Gilat Satellite Networks Ltd (GILT) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Fourth Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, February 12, 2019.

I would know like to turn the call over to 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 Fourth Quarter and Full Year 2018 Conference Call and Webcast. A recording of this call will be available beginning at approximately noon Eastern time today, February 12, and will be available for telephone replay until February 17 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 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 will -- I would now like to turn the call over to Yona Ovadia. Yona, we are ready to begin.

Thank you, June. Good morning, good afternoon and good evening, everyone, and thank you for joining us. I'm pleased to report our Q4 results as well as to provide a summary of our performance in 2018. At the end of my review, I will also provide some highlights on our objectives for 2019.

Q4 was another strong quarter, concluding a year of important progress for Gilat. In 2018, we continued to focus on building a mix of quality, profitable revenues through our growth engines of 4G LTE cellular backhauls for the mobile market, mobility in-flight connectivity and broadband. And in fact, full year 2018 revenues from our Fixed Networks Segment, which includes our backhaul, increased 24% from 2017, while our Mobility Solutions Segment, including IFC, increased 10% from the previous year. In contrast, Terrestrial Infrastructure segment revenues in 2018 were down 68% from 2017. This was in part expected as the construction phase of our first 3 regions in Peru for Fitel was winding down. However, delays in the inspection and approval process by Fitel delayed certain revenues into 2019. Fortunately, these delays are temporary, and I will say more about Peru later in my remarks.

In total, Gilat's full year 2018 revenues were $266.4 million or 6% lower than 2017, while fourth quarter revenues were $69.7 million due again to the lower construction revenues in Peru.

Even with the effect of Peru, we made substantial strides in improving profitability in 2018. GAAP operating income for full year 2018 increased 98%, virtually doubled from 2017 to $21.3 million. Adjusted EBITDA rose 35% to $35.2 million, and GAAP net income reached $18.4 million or $0.33 per diluted share. I might add that this was a conflict why we made a significant investment in R&D, which represented 12.4% for 2018 revenues, up from 9.9% in 2017. We plan to continue and make substantial investments in R&D in 2019 in order to maintain our product leadership in the market, which I will speak more about later.

Let me now provide more details on our business with this review. In 2018, we continue to see progress in our strategic focus area of broadband connectivity. The year started with a major achievement with NBN Australia for a deal worth tens of millions of dollars. Additional significant successes were achieved in collaboration with HISPASAT in Brazil, Gazprom in Russia, JSAT in Japan and finally, in China, with China Satcom, where our win of the ground network for ChinaSat-18 joined with our 2015 win of ChinaSat-16 makes Gilat the de facto solution for anyone who wants to benefit from the advantages of HTS Ka over China.

Specific in the fourth quarter, we closed new broadband connectivities in Japan where we secured a multimillion dollar project with the Japanese government agency called Local Authorities Satellite Communication, or LASCOM; in Mexico, where we collaborated with HISPASAT and [generally won the deal] with Dish Mexico; and in India, where Gilat was chosen to provide broadband connectivity for the GSAT-11 multi-spot beam satellite recently launched by ISRO, the Indian Space Research Organization. These substantial successes throughout the year demonstrate Gilat's leadership in providing the high-performance, highly efficient ground network.

Regarding cellular backhaul. In 2018, Gilat also continued as the front-runner of 4G LTE cellular backhaul with extensions of projects with existing customers such as Globe in the Philippines as well as new contract wins, including Telstra in Australia and Altice in Portugal. In the strategic focus area of mobility, which is very small [storm] throughout the year. In 2018, Gilat significantly expanded the largest global IFC network, which is Gogo. Gogo recently reported ending the year with over 1,000 commercial aircraft installed and activated with 2Ku solutions, which includes the Gilat IFC's modem. We also made significant strides with our aero dual-band terminal, including passing the standard for the environmental testing of avionics hardware and received the DO-160 certification. Another area of opportunity for us is the non-geostationary orbit, also known as NGSO constellation. Gilat achieved 2 important milestones in demonstrating successful trials of our mobility technology for LEO satellites. A first-ever live in-flight demonstration for broadband connectivity over LEO resulted from the cooperation Gilat had with Global Eagle and Telesat. And recently, Gilat demonstrated exceptional maritime connectivity over Telesat's LEO Phase 1 test satellite with a Tier 1 maritime service provider. This was an industry-first milestone for maritime applications requiring exceptionally low latency and high bit rate.

Going back to Peru. Despite the delays in construction and inspection of the first 3 regions of Huancavelica, Ayacucho and Apurimac that were won in 2015, we expect to move to the operational phase of these region in -- regions in 2019 once the approval process by Fitel is complete. We also plan to complete the construction of the forest region, Cusco, in 2019, and then finalize the approval process with Fitel as well as enter the operational phase in the first half of 2020.

As we said several times in the past, our interest in Peru is mainly not the construction dollars but the operational fees. And with gradual acceptance of the regions in 2019 and 2020, we look forward to moving to the operational phase of this project, which yields higher margins. We are [made] and committed to making Peru a source of recurring profitable revenue for Gilat.

Lastly, regarding 2018, and as I mentioned earlier, we have increased our investment in R&D in 2018 compared to 2017. As we look at the market and market trends, it is clear to us that there is growing demand globally for affordable broadband, fueled in part by the availability and declining price of satellite capacity. This creates the demand for technology that offers higher and higher throughputs and greater and greater efficiencies. And this need will continue with the appearance of enabling technology and -- technologies and applications such as 5G. As the leader in LTE satellite backhaul, Gilat is ideally positioned to capitalize on this market need, and we continue to invest significantly in advancing our technology. As part of this investment, this quarter, we announced the powerful 5G solution to provide new levels of speed and capabilities in support of next-generation services. We are committed to continue -- to a continued investment in our products as I will elaborate in a minute.

So in summary, 2018 was a year of important progress for Gilat as we advanced our business strategy and achieved substantial profitability growth. Looking at 2019, we will continue our focus on improving profitability by continuing to develop and expand our existing growth engines as we see continued reception to our services and solutions. As I described earlier, as the market constantly evolves and requires higher throughputs and greater efficiency, we will also continue to invest substantially in R&D and in our product road map and even in higher levels than 2018 to maintain product leadership, especially in the era of NGSO and 5G.

I'm pleased to say that we have a healthy pipeline as we go into 2019, and therefore, our management objectives for 2019 are revenues between $275 million to $295 million, which represents growth of between 3% to 11% from our comparable 2018 results. We expect GAAP operating income of between $23 million to $27 million and adjusted EBITDA of between $38 million to $42 million. This represents an adjusted EBITDA increase of between 8% to 19% year-over-year even with the continued significant investment in R&D.

In addition, I'm also pleased to say that with this continued and significant progress and the strength of the Gilat balance sheet, the board is planning to award a cash dividend to shareholders of about $25 million while maintaining our ample liquidity to fund future growth.

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

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 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, expenses for tax contingencies to be paid under an amnesty program and initial recognition of deferred tax assets, which expect to carry forward losses. The reconciliation table in our press release highlights these data, and our non-GAAP information presented exclude these items.

I will start with some brief highlights of our 2018 full year results. Total 2018 revenues were $266.4 million compared to $282.8 million in 2017. Our total revenues include revenues from constructing the Fitel network in Peru, which are recorded in the Terrestrial Infrastructure segment. Construction revenues were $25 million in 2018 compared with $78.3 million in 2017. As Yona noted, the decline was partially expected due to the wind-down of the construction phase in our initial 3 regions in Peru but was also due to some delays in our progress, coupled with a very slow inspection and approval process by Fitel. Excluding these construction revenues in Peru, our 2018 revenues were $241.4 million compared to $204.5 million in 2017, an increase of 18% year-over-year.

Our Mobility segment revenues were $97.2 million compared to $88.4 million in 2017, about 10% year-over-year growth, mainly due to an increase in our IFC revenues. Our fixed segment revenues, which includes also cellular backhaul revenues, increased to $144.2 million from $116.1 million in 2017, an increase of about 24% year-over-year, mainly due to higher revenues in Latin America, Asia Pacific and North America.

Moving down the income statement. On a GAAP basis, we are reporting full year operating income of $21.3 million compared to operating income of $10.9 million in 2017. Net income on a GAAP basis for 2018 was $18.4 million or $0.33 per diluted share compared to $6.8 million or $0.12 per diluted share in 2017.

On a non-GAAP basis, we are reporting full year operating income of $25.1 million compared to non-GAAP operating income of $18.5 million in 2017, an increase of 36%. Non-GAAP net income for 2018 increased to $18.2 million or $0.32 per diluted share from non-GAAP net income of $14.6 million or $0.27 per diluted share in 2017.

Adjusted EBITDA for 2018 increased 34.6% to $35.2 million or 13.2% of revenues compared to an adjusted EBITDA of $26.2 million or 9.3% of revenues in 2017.

I will now move to our financial highlights for the fourth quarter of 2018. Revenues for the fourth quarter were $69.7 million compared to $82.7 million in the same quarter last year and $62.8 million in the previous quarter. Our GAAP gross margin in the fourth quarter of 2018 was 37.3% of revenues compared to 30.5% in the same quarter last year and 38.5% in the previous quarter.

Total operating expenses on a GAAP basis for the fourth quarter were $18.5 million compared to $19.6 million in the same quarter of last year and $18.2 million in the previous quarter. The main increase was in our R&D expenses, which represented 12.8% of revenues due to increased investment in our product portfolio, especially in our growth engines, in-flight connectivity and cellular backhauls. Sales and marketing expenses were 7.9% of revenues, while G&A expenses were 5.8% of revenues.

GAAP operating income was $7.5 million in the fourth quarter compared to $5.6 million in the same quarter last year and $6 million in the previous quarter. GAAP net income was $5.3 million or $0.09 per diluted share compared to net income of $3.4 million or $0.06 per diluted share in the same quarter of last year. Net income in the previous quarter was $8.7 million or $0.16 per diluted share and include a onetime deferred tax asset benefit of about $4.1 million.

On a non-GAAP basis, operating income for the fourth quarter was $7.9 million compared to $7 million in the same quarter last year, $6.5 million in the previous quarter. Non-GAAP net income was $5.7 million or $0.10 per diluted share compared to non-GAAP net income of $4.7 million or $0.09 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $5.1 million or $0.09 per diluted share.

Adjusted EBITDA for the fourth quarter was $10.5 million compared to an adjusted EBITDA of $9 million in the same quarter last year. Adjusted EBITDA for the previous quarter was $9.1 million.

As of December 31, 2018, our total cash and equivalents, including restricted cash net of short-term bank loans and credits, were $104.2 million, an increase of about $1 million from the previous quarter.

DSOs, which exclude receivables on revenues from our Terrestrial Infrastructure segment, decreased to 71 days compared to 73 days in the previous quarter.

Our shareholders' equity at the end of the quarter totaled about $239.1 million. Based on our strong balance sheet as well as our continued growth prospects and cash generation, the Gilat Board of Directors expects to declare a cash dividend of $25 million or approximately $0.45 per share subject to final determination that the company meets the criteria set out in the Israeli Companies Law. Under the Israeli Companies Law, such dividend will be based on our audited financial statement to be issued in March 2019.

As Yona mentioned, our management objective for 2019 are revenues of between $275 million to $295 million. Excluding expected Terrestrial Infrastructure construction revenues in Peru of approximately $23 million to $30 million, we are targeting full year revenues without construction of between $262 million to $265 million. This represents a growth of between 3% to 11% from our comparable 2018 results. We expect GAAP operating income of between $23 million to $27 million and non-GAAP operating income of between $27 million to $31 million. We expect adjusted EBITDA to be between $38 million to $42 million, representing an adjusted EBITDA increase of between 8% to 19% year-over-year.

In closing, we have concluded another very good year at Gilat. We focused on increasing our profitability [over it]. We have a strong balance sheet with cash and equivalents of approximately $104 million, which gives the company the flexibility to make the right decisions needed to support the execution of our strategy. In 2019, we will continue to focus on bottom line profitability and continued growth in our adjusted EBITDA.

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 Gunther Karger of Discovery Group.

Question, is there any comment to M&A activity ongoing?

Gunther, in respect of M&A, as I said, we have sufficient fund as of December 31, 2018. We have about $104 million. Even with the dividend distribution, we still have plenty of funds. We continue to generate cash from operation quarter-over-quarter. So we have the flexibility to do a nonorganic M&A acquisition. We are -- it's something that is on our table, but we don't have anything concrete right now. We are looking for our opportunities. And once we have something, we will let everyone know.

The next question is from Michael Hebner of IFS Securities.

The low-flying satellites everybody is putting up in the air, how are we taking advantage of that? Are we on any of these programs? And if so -- and if not, why?

Absolutely. We are active in this market. I cannot go into specific opportunities and our position in those opportunities, but we are active. We are investing quite significantly. As I mentioned earlier, there are 2 achievements that we have reported already this year. One was a in-flight connectivity, the first-ever airplane to fly and connect to a GEO satellite, switching from LEO and back. This was done with the collaboration with Global Eagle and the Gilat modem. The second one, which we reported not too long ago, was a maritime trial, again with a leader in this space also connecting to the Telesat LEO test satellite. So these 2 are -- were announced last year. We are active in this market. I can also say that Telesat is not the only opportunity that we are engaged with. So definitely, we are active in this market. Quite a significant amount of our investment in R&D is directed towards that type of constellations, and we are optimistic that we will get a portion of this business as those constellations mature, reach decisions and start the launch.

Before you talked, somebody asked a question about acquisitions and stuff. Now if I was in -- with the technology and the number of wins you have, why wouldn't somebody try to buy you, guys? And so they would keep the technology, so they would dish TV or whoever, so they could utilize the -- your technology and nobody else could.

That's a question towards potential candidates. I don't know. I think that -- what I would -- I'd feel comfortable saying is that our board is optimistic regarding our long-term prosperity and our long-term holders of our shares and do not intend to cash on these investments in the short term. So we have their trust, and they are long-term investors. Maybe that's part of the answer.

So with the Huawei stuff and President Trump and all of that, what do you see in the mechanics changing? Israel kind of like on defense and able to serve all these markets. What are you seeing out there?

I don't want to go into politics and particularly, Mr. Trump's strategy and all that. I can tell you one thing. We are doing good business in China. We intend to grow our business in China. This is one of our focus areas. And sometimes, things work in your favor; some time, against geopolitically and otherwise, but we rely mainly on our technology, on our team. And I would also say we are very cautious regarding protecting our IP, and this strategy has proven itself in China and we believe will continue to yield good results.

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

Yona, appreciate offering a view to how you see the year going. Aside from the construction work in Peru, could you highlight what you think are -- I mean, I know you just alluded to China being a nice growth avenue and also LEO satellites. But could you be more specific about where you see your biggest growth drivers and how you see 5G playing into that?

Yes. The strategy that we portray for 2019 is, first of all, we are going to be focused on improving profitability. I want to highlight that. And the numbers are where were stated earlier. We are currently projecting $38 million to 48 -- $42 million. The way to achieve that is growing within but also expanding our growth engine. But let me provide some more color. We talked about broadband. In 2018, we had a series of wins that we are pleased with that I mentioned earlier, NBN, Gazprom, et cetera, and we intend to continue and fight and to hopefully win such geostationary opportunities. However, there's no doubt in the next -- one of the next expansion there in broadband is NGSO, could be LEO, could be MEO, but definitely, this is a big opportunity or a number of opportunities ahead of us. So point being within broadband we're expanding from GEO to NGSO. Moving on to in-flight connectivity, we declared our plan to expand within in-flight connectivity from the modem business to the antenna business. We continue to invest in that area, and we believe that we will be successful in 2019. So this could be a significant opportunity to grow in revenues and profit. This is regarding in-flight connectivity. Regarding Peru, we had a hiccup of sorts in 2010 because of the delay, but our plan is to move to operations in the first 3 regions in 2019 and add Cusco at the first half of 2020. And therefore, we will start to see the fruit of our investment, and we will start to benefit from what we have been aiming for all along, which is the recurring revenue, which brings profitability with them. So in all areas, I think we have expansions, and that's why I used the word expansion in my previous conversation. We want to expand within the growth area, and we see the opportunity for expansion within the -- with each one of those growth areas, which, in turn, will contribute to growth in profitability.

The next question is from [Rozz Doom] of Leader Capital Management.

(foreign language)

[Rozz], in English, please.

Okay. No problem. I would like to know if the guidance for 2019 include any deals in the antenna market.

The guidance for '19 includes a combination of several revenue mix, including antenna market. Although antenna is not going to be -- in terms of revenue, is not going to be very significant because we will see the initial start of those revenues. But definitely, in our objective for 2019, we have antenna revenues.

We have a follow-up question from Gunther Karger of Discovery Group.

Given the merger between General Electric transportation and Wabtec, combining those 2 with freight (inaudible) on passenger systems, which increases the interest in the spectrum. Is there any progress that you're seeing (inaudible) Chinese (inaudible) ?

I'm not sure I understand the question. This merger is not relevant to us. I'm not sure. I follow up the question. Can you please repeat?

Oh, sure. I was just referring -- referencing the merger between General Electric transportation and Wabtec, which combines the 2 railroad businesses, which increased the interest, generally. And going to the Chinese area that you're involved with, which are the railroad companies that you provide the broadband systems to, is there any progress report with regard to the Chinese project?

A few -- showed update on our business in China with the CRRC, they're switching from a Ka to Ku -- opposite, sorry, from Ku to Ka. So the -- basically, they are starting the whole process right now. We haven't gave up. We are supporting them, but it will take time. It will take time. In parallel, we have some progress worldwide with trains. It's not something that we can announce, but we see progress, and we see some revenues every year from selling antennas to trains.

(Operator Instructions) The next question is from Idan Rodkin of Rimon Investment Fund.

I just wanted to ask about the dividend. What's the reason behind it? Why now? Why relatively so big?

Idan, up until recently, we didn't have a profit to allocate dividend from based on the Israeli Companies Law. Now the company has a significant cash surplus for a long time. We are generating cash from operation, and we generated -- excluding Peru, we generated only in 2019 almost $40 million from operation. Expectation is to continue to generate cash in the future. We have significant investment in R&D, and we have sufficient fund in cash both to support inorganic acquisition and if we need to pay cash dividend to a long-term shareholder that believes in the company and stayed with the share for a long time. So I believe it's the right thing to do, $0.45 per share. It's -- in one way, it's not a lot. In the other way, it's significant to a company that's never paid a dividend. But still even after with the allocation, we will have more than $80 million in cash and equivalents. So we have plenty of cash to support our future growth.

And no debt.

And we have no debt, of course.

We have a follow-up question from Michael Hebner of IFS Securities.

Yes, that dividend, are you planning to paying that once? Or is it going to be split over 4 quarters? What's your plan on that?

Once we will file our [2018 report of the] financial, we -- the board will take the final decision, but we expect to pay $25 million at once.

Okay, onetime dividend.

Yes.

Yes.

Do you plan on setting up a dividend reinvestment plan that somebody can -- a drip or something like a lot of the REITs and stuff have or no?

No.

Not at this point, no. Not yet.

Okay. Now what's the thoughts behind -- if I'm dealing with somebody who's not paying me, i.e., Peru, the idea that I'm extending this relationship, how much more money is it costing to extend this relationship to give our return on investment? And then why did you think we're going to...

Yes. I think we need to remember, first of all, Fitel or the Peruvian government paid upfront $100 million, and they paid additional significant amount during the construction phase based on milestone. Now we are -- towards the end of the project, we finalized the majority of the projects. And now we are waiting for them to accept the networks and pay the last construction payment. So here and there, we need to bring money from home to finalize the network. But overall, it's not a big cash burden on the company, and I would say that more than 95% is funded by advances we got from them, from the Peruvian government. And as Yona said, we are not there for the construction revenue, which is more of a onetime revenue. We are there for the recurring revenue. And we have up until today a backlog on those agreements of more than $23 million, $24 million a year of recurring revenue profitable ones, and we can sell services over those networks. And we expect overall that Peru alone will generate about $50 million a year in profitable recurring revenues. And we are already more than halfway there together with the satellite recurring revenues that we have in Peru today and with the Fitel revenues and services that we already sold on the network. So we believe it will meet the $50 million target once all networks will be active.

Now what was the issue why we didn't get paid? Was it something we did, something they did, change in administration? Or what was the pretext for not completing the original agreement?

It's a combination. They need -- it's a big network where a lot of polls, a lot of the telecom know that they need to grow one by one. Fitel didn't have the men part to do so for that to work, some kind of an RFP for companies that will perform the testing. They started it, finished some of it, and they gave us some observation to fix, and so we need to fix it and get acceptance. So it's a very long process, but we are on our way to get the acceptance. (inaudible) a month or 2, might be another quarter, but we are on our way.

Good. But what are you doing to reach out to investors? I mean, there's very -- I mean, you guys have an exciting future, exciting technology. You're in the most exciting area, I think, that's out there, one of them. And what do you doing to reach out to get more investors involved with the story?

We are investing a lot of CFO time and CEO time talking to investors both in Israel and in the U.S., talking to a lot of analysts who cover the market, and we will continue to do so. And we are there. We are very open. Everyone that wants to talk to us, we are having a talk. Hope to see you soon next time we'll be in New York.

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 039-25-5901; internationally, please call 972-3-925-5901.

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

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

Thank you. This concludes Gilat's Fourth Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.