Gilat Telecom published its second-quarter report. Two lines in it are almost empty, and that is what makes it interesting.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 71.4 | |
| Gross profit | 21.0 | 29.4% |
| Operating profit | 8.5 | 11.9% |
| Pre-tax profit | 8.4 | 11.8% |
| Net profit | 8.4 | 11.8% |
| Basic earnings per share | NIS 0.07 | |
| Balance sheet total | 274.5 | |
| Shareholders' equity | 132.4 |
Operating Profit Is Barely Eroded on the Way Down
**From NIS 8.5 million of operating profit, NIS 8.4 million was left before tax. NIS 86 thousand was taken out
- 1.0%.**
And then the tax line took nothing: net profit is identical to pre-tax profit.
And both of those lines deserve separate explanation.
The first - financing - is explained by the balance sheet: NIS 274.5 million of assets on equity of NIS 132.4 million, a ratio of 2.1 to one. A company of this size, with moderate leverage, simply does not pay meaningful interest.
And the second - tax - is more unusual. Pre-tax profit of NIS 8.4 million with no tax charge at all is not a routine position.
The usual explanation for such a position is accumulated losses from prior years, offset against taxable income and reducing the tax liability to nil - or the recognition of a tax asset that offsets the current charge.
The structured quarterly filing does not detail the tax reconciliation, so I do not assert which of them happened here.
What is important to say: if the source is accumulated losses, they are finite. Once they are used up, the same pre-tax profit will produce net profit about 23% lower - without anything in the business changing.
And the Margins
| Gross margin | 29.4% |
| Operating margin | 11.9% |
| Survival | about 40% |
In telecoms, the gross margin reflects the gap between what is charged to the customer and the cost of the bandwidth and infrastructure purchased. The expenses beneath it are sales, service and head office.
Survival of 40% is a reasonable range for a telecoms services company, and it is close to what we saw today at Mer - a company from the same world, at 43%.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
What I find instructive here is how rare it is for operating profit to arrive intact at the bottom line.
I read 33 Israeli sets of accounts today. At Nofar Energy financing took 122% of operating profit; at Dalia, 63%; at Novolog tax took 79% of what was left. Here those two lines together took less than one percent.
And that says something about the kind of business: a company that does not need a heavy balance sheet to generate revenue keeps its profit.
And what I flag as a caution is precisely the absence of tax. A pleasing figure that comes from prior-year losses is not a run rate - it is a benefit that runs out. And because the accounts do not detail it, I read the NIS 8.4 million of net profit as this quarter's figure rather than as one representing a year.
And what I would look for in the full accounts is the balance of carried-forward losses. That determines how many more quarters will look like this, and it does not appear in the structured filing.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
