Gilat Satellite Networks Ltd (GILT) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's First Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded May 15, 2018.

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

All right. Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's first quarter 2018 conference call and webcast. A recording of this call will be available beginning at approximately noon, Eastern time today, May 15, and will be available for telephone replay until May 18 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.

Thank you, June. And good morning, good afternoon, everyone. Thank you for joining us, and I'm assured that today we'll have a smooth and uninterrupted call, so I hope it will be productive.

I'm pleased to report that the first quarter of 2018 was a very good quarter for Gilat, giving us a solid start of the year. To summarize our financial performance, revenues grew 5.4% year-over-year to $67.4 million, GAAP operating income reached $3.7 million versus $18,000 in Q1 of 2017, while adjusted EBITDA increased 78% year-over-year, reaching $7.5 million, or 11.2% of revenues. We also remained strongly profitable on a GAAP basis in the first quarter, with a net income of $2.3 million versus a loss of $800,000 in Q1 2017.

On a non-GAAP basis, net income increased to $3.8 million compared with $1.7 million in the same quarter last year. Our ability to achieve this level of profitability in the first quarter, which is typically the lightest quarter of the year, shows our continued progress in building a mix of quality revenues through our strategic growth engines of mobile cellular backhaul and mobility IFC, along with continued efforts to drive costs out of the business.

To offer greater visibility into our business, we have moved to new reporting segmentation beginning with the first quarter of 2018, a segmentation that better reflects our strategy and our organizational and operational structure. Our CFO, Adi, will elaborate on the new operating segments in his comments. However, let me just say briefly that the new structure has 3 segments consisting of Fixed Networks, Mobility Solutions and Terrestrial Infrastructure Projects. This structure is more directly aligned with our business and as such, provides greater visibility and better demonstrates the progress that we are making in each of our growth engines, as represented in the Fixed Networks and Mobility Solution Segments. The third segment, Terrestrial Infrastructure Projects, captures and isolates the construction revenues associated with our projects in Peru. As we have said in the past, our interest in the Peruvian projects is not mainly the construction dollars but ultimately, the recurring revenues for services that allow the complete -- that follow the completion of the construction. As said, we believe that this segmentation better demonstrates our focus and provides greater visibility to our business and our main growth engines. Adi will elaborate shortly on the actual trends of these engines, which are the drivers of our business.

Moving on to the business section. Let me provide some details on our business this quarter. This first quarter was also positive from a business perspective due to new as well as continued engagements with customers and partners in our main strategic focus areas. Let me highlight a few developments in these areas.

In the enterprise market, as we mentioned last time we spoke, we won in the first quarter a major multimillion-dollar deal for NBN in Australia to meet the demand of broadband services for businesses and government customers. Our advanced platform delivered high spectral efficiency, low cost per bit and very powerful user terminals, which we believe is the reason we were selected. With these, NBN can deliver more bits per hertz with lower cost per bit, demonstrating our platform's leadership in ground segments for HTS, which is high-throughput satellites; and VHTS, very high throughput satellites. And we are encouraged by this win, not only for its size and its criticality for our presence in the region, but also as it demonstrates again our platform's leadership position.

With these 3 underlying themes of high spectral efficiency, low cost per bit and powerful user terminals, we will continue to invest heavily in R&D as we continue to enhance our platform to support VHTS and non-geostationary constellations towards full network virtualization, beam hopping and the upcoming world of 5G in order to meet the demand of our customers.

LTE backhaul continues also to be a significant growth engine for Gilat, with ongoing commitments for major MNOs in North America, Latin America, Europe and Asia, which include both network expansions and long-term end-to-end projects. In addition, we secured a number of backhaul wins. And among them, we already announced Altice in Portugal for critical communications. And others will be announced in the coming weeks and months.

Turning to mobility. At a satellite show in Washington, D.C. held in March, we displayed Gilat's complete dual-band aero terminal for commercial in-flight connectivity. Our AeroEdge 6000 is a highly efficient, high-performance Ku/Ka airborne terminal, which includes Gilat's dual-band antenna, Taurus MODMAN and Wavestream transceivers. Recently, this terminal achieved noteworthy performance during the live customer demonstration in China. The demonstration operated both Ku and Ka frequencies, delivering extraordinary download speeds of 130 bits -- 130 megabit per second while having dozens of concurrent users.

In Latin America, we see continued, albeit slow, slow recovery that demonstrates our collaboration with HISPASAT to provide commercial broadband services throughout Mexico. We're engaged in additional opportunities in the region and believe that we'll be able to report further in the coming weeks and months.

And lastly, in Peru, we're entering the acceptance test process, or ATP, which is the last phase of construction -- of the construction of our Fitel projects. This phase has extended somewhat due to the new government and the setup of new ministers. But still, we intend to finalize all of -- all or most of these projects by year-end as planned. As I said earlier, our interest in Peru projects is not mainly the construction dollars, but rather the high-margin recurring revenues from services that follow the completion of the construction.

So in summary, I'm pleased with our results for the first quarter, which were stronger than typical for Gilat's first quarter. I'm also pleased to start the year on the right foot with the closing of the NBN agreement. And with our positive first quarter performance, we remain strongly confident with our strategy and achieving our growth and profitability targets for the year.

With that, we are moving to Adi's presentation.

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, litigation expenses related to trade secret claims and expenses for tax contingencies to be paid under an amnesty program. The reconciliation table in our press release highlight this data, and our non-GAAP information presented exclude these items.

I will now move to our financial highlights for the first quarter of 2018. Revenues for the first quarter of 2018 were $67.4 million, a 5% increase compared to $63.9 million in the first quarter of 2017. Effective with the first quarter of 2018, we have changed our operating segments to more accurately reflect our management focus, organizational alignment, customer base and end markets. The 3 segments are Fixed Networks, Mobility Solution and Terrestrial Infrastructure Projects. We believe that these changes are consistent with how the business is viewed by the chief operating decision-maker and as such -- as a result, the company's operation can be more effectively managed.

Fixed Network Segment includes our broadband satellite networks equipment activities, including our cellular backhaul solutions and services for telcos as well as our products and solutions for enterprises, consumers and governments worldwide. It further includes our network operations and managed services activity in Peru and Colombia, which were previously reported as part of the service segment. Our Fixed Network revenue for the first quarter of 2018 was $37.6 million compared to $26.9 million in the same quarter last year and $34.7 million in the previous quarter, representing increases of 40% and 8%, respectively, over the prior periods. The increase over the same period last year reflects higher revenues from our Latin America region, including our activity in Colombia. The increase over the previous quarter was mainly due to higher revenues in Latin America and North America.

Mobility Solutions Segment include our satellite communication equipment for on-the-move satellite communication activities, including our in-flight connectivity activities as well as our defense and homeland security activities. Our mobility revenues for the first quarter increased to $20.8 million from $14.9 million in the same quarter last year, mainly due to IFC revenues. Mobility revenues in the fourth quarter of 2017 was $32.6 million. The decrease is primarily due to seasonality in our business with our fourth quarter typically our strongest and the first quarter our lightest.

Terrestrial Infrastructure Projects Segment includes our construction of the Fitel fiber network activity in Peru. Terrestrial infrastructure revenues were $9 million compared to $22.2 million in the same quarter last year and $15.4 million in the previous quarter. As discussed previously, revenues from Fitel can vary quarter-to-quarter depending on the percentage of the project's completion.

In total, in the first quarter of 2018, Fixed Networks represented 56% of revenues, Mobility Solution represented 31%, and Terrestrial Infrastructure Projects represented 13% of revenues. In the first quarter of 2017, those percentage were 42% for Fixed Networks, 23% for Mobility Solution and 35% for Terrestrial Infrastructure, demonstrating the shift of our revenue mix towards our area of strategic focus as well as wind down of the construction phase in our project in Peru.

Our GAAP gross margin in the first quarter of 2018 increased to 31.7% of revenues from 27.1% in the same quarter last year. The increase in our gross margin is mainly attributable to higher revenue volume and more favorable revenue mix. Our gross margin in the previous quarter was 30.5%.

Total operating expenses on a GAAP basis for the first quarter was $17.7 million compared to $17.3 million in the same quarter last year and $19.6 million in the previous quarter. GAAP operating profit in Q1 was $3.7 million compared to an operating profit of $18,000 in the same quarter last year and $5.6 million in the previous quarter. GAAP net income was $2.3 million or income of $0.04 per diluted share compared to a loss of $784,000 or a loss of $0.01 per diluted share in the same quarter last year, and net income of $3.4 million or income of $0.06 per diluted share in the previous quarter. On a non-GAAP basis, operating income for the first quarter was $5.1 million or 7.6% of revenues compared to an operating income of $2.5 million or 3.8% of revenues in the same quarter last year. Non-GAAP operating income for the previous quarter was $7 million or 8.5% of revenues.

Non-GAAP net income in the first quarter was $3.8 million of income of $0.07 per diluted share compared to non-GAAP net income of $1.7 million or income of $0.03 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $4.7 million or income of $0.09 per diluted share.

Adjusted EBITDA for the first quarter of 2018 was $7.5 million or 11.2% of revenues compared to adjusted EBITDA of $4.2 million or 6.6% of revenues in the same quarter last year. Adjusted EBITDA for the previous quarter was $9 million or 10.8% of revenues.

As of March 31, 2018, our total cash and equivalent, including restricted cash, were $106.5 million, an increase of $19.7 million from the previous quarter. The increase is primarily attributable to strong collections in the first quarter, including several milestone payments from our projects in -- for Fitel in Peru.

DSOs, which include our Fixed Networks and Mobility Solutions Segments, and exclude receivable and revenues of our Terrestrial Infrastructure Projects segment, decreased to 64 days compared to 70 days in the previous quarter. Previously reported DSOs excluded receivables and revenues of our service segment. Our shareholders' equity at the end of the quarter totaled to about $222.4 million compared to $218.3 million at the end of the fourth quarter of 2017.

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

(Operator Instructions) The first question is from Andrew Spinola of Wells Fargo.

I have a pretty high-level question. Yona, I wanted to start with you. You made a comment about investing heavily in R&D, and it was up quite a bit in the quarter year-over-year. And trying to get a better sense of what you're investing in and where you see the best opportunities. I know kind of high-level what those markets are, but can you maybe drill down a little bit on your R&D spend? And tell me why you saw various areas you think Gilat can sort of be a winner.

Well, I think the answer is multilayered. And I would say, first of all, that we -- when we analyze the markets we are targeting and we analyze the market trends, we believe that there will be bigger demand and there will be a overall trend of price erosion. Therefore, we must prepare for these trends as we see already the pressure to provide bigger throughput for lesser cost. Therefore, we defined the 3 design themes that I elaborated on earlier, which are spectral efficiency, cost per bit and strong VSATs. We believe that with the markets going to broadband and more capacity at lower cost, this will be the prerequisite in all directions we go. So these are the design themes. Now where are we going with our platform? First of all, the world is moving from HTS to VHTS, from high throughput to very high throughput, again as exemplified by ViaSat-3, Jupiter-3, et cetera, et cetera. These are high-throughput satellites, very high throughput satellites. You need in those characteristics, and this is one market we're targeting. Secondly, we are preparing for the NGSO constellations. We -- as we mentioned earlier, we believe that while there's a lot of doubt, our belief is that not all will fail. So some will be successful and, therefore, we have to prepare for the NGSO constellations. That includes the beam hopping. That includes onboard processing, network virtualization, et cetera. This is the second market we are targeting. And then finally, the other market we're expanding into is ESA antennas, which is mandatory for NGSO constellations to be successful. And we are beginning our path into -- our journey into that area. And we are -- we believe that we have made initial steps, and we believe that we'll be part of the booming world of ESA antenna providers.

And I guess, just sort of the follow on to that question is as I'm thinking about your financials, with R&D up quite a bit and some of your operating expenses down, how should we think about sort of where those different line items trend as you go after this opportunity?

Andrew, it's Adi. I think that more or less, the current run rate of R&D, as you can see in Q1 and Q4, will continue until the end of the year, more or less.

So at these absolute levels you're saying?

Yes, it's absolute level of around $8 million to $8.5 million a quarter.

Okay. And is there more opportunity on the sales and marketing and G&A side to take cost out? Or is it similar for those line items for the rest of the year as well?

I think the G&A more or less will stay the same level. Sales and marketing, as we are investing more and more in sales and marketing, I think it -- we expect it to increase a little bit.

Got it. And can you maybe elaborate a little bit on why gross margin -- you mentioned gross margin improved this quarter on mix. Can you remind me what some of your higher-margin revenue lines are? And what, maybe specifically, drove the better gross margin this quarter?

Yes. In general, our products for -- in our growth area, for cellular backhaul and in-flight connectivity, drives a bit of a higher margin. Especially we are focusing on developed countries and less on the developing countries. Over there, customers know and appreciate better technology and are willing to pay premium for better products.

And then on revenue, I guess, to make your guidance on the top line, you need to sort of show an acceleration from Q1. Is that -- do you have the awards and backlog at this point that give you the visibility to that? Or is this business from existing customers? Or do you need to win business to make that? And what's your visibility to those opportunities?

It's combination of backlog and existing customers. In general, I would say that more than 75% of our forecast is already either recognized or in backlog. So we have a pretty good visibility until the end of the year. Having said that, we need to remember that in some cases, we need to get acceptance from customers, so it can slip quarter-to-quarter or even year to year. But in general, not like other years, we have a very good visibility to our top line and bottom line this year.

Got it. And Yona, just in general, can you comment on sort of the RFP activity in the mobile network opportunities, the LTE backhaul? I know it's an attractive space for you guys. How's it been looking in the last 3 months?

It's looking more or less the same. We are progressing with existing customers, and the pipeline is increasing. More of the -- most of the customers who bought equipment for cellular backhaul, as an example, already expand their network. And the pipeline is increasing on a monthly basis. So I think it will continue to support our growth.

Last question for me. Just the CapEx was higher this quarter, and I think your model's changing somewhat, where you're taking on more CapEx with some of these service contracts. Do have a sense -- was this a one-off quarter of higher-level CapEx? Or is this a run rate going forward where you might do something like $12 million or $14 million this year in CapEx?

The CapEx this quarter includes deployment of several managed service transactions that we won late Q3 and early Q4. I would expect 2018 CapEx to be higher than 2017. But I'm not sure we will continue to keep the $3 million unless we win another big managed service transaction.

The next call is from Michael Hebner from IFS Securities.

With all the news on Trump and the ZTE and Huawei and 5G and countries making a strategic interest, seems that, that would create some opportunity for you. Are you seeing anything in that arena on the big picture?

I think that the satellite industry is still in the process of analyzing and trying to identify the right opportunity for 5G. In that context, it is a little bit behind cellular world. So I think that at this point in time, we, as everybody else, are part of the forums and the processes that try to define the best fit of 5G into the satellite domain. But at this point, I don't think there is any concrete opportunity. Maybe when we see the NGSO constellations of LEO and MEO with thousands and thousands of beams, 5G coming into materialization. But I think this is a few years down the road. At this point, I think it's, in general for the industry -- in general, 5G is a little bit of un-mature in order to translate it into specific opportunities.

So when you're looking at -- you've got the profitability under control now. You're making money. So what are we doing on the sales side to get something moving? I mean, it's a massively growing industry. How are we going to start growing our revenue at a higher rate?

Well, first of all, as I explained in my response to Andrew's question, we are investing a lot in R&D because this is the foundation. We need to have a product that maintain our leadership position and not only that, but create our platform fit to compete in new spaces, like NGSO constellations and also penetrating into new territories and the ESA antenna. So first of all, we will continue to invest relatively heavily in R&D. That's something that will remain high in our priority list. Secondly, we intend to expand, as we said previous calls and on this call, to expand our efforts from certain areas where we already made some success, like North America to Europe to Latin America and others. Because we believe there's potential there that we were not able to capture. We were so focused on the previous territory that we were operating in. As far as strategic options, we are all the time looking. There's definitely another vehicle or another tool at our disposal to accelerate our growth. And that's something that's on our radar. And when the right opportunity arise, we will take advantage of it.

Good. What about Investor Relations? It seems like you're not doing much on that front. I mean, is there -- are you doing anything more, going to any shows? How are you enhancing -- you've got some good profitability. How are you enhancing that?

We are doing the best we can on that front. We invest a lot in meeting investors, attending shows, and we'll continue to do so. Maybe not everything is visible. We are traded both in Nasdaq and Tel Aviv. And we plan to do a road show in June. So maybe we'll be able to meet with you.

Now have you hired any more salespeople? So on the side, we're always going to have a plan, but you usually need somebody out there selling that plan. Do we have any more salespeople? Are we going to add any more salespeople to -- seems like you have some good products here, to get the stuff out there?

Definitely. We are constantly in the process of expanding our sales force. This is an immediate derivative of our plan to expand from North America, as I mentioned earlier, to Europe, to Latin America and other parts of the world. So the intent is to improve our sales team and to expand it, and we do it all the time. This is a critical component of our plan to expand into new territories and into new product line. Definitely, we are searching and hiring every day of the year.

So if we had 10 salesmen last year, how many do we have this year? Do we have a number?

We do not share such numbers.

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

I guess, just back on 5G commentary, Yona. Agreed that there's just a greater amount of bandwidth required. And I guess I'm wondering what the technical requirements are in going from HTS to VHTS and how you're handling that. And specifically in -- I guess, as you address spectral efficiency, what sort of modulation orders are you changing and how fast do you think you can get your bandwidth to increase?

We could go into technical discussion, but without confusing the forum, I would say the following: First of all, we are currently in the midst of upgrading our network and our user terminals to be fully compliant with S2X, which is the new standard to address a VHTS satellite, at least on the outbound. On top of that, we will -- this will be a process that will be complete by the end of 2018 and, therefore, the full hub and VSAT product line will be fully compliant with S2X, as I said, by the end of this year. In the coming years, we intend also to invest further in the inbound in order to expand our -- the pipe, if you will, on the inbound as well and bring that into fully compatibility and support of satellites, which will be the size and ability to deliver such as Jupiter-3, such as the new Eutelsat satellite and other VHTS satellites, plus as well with the capacity that will be delivered by mPower, the new O3b constellation, and also Telesat and OneWeb sat constellations. Not all of them are still out there bidding, but at least we want to be ready from our platform perspective. As far as the VSATs themselves, we also continue to invest. The ultimate goal is to get to 1 giga per VSAT, but this will be the high end of the product, again, to reflect the ability to transmit and receive a lot of bandwidth for every end user. I think these are the highlights of our technical goals. We can go into more details, but I think it gives you the order of magnitude of what we're aiming in the coming 2 to 3 years in terms of product road map. I believe that this will be supportive adequately with the VHTS and NGSO constellations that will be out there in the coming 2 to 3 years.

Okay, okay. On the airport terminal and the D.C. show, could you give us just a little more color on the upshot? Were you able to talk to more manufacturers? Were you able to talk to more airlines specifically? Can you give us a sort of a status report on where you are?

Yes. I don't want to be -- I don't want to disclose the customer -- the potential customer's information, but we had a very successful show in China. We presented the dual-band terminal. We presented it to most, if not all of the major airlines in China as well as local, domestic and international service providers. There's a lot of interest. We believe that the antenna and the solution is ready for STC and should start STC in the coming weeks and months, therefore, be ready for commercial flights early 2019. We also believe that there will be commercial interest in the antenna in the coming months. And towards the beginning of 2019, there will be a deployment. I do not want to go into details of 1, 2, 3 or how many customers and who they are -- this is obviously confidential -- nor volumes. But we are very optimistic regarding our completion of the antenna on time, certification and deployment into commercial use. At this point, this is all I can say. But we are optimistic that there will be customers to this very, very unique and high-performance antenna.

Okay. I understand the China perspective, but could you give me -- or I'm sorry, can you offer any more insight on what's happening, say, in North America, Europe?

Yes. Unfortunately, I cannot go into detail here as well for a different reason. As you know, we are codeveloping this antenna with Hughes network. And these territories are where -- they have the selling rights of the antenna. So while I have the data, I cannot share it with you. You'll have to -- I'll have to defer you to Pradman in order to tell you where they stand on these efforts. This is their -- as part of our agreement, they have the exclusive rights to market the antenna in those territories.

Okay. Fair enough. Adi, thank you for the new segmented presentation. But when the Peruvian project moves from construction to service and you start looking at service-generated revenues, will those revenues flow into Fixed Networks or do you continue to expect to break them out?

No, those revenues will flow to Fixed Networks. It's part of our overall operation in Peru. We have a relatively large operation today that will deal with these networks and other satellite networks that we have in Peru. It's managed together. It's tied together. You cannot break it.

Okay. Apologies, Yona, for flipping back and forth. But on the airborne terminal, is -- in some of those contracts, do you hope to include a service portion? I know that you've spoken to this in the past, and I was hoping you wouldn't mind reminding me.

Sure. Currently, our strategy is to offer services on the cellular backhaul enterprise side of the house, not on the IFC, neither basement nor antenna side. So currently, we are not targeting service. This is not part of our strategy. We are still in our build up and penetration phase. But if the opportunity comes, we will not say no. But we're not actively pursuing, no. But we are definitely on the enterprise, and so the backhaul side.

(Operator Instructions) The next question is from Gunther Karger of Discovery Group.

Regarding the in-flight services area, particularly the segment that you service with Gogo contract, how is that general business going currently? And what is the outlook for that business?

This business is growing quarter-over-quarter and year-over-year. We expect it to grow -- we gave a guidance of mobility revenue to grow on average about 15% year-over-year in 2018 after a significant growth of 40% year-over-year in 2017. We expect to continue to grow.

A follow-on question on that. Regarding antenna developments that the prior gentlemen might have covered, but I wasn't sure. I remember you were developing an antenna system that is flush with the fuselage. Is this the antenna development that was referred to, that's now under development?

No, I think you are mixing 2 different projects. The one that you refer to is a experimental development together with Airbus. And currently, we have nothing to share on it.

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 03-925-5901. Internationally, please call 972-3-925-5901. Mr. Sfadia, would you like to make your concluding statement?

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

Thank you. This concludes Gilat's first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.