MORE FROM LEHMAN BROS:
Headline: Gilat Satellite :Reports Solid 3Q97 In Line: Backlog & Visibility Improve
Author: Tim Luke 1(212)526-4993
Rating: 1
Company: GILTF
Country: SEO CUS CIS
Industry: TELECM
Ticker : GILTF Rank(Prev): 1-Buy Rank(Curr): 1-Buy
Price : $28 1/8 52wk Range: $42-24 Price Target: $45
Today's Date : 11/12/97
Fiscal Year : DEC
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EPS 1996 1997 1998 1999
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.24J 0.28A 0.28A - -E - -E - -E - -E
2nd: 0.26A 0.34A 0.34A - -E - -E - -E - -E
3rd: 0.33A 0.39E 0.39A - -E - -E - -E - -E
4th: 0.43A 0.50E 0.50E - -E - -E - -E - -E
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Year:$ 1.22A $ 1.51E $ 1.51E $ 1.90E $ 1.90E $ - -E $ - -E
Street Est.: $ 1.50E $ 1.51E $ 1.88E $ 1.89E $ - -E $ - -E
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Price (As of 11/11): $31 1/8 Revenue (1997): 104.6 Mil.
Return On Equity (97): 16.4 % Proj. 5yr EPS Grth: 30.0 %
Shares Outstanding: 11.2 Mil. Dividend Yield: N/A
Mkt Capitalization: 349.81 Mil. P/E 1997; 1998 : 20.6 X; 16.4 X
Current Book Value: $8.64 /sh Convertible: YES
Debt-to-Capital: 43.6 % Disclosure(s): C
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* This morning, Gilat Satellite Networks delivered strong 3Q97 earnings of
$0.39 vs. $0.34 in 3Q96 (restated for Skydata acquisition) in line with our
consensus estimate.
* Revenues in 3Q97 increased 40% YoY and 8% QoQ to reach $27.4 million ahead
of our estimate of $26.9 million. Strength across all major VSAT product
offerings. Book to Bill substantially greater than 1.
* Gross margins improved to 44.3% up QoQ Vs 42.9% in 3Q97 & 44.0% in 3Q96
benefiting from improved engineering efficiencies and product mix. Operating
expenses in line, Net R&D 7.8% of sales Vs 7.9% in 3Q97 SG&A at 20.4% Vs 21.3%
in 3Q97. No currency impact.
* Gilat closed 3Q97 with cash & equiv. of $48.6 million, a slight decrease
from $50.1 million in the prior quarter. Receivables days in average move
lower to 143, Inventory levels increase slightly from 119 to 126 days in
average.
* Reiterate 1 Buy Rating. Gilat remains well positioned in expanding VSAT
market, expect Revenue & EPS growth of approx. 30% in FY98 & FY99. Believe
concerns over winding down of GE alliance overdone. Price target $45 or 22x
1998 estimate of $1.90.
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This morning, Gilat Satellite Networks reported 3Q97 earnings of $0.39 vs.
$0.34 in 3Q96 (restated for Skydata acquisition) in line with our consensus
estimate. Following the release of earnings, management held a conference
call with investors, we believe highlights from the quarter include the
following:
Strong Revenue Growth and Visibility Continues
During 3Q97 Gilat grew revenues 40% year over year and 8% sequentially to
$27.4 million above our estimate of $26.9 million. Gilat enjoyed strength
across all major product lines driven by the core SkyStar Advantage. Though
the company does not disclose backlog figures on a quarterly basis, Gilat did
confirm that book to bill was substantially greater than 1. Our computations
indicate that based on new orders of over $35 million in 3Q97 and sales of
$27.4 million, backlog levels (which include letters of intent) may be in a
range of $40 to $45 million, boosting visibility for the balance of 1997 andinto 1998. While the company does not break down revenues by geographic
regions, we note that only 5% of the record backlog levels of approximately
$40 million was for Asia.
During the quarter, Gilat announced that the Ethiopian Telecommunications
Corporation , the nation's PTT, agreed to purchase 470 FaraWay and DialAway
VSATs worth approximately $15 million. Gilat was chosen out of nine
competitors due to its price/performance advantage to provide over 450 towns
and villages with satellite telecommunications. Gilat indicated that further
opportunities may exist soon after the basic infrastructure is organized which
will supplement basic telephony services with distance learning and
potentially satellite television. We view Gilat's selection from a field of 9
vendors as another firm endorsement of the company's technology leadership.
Gross Margins Beat Expectations, Expenses In Line
Gross margins improved in 3Q97 to 44.3%, an increase from 42.9% in the prior
quarter and 44.0% in 3Q96 as the company continued to benefit from engineering
efficiencies and lower component costs. Looking forward, we are believe the
company may be able to deliver some upside over our estimated gross margin
range of 41-43% as the new products increase as a percentage of sales. Gilat
reported net R&D expenses of $2.1 million or 7.8% of sales a decrease from
7.9% in the prior quarter. Going forward, we believe the company will sustain
Net R&D levels in the range of 7% to 8% of sales. SG&A expenses moved lower
from 21.3% of sales in 2Q97 to 20.4% in 3Q97. Gilat's other income line was
impacted by interest expense relating to the recent convertible bond offering
with other income moving from income of $296,000 in 2Q97 to an expense of
$34,000 in 3Q97. We expect interest expense of around $1.1 million in FY98
Focus On GE Relationship May Be Overdone
We believe that weakness in Gilat's share price today may result from investor
focus on Gilat reseller relationship with GE. As highlighted in last quarters
conference call, management confirmed that it is unlikely the current reseller
arrangement with GE will be renewed when the contract expires at the end of
1998. As we have anticipated, management confirmed GE is moving ahead with
the development of its own VSAT platform based on the technology of its recent
acquisition of Tridom from AT&T. We note that while GE has represented 30% of
Gilat's sales in the first 9 months of 1997, Gilat's positioning in the VSAT
industry may actually improve if the company is not tied to an exclusive
reseller deal in the US market. In fact, we believe that a number of rival
operators may be eager to partner with Gilat and expect further announcements
may emerge over the next several months. We would also highlight that we
consider that Gilat's position as a technology leader and its long association
with GE's customers is likely to ensure that GE continues to distribute
considerable volumes of Gilat's product line in 1998 and 1999. We note that
as Gilat's moves to a direct sales model using its own platform the company's
margins may be positively impacted.
Balance Sheet Remains Intact
Gilat's balance sheet remains healthy with 3Q97 with cash and cash equivalents
at $48.6 million, a slight decrease from $50.1 million in the prior quarter.
Receivables increased from $39.1 million in 2Q97 to $46.6 million in 3Q97 but
decreased from 151 days in average to 143 days. Inventories increased from
$19.5 million in 2Q97 to $22.7 million in 3Q97 and increased from 119 days in
average to 126 days. The company retains long term debt of $75 million from
the convertible offering earlier in the year.
Stock Opinion:
We believe Gilat is likely to continue to benefit from strong growth in its
core market of data oriented VSAT equipment as the company extends in market
share as a price/performance leader. Additionally, we consider that as a
technology leader Gilat is well placed to exploit the development of new VSAT
applications notably in the areas of Internet access and rural telephony.
Based on Gilat's strong competitive position with increasing visibility with a
rising backlog, we believe the Company should continue to enjoy revenue
growths of approximately 25-30% over the next several years. Our positive 1
Buy rating and twelve month our price target of $45 reflect our view that overthe next twelve months, investors are likely to focus on Gilat's ability to
deliver earnings growth of 25-30%, allowing the shares to trade at a multiple
of approximately 22x-23x our 1998 estimate of $1.90.
BUSINESS DESCRIPTION: Gilat designs, develops, manufactures, markets and
supports Very Small Aperture Terminal (VSAT) satellite earth stations, hub
equipment, and related software products.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
