

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 fourth quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect..