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Gilat Satellite Networks Ltd. (NASDAQ:GILT) Q3 2023 Earnings Call Transcript

Gilat Satellite Networks Ltd. (NASDAQ:GILT) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Third 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. [Operator Instructions] As a reminder, this conference is being recorded November 7, 2023. By now, you should have all received the company's press release. If you have not received it, please contact Gilat’s Investor Relations team at EK Global Investor Relations at 1-646-688-3559 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. Helft, would you like to begin?

Ehud Helft: Yes. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat’s third quarter 2023 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, November 7 as a webcast on 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 earning 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 introduction. On the call today are Mr. Adi Sfadia, Gilat’s CEO; and Mr. Gil Benyamini, Gilat’s CFO. I would now like to turn over the call to Adi Sfadia, we're ready to start.

Adi Sfadia: Thank you, and good day to everyone. I want to thank you for joining us today for our third quarter 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 are 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. 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 event 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 biggest review of the third quarter of 2023. We are pleased with our results for the third quarter, 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 communication space in general. In particular, I would mention the in-flight connectivity market that contributes significantly to our revenue growth and profitability this quarter. We reported significantly improved profitability and adjusted EBITDA, demonstrating the operating leverage inherent in our business.

In fact, our year-to-date adjusted EBITDA of $27 million already exceed the adjusted EBITDA from the all of 2022. We are very pleased with the progress made this year and we expect this trend to continue. Looking ahead, we are narrowing our revenue and profitability expectations for the full year 2023. We expect revenues of between $265 million to $275 million. We are increasing our GAAP operating income to between $29 million to $31 million due to one-time income net that Gil Benyamini, CFO will discuss in his comments. And we expect adjusted EBITDA of between $35 million to $37 million, representing irrelevant growth of 43% at the midpoint. In the very high throughput satellite, the VHTS and the non-geostationary satellite, the NGSO constellations business, we continue to lead with follow on multimillion dollar holders from our strategic partners, the satellite operators.

Network expansions and delivery of Gilat multi-orbit next-generation platform, the SkyEdge IV and the Aquarius VSATs are taking place globally in support of multiple applications such as in-flight connectivity, cellular backhaul, enterprise. In the third quarter, we secured a new win for millions of dollars for our multi application platform to support new high throughput satellite. This satellite will be used primarily for IFC with maritime and cellular backhaul as secondary applications. In our SSPA 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 backhaul solution over satellite.

A significant award this quarter for approximately $20 million 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, a most exciting technical milestone was achieved with SkyEdge IV, Aquarius VSAT for 5G cellular backhaul in India with Reliance Jio over SES O3b mPOWER services. An outstanding performance of one gigabits per second was showcased in India's first satellite based giga fiber service called Geospace Fiber at the India Mobile Congress. The amazing success demonstrates high speed backhauling services of a satellite to deliver high throughput connectivity to previously inaccessible geographic within India.

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 Taurus Modems deployments that operate both on SkyEdge IV and SkyEdge II-c. In addition, we engage 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 longtime partner in the IFC market, we have continually relied on Gilat business. In March this year, we signed an agreement to acquire DataPath, Inc, a leading U.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 of Gilat business into the U.S. 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 million 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 DataPath acquisition will provide a tailwind for major defense opportunities. 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 third quarter, we already advanced a project with the Ministry of Defense of a 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 expansion from a large government corporation in Asia-Pacific to provide connectivity for multiple applications across the nation. This includes, but not limited to, enterprise applications, with strong opportunities for several backhaul, emergency response and mobility applications such as Coms-on-the-Move and Coms-on-the-Post, providing social inclusion is a big part of our strategy, and we have exemplified also a new deal in the Philippines, a new global network was deployed to provide connectivity to the unconnected, leveraging our SkyEdge II-c platform and Gemini VSAT.

A broadband satellite hovering in the sky, highlighting the company's satellite-based broadband communication solutions.
A broadband satellite hovering in the sky, highlighting the company's satellite-based broadband communication solutions.

In Peru, we are progressing towards completing the construction of the Amazonas region, which is the 6th region awarded to Gilat back in 2018. We expect to enter acceptance process soon, enabling us to deliver the network to Pronatel and to move into the operational phase in the first half of 2024. Furthermore, in Peru, we are expecting additional progress in the next few months. This includes the maturity of several large RFPs with [indiscernible] 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. We continue to lead with our next-generation platform, SkyEdge IV that support multiple orbits and verticals, including our strategic markets of mobility, solar vehicle and defense.

We also secured new opportunities for our SSPA business, especially in the IFC segment, and are seeing increased opportunities in that 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 Benyamini, our CFO. Gil, please.

Gil Benyamini: Thank you, Adi. 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 consistent and comparable measures to help investors understand our current and future operating performance. Non-GAAP financial measures mainly exclude the effect of non-cash, stock-based compensation expenses, amortization of purchased intangibles, amortization of intangible assets 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.

The reconciliation table in our press release highlights this data and our non-GAAP information presented exclude these items. I will now move to our financial highlights for the third quarter of 2023. Overall, as Adi mentioned earlier, we are very pleased with the strong results of this quarter. We reported a 6% year-over-year growth in revenue and a solid improvement in profitability. Non-GAAP gross margin was 41% and our adjusted EBITDA reached $9.5 million higher by 30% compared to Q3 last year. 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 third quarter was $63.9 million, 6% higher than those of third quarter 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 segments, Q3 2023 revenues of the Satellite Network segment were $40.7 million compared to $32.4 million in the same quarter 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. Q3 2023 revenues of the Integrated Solutions segment were $11 million, compared to $15.7 million in the same quarter last year.

The decline was mainly due to a transition period between strategic and large projects in the segment. Q3 2023 revenues of the Network Infrastructure and Services segment were $12.2 million, compared to $12.3 million in the same quarter last year. I would now like to summarize our third quarter 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. 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 $13.1 million in the quarter or 20% of revenue, compared with $19.6 million or 33% of revenues in the same quarter last year.

The significant decline in GAAP operating expenses was due to a win of a Philippines lawsuit, which was settled this quarter and resulted in a one-time other income as well as a sale of real estate in Bulgaria and therefore a reduction in GAAP OpEx of $7.4 million. GAAP operating income for the quarter improved to $12.7 million, compared to $3.4 million in the same quarter last year. GAAP operating income in Q3 2023, excluding the one-time other income was $5.3 million higher by 55% compared to Q3 2022. GAAP net income in the third quarter was $10.2 million or diluted earnings per share of $0.18. This is compared to a GAAP net income of $2.1 million or diluted earnings per share of $0.04 in the same quarter last year. GAAP net income in Q3 2023, excluding the one-time other income was $3.8 million, almost double that over the third quarter last year.

Moving to the non-GAAP results. Our non-GAAP gross margin in Q3 2023 improved to 40.5%, compared to 38.3% in the same quarter last year. Non-GAAP operating expenses in Q3 2023 were $19.8 million, compared with $18.7 million in the same quarter last year. Non-GAAP operating income for the quarter improved to $6.1 million, compared to $4.4 million in the same quarter last year. Non-GAAP net income in the third quarter was $4.6 million, or diluted earnings per share of $0.08. This is compared with a non-GAAP net income of $3 million, or diluted earnings per share of $0.06 in the same quarter last year. Adjusted EBITDA for the quarter was $9.5 million, an improvement of 30% compared with an Adjusted EBITDA of $7.3 million 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 $100.3 million, compared with $87.8 million on June 30, 2023 and compared to $69.9 million as of September 30, 2022. We do not hold any debt. In terms of cash flow, we generated $13.8 million from operating activities during the third quarter of 2023, which also includes the collection of the lawsuits award in the Philippines as I mentioned earlier. DSOs, which exclude receivables and revenue from our terrestrial network construction projects in Peru were 75 days higher 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 million compared with $255 million at the end of June 2023. 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. Our updated expectations show a strong 2023 with revenue of between $265 million to $275 million, representing year-over-year growth of 30% at the midpoint, GAAP operating income of between $29 million to $31 million, representing year-over-year growth of around 3x at the midpoint, and adjusted EBITDA of between $35 million to $37 million, representing year-over-year growth of 43% at the midpoint.

All in all, as Adi 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 would be happy to take your questions. Operator, please.

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