Gilat Satellite Networks Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's 3rd Quarter 2023 Results Conference Call. All participants are present in listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded November 7, 2023.

Operator

By now, you should have all received the company's press release. If you have not received this, please contact Gilat's Investor Relations team at IK Global Investor Relations at 1-six forty six-six eighty eight-three thousand five hundred and fifty nine or view it in the News section of the company's website, www.gilat.com. I would now like to hand over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr.

Operator

Helft, would you like to begin?

Speaker 1

Yes. Good morning, good afternoon, everyone. Thank you for joining us today for Gilat's Q3 2023 results conference call and webcast. A recording of this call will be available beginning at 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 There are no 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 die from materially from anticipated results.

Speaker 1

Gilat is under no obligation to update or update forward looking statements whether as a result of new information, future events or otherwise. And the company expressly disclaims any obligation to do so. More detailed information about research, SantiPharm and Gilat's with all sides of the Securities and Exchange Commission. With that said, let me turn to the introduction. On the call today are Mr.

Speaker 1

Adi Sfadia, Gilat's CEO

Speaker 2

Thank you, Ehud, and good day to everyone. I want to thank you for joining us today for our Q3 of 2023 earnings call. I want to take a moment to comment on the tragic events of October 7 and the war in Israel. Our thoughts and prayers with the victims and families of this horrific attack. We are very proud of our employees' response to this crisis and their dedication to the company during these times.

Speaker 2

We also want to thank our partners, customers, suppliers and the world community at large for their full hearted support. Before I discuss the business results of the quarter, I want to emphasize that Gilat is a strong global company with operation and development centers worldwide. Our operation remains unaffected by the recent events in Israel. We continue to closely monitor the situation and have implemented relevant measures and refreshed our business continuity plans to minimize any potential effect, if at all, on our business. Now let's move to the previous review of the Q3 of 2023.

Speaker 2

We are pleased with our results for the Q3, particularly the continued revenue growth combined with the continued improvement of our profitability. The good performance was due to growing interest in our solutions as well as advancement in the satellite communications space in general. In particular, I would mention the in flight connectivity market that contribute significantly to our revenue growth and profitability this quarter. We report significant improved profitability and adjusted EBITDA EBITDA from the all of 2022. We are very pleased with the progress made this year and we expect this trend to continue.

Speaker 2

Looking ahead, we are narrowing our revenue and profitability expectations for the full year 2023. We expect revenues of between $275,000,000 We are increasing our GAAP operating income to between $29,000,000 to $31,000,000 Due to one time income net, Dukhil Bin Yamini, our CFO, will discuss in his comments. And we expect adjusted EBITDA of between $35,000,000 to $37,000,000 representing elongated growth of 43% at the mid-20s. In the very high throughput satellite, the VHTS and the non geostationary satellite, the NGSO constellation business, We continue to lead with follow on multimillion dollar orders from our strategic partners, the satellite operators. Network extensions and delivery of Gilat's multi orbit generation platform, the SkyEdge 4 and the Aquarius VSAT are taking place globally in support of multiple applications such as In slide connectivity, cellular, vehicle and enterprise.

Speaker 2

In the Q3, we secured a new win for 1,000,000 of dollars for our multi application platform to support new high throughput satellites. This satellite will be used primarily for ISP with maritime and cellular backhaul as secondary applications. In our SPA product line, I'm pleased to report that we continue to take progress in a major project with significant potential for a large NGSO constellation. We are on track and expect to pass qualification process in Q4 this year. This quarter continues to be a strong quarter for Gilat's cellular vacor solution over satellite.

Speaker 2

A significant award this Quarter for approximately $20,000,000 for a contract extension from a Tier 1 MNO in the United States. Gilat continued to support this long term Tier 1 customer with a multiyear end to end managed services contract for satellite based cellular backhaul and emergency response services. Furthermore, the most exciting technical milestone was achieved with QIAGE 4AQARIS VSAP for 5 gs Cellular Backhaul in India with Reliance Jio over SCS also being in power services. An outstanding performance of 1 gigabit The second was a showcase in India's 1st satellite based gigafiber service called Geospace Fiber at the India Mobile Congress. The amazing success demonstrates high speed decking services over satellite to deliver high throughput connectivity to previously inaccessible geographic within India.

Speaker 2

I couldn't be prouder of our team who made this happen. During the quarter, we built upon our ongoing activity with Intelsat with an additional multimillion dollar deal to enhance the global network and torus modem deployments that operate both on SkyEdge 4 and SkyEdge 2C. In addition, we engaged in our SSPA business in several new opportunities for next generation IFC equipment, which we hope will mature in the next few months. This success in addition to our ongoing business With another large aerospace integrator, a long time partner in the IFC market, we have continually relied on Gilat's Amphitos. In March this year, we signed an agreement to acquire Datapas Inc, a leading U.

Speaker 2

S. Defense satellite integrator. This is a major step in our initiative to increase our presence in the strategically growing defense market. The acquisition is an important step in the extension for Gilat's business into the U. S.

Speaker 2

DoD and government sector as well as into other international government and defense markets. We are progressing very well towards the closing of the transaction. We expect our revenues in the defense sector to increase by approximately $50,000,000 on a yearly basis following the imminent closing of this acquisition. We are now waiting final regulatory approval, which by recent indication should arrive soon, following which we expect closing to happen this quarter. We further expect that the forthcoming closing of Datapas Acquisition will provide a tailwind for major defense opportunities.

Speaker 2

As I have mentioned in the past, We are putting great focus on the defense market and we are seeing slow but good progress in this area and expect This extra focus will bear fruit soon. In the Q3, we only advanced a project with the Ministry of Defense of the country in Southeast Asia. We continue to grow our pipeline and are working on several exciting deals, which we hope will materialize in the near future. Furthermore, our enterprise customers worldwide continue to depend on us to enhance their business and new opportunities continue to arise. For example, we received a managed service contract extension from a large government corporation in Asia Pacific to provide connectivity for multiple applications across the nation.

Speaker 2

This includes, but not limited to, enterprise applications with strong opportunities for several backward emergency response and mobility applications such as comms on the move and comms on the post. Providing social inclusion is a big part of our strategy. We have exemplified also a new deal in the Philippines. A new global network was deployed to provide connectivity to the unconnected, leveraging our Skych 2C platform and Gemini Research. In Peru, We are progressing towards completing the construction of the Amazonas region, which is the 6th region awarded to Gilat back in 2018.

Speaker 2

We expect to enter acceptance process soon, enabling us to deliver the network to Bonatel and to move into the operational phase in the first half of twenty twenty four. Furthermore, in Peru, we are expecting additional progress in the next few months. This includes the maturity of several large RFPs in Guanajal and the Peruvian government as well as several project extensions. We are most pleased with the strong pipeline we have in Peru. To conclude, I am pleased with our ongoing support of our partners as well as our ability to capture significant new opportunities.

Speaker 2

We continue to lead with our next generation platform SkyEdge 4 that support multiple orbit and verticals including our strategic markets of mobility, cellular, vehicle and defense. We also secured new opportunities for our SSPI business, especially in the IFC segment and are seeing increased opportunities in this line of business. We have a strong pipeline and expect the materialization of important deals over the coming months. And with that, I hand over to Gil Bin Yamini, our CFO. Gil, please?

Speaker 3

Thank you, Eddie. Good morning and good afternoon to everyone. I would like to remind everyone that our financial results are presented on both 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 these non GAAP financial measures provide related to acquisition transactions, lease incentive amortization, impairment of held for sale assets, Income tax effect on adjustments, one time changes of deferred tax assets and other operating income or expenses.

Speaker 3

The reconciliation 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 Q3 of 2023. Overall, as Adi mentioned earlier, we are very pleased with a strong result of this quarter. We reported a 6% year over year growth in revenue and the solid improvement in profitability. Non GAAP gross margin was 41% and our adjusted EBITDA reached $9,500,000 higher by 30% compared to Q3 last year.

Speaker 3

Given the strong performance to date alongside with expected timing of Q4 deliverables And our proximity to the end of the year, we narrowed our revenue and adjusted EBITDA guidance and increased our GAAP operating income guidance, which I will cover later. In terms of our financial results, revenues for the Q3 was $63,900,000 6% higher than those of Q3 of last year. This was driven by growth in the Satellite Network segment, mainly from the cellular backhaul, enterprise and mobility verticals. In terms of revenue breakdown by segment, Q3 2023 revenues of the Satellite Network segment were $40,700,000 compared to $32,400,000 in the same for the last year. The significant increase mainly resulted from some large deals, which were delivered this quarter to our Strategic customers in the mobility market as well as the high volume with our enterprise and solar backhaul customer base.

Speaker 3

Q3 'twenty three revenues of the Integrated Solutions segment were $11,000,000 compared to $15,700,000

Speaker 2

in the

Speaker 3

same quarter The decline was mainly due to a transition period between strategic and large projects in this segment. Q3, 2023 revenues of the Networked Infrastructure and Services segment were $12,200,000 compared to $12,300,000 in the same quarter last year. I would now like to summarize our Q3 both GAAP and non GAAP results. Our GAAP gross margin in Q3 2023 improved to 40.4% compared to 38.2% in the same quarter last year. The improvement in our gross margin was mainly due to a favorable product and services revenue mix recognized this quarter and the higher level of revenue.

Speaker 3

I note that revenue margins and profitability may fluctuate between quarters as an outcome of the actual revenue volume and deal mix. GAAP operating expenses in Q3 2023 were $13,100,000 In the quarter or 20 percent of revenue compared with $19,600,000 or 33 percent of revenues in the same quarter last year. The significant decline in GAAP operating expenses was due to a win of Philippines lawsuit, which was settled this quarter and resulted in a one time other income as well as the sale of real estate in Bulgaria and therefore a reduction in GAAP OpEx of $7,400,000 GAAP operating income for the quarter improved to $12,700,000 compared to $3,400,000 in the same quarter last year. GAAP operating income in Q3 2023 Excluding the one time other income was $5,300,000 higher by 55% compared to Q3 2022. GAAP net income in the 3rd quarter was $10,200,000 or diluted earnings per share of $0.18 This is compared to a GAAP net income of $2,100,000 or diluted earnings per share of $0.04 in the same quarter last year.

Speaker 3

GAAP net income in Q3 2023, excluding the one time other income was $3,800,000 almost double that over the 3rd quarter last year. Moving to the non GAAP results. Our non GAAP gross margin in Q3 2023 improved to 40.5 percent compared to 38.3 percent in the same quarter last year. Non GAAP operating Expenses in Q3 2023 were $19,800,000 compared with $18,700,000 in the same quarter last year. Non GAAP operating income for the quarter improved to $6,100,000 compared to $4,400,000 in the same quarter last year.

Speaker 3

Non GAAP net income in the 3rd quarter was $4,600,000 or diluted earnings per share of $0.08 This is compared with a non GAAP net income of $3,000,000 or diluted earnings per share of $0.06 in the same quarter last year. Adjusted EBITDA for the quarter was $9,500,000 an improvement of 30% compared with and adjusted EBITDA of $7,300,000 in the same quarter last year. Moving to our balance sheet. As of September 30, 2023, our total cash and cash equivalents, including restricted cash, was $100,300,000 compared with $87,800,000 on June 30, 23 and compared to $69,900,000 As of September 30, 2022, we do not hold any debt. In terms of cash flow, we generated $13,800,000 from operating activities during the Q3 of 2023, which also includes the collection of the lawsuits award in the Philippines, as I mentioned earlier.

Speaker 3

DSOs, which exclude receivables and revenue from our terrestrial network construction projects in Peru, We're 75 days, other than the previous quarter DSO, which were 63 days. The increase was impacted by an increase in receivables, partially offset with increase in revenues and is in line with our credit policy. Our shareholders' equity as of September 30, 2023 totaled about $265,000,000 compared with $255,000,000 at the end of June 23. Looking ahead, As I already mentioned, due to our proximity to year end, we have narrowed our revenue guidance and adjusted EBITDA guidance range for the year. Given the one time other income as mentioned before, we are updating our GAAP operating income target for the year.

Speaker 3

Our updated expectations show a strong 2023 with revenue of between $265,000,000 to $275,000,000 representing year over year growth of 30%. At the midpoint, GAAP operating income of between $29,000,000 to $31,000,000 representing year over year growth of around 3 times at the midpoint and adjusted EBITDA of between $35,000,000 to $37,000,000 representing year over year growth 43% at the midpoint. All in all, as Abhi mentioned, we are very pleased with our performance to date and we expect to conclude 2023 as a strong year for Gilat. That concludes my financial review. I would now like to open the call And we'd be happy to take your questions.

Speaker 3

Operator, please.

Operator

Thank Your questions will be pulled in the order they are received. Please stand by while we poll for your questions. The first question is from Ryan Coons of Needham and Company. Please go ahead.

Speaker 4

Hi. Thanks for the question and I'm glad to hear everyone in the company is safe. Can we start maybe with gross margins and maybe talk through some of the puts and takes on gross margin? It looked like a nice step up sequentially in September, But maybe I'm reading into the implied guidance for December, it will be another step down. Maybe is there some product mix issues there that are swinging gross margin around?

Speaker 3

Yes. Hi, Ryan. So, as you know, gross margins are affected mainly By volume and mix, the changes during this year between quarters were mainly due Due to mix changes of our product, while delivering some of the products, For instance, in the IHC and NGSO, usually with higher profit margins and Other products with lower ones, plus we have the Peru effect, which was more Stronger in Q2 and lowered the gross margins a bit. So it fluctuates, but I think that What we see now is the trend throughout the year. So I would also say that Looking at Gilat on a quarter by quarter basis, maybe a bit misleading and I would look on a year to date basis or trailing 12 months and I think that this will give us a better picture.

Speaker 4

That's fair. Thanks for that clarification. And on your recent win in the backhaul, it sounds like with a large U. S. Operator, Any timing around your expectations for when you might start to see revenue from that?

Speaker 2

Hi, Ryan. It's Actually, we are seeing revenues already. It's the sales extension of this project. We are entering actually, we already entered the 7th year of doing business with that customer and it's around $1,500,000 per quarter, slightly more than that with some upside every quarter.

Speaker 4

Nice. Great. And it sounds like IFC It was strong in the quarter. Any more color you can share with us on your kind of progress in the IFC market here in the near term, Either in Q3 or the next few quarters.

Speaker 2

In the IFC, what we see is a lot of A lot of interest. We have several main customers. The main one is the Intelsat and we have a large Very large U. S. Integrator who bundles our SSPA with this terminal.

Speaker 2

And this business continue regularly and Almost every quarter additional orders made via additional modem, network expansions or additional SSPAs. We do have some small customers for our baseband and modem and other customers for SSPA. We are seeing a lot of interest on our SSTA product line. We saw a small award that Soon we will become very large customers. So we expect to have a strong year in 'twenty three in general and also And a strong year in 2024 in the IFC.

Speaker 4

Great. That's really helpful. And

Speaker 2

Also business jet, yes. Right now, the main focus is on the commercial, but also on the business jets.

Speaker 4

Got it. Helpful. I think that's all I had. I'll pass the call to him.

Speaker 2

Yes. Brian, I just would like to mention another thing. If you remember last We announced our Cellcom Direct deal to develop electronically steered antenna. So we are in the development process and we expect to see revenue within, let's say, 18 months from today. So in 2025, we expect additional growth in this sector.

Speaker 4

Great. And that's for transmission You

Speaker 2

said that's for business jets. Yes. Yes, this is for business jets.

Speaker 4

Got it. Great.

Speaker 5

Thanks for that.

Speaker 1

Thank you.

Operator

The next question is from Chris Quilty of Quilty Analytics. Please go ahead.

Speaker 6

Speaking of Business Jet, you guys were the new entrant last quarter with the Satcom Direct announcement. And this quarter, we just got the announcement that Hughes has now jumped into the ring with the Delta order. I'm assuming that's something you couldn't address timing wise because of your new product. But from what you know competitively, how does The Satcom Direct product you're developing stack up against the recent Hughes announcement?

Speaker 2

Yes. So first of all, it's news that H and S is getting into the Being a service provider in IFC, their main focus is on the regional jet And they are using a flat panel antenna from Fincom. Saccon Direct is their main focus is on business jet and military And we are developing for them the ESA, the electronically steered antenna. So it's a completely different type of term.

Speaker 6

Understand. Do you see any other product line extensions? You're starting at the bizjet level with the Satcom Direct product as it scale up

Speaker 2

The business jet has a smaller antenna and Starcom direct antenna is Focused on one way constellation. For Giro, we need a bigger antenna And this is part of our roadmap as well, but this antenna for commercial Aviation will be for GEO and LEO as well, not only for GEO. Got

Speaker 6

you. Switching gears, the Aquarius wasn't a product line you talked about much. I think you did a relaunch with SkyEdge for In 'twenty one or 'twenty two, is that correct? Yes. So has that Product line caught on in the way that the SkyEdge 4 has or is it just Such an ultra high performance product line that it just takes much longer for it to gain traction in the market?

Speaker 2

So the Aquarius product portfolio is a new product portfolio dedicated for SkyEdge 4. We do have several Sky is to see modems that also works on Sky is full, but the Aquarius is the new line of product So it started with cruise with SCS Empire, but not only. We are now seeing it on So, we are back and we see more in the future. As I mentioned in my notes, we recently The demo, 1 gigabaud per second with SCS and Reliance Jio in India. This is a robust achievement and those modems I was supposed to be with very high speed performance, of course, fixed to the 5 gs requirements.

Speaker 6

Switching gears again, I think you mentioned well, first of all, could you just repeat the DataPath Revenue contribution for next year, but I think you indicated that's all classified as defense. There may be very small commercial From a reporting perspective, can you remind us Gil, does it all land in integrated networks or does it get spread Across multiple segments.

Speaker 2

So, the DataPath revenues is around $50,000,000 Plus minus 10%. And it's probably we learned on the satellite network, but it's still under accounting review. So it's a bit early to say.

Speaker 6

All right. Fair enough. And in general, how I mean, I know you don't provide orders per se In terms of an order book, but what have you seen as you look through look back, I guess, over 2023, What have you seen in the trend line towards order strength or weakness over the course of the year and sort of what are you baking As you go into Q4.

Speaker 2

So it really depends on the segment. But in general, I would say that our bookings or order in are give or take as At the beginning of the year when we put the guidance, we are seeing a lot of traction in IFC and in cellular backhaul. In the defense, we are developing our pipeline. I'm sure you know that the sales cycle is very long in the defense. So we are seeing slow, but very good progress and we hope to have a tailwind once we close the Datapas acquisition.

Speaker 2

We are seeing some slowness in integrated solution order, but we expect to ramp up in the next Quarter of 2. And in terms of, it really depends on local RFPs And we know that the government plan to launch several very large RFPs in the next few weeks and we also expect some contract extensions and extensions. So we expect A strong close for the year in Peru.

Speaker 6

Got you. You mentioned integrated solutions and obviously There's been a lot of weakness this year. Can you remind us, I mean is that certainly most of the defense companies that I deal with have talked about order slowness with Do you think it is more related to the macro government purchasing environment Or is it specific to the programs that you're working on that you've seen some delays?

Speaker 2

I think it's a combination of the 2. But I would say that the majority of the slowness is the shift that we are seeing between Several large projects which ended during 2022, early 2023 and other large projects that we Awarded, we expect them to uplift towards mid or end of next year. So it seems like a transition year.

Speaker 6

Got you. That's good color I wasn't aware of. And then I guess final question and sorry this is a little esoteric, but Gil, it looks like your

Speaker 2

Thank you, Chris.

Operator

The next question is from Gunther Karger of Discovery Group. Please go ahead.

Speaker 5

Yes. Thank you. Excellent quarter. Congratulations. So I didn't hear any comment on Peru.

Speaker 5

Could you give an update on Peru, please? And also the second question is the I may have missed the Do you expect to close on the data path this year?

Speaker 2

So can you repeat your question again about Peru?

Speaker 5

Yes. Just a general update on Peru. I missed Sure.

Speaker 2

So, in Peru, business as usual, we are Close to the end of finishing the 6th region, the Amazonas region that was awarded back in 2018. We expect to start the acceptance procedures with the government before the end of the quarter and to final acceptance of the mid of next year and then to switch to operation phase. In parallel, we see a lot of bids that are coming Up soon in the quarter and we are also expecting several contract extension and extension. So we expect to have A strong booking quarter for Peru. As for DataPath, indeed, we Progressing towards closing this quarter.

Speaker 2

We already received the CPU's approval And we're still awaiting one last government approval, which by recent indication, We expect to get it in the next, if not days, then weeks. And there are some less order of customary closing condition, which we expect to achieve as well in the next So indeed, we are expecting to close the transaction this quarter.

Speaker 5

Thank you. And also regarding the Danaopat, Do you anticipate keeping that operation as a separate subsidiary? Or do you expect to integrate that into your Military and Defense Operations.

Speaker 2

Combination of the 2. Our data path is going to be An important leg in our defense strategy, but we do expect them to continue to work independently and to grow their business while using Gilat and the waste stream Resources in the defense in order to increase the overall defense presence of Gilat worldwide.

Speaker 5

Thank you very much, Raul, David.

Speaker 2

Thank you,

Operator

Please stand by while we poll for more questions. There are no further questions at this time. Mr. Binyamimi, would you like to make your concluding statement?

Speaker 3

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 at our next call. Thank you very much and have a great day.

Operator

Thank you. This concludes Gilat's Q3 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.

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Gilat Satellite Networks Q3 2023
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