Gilat Satellite Networks Ltd. (GILT) CEO Yona Ovadia on Q3 2019 Results - Earnings Call Transcript

Nov. 19, 2019 2:11 PM ETGilat Satellite Networks Ltd. (GILT)
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Gilat Satellite Networks Ltd. (NASDAQ:GILT) Q3 2019 Results Earnings Conference Call November 19, 2019 9:30 AM ET

Company Participants

June Filingeri - IR, President at Comm-Partners LLC

Yona Ovadia - CEO

Adi Sfadia - CFO

Conference Call Participants

Gunther Karger - Discovery Group

Michael Hebner - McNally Financial

Chris Riemenschneider - Wells Fargo


Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Third Quarter 2019 Results Conference Call. All participants are at present in listen-only mode. Following the managements formal presentation instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, November 19, 2019.

I would now like to turn the call over to June Filingeri of Comm-Partners LLC to read the safe harbor statement. June, please go ahead.

June Filingeri

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's Third Quarter 2019 Conference Call and Webcast. A recording of this call will be available beginning at approximately noon Eastern Time, today, November 19, and will be available for telephone replay until November 22nd at noon. The webcast 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 release 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, and the company expressly disclaims any obligations 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.

Yona Ovadia

Thank you, June. Good morning, good afternoon, and good evening everybody. Thank you for joining us today.

I'm very pleased to share with everyone that the third quarter was marked by no less than four landmark achievements that demonstrate Gilat’s progress over the last quarters and years.

The first is becoming a prominent player in the ground segment for Non-Geostationary Orbit also abbreviatedly known as NGSO satellites as SES chose our platform for its O3b mPOWER Medium Earth Orbit constellation.

The second one is in the Aero Mobility, where we are encouraged by the clear directions of airlines to offer free Wi-Fi, which is already starting to generate significant demand for Gilat equipment in this quarter.

The third achievement is the signing of a $10 million multi-year services contract in Peru materializing our vision of making Peru a profitable recurring revenue engine for Gilat over the networks that we have built. The last one is the substantial progress we continue to demonstrate in improving profitability.

In fact, we have attained a record achievement of a double-digit millions of dollars of adjusted EBITDA, $10.1 million to be exact. This has been achieved only once before since we made growth in profitability in one of the pillars of our strategy, and we have every intention of repeating this going forward.

Summarizing our financial performance for the third quarter, GAAP operating income totaled $7 million, adjusted EBITDA grew to $10.1 million, and revenues totaled $63.4 million. We also achieved bottom-line profitability with GAAP net income of $6.3 million or $0.11 per diluted share.

We have updated our management objectives for 2019 as follows; reiterating GAAP operating income of between $23 million and $27 million and adjusted EBITDA of between $38 million and $42 million. While reducing the revenue range to between $260 million and $270 million, the adjustment in revenue objectives is due to delay in several key orders particularly in Latin America and Southeast Asia, coupled with delivery constraints that we have since mostly resolved.

And let me move now to the business section and elaborate on our progress this quarter. I would like to start out with an outstanding achievement for Gilat in reaching a landmark in fulfilling our strategy to be a significant player in the NGSO constellations.

Gilat multi-orbit GEO and NGSO platform was selected by SES for its revolutionary mPower MEO constellation with a multi-million-dollar contract for Gilat. We expect deployment of constellation services to start in roughly two years.

Gilat was selected for one reason only. The fact that we brought to the table technological innovation and our innovation ground product design significantly reduces cost per bit, provides best-in-class spectral efficiency, and demonstrates a step-function in modern performance.

All are vital for the revolutionary multi-terabit, high-performance constellations such as mPower. This win positions Gilat at the forefront of ground networks for NGSO constellations and put Gilat in an excellent position to win additional opportunities in the vast market that NGSO creates.

But further than that, Gilat’s product roadmap will serve not only NGSO, but also the new generation of GEO satellites namely HTS and VHTS thus creating more opportunity for Gilat.

Moving to Mobility. The Mobility Aero market was a positive driver for our revenue growth in the third quarter and continues to be a major growth engine for Gilat. As mentioned last quarter the plan by a number of U.S. airlines to offer free Wi-Fi is a tailwind and a major opportunity for Gilat.

This is due to a significant expected usage increase and particularly a usage shift to a mix of business and leisure travelers. Free Wi-Fi is likely to enhance the usage of higher bandwidth applications such as streaming and social media.

To support this trend, there will be an increase in their IFC bandwidth requiring additional equipment that can provide excellent satellite resource utilization. Gilat is well positioned with our field-proven, high-performance solution that easily met the demand of hundreds of concurrent passengers providing hundreds of megabits per second with an excellent user experience.

As I said in my opening remarks, we are already starting to see significant demand as a result of this trend. We also believe that there will be further acceleration of our business in Aero as we expand our business and product portfolio for aero antennas, and we see announced - as we have announced an entry into the business aviation terminal market last quarter through a major contract with a Tier 1 business aviation service provider.

Moving on to Peru, as I discussed with you last quarter, we turned the critical corner and moved from the construction phase to the operational phase in three regions, namely Huancavelica, Ayacucho, and Apurimac to start service delivery to over half a million people.

As part of the completion of construction, we received this quarter; the third quarter another payment of about $28 million in addition to a partial release of bank guarantees. Also, we remain confident in our plans to complete the construction phase and move to the operational phase in the fourth region of Cusco in the first half of 2020.

However, I'd like to remind everyone that our interest in Peru is not the construction dollars, but the profitable recurring revenue from operations and sales of services over the network. And indeed, I am most pleased to report that our plans are materializing, and we already were awarded a $10 million five-year project for 3G, 4G backhaul services in Peru over the infrastructure and network that we at Gilat recently started to operate.

We expect this contract will significantly expand over time to additional multiple millions of dollars as well as selling additional services to other interested parties over our network. We are of course very pleased to see the pipeline grow and to see our vision of selling profitable services over our network starting to materialize so soon.

In enterprise, we have reached another important milestone this quarter in Australia with NBN. With the launch of NBN's business satellite services aiming to meet the connectivity demand for businesses and government customers throughout regional and rural Australia.

The commercial launch of this flagship project initiates the commencement of our management -- managed services to NBN delivering revenue of tens of millions of dollars over a 10-year period.

During the launch event last month, NBN's CEO, Steven Rue said, we are doubling our commitment to regional Australia with a focused business unit responsible for engaging with regional customers and meeting their needs.

This successful launch coupled with a declared focus on regional and rural areas of Australia provides significant opportunity for further growth would be last multi-service platform for cellular backhaul, mobility services and enterprise offerings. We expect that this additional opportunity will translate into significant additional business for Gilat in the coming quarters and years.

Moving on to cellular backhaul. On cellular backhaul front, Gilat continues to be recognized as the global leader with the announcement this quarter of the selection by the largest mobile carrier in Japan NTT DoCoMo.

Gilat was awarded the project in partnership with Sky Perfect JSAT Corporation, Asia's largest satellite operator to expand NTT DoCoMo's LTE footprint to islands and other hard-to-reach regions.

This successful - this success joins major Tier 1 wins worldwide and specifically strengthened Gilat's leadership in Japan and add to our long-time customers Softbank and KDDI who continue to expand their networks providing superior user experience as expected by their customer base throughout Japan.

Moving onto China. Our environment in China is another area in which we would like to report progress. As you'll surely now China Satcom owns and operates the most capable and extensive Ka-band spot beam satellite system in China with plans to launch several additional VHTS satellites in the coming years.

Gilat and China Satcom reached an agreement to work together to deploy Gilat's DVB-S2X technology for efficient and high-performance satellite communication on its Ka network throughout China. Thus meeting our commitment to provide the innovation required to support our partners in delivering the high performance needs for IFC, as well as other markets such as cellular backhaul enterprise and others.

Before I conclude, let me return to our first notable achievement this quarter, the substantial growth in our adjusted EBITDA. The continued progress we have made to date and especially in the third quarter due is to the relentless execution of our strategy to focus on targeted growth engines and reduce operating costs, while continuing to invest in R&D to maintain our technology and product leadership. We fully intend to continue to execute this strategy going forward.

And so in closing, we are pleased with our momentum in the marketplace and in parallel with our continued improvement to our bottom line. We are engaged in these days in planning on work plan for 2020 and we will base it on the same guidelines of the existing growth engines with continued, if not increased investment in maintaining our product leadership and an improvement of both the top-line as well as the bottom line.

And with that, Adi, we're ready for your report. Please go ahead.

Adi Sfadia

Thank you, Yona, and good morning and good afternoon everyone.

I would like to remind everyone that our financial results are presented both on a GAAP and non-GAAP basis.

We regularly used supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. We believe these non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating performance.

Non-GAAP financial measures mainly exclude the effect of stock-based compensation, amortization of purchased intangible, amortization of lease incentives, litigation expenses or income-related to trade secret claims, the organization costs expenses for tax contingencies to be paid under an amnesty program and initially completion of deferred tax assets with respect to carry-forward losses. Reconciliation table in our press release highlighted data and our non-GAAP information presented exclude these items.

I will now move to our financial highlights for the third quarter of 2019. Revenues for the third quarter of 2019 were $63.4 million compared to $62.8 million in the third quarter of 2018 reflecting higher revenues from our Mobility Solutions segment mainly in-flight connectivity and higher revenues from our terrestrial infrastructure projects segment which includes the construction phase of our projects in Peru, partially offset by lower revenues in our Fixed Networks.

Revenues in the previous quarter were $59.7 million. Fixed Networks segment revenues were $27.3 million compared with $34.9 million in the same quarter last year. The decrease is mainly due to lower revenues from our Latin America region especially our activity in Colombia, where our governmental project concluded earlier in the year.

Fixed Networks revenues in the previous quarter were $30.4 million. Mobility Solutions Segment revenues were $27.1 million compared to $21.8 million in the same quarter last year and $22.6 million in the previous quarters, the increase in our revenues year-over-year reflects higher IFC revenues.

Terrestrial Infrastructure Projects Segment which includes the construction revenues of our project for Fitel in Peru were $9 million compared to $6 million in the same quarter last year and $6.7 million in the previous quarter. As discussed previously during the construction phase revenue for Fitel can vary quarter-to-quarter depending on the percentage of the project completion.

During Q3 and early Q4, we concluded the construction phase of the networks in the [Indiscernible] regions we won in early 2015 and pass the acceptance of Fitel. With that, we are starting the operational phase which will contribute to our Q4 Fixed Networks revenues and 2020 top-line.

As percentage of total revenues Fixed Network represented this quarter 43% of revenues. Same as Mobility Solution, Terrestrial Infrastructure Project represented 14% of revenues. In the third quarter of 2018 those percentage were 56% for Fixed Networks, 35% for Mobility Solution and 9% for Terrestrial Infrastructure.

Our GAAP gross margin in the third quarter of 2019 were 36.7% of revenues compared with 38.5% in the same quarter last year. The decrease in our gross margin is mainly attributable to a less favorable revenue mix and higher revenues from our project in Peru this quarter which have lower margins during the construction phase, our gross margin in the previous quarter were 36.8%.

Total operating expenses on a GAAP basis for the third quarter were $16.3 million compared to $18.2 million in the same quarter last year and $17.1 million in the previous quarter. GAAP operating profit was $7 million compared to operating profit of $6 million in the same quarter last year and up from $4.9 million in the previous quarter.

GAAP net income in the third quarter were $6.3 million or 11% per diluted share compared with net income of $8.7 million or $0.16 per diluted share in the same quarter last year. Last year net income includes a deferred tax benefit of $4.1 million.

Net income for the previous quarter was $3.5 million or $0.06 per diluted share. On a non-GAAP basis operating income for the third quarter was $7.5 million or 11.8% of revenues compared to operating income of $6.5 million or 10.3% of revenues in the same quarter last year.

Non-GAAP operating income for the previous quarter was $6.3 million or 10.5% of revenues. Non-GAAP net income in the third quarter was $6.8 million or $0.12 per diluted share compared to a non-GAAP net income of $5.1 million or $0.09 per diluted share in the same quarter last year.

Non-GAAP net income for the previous quarter was $4.8 million or $0.09 per diluted share. Adjusted EBITDA for the third quarter of 2019 increased to $10.1 million or 15.9% of revenues compared to adjusted EBITDA of $9.1 million or 14.5% of revenues in the same quarter last year. Adjusted EBITDA in the pervious quarter was $8.9 million or 14.9% of revenues.

As of September 30, 2019, our total cash and equivalents including restricted cash were $84.2 million, an increase of $14.7 million from the previous quarter. During the quarter, we generated about $17.2 million from operating activities offset in part by CapEx spending of about $2.1 million.

DSOs which include our Fixed Networks and Mobility Solutions segments and exclude receivables and revenues of our Terrestrial Infrastructure Projects segment increased to 86 days compared to 83 days in the previous quarter. Our shareholders equity at the end of the quarter totaled about $228.6 million, compared with $223.2 million at the end of the previous quarter.

That concludes our review. Thank you for your attention. I would like to open the call for questions. Operator, please.

Question-and-Answer Session


[Operator Instructions] First question is from Gunther Karger from Discovery Group. Gunther, please go ahead.

Gunther Karger

Yes. So good morning or good afternoon. I don't have a question. I just have a statement. Congratulations on doing excellent work. Thank you.

Yona Ovadia

Thank you, Gunther.


Next question is by Michael Hebner of McNally Financial. Michael, please go ahead. Michael.


I'm sorry, there's been some issue. [Operator Instructions]. Next question is by Michael Hebner. Michael Hebner, please go ahead.

Michael Hebner

Yes. Last year, you paid a dividend or something or I've seen a dividend. Is there any plans for future dividends because I see that's one of the reasons why your cash went down, $24 million?

Adi Sfadia

Yes. Indeed, in early Q2 we paid 25 - close to $25 million of dividend. The dividend was declared as a special dividend. We haven't yet adopted ongoing policy for dividend payments. So now, I don't know what will happen next year.

Michael Hebner

Yes. I was disconnected from the call. Have you guys given guidance for what's the - what are we looking at for 2020? When are we going to see some numbers on that?

Adi Sfadia

So - and now, we started to work on our 2020 annual operating plan and budget. So, it's too early to provide guidance to the market. All I can say is that we expect to see the same EBITDA growth that we saw in the last few years on average.

Michael Hebner

Now the mPower, you said that we're not going to receive revenue on that for two years or it's not operational. Could you put some more color around that?

Adi Sfadia

Yes. In general, the satellites are going to be launched in about two years. And in the meantime, we have some development to do. So, once the satellite will be up in the air, we will need to provide ground equipment to support it.

Michael Hebner

Okay. Now the Peru, what kind of recurring revenue are we expecting to get out of there and when do we expect that to really start to launch?

Adi Sfadia

So, in Peru we won $550 million of project. About two-third is onetime construction revenues and about $220 million are operational revenues. Yearly maintenance for a period of ten years for the entire fixed projects together, so that's gives you about a yearly run rate of $22 million. In addition, we have about $10 million to $12 million recurring revenue for managed service, mainly satellite business that we provide today.

In addition, we started to sell services over the network. We recently announced a $10 million deal with one of the network operators in Peru. That gives more than $2 million a year. And actually, we expect this more than double or even triple within few years because its initial order for a few 100 sites, we expect them both to increase the size and to buy more capacity and later on to renew the agreement from five years to up to the ten years that we maintain the network.

All-in-all, together with additional opportunities and potential in Peru, we believe that by the end, we will have all networks up and running. We will have about $50 million per year, highly-profitable in Peru recurring revenues.

Michael Hebner

Thank you.

Adi Sfadia

Thank you Mike.


[Operator Instructions] Please stand by while we pull for more questions. There are no further questions at this time. I am sorry. Next question is Chris Riemenschneider from Wells Fargo. Chris, please go ahead.

Chris Riemenschneider

Hi Chris Riemenschneider, Wells Fargo. Just can you give us a little update on the 5G race with the federal Communication, FCC wanting to control lucrative airwaves versus Intelsat and SGS. How will that affect our business?

Yona Ovadia

So, now I think it's not relevant for Gilat, those regulations. In general, I would say that in 5G, we are investing a lot in examining the market and technology. Our projects - our products today are 5G ready, and we continue to invest to make sure that we will be at the top of the technology to make sure that we will penetrate the market and take significant market share as we did in the 4G. Other than that, it's too early to say. I hope that answers your question.

Chris Riemenschneider

All right. And that's a few years out?

Adi Sfadia

Two to four years, I must be honest with you. 5G with satellite, first, we take Manhattan with fiber, and later on we pass to the rurals. What we do believe will happen as we will see more and more in urban areas deployment of 5G, we'll see a lot of shift from 2G and 3G rural areas to 4G, and we believe that this 5G deployment will give us a significant tailwind in the 4G. 5G revenues over satellite, we will see here and there not a lot, but significant one, I think its three to four years at least from today.

Chris Riemenschneider

Okay. Very good. Thank you.

Adi Sfadia

Thank you, Chris.


Next question is by Michael Hebner of McNally. Michael, please go ahead.

Michael Hebner

It looks like with the speeds that the satellites are able to produce, do you see a lot - and again with all over the world, and you're not going to be able to put these 5G towers. It seems like their satellite is going to give a lot greater opportunity. What's your thoughts on that?

Adi Sfadia

No doubt, 5G will bring a lot of opportunity for satellite equipment companies. Again, as I said, it's four years from today. And I think that with the NGSO constellation, it is much more relevant for satellite and geostationary, especially because it solves the latency issue that we have with geostationary satellites.

Michael Hebner

One question I always ask on every conference call. What are you doing - I mean you guys are doing such a great job and you have such great numbers. What are you doing to reach out to the investment community to get some more sponsorship and following of your stock?

Adi Sfadia

We are doing everything that is in our power except of participating in conferences and making one with - with investors both in Israel and the U.S., and actually we recently returned from the Needham Conference in New York. We are considering several media company that will help us distribute our message to wider audience and not only to investors. Other than that, we're doing everything that we get.

Michael Hebner

Good. Thank you for your time, guys. Great quarter.

Adi Sfadia

Thank you. Michael.


There are no further questions at this time. Before I ask Mr. Adi Sfadia to go ahead with his closing statements, I would like to remind my participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1888-326-9310. In Israel, please call 03-9255900. Internationally, please call 972-3-9255900. Mr. Sfadia, would you like to make your concluding statement?

Adi Sfadia

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


Thank you. This concludes Gilat's third quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.

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