Gilat Satellite Networks Ltd (GILT) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Third Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, November 14, 2017. I would now like to turn the call over to Ms. June Filingeri of Comm-Partners LLC to read the safe harbor statement. June, please go ahead.

Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's third quarter 2017 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern time today, November 14, and will be available for telephone replay until November 17th at noon. The webcast will be archived on the Gilat website for a 30-day period.

Also, please note that investors are urged to read the forward-looking statements in Gilat's earnings releases 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. 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 Chief Executive Officer; 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.

Thank you, June, and good morning, good afternoon, and good evening, everyone. Thank you for joining us today. As always, I'd like to share with you a brief summary of our financial results, followed by a review of the business. However, let me start by saying that we are announcing today an important end-to-end multi-year deal with T-Mobile U.S., whereby we build and operate a centralized backhaul network based on our leading technology for the satellite services in the U.S. This comes on the heels of 3 other such deals that we have announced since September, namely with Globe in the Philippines, Sprint in a contract expansion and a tier 1 Telco in Latin America. This concludes a truly exceptional -- exceptionally fruitful few months in terms of materializing or better accurately -- more accurately is demonstrating the potential of our cellular backhaul growth engine as we previously communicated.

Back to our financial results. I'm pleased to report that Gilat again achieved very good financial results for the third quarter of 2017. Our revenue totaled $69.9 million, and our adjusted EBITDA was $7.1 million. Our management continues to focus on profitability, achieved by a combination of driving costs out of the business, as well as building a mix of quality and profitable revenues through our strategic growth engines of mobile cellular backhaul and mobility in-flight connectivity.

In particular, let me note that we achieved GAAP net income of $2.1 million for the quarter, and we remain committed to our long-term target of being profitable on a GAAP basis. Based on our strong third quarter achievements, as well as our progress year-to-date, we are refining our management objectives for 2017 by narrowing our profitability targets up towards the higher end of the prior range to GAAP operating income of $9 million to $11 million and adjusted EBITDA of $24 million to $26 million while keeping our revenue objectives at $280 million to $290 million.

On the business side, we are pleased to have announced multiple multi-year cellular backhaul wins this quarter, as well as have made substantial progress in the IFC space, causing me to be optimistic about our pipeline opportunities.

On the mobile side, we have spoken in the past about our strategy to add larger, long-term projects with recurring revenues with the goal of maintaining a more consistent revenue and profitability stream. We believe that the deals we announced earlier this quarter are due to both our LTE cellular backhaul carrier-grade technology that meets the stringent service level requirements in terms of throughput and user experience, as well as our experience in integrating multi-site satellite-backed networks into the MNO's cellular network. As we discussed in previous quarters, we are seeing that satellite backhaul is becoming more and more a legitimate part of the cellular network aligned for extended, reliable LTE coverage.

So as I mentioned in my opening remarks, T-Mobile awarded Gilat for an end-to-end multi-year projects for LTE cellular backhaul for network expansion in rural areas, destinations, highways and elsewhere, where fiber delivery is challenging throughout the continental United States. These wins comes on top of 3 additional service deals with Tier 1 and telco -- other major telcos around the world that we have announced over the past few months. First in the U.S., we expanded our contract with Sprint to include the 3-year service project, in addition to our technology provided for the 3G and 4G network. Second, we secured a deal in the Philippines with Globe, the leading telecommunications company there, for a 5-year contract for 4G cellular satellite backhaul services. And third, we closed the deal with a major telecom service provider in Latin America to provide an end-to-end services project for rapid rollout of high performance broadband. These wins further prove our belief that satellite-based LTE cellular backhauling is becoming the viable and standard solution for plentiful, quality and affordable broadband.

I would also like to highlight our role in the recovery efforts after the recent hurricane disaster in Puerto Rico and the U.S. Virgin Islands. We are proud to report that both T-Mobile and Sprint are using Gilat's equipment for their emergency response teams to restore communications to the population there that has been experiencing severe disruption. Close to 50 of Gilat's VSATs are already installed and more installations underway.

In mobility, we are making progress in the IFC space. We have reached a noteworthy milestone with our customer, Gogo, with over 150 airplanes already flying with our airborne modem, showing the strong pace of ramp-up. We see a potential of approximately 2,000 aircraft providing all with an excellent user experience based on Gilat solution. Equally important, we are making further inroads with our airborne antennas. We offered today our dual-band Ku/Ka antenna, with development to be completed early next year and moving into SEC certification later in the year. We are very active with our different partners with a goal of the first commercial flight with our Ku/Ka antenna during 2018, thus paving the way to adoption and deployments in the coming years.

In addition, we believe that further antenna potential is in electronically steered antennas, also called ESAs, especially with the emergence of LEO and MEO constellations. Gilat is moving in this direction, and has made progress on its RFIC and ESA antenna development programs. We are gradually taking our aero antennas in this direction, and I'm optimistic that the interest we are seeing in the marketplace will translate into concrete achievements in the coming quarters.

In addition, our business in Peru is progressing as planned, and in accordance with the project milestones. Completion of the construction phase in the 4 regions is expected throughout 2018. These projects will then move to ongoing operation, which are expected to bring us recurring and more profitable revenue.

So in summary, we are pleased with the continued progress in our financial results in the third quarter, along with the momentum we are seeing in our growth engines of cellular backhaul and in-flight connectivity, as evidenced by the exceptional number of wins that we have announced.

I'm also encouraged by our initial achievements in creating recurring revenue streams via multiple -- via multi-year service deals, which is a good point where we can move now to Adi for your report.

Adi, please?

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 use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business, and to make operating decisions. We believe this non-GAAP financial measures provide consistent and comparable measure 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, litigation expenses related to trade secret claims and expenses for tax contingencies to be paid under an amnesty program. Reconciliation table in our press release highlight this data, and our non-GAAP information presented exclude these items.

I would like now to move to our financial highlights for the third quarter of 2017. Revenues for the third quarter of 2017 were $69.9 million, a 6% increase compared to the $66.2 million in the previous quarter. Revenues for the third quarter of 2016 was $78.6 million due to different stages of progress in Peru projects. Our GAAP gross margin in the third quarter of 2017 was 29.1% of revenues compared to 29.5% in the previous quarter and 30.2% in the same quarter last year.

Total R&D expenses on a GAAP basis were $6.9 million compared to $6.2 million in the previous quarters, and $6.4 million in the same quarter last year. We continue to invest heavily in R&D to support our strategy in cellular backhaul and ISP. Further, marketing expenses were $5.8 million compared to $5.6 million in the previous quarter and $6.2 million in the same quarter last year.

G&A expenses were $4.3 million compared to $5.9 million in the previous quarter and $11.3 million in the same quarter last year. G&A expenses in the third quarter last year included allowance for doubtful accounts of about $4.6 million and litigation expenses of about $2 million. G&A expenses in the previous quarter include about $600,000 of tax-related penalties due to the company's decision to participate in tax amnesty program in Brazil.

Total operating expenses on a GAAP basis were $17 million compared to $17.7 million in the previous quarter and $23.9 million in the same quarter last year.

GAAP operating profit in the third quarter were $3.3 million compared to an operating profit of $1.9 million in the previous quarter and an operating loss of $229,000 in the same quarter last year. Net income on a GAAP basis was $2.1 million or income of $0.04 per diluted share, the same as previous quarter, and compared to a loss of $2.2 million or loss of $0.04 per diluted share in the same quarter last year. On a non-GAAP basis, the operating profit for the third quarter was $4.9 million or 7% of revenues compared to an operating profit of $4.1 million or 6.2% of revenues in the previous quarter, and operating profit of $3.3 million or 4.2% of revenues in the same quarter last year.

Non-GAAP net income in the third quarter was $3.6 million or income of $0.07 per diluted share compared to a non-GAAP net income of $4.6 million or income of $0.08 per diluted share in the previous quarter, and non-GAAP net income of $1.4 million or $0.02 per diluted share in the same quarter last year. Adjusted EBITDA for the third quarter of 2017 was $7.1 million or 10.2% of revenues compared to adjusted EBITDA of $5.9 million or 8.9% of revenues in the previous quarter. Adjusted EBITDA was $5.2 million or 6.7% of revenues in the same quarter last year.

As of September 30, 2017, our total cash and equivalents, including restricted cash net of short-term bank loans and credits, were $108.2 million, a decrease of $1.3 million from the previous quarter. DSOs, which excludes receivable and revenues of our service segment decreased to 64 days compared to 71 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled about $214.5 million compared to $212.7 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.

(Operator Instructions) The first question is from Martha Masiarz of Wells Fargo Advisors.

First off, congrats on your backhauls wins. I just wanted to ask what's been driving the pickup in the demand for these contracts, and how do you see these opportunities going forward?

We certainly hope and believe that we have gained momentum and the wins that we have will carry us forward to additional -- to both expansions in the current deals, as we've seen in the Sprint phase, as well as additional wins. As I mentioned in my previous quarterly conversation, cellular backhaul is viewed by the telcos as something that they are struggling with. On the one hand, the potential is there. On the other hand, there is a bit of cautiousness, is this is a reality? Every win that we announce persuades the market model this is a reality, as we are convinced that this is the case, and every win gives us more tailwind to persuade others that are hesitating that this is a viable tool and they should be taking advantage of it. So the net of it is every win is demonstrating our conviction in this tool, and every win gives us more tailwind in terms of bringing this message and winning more deals with other telcos around the world.

Okay, great. And then the second question I had was regarding your mobility market. I know you've been getting traction in the air market with (inaudible) Gogo. And I was just wondering, do you see yourself expanding into the maritime market?

Not in the short term. Currently, we are very busy with our potential in the aero market. We dipped our toes in the maritime market a few quarters back when we announced a solution with SES. But currently, it is limited to that attempt. We are focused on where we see the largest potential and the opportunities in the short to mid-term, which are to aero. But that doesn't mean that we are excluding ourselves from the maritime market. We are always looking for the right opportunity and when it presents itself, we will pursue.

The next question is from Kevin Dede of H.C. Wainwright.

So Yona, I'm concerned about how to look at your financial model as it morphs with mortgage managed service contracts. I know you've got about a gross margin churning under -- just under 30% and 7% operating margin. How do you think that changes over the next year as revenues start swinging toward more managed services?

Kevin. It's Adi. I will take this question. In general, it's too early for us to give guidance for 2018. But in general, I would say that we intend to keep together with those services, managed services, we intend to keep the same margins that you see today in the commercial segment. So we are not giving quarterly information about it on the 20th, but we intend to keep those margins going forward with the managed service. Of course, as long -- when we expand those deals and then we see more and more margin, it will affect the overall gross margin of the commercial.

Okay. Do you think you might speak to the percentage of revenue that's coming in from managed services versus equipment?

It's something we need to consider during next year, which will be relevant. Most of the -- all of the agreement that we won, we are now in a ramp-up stage, and we expect to see them working towards the end of Q4 or early Q1. So next year, when we will announce the guidance, we will consider if and what to disclose.

So Yona, talk a little bit about how you're managing your sales and marketing activities in addressing cellular backhaul versus the legacy VSAT business?

Kevin, in the previous quarters, we defined our strategy. We do not give up on any fortress that we have in the consumer and enterprise markets around the world. We hold the line and try to do better while focusing our growth engine. So we're not neglecting nor giving up on our business in area that experience ups and downs, such as Latin America where we had a few weak quarters, but we are hoping to turn that around. We are doing well in Africa, Southeast Asia, Australia. But in general, our strategy is do better as much as we can in the enterprise and consumer business, which is more CapEx-based business around the world, while trying to promote and push as much as possible our focus and our energies into growth engines where we see a lot of opportunity that will translate into long-term recurring revenue. So we built our teams in a way that the people in the sales are doing everything they can to improve on the various fronts with dedicated teams to push forward on our growth engines as an overlay to the teams in the front. So in general, just to summarize, our strategy is keep and improve what we have, focus with dedicated teams to push forward where we see the opportunities, mainly in-flight connectivity, cellular backhaul, and if the opportunity presents itself, additional markets as was mentioned in the previous question via focused teams that are pursuing the opportunities in those areas.

So Yona to -- okay, I understand. You still have people in the field and you're not going to give up on the strong relationships that you have in your consumer and enterprise business, very clear. What isn't so clear is the, I guess, the tactical changes that you need to make to address both in-flight and cellular backhaul. I mean, what are there -- 350 separate cellular service companies around the world? And it would seem to me that a satellite backhaul application would be great in one of the rural areas. It's just -- I'm just curious to understand how you're looking at that. Are you trying to build more on your sales and marketing team? Or are you expecting the existing one just to extend their capabilities?

Kevin, this is Adi. In general, most of those telcos, except maybe T-Mobile, were already -- are already our customers. So we have a good relationship with them. We are trying to approach with managed service when we see the opportunity more on a fee level relationship rather than working with procurement and answering bid. It's more non-solicitation offers. We try to develop those opportunities. But in general, it's combination of the local team on the ground, together with a lot of overlay support and headquarter support from my headquarter in Israel.

So looking at the expense side of it, Adi, would you -- I guess would you expect to see just an incremental increase through next year?

On sales and marketing in general, I think that we are going to keep more or less our OpEx level the same. It's too early to say because we just started the budget process right now. But in general, we have no intention to double or to increase significantly none of our OpEx expenses.

The next question is from Gunther Karger of Discovery Group.

Question regarding China, regarding particularly the train business, is there any progress report on that aspect, the trains?

Gunther, this is Adi. So let me give you a quick status report, a high-level status report on China. So in the trains, together with CRRC, we are still in testing and certification process. It's a long process and we don't have end yet -- end date yet. In addition, we are working to develop our relationship in the ISC arena in China. We have a relationship with Air Media, and we are continuing to look for other additional partners. And in addition in the commercial segment, we have a very strong relationship with China Sat. We started to buy VSATs to their new satellite. So we expect to see more and more revenues from them in the coming few quarters.

The next question is from [Mike Hefner] of IFS Securities.

Yes, when I was reading some of these numbers, I think I've picked up the airplane, the Gogo stuff, you could make that service 16x faster. Did you have other metrics on the backhaul, what you can do to the cellphone and the broadband, what you're able to bring to the table on that, and A? And then B, what is the sizes of these markets if you're going to do $100, where are you going to do it in mobile, in backhaul and cellular?

So addressing the first question, we were asked a similar question a few quarters back, and our message is very simple. Our equipment can deliver up to 150 megabits per second to the handset to the end-user, to the driver, to the person in the rural area to et cetera, 150 megabits per second. However, we don't control that. This is the prerogative of our customers, T-Mobile, Sprint, et cetera, they will decide how much actually to allocate to each user, how much pressure they want to put on every VSAT, and as a result of it, how to impact their user experience. We give the tools, which are immense tools to our end-user -- to end customer, apologies, and they decide what is the end-user experience. We do not control that. Of course, we encourage them to give as much capacity as possible so that customer satisfaction will be optimal and equal to fiber. But at the end of the day, that's their business decision. We enable 150 megabits per second to the handset, which is by far more than any use even extensive use would need. So there is no limitation from our perspective. Actual implementation depends on the business plans of our customer. Regarding the second question, we currently focus our energies and our attention to higher potential and higher ARPU customers. Therefore, 2 of the 4 wins we announced are in the U.S. When we try to look at the opportunities and map which ones we attack versus not, which one we focus versus not, we try to go by the potential for us. Obviously, ARPU in the U.S. is much higher than Latin America, which is higher than Southeast Asia, and accordingly, our efforts. Of course, you need to have a recipient on the other end. But we believe that there is business globally, and we want to grab market share. As a result, we go for those who have the higher ARPUs, higher profitability areas first. And from there, we will expand and hope that the momentum we created and the tailwind we got will help us go to those areas as well.

Good. Now what type of barriers to entry do you have versus -- your competitors? I mean, what type of lead do you think that we have against people offering similar services, what we're doing?

Two things. I think that we have 2 distinct differentiators that I referred to also earlier in my script. The first one, which is short-lived is technology. We believe that we have superior technology. But I have no doubt that as we speak, others are developing competing technologies. So the time window there is not endless. The other differentiator that we are developing, which is I think more substantial and difficult to match is our experience in integrating multi-site satellite best networks into the core network of the Telco. May sound easy, but I assure you, it's very complicated, very complicated, taking into consideration the very stringent requirements of the telcos and their concern in protecting their customer base. We're not going into details here. Some of it -- because of some competitive information, but this knowledge is rare. And we believe that we are leaders in this area, and the ability to build such knowledge and such expertise are far more difficult to match compared to just catching up on technology.

Is that why Sprint and T-Mobile seemed to be further ahead in owning the spectrum and owning the bandwidth? And so that's why they're utilizing your service versus the AT&Ts and the Verizons that seem to be slower? Should you expect Verizon and AT&T to have to finally move?

Well, let's see what the coming few quarters bring in that context.

(Operator Instructions) The next question is a follow-up from Kevin Dede of H.C. Wainwright.

Yona, you've mentioned the Ku/Ka for IFF. Now -- yes, you mentioned that you'd be going through trials at the end of next year. So how long do you think it would take before it would deliver revenue? And will this version be steerable? Or would that require another iteration for ESA?

Kevin, it's Adi again. The Ku/Ka -- the Ku/Ka will be commercially available somewhere in mid-2018. So we expect to see initial revenues, I would say, in the second half of '18. But this is not the electronically used antenna. This antenna is under development. It will be our next generation antenna. I believe that within 2 years or so, it will be commercially available.

Okay. All right, Adi, so can you talk to the revenue mix of managed services, maybe this year or maybe the number of customers that you have on managed services versus your total customer base?

Right now, we announced only 4 significant managed service deals. So this is basically what we have right now. I'm not sure what you mean by mix of revenues. Revenues there is a combination of bringing our CapEx and providing end-to-end services, including space segment capacity. And we are getting -- it depends on the model with the customer. It can vary from fixed per site or pay as you go. It depends on the specific deal. This is why we believe that it's a very big potential for us both in top line and also in bottom line later on.

The next question is a follow-up from [Mike Hefner] of IFS Securities.

I'm just trying to get some color. So when the management's siting down and they're focused on marketing, where do you see the biggest opportunities to focus those resources? I mean, is it on -- how big is this Gogo market? How many dollars would that bring to us? And then the airplane antenna, this new antenna, how big a market is that, that we could sell into versus the broadband stuff?

Sure, okay. It' a very good question. Let Adi answer.

So the IFC market, we -- today, we have about 4,000 commercial aircraft connected to satellite Internet connectivity, and we expect to add about 2,000 planes a year. So based on the research that (inaudible) did, they expect to have in 2026 about 28,000 commercial aircraft connected. In terms of market size, today, the market size is about $300 million, and it's going to be soon about $600 million, and it's going to stay about $600 million because the number of the aircraft that are going to be connected each year will stay at around 2,000 aircraft. Now I cannot give you information about our prices with Gogo. But I can say that the potential with the antennas from our perspective is enormous because antenna for aircraft, it's about $200,000 to $300,000 per antenna. It depends on the antenna, the quantity, the commitment, but it's a large portion of this market size. I just mentioned commercial aviation, of course, there is also business jets and other subsegment in this market that we are also pursuing for opportunities.

So when I drive around my car and I get to these areas there's no coverage. Is there any transferability? Can you put any antenna on a car and it can reach my cellphone service? Is there any broad application to this?

Connected car is one of the dreams of the industry. But I think that we will need -- currently, the antenna is very expensive if you put it on a car. It should be electronically steered antenna that should be very small and should track the satellite. So currently, those kind of antenna are very expensive. It's like putting antenna of an aircraft on a car. We believe that our technology in the future, the ESA technology, might fit to those kinds of solution, but I think it's way too early to discuss it.

I would like just to add to that, we're currently focused on broadband opportunity, and I think in general, the whole market is broadband. There is a market for narrowband and I see the typical -- I'm sorry, IoT is a typical narrowband opportunity, including connected cars. To develop antenna that fit in to the mass-market is a very challenging task. This is why we are taking our ESA development in the direction of IFC antennas because there, of course, the price of such an antenna would be acceptably much higher. As far as adapting ESA antennas to the mass-market, I think it's a challenge that the industry will continue to struggle in order to find solution for in the coming few years. We may eventually get there as well with our ESA direction. But it's not our near-term solution. This is a very challenging task to develop a ESA antenna for IoT connected car applications in an affordable price.

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) 9255-901. Internationally, please call 9 (723) 925-5901. Mr. Sfadia, would you like to make your concluding statements?

I would like to thank you all for joining us for this call and for your time and attention. We hope to see you soon, and we'll speak to you in our next call.

Thank you very much, and have a great day.

Thank you. This concludes Gilat's third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.