Gilat Satellite Networks Ltd (GILT) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Second Quarter 2021 Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded August 10, 2021. 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 GK Investor & Public 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 GK Investor Relations. Mr. Helft, would you like to begin, please?

Yes. Thank you, operator. Good morning, and good afternoon, everyone. Thank you for joining us today for Gilat's second quarter results conference call and webcast.

A recording of this call will be available beginning at approximately noon Eastern time today, August 10, as a webcast on Gilat's 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 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 those anticipated results. Gilat is under no obligation to update or alter these forward-looking statements, whether a result of new information, future events or otherwise, and the company expressly disclaims any obligation to do this. More detailed information about risk factors can be found in Gilat's reports filed with the Securities and Exchange Commission.

And with that, let me turn to introductions. On the call today are Mr. Adi Sfadia, Gilat's CEO; and Ms. Bosmat Halpern, Gilat's CFO. I would now like to turn the call over to Adi. Adi, we're ready to begin.

Thank you, Ehud, and good day, everyone. I would like to thank you for joining us today for our second quarter of 2021 earnings call. I'm very pleased with our results this quarter which demonstrate a solid improvement and return to profitability in our business.

We showed strong revenue growth of 49% year-over-year and 27% quarter-over-quarter. The improvement was throughout our income statement with improved gross margins and a return to profitability on non-GAAP basis with positive EBIT of $200,000 and adjusted EBITDA of $2.5 million.

Our performance was driven by the Cellular Backhaul, NGSO, enterprise broadband and defense markets, which have shown significant progress, and we expect this momentum to continue for the foreseeable future. We also made significant progress in the mobility market and in our operation in Peru, securing significant deals.

Looking ahead throughout 2021, we expect to continue our growth strength in both revenues and profitability. We expect the Cellular Backhaul, NGSO and our operation in Peru will be the main growth drivers for the remainder of 2021 and beyond.

Moreover, looking further out into 2022, we believe that it will be a year of significant growth for our company as our NGSO projects further materialize and our mobility segment grows with maritime and defense opportunities and the expected recovery of IFC. In order to material the significant opportunities we see ahead, we are investing increased efforts in R&D to better support our future growth.

Now I'll focus on some of the business achievements and highlights for the quarter. Mobility is a major focus area and growth engine for Gilat. We recently secured a multimillion-dollar agreement with SES for our next-generation mobility platform. This is a breakthrough in solidifying our leadership in the mobility market, enabling supply of initial maritime services to some of the world's top cruise liners and maritime service providers. Connectivity will be delivered by our multi-orbit platform utilizing the O3B mPOWER constellation and other SES gear satellite, including SES-17.

In the IFC market, we are seeing initial seeds of recovery. This remains a highly strategic market for Gilat, and we view the short-term impact from the pandemic over the past few quarters as temporary issue. However, we do believe it will still take some time for the IFC industry to return to its pre-COVID levels and for Gilat IFC segment to recover to its full potential.

In the defense segment, we are seeing growing global opportunities, as we mentioned last quarter. We closed several important multimillion-dollar deals in both Latin America and Asia. Furthermore, we were awarded a $5 million contract by tier 1 U.S. terminal provider to power tactical Satcom terminals for militaries worldwide. This is in addition to our ongoing successful supply of high-quality military communication products to the U.S. Department of Defense and the U.S. Army from our U.S. subsidiary Wavestream.

In Peru, we received a $13 million award from Pronatel to provide public free Wi-Fi services across hundreds of sites in the regions of Ayacucho, Apurimac, Huancavelica and Cusco. This 2-year project has potential for further expansion to thousands of additional sites and extensions for additional years. We are making significant progress with our strategy to deliver services over the network, and as such expect to meet our previously stated goal of $50 million in annual recurring revenues from Peru.

The non-geostationary orbit satellite constellation and the very high throughput satellite segments continue to be a major strategic focus area and growth engine for Gilat. As a leading provider for this market, we see solid growth potential, comprising of hundreds of millions of dollars in market opportunities for which we are making very significant progress in several fronts. We continue to receive multimillion-dollar orders from a leading satellite operator for support of low orbit constellation. As we reported in the past, our subsidiary Wavestream was chosen to supply gateway solid-state power amplifiers for this project.

We also continue our development of the ground segment for the SES O3B mPower satellite constellation and expect to start seeing significant revenue from this project in the coming quarters. The Cellular Backhaul segment continued to be a strategic importance to us. We saw significant expansion in follow-on orders during the quarter from our tier-1 MNO globally. This is a testament to the great value that our customer sees in our solution as they continue to expand their networks.

I would like to highlight our leading MNO customer in Latin America who expanded a multimillion-dollar IoT project for additional coverage provided by Gilat Cellular Backhaul solutions. The mobile operator expand its agricultural IoT network to address the critical need for enabled better communication between the field and the office.

On the 5G front, as the market adoption of 5G is growing, we see strong potential for Gilat to expand its leadership. This is -- this will initially be with the drive towards additional 4G deployments and as a next step with 5G as it spreads to rural areas. In North America, we closed the deal estimated at over $5 million with Pacific Dataport to provide broadband coverage in Alaska for everyone everywhere.

This strategic agreement will utilize Gilat's multi-application platform to provide both fixed and mobility applications. In the enterprise segment, we also closed important deals in Latin America, including one with Telefonica.

In summary, as you can see, it has been very active and successful quarter for Gilat, and I'm particularly satisfied with our solid strategic and financial performance over the past quarter. This strength was driven by Cellular Backhaul, NGSO and defense markets, enabling very strong revenue growth and our return to profitability on non-GAAP and EBITDA level, following the COVID-19 downturn over the past year.

Furthermore, we won new service project in Peru, which will bring us to recurring revenues in the future as well as new contracts in defense and maritime markets. We expect our momentum to continue for the remainder of 2021, providing continued growth in both revenues and profits.

Moreover, looking further out into 2022 and beyond, we expect significant growth primarily in the following market segments. In the NGSO and VHTS segment, we see opportunities of hundreds of millions of dollars for which we are making very significant progress. In the mobility segment, we expect to strengthen our leadership with the SES award for our mobility and maritime platform as well as we expect the recovery of the IFC market as air travel picks up.

In the Cellular Backhaul or the satellite segment, we are the global leaders in 4G and LTE, and as such we expect to enjoy the growing opportunity as markets adopt 5G, for which we have proven technology. In the defense segment, we believe that our gained momentum with global wins this quarter has further potential of tens of millions of dollars. I'm excited with our potential and look forward to reporting on our progress over the coming quarters and years.

And with that, I'd like to hand over to Bosmat. Bosmat, we are now ready for your report. Please go ahead.

Thank you, Adi. Good morning and good afternoon to 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.

These non-GAAP financial measures should be considered in addition to and not in lieu of comparable GAAP financial measures. Non-GAAP financial measures mainly exclude the effect of stock-based compensation, amortization of purchased intangibles, amortization of lease incentive, litigation expenses or income related to trade secret claims, reorganization costs, merger acquisition and related litigation costs and settlement and initial recognition of deferred tax assets with respect to carryforward losses. The reconciliation table in our press release highlights this data and our non-GAAP information presented excludes these items in accordance with Reg G requirements.

I will now move to our financial highlights for the second quarter of 2021. Overall, as Adi mentioned earlier, we are pleased with the results. Our quarterly results showed continued sequential improvement and strong year-over-year improvement in both revenue and profitability. Notably, we are very happy to have returned to profitability on a non-GAAP basis in the quarter, which we expect to maintain and improve in the coming quarters. The trend indicates that we are moving in the right direction. And even while the COVID pandemic remains in the background, there is a clear stabilization of our end markets. Our improvement does not yet have the significant contribution of the in-flight connectivity, or IFC vertical, which remains weak.

In terms of our financial results, revenues for the second quarter were $56.9 million, up 49% when compared to $38.3 million in the second quarter of 2020 and up 27% compared to $44.7 million in the previous quarter. The increase was driven by revenue growth from enterprise broadband, Cellular Backhaul, NGSO and defense markets.

In terms of the revenue breakdown by segment, fixed network segment revenues were $30.8 million compared to $21.8 million in the same quarter last year. We also saw an improvement compared with the previous quarter, where Fixed Networks revenues were $25.3 million. These results demonstrate the significant improvement in the business we have been seeing in this segment, and we expect that it will show continued improvement in the second half of 2021.

Mobility Solutions segment revenues were $19.9 million compared to $14 million in the same quarter last year. Compared to previous quarter, we saw an increase from $11.1 million. The improvement in this segment is driven by revenues from NGSO and defense markets, while IFC remains weak. Terrestrial Infrastructure Projects segment revenues, which include the construction revenues for our projects in Peru for Pronatel, were $6.2 million compared to $2.5 million in the same quarter last year and $8.3 million in the previous quarter.

To summarize the quarterly GAAP results, our GAAP gross margin improved to 29% compared to 25% in the same quarter last year and 28% in the previous quarter. GAAP operating loss improved to $300,000 compared to operating loss of $3.5 million in the same quarter last year and operating loss of $3.7 million in the previous quarter. GAAP net loss in the second quarter improved to $100,000 or $0.00 per share compared with a net loss of $4.2 million or a loss of $0.08 per share in the same quarter last year. In the previous quarter, we had a GAAP net loss of $5.1 million or a loss of $0.09 per share.

Now looking at our quarterly results on a non-GAAP basis. Non-GAAP gross margin improved to 29% compared to 25% in the same quarter last year and 28% in the previous quarter. I'm very encouraged, as I said before, by a return to profitability on a non-GAAP basis, while we continue to invest significantly in R&D. Non-GAAP operating income for the quarter was $200,000 compared with an operating loss in the same quarter last year of $2.6 million.

In the previous quarter, the operating loss was $3.8 million. I note that we had $16.6 million in non-GAAP operating expenses in the quarter compared with $12.2 million in the second quarter of last year and $16.2 million in the previous quarter. The second quarter of last year included temporary cost reductions, which mainly consisted of reduction of our global workforce to 80% [work-scope].

We returned all our employees to 100% work-scope in December 2020. We continue to invest significant efforts in R&D to ensure timely delivery of the existing large projects we have been awarded, mainly in LEO and MEO constellations and also to capture other opportunities we see ahead of us. Non-GAAP net income in the quarter was $400,000 or $0.01 per share. In the same quarter last year, we reported net loss of $3.3 million or $0.06 per share.

In the previous quarter, we reported a net loss of $5.2 million or $0.09 per share. Adjusted EBITDA for the quarter improved to $2.5 million compared with an adjusted EBITDA of $100,000 in the same quarter of last year. In the previous quarter, we reported an adjusted EBITDA loss of $1.4 million.

Moving to our balance sheet. As of June 30, 2021, our total cash and equivalents and short-term deposits, including restricted cash, were $82 million compared with $75.6 million at the end of the previous quarter. In terms of cash flow, we generated $8.4 million from operating activity. DSO, which include our Fixed Networks and Mobility Solutions segments and exclude receivables and revenues of our Terrestrial Infrastructure projects segment, decreased to 65 days compared to 77 days in the previous quarter.

With regards to our inventory, as you probably know and heard, there is a global shortage of electronic components and materials, which has been ongoing now since early 2021 and is affecting us and numerous other companies. However, given our careful planning and prudent inventory management, we have been able to manage the impact thus far, and we continue to work hard and are leveraging our strong cash position to ensure we have sufficient inventory available to meet the demand for our solutions. Our shareholders' equity at the end of the second quarter totaled $228.7 million compared with $228.1 million at the end of the previous quarter.

Looking ahead, all in all, we are encouraged with the continued sequential improvement in our results on both the top and bottom line. As Adi mentioned, we view 2021 as a year of recovery in which we emerged from the COVID-19 crisis. We look forward to a year of continued revenue growth and improved profitability in 2021 and much more so in 2022.

That concludes my financial review. I would now like to open the call for questions. Operator, please?

(Operator Instructions) The first question is from Chris Quilty of Quilty Analytics.

Congratulations on the good results. Question for Bosmat on the last point you mentioned around the chip shortages. Are you seeing improvements, or is the situation getting worse there? And how should we think about that in terms of either restricted sales capability or impact on margins for the balance of the year?

Thank you for the question. Right now, we mainly are in control of those shortages. We do see impact of the lead times of our equipment, and that's why we are managing that by ordering ahead of time. Sometimes we need to order a year in advance. I do not expect it to have a material impact on our margins or on our results as we manage it correctly. However, I do expect that our inventory levels will slightly grow because of those shortages.

Fortunately, you have the cash to front that. And I guess on a similar angle, with the resurgence of the delta variant, are you seeing any impact on your business in terms of trends either globally, by region or by market activity?

This is Adi. The delta version -- variant, I think 2 months ago, we thought that the COVID is behind us with result of a vaccine and the vaccination rate, and now we see that we are far from finishing this episode. We started to meet some customers, and now it seems like, due to the restriction in Israel and worldwide, we need to reduce our travel significantly again. But from business perspective, more or less, it's the same in the last 6 months. We don't see additional effect. But again, I learned from the last 15 months that every month you learn something new. But right now, it's the same situation as it was in the last 6 months.

Great. And a follow up on -- I think you had stated in the script that you expect Peru to be the primary growth driver in the back half of the year. Is that expected to come on the terrestrial side or services? And will that have any kind of a material impact on the gross margins that you report in the back half of the year relative to the first half?

The growth should come from services, mainly from services, most of them on the terrestrial network that we are building. And it's going to increase our margin, especially in Peru. The effect on the consolidated P&L will be -- it depends on the other revenue mix, not only on Peru. But if we take Peru as a stand-alone, Peru margin should increase significantly with winning additional service speed, and I guess that it will also increase our overall gross margin.

Great. And congrats on the new defense wins. Can you help us understand, are those wins that you're seeing in the defense segment generally new program starts? Or are these programs where you're going in and taking away business competitively?

It's a combination of both. In the U.S., there are some programs that we are continuing to get orders. Some cases, it's a new project under existing programs. If we consider a program, a huge budget basket under the DoD. But we do see more and more business outside of the U.S., especially for broadband solution, gateway hubs and then VSATs for non-U.S. countries. And we do see some new programs in the DoD that we are now trying to find a way in.

Great. I know you don't typically provide book-to-bill per se, but can you give us a sense of what the order trend is looking like either in the quarter or year-to-date? And I would guess generally at a top level and specifically with regard to IFC, whether you're seeing any early leads there of order activity picking up?

In the last few quarters, on average, our book-to-revenue ratio was higher than 1, which I think it's good situation. On IFC, we are seeing initial seeds of orders for both SSPAs, box and amplifiers, and they're also for baseband, but it's the beginning. We hope it's a beginning of a trend. To be honest, the delta variant now probably will delay again the recovery by a quarter or 2 until people will understand where it's going to take us.

And are you changing your strategy at all with regard to the IFC market? Obviously, Intelsat, the former Gogo are large anchor customer. But in terms of your approach to the airline customers, are you working primarily through partners or directly? And has anything changed post-COVID with the opportunity set there?

No, I think the strategy hasn't changed. We -- here and there, we do talk with the end users, but we are primarily focused on supporting our partners Honeywell, Gogo and [Nuvu], Global Eagle, supporting their requirements. We do participate in some of new RFPs that service providers issued in the last few months and probably will issue additional in the next few quarters. But we have no intention to go directly to the airlines.

Great. And a final question on the NGSO market. Obviously, SES with mPOWER is the big growth driver going into 2022. But are there additional opportunities out there? Obviously, Telesat and Amazon being the largest potential opportunities, but are there other potential constellations or competitive wins that you see in the next, say, 12 to 24 months?

Without naming names, we are working with -- I think, except SpaceX, we are working with all the -- or trying to work with all the big satellite operators. There are a lot of new initiatives, startups, that raising a lot of money, either with IPO, private money or under stocks, and we have a discussion with them as well. I do believe that we'll see success in getting awards in the next few quarters.

Great. Congratulations.

Thank you, Chris.

The next question is from Gunther Karger of Discovery Group.

Yes. Congratulations on continued excellent results. My question is regarding the defense military business. I know that, I'd say a year ago, that business was relatively minor. Since then I've noticed the increasing number of wins. At the present time, what percentage of total business is represented by the defense and military worldwide?

Indeed a few quarters ago, the defense business was relatively minor. And we are saying I think in the last 2 or 3 quarters that we are seeing more and more traction from defense worldwide. We had several awards I think the second quarter. This quarter was the strongest one. In terms of revenue, it's not a data that we provide, but we do see increased portion of defense revenues. It's becoming a trend, although I can't say it's a quarterly -- it's a quarter-over-quarter trend. I remind everyone that our business is -- vary from quarter to quarter and both top line and margins depend on the revenue mix. But we do see more and more business from the defense coming in.

(Operator Instructions) There are no further questions at this time. Ms. Halpern, would you like to make your concluding statement?

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

This concludes Gilat's Second Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.