U.S. Markets closed

Edited Transcript of GILT earnings conference call or presentation 19-Nov-19 2:30pm GMT

Q3 2019 Gilat Satellite Networks Ltd Earnings Call

Petah Tikva Dec 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Gilat Satellite Networks Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adi Sfadia

Gilat Satellite Networks Ltd. - CFO

* Yona Ovadia

Gilat Satellite Networks Ltd. - CEO

================================================================================

Conference Call Participants

================================================================================

* Christian Riemenschneider;Wells Fargo;Financial Advisor

* Gunther Karger

Discovery Group Inc. - Analyst

* Michael James Hebner;McNally Financial Services Corporation;Broker

* June Filingeri;Comm-Partners

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Third Quarter 2019 Results Conference Call. (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;Comm-Partners, [2]

--------------------------------------------------------------------------------

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 phone replay until November 22 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 releases with the 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 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.

--------------------------------------------------------------------------------

Yona Ovadia, Gilat Satellite Networks Ltd. - CEO [3]

--------------------------------------------------------------------------------

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 4 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 nongeostationary 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 multiyear 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 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 objective 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 landmarks 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 multimillion-dollar contract for Gilat. We expect deployment of constellation services to start in roughly 2 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 constellation 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 road map 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 WiFi 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 the 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 antenna, and with the 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 a critical corner and moved from the construction phase to the operational phase in 3 regions, namely Huancavelica, Ayacucho and Apurimac to start service delivery to over 0.5 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'm most pleased to report that our plans are materializing and we already were awarded a $10 million 5-year project for 3G/4G backhaul services in Peru over the infrastructure and network that we -- 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 demands 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, Stephen 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 the declared focus on regional and rural areas of Australia, provides significant opportunity for further growth with Gilat's 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 the 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 adds 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 on to China. Our involvement in China is another area in which we would like to report progress. As you surely know, 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 DBBS 2x 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 solar backhaul, enterprise and others.

Before I conclude, let me return to our fourth 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, is due to the relentless execution of our strategy to focus on targeted growth engine 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 this -- 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 are ready for your report. Please go ahead.

--------------------------------------------------------------------------------

Adi Sfadia, Gilat Satellite Networks Ltd. - CFO [4]

--------------------------------------------------------------------------------

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 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 intangibles, 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 initial recognition of deferred tax assets with respect to carryforward losses. Reconciliation table in our press release highlight these 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 include 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 Network Segment revenues were $27.3 million compared to $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 projects concluded earlier in the year. Fixed Network 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 quarter. The increase in our revenues year-over-year reflects higher IFC revenues. Terrestrial Infrastructure Projects Segment, which include 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 from 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 network in the [first 3] regions we won in early 2015 and passed 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 percentages were 56% for Fixed Networks, 35% for Mobility Solutions and 9% for Terrestrial Infrastructure.

Our GAAP gross margin in the third quarter of 2019 was 36.7% of revenues compared to 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 was 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 $0.11 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 million -- 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 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 previous 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 now to open the call for questions. Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) First question is from Gunther Karger from Discovery Group.

--------------------------------------------------------------------------------

Gunther Karger, Discovery Group Inc. - Analyst [2]

--------------------------------------------------------------------------------

I don't have a question, I just have a statement. Congratulations on doing excellent work. Thank you.

--------------------------------------------------------------------------------

Yona Ovadia, Gilat Satellite Networks Ltd. - CEO [3]

--------------------------------------------------------------------------------

Thank you, Gunther.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Next question is by Michael Hebner of McNally Financial -- Michael, sorry. I'm sorry, there's been some issue.

(Operator Instructions) Next question is by Michael Hebner.

--------------------------------------------------------------------------------

Michael James Hebner;McNally Financial Services Corporation;Broker, [5]

--------------------------------------------------------------------------------

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, Gilat Satellite Networks Ltd. - CFO [6]

--------------------------------------------------------------------------------

Yes. Indeed, in early Q2, we paid $25 million -- close to $25 million 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 James Hebner;McNally Financial Services Corporation;Broker, [7]

--------------------------------------------------------------------------------

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, Gilat Satellite Networks Ltd. - CFO [8]

--------------------------------------------------------------------------------

So -- and now we started to work on our 2020 annual operating plan and budget, so it's too early to provide a 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 James Hebner;McNally Financial Services Corporation;Broker, [9]

--------------------------------------------------------------------------------

Now the mPOWER, you said that we're not going to receive revenue on that for 2 years or it's not operational. Could you put some more color around that?

--------------------------------------------------------------------------------

Adi Sfadia, Gilat Satellite Networks Ltd. - CFO [10]

--------------------------------------------------------------------------------

Yes. In general, the satellites are going to be launched in about 2 years. 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 that.

--------------------------------------------------------------------------------

Michael James Hebner;McNally Financial Services Corporation;Broker, [11]

--------------------------------------------------------------------------------

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, Gilat Satellite Networks Ltd. - CFO [12]

--------------------------------------------------------------------------------

So in Peru, we won $550 million of project. About 2/3 is onetime construction revenues and about $220 million operational revenues, yearly maintenance for a period of 10 years for the entire 6 projects together. So that's give 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 operator in Peru that gives more than $2 million a year. And actually, we expect this more than double or even triple within a few years because it's initial order for a few hundred sites. We expect them both to increase the size and to buy more capacity and later on to renew the agreement from 5 years to -- up to the 10 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.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I'm sorry, next question is Chris Riemenschneider from Wells Fargo.

--------------------------------------------------------------------------------

Christian Riemenschneider;Wells Fargo;Financial Advisor, [14]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Adi Sfadia, Gilat Satellite Networks Ltd. - CFO [15]

--------------------------------------------------------------------------------

For 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 product today are 5G-ready, and we continue to invest to make sure that we'll 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.

--------------------------------------------------------------------------------

Christian Riemenschneider;Wells Fargo;Financial Advisor, [16]

--------------------------------------------------------------------------------

Okay. And that's a couple of years out -- sorry. And that's a few years out?

--------------------------------------------------------------------------------

Adi Sfadia, Gilat Satellite Networks Ltd. - CFO [17]

--------------------------------------------------------------------------------

2 to 4 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 is 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 it's 3 to 4 years at least from today.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question is by Michael Hebner of McNally.

--------------------------------------------------------------------------------

Michael James Hebner;McNally Financial Services Corporation;Broker, [19]

--------------------------------------------------------------------------------

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 able to put these 5G towers, it seems like the satellite is going to give a lot greater opportunity. What's your thoughts on that?

--------------------------------------------------------------------------------

Adi Sfadia, Gilat Satellite Networks Ltd. - CFO [20]

--------------------------------------------------------------------------------

No doubt, 5G will bring a lot of opportunity for satellite equipment companies. Again, as I said, it's 4 years from today. And I think that with the NGSO constellation it will much more relevant for satellite and geostationary, especially because it solves the latency issue that we have with geostationary satellites.

--------------------------------------------------------------------------------

Michael James Hebner;McNally Financial Services Corporation;Broker, [21]

--------------------------------------------------------------------------------

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, Gilat Satellite Networks Ltd. - CFO [22]

--------------------------------------------------------------------------------

We are doing everything that is in our power, except of participating in conferences and making one-on-one 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 companies that will help us distribute our message to wider audience and not only to investors. Other than that, we are doing everything that we can.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

There are no further questions at this time. Before I ask Mr. Adi Sfadia to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin 2 hours after the conference. In the U.S., please call 1 (888) 326-9310. In Israel, please call 03-925-5904. Internationally, please call 972-3-925-5904.

Mr. Sfadia, would you like to make your concluding statement?

--------------------------------------------------------------------------------

Adi Sfadia, Gilat Satellite Networks Ltd. - CFO [24]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Thank you. This concludes Gilat's Third Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.