Gilat Satellite Networks Ltd (GILT) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's First Quarter 2023 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, May 9, 2023. By now, you should have all received the company's press release. If you have not received it, please contact Gilat's Investor Relations team at EK Global Investor Relations at 1 (646) 688-3559 or view it in the news section of the company's website, www.gilat.com.

I would now like to hand over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin?

Yes. Good morning, and good afternoon, everyone. Thank you for joining us today for Gilat's First Quarter 2023 Results Conference Call and Webcast. A recording of this call will be available beginning at approximately noon Easter time today, May 9, as a webcast 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 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 the 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 explicitly 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, let me turn to introduction. On the call today are Mr. Adi Sfadia, Gilat's CEO; and Mr. Gil Benyamini, Gilat's CFO. I would now like to turn the call over to Adi Sfadia.

Thank you, Ehud, and good day to everyone. I want to thank you for joining us today for our first quarter of 2023 earnings call. 2023 started very well for Gilat. The first quarter of 2023 was another quarter in which we showed solid year-over-year revenue growth. Our growth was brought across multiple business areas and totaled 15% compared to the same quarter last year. Adding to that, the significant improvement in our profit margins with gross margin reaching a multiyear high of 42% and adjusted EBITDA of $8.4 million, more than triple the adjusted EBITDA of the same quarter last year.

As you can imagine, I am very pleased with the results of the first quarter. Looking ahead, we are increasing our profitability expectations for the year. We expect GAAP operating profit of between $16 million to $20 million and adjusted EBITDA of between $31 million to $35 million, while keeping the revenue guidance at the same level of between $260 million to $280 million. 2023 is turning out to be a very strong and profitable year for Gilat.

I am pleased to highlight 3 major activities achieved this quarter. First, we continue to make great progress with our strategy to be the partner of choice for the satellite operators. Second, we signed this quarter a strategic agreement with a leading IFC service provider with a potential of tens of millions of dollars for the development and supply of electronically steered antenna. And third, we signed an agreement to acquire DataPath Inc., a U.S. defense integrator to significantly boost our defense offering focusing on the U.S. Department of Defense.

I will now focus on some additional business achievements and opportunities. The new area of satellite communications continues to be a primary focus for Gilat. We strengthened and expanded our strategic relationship with the satellite operators, SES and Intelsat, receiving orders of tens of millions of dollars during the first quarter of 2023. During the first quarter, Hispasat, a leading global satellite operator based in Spain chose SkyEdge IV, Gilat's next-generation platform for its new highly flexible and efficient Amazonas Nexus satellite.

This is further testament to the great market acceptance of SkyEdge IV as we experienced additional operators choosing Gilat's next-generation platform. We have a growing pipeline of operators that see the value of the SkyEdge IV, which was designed to meet the need for VHTS, multi-orbit software-defined satellite and serves multiple applications. Particularly in our (inaudible) is the expanded strategic partnership with SES to include also (inaudible) SES's existing Neo constellation. In addition to SkyEdge IV already being the platform of choice for the O3b mPOWER and SES-17.

Furthermore, Intelsat is strengthening its strategic partnership with Gilat and joined the multiservice capabilities of Gilat's platform and terminals, such as in-flight connectivity and cellular backhaul. As a reminder, SkyEdge IV is chosen for Intelsat high-throughput satellite IS-40e which was launched last month. In our SSPA product line, we are on track with previously reported project with significant potential for large NGSO constellation. The IFC segment remains a strategic market and significant growth engine.

As I mentioned earlier, I'm excited to share the win for a major ESA project with the potential of tens of millions of dollars with the leading ISP service provider. The ESA terminal will enable us to increase our IFC presence with an additional product and to enter new market segments such as IFC for business jets as well as connectivity for government and military aviation.

This third ESA project is an important turning point and growth engine as we enter to the new promising and growing ESA market. Furthermore, we are collaborating with our partners on several potential projects for both ESA and IFC transceivers for the clients. In addition, Intelsat continued to expand its global IFC network to include both SkyEdge IV and SkyEdge II-c working together. This demonstrates a great advantage to our partners on upward compatibility while protecting their past investments. We expect even further extension as IFC picks up and Intelsat broadens the global coverage with increased capacity to serve additional aircraft. Gilat's platforms will operate on multiple satellites, including Intelsat IS-40e, Hispasat Nexus, IS-46 and Eutelsat E10B.

During the first quarter, we signed an agreement to acquire DataPath Inc., a U.S. defense satellite integrator. This is a major step in our initiative to increase our presence in the strategic growing defense market. The acquisition is an important milestone for the expansion of Gilat's business into the U.S. DoD and government sectors as well as into other international government and defense markets.

The acquisition price has a fixed component and an airline component that together total to an enterprise value of up to $45 million. As part of the acquisition, Gilat will assume approximately $15 million of DataPath debt mainly to banks and most of the remainder of the purchase price of up to $30 million, including the airline portion, will be paid in Gilat shares.

I am pleased that we are progressing well with the closing of the transaction that is subject to certain regulatory approvals, mainly CFIUS approval in the U.S. We expect our revenues in the defense sector to increase by approximately $50 million on a yearly basis following the closing of the acquisition, which is expected in the third quarter of 2023. In addition, this quarter, we launched 2 new products for the defense market that we expect to further enhance our offering.

First is the endurance, a modular hot swappable high-power amplifier solution designed to disrupt the industry by its ability to replace existing subcon solutions based on cube technology. The U.S. DoD is already evaluating this SSPA for significant Satcom program. Once certified, we expect follow-on orders valued at millions of dollars per year in the coming few years and the ability to pursue additional USD and commercial programs. The second addition to our portfolio, the military and government market is the new satellite modem SkyEdge IV Taurus-M. This new modem can also operate with SkyEdge II-c, and as such, protects part investments of customers who've already adopted Gilat's leading platform.

In our strategic cellular backhaul growth engine, we continue to expand our global presence with multimillion dollars of orders. We continue to receive orders from leading mobile network operators as well as from satellite operators who have chosen Gilat as the lead technology for cellular backhaul, including this quarter in Australia, Latin America and Africa.

In the enterprise market, 2 deals stood out during the quarter. First, in Asia a multimillion dollar was received to expand an advanced disaster response national network to ensure service continuity. And second, in Latin America, a world-leading financial service company is deploying millions of dollars of Gilat technology across the country for communication backup over satellite, to expand the reliability and robustness of the network.

In Peru, we made progress this quarter with (inaudible) accepting the network in our fifth project in the ECA region. This will allow us to speak to the operation phase and to provide services to customers. Furthermore, I am pleased to report that in January this year, Gilat Peru received about $3.2 million as initial payment for the first arbitration of the two arbitrations (inaudible) Ministry of Communication in 2018 and in 2022 for a total amount of approximately $29 million.

To conclude, I believe that Gilat today is in its best position it has been in a long time. Revenue is growing strongly with bookings, backlog and pipeline at a very healthy level. This is due primarily but not solely to the strengthening and growing of the relationship with the satellite operators to significantly build our position in the defense market with the agreement to acquire DataPath and to embarking on ESA terminal project for IFC with a potential of tens of millions of dollars.

Just as important, looking ahead, we're well on track with our revenue expectation for 2023 between $260 million to $280 million, representing year-over-year growth in revenues of 13% at the midpoint. We are increasing our profitability expectations. GAAP operating profit of between $16 million to $20 million and adjusted EBITDA of between $31 million to $35 million, representing year-over-year growth of 31% at the midpoint. I'm looking forward to a successful year in materializing many of the opportunities discussed as well as capturing additional large projects. And with that, I hand over to Gil Benyamini, our CFO.

Gil? .

Thank you, Adi. Good morning and good afternoon to everyone. I would like to remind everyone that our financial results are presented in both GAAP and non-GAAP basis. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and to make operating decisions. We believe that 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, lease incentive, amortization, litigation income or expenses, income related to trade secret claims, restructuring, reorganization costs, merger, acquisition and related litigation income or expenses, impairment of held-for-sale assets, other expenses, income tax effects on adjustments, onetime changes of deferred tax assets and onetime tax expense related to the release of historical tax dropped earnings.

The reconciliation table in our press release highlights this data, and our non-GAAP information presented excludes these items. I will now move to our financial highlights for the first quarter of 2023.

Overall, as Adi mentioned earlier, we are very pleased with the strong start of 2023. We recorded a 15% year-over-year growth in revenue and a significant improvement in profitability. Non-GAAP gross margin was at a multi-year high at 42% and our adjusted EBIT $8.4 million, more than 3x over Q1 last year. We're well on track with our revenue targets for the year. And today, we also increased our GAAP operating profit and adjusted EBITDA guidance, which I will cover later.

In terms of our financial results. Revenues for the first quarter were $59 million, 15% higher than the first quarter of last year, which were $51.4 million. The improvement was driven by growth in the satellite network segment, mainly from the VHTS and NGSO, IFC and cellular backhaul verticals. In terms of the revenue breakdown by segment, Q1 '23 revenues of the Satellite Networks segment were $33.5 million compared to $24.8 million in the same quarter last year, significant increase mainly resulted from the large deals delivered this quarter to our strategic customers in the IFC and maritime market.

Q1 '23 revenues of the Integrated Solutions segment were $12.9 million compared to $13.7 million in the same quarter last year. Q1 '23 revenues of the Network Infrastructure & Services segment were $12.5 million compared to $12.9 million in the same quarter last year. I would now like to summarize our first quarter, both GAAP and non-GAAP results.

Our GAAP gross margin in Q1 '23 improved to 42% compared to 32% in the same quarter last year. The improvement in our gross margin was due to a particularly favorable product and services mix recognized this quarter and the higher level of revenue. Please be aware that revenue model and profitability may fluctuate between quarters and as an outcome of the revenue volume and deal mix. It is recommended to analyze the profitability according to the trailing 4 quarters and in light of the annual guidance. The gross margin in the trailing 4 quarters was 38.6% compared to 33.4% in the trailing 4 quarters that ended on March 31, 2022.

GAAP operating expenses in Q1 '23 were $17.7 million in the quarter at a relatively similar level of those of the same quarter last year. We've received a first payment of approximately $3 million for the first of 2 arbitrations won against (inaudible) the Ministry of Communications in Peru, in 2018 and in 2022 for a total amount of approximately $29 million which is included only in the GAAP numbers and offset much of the increase in the operating expenses in the quarter.

GAAP operating income for the quarter improved to $7 million compared to an operating loss of $1 million in the same quarter last year. GAAP net income in the first quarter was $5.6 million or diluted earnings per share of $0.10. This is compared to a GAAP net loss of $2.5 million or a loss per share of $0.04 in the same quarter last year.

Moving to the non-GAAP results. Our non-GAAP gross margin in Q1 '23 improved to 42% compared to 32% in the same quarter last year. Non-GAAP operating expenses in Q1 '23, were $19.5 million compared with $16.7 million in the same quarter last year. The increase was mainly due to an increase in R&D expenses to support our long-term business growth. Non-GAAP operating income for the quarter improved to $5.3 million compared to an operating loss of $0.3 million in the same quarter last year. Non-GAAP net income in the first quarter was $3.8 million or diluted earnings per share of $0.07. This is compared with a net loss of $1.8 million or a loss per share of $0.03 in the same quarter last year.

Adjusted EBITDA for the quarter was $8.4 million, over 3x improvement compared with an adjustment EBITDA of $2.5 million in the same quarter last year. Moving to our balance sheet. As of March 31, 2023, our total cash and cash equivalents, including restricted cash, were $89.7 million compared with $87.1 million on December 31, 2022, and compared to $75.1 million as of March 31, 2022. We do not hold any debt. In terms of cash flow, we generated $6.2 million in operating activities during the first quarter of 2023.

DSOs, which exclude receivables and revenues of our terrestrial network construction projects in Peru were 77 days, higher than previous quarter's DSO, which were of 72 days. The increase was impacted by a decrease in revenues, partially offset by a decrease in receivables due to higher collection in the quarter. Our shareholders' equity as of March 31, '23, totaled about $250 million compared with $244 million at the end of December 2022.

Looking ahead, as I already mentioned, we have increased our GAAP operating income and EBITDA guidance for the year. Our expectations remain for a strong 2023 with revenues of between $260 million to $280 million representing year-over-year growth of 13% at the midpoint. GAAP operating income of between $16 million to $20 million, representing year-over-year growth of 81% at the midpoint, and adjusted EBITDA between $31 million to $35 million, representing year-over-year growth of 31% at the midpoint.

That concludes my financial review. I would now like to open the call and would be happy to take your questions. Operator?

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

Great quarter here. I just wanted to follow up on the satellite networks business, which seems to be the real revenue strength. I think you mentioned that there were a couple of large programs in IFC and Maritime I think. Should we view that as sort of a onetime risk there? Or do you feel good about sort of an upward trajectory through the balance of the year? .

Chris, it's Adi. Indeed, we said last time that we had a record year both in IFC and cellular backhaul in orders in 2022, and we are now seeing the outcome in revenues. We had also a very strong quarter, both in IFC and cellular backhaul during this quarter. So we will see continued strong revenues from both cellular backhaul and IFC during the year. We also have Maritime revenues, but it's not as high yet. It will take time to be a significant growth engine.

In addition, we see a lot of business from the satellite operators for NGSO and VHTS satellites related or not related to IFC and cellular backhaul. So altogether drives the growth in revenues this quarter and the growth in profitability.

Great. And I think one more launch with O3b mPOWER and SES expects to turn on service in Q3. How does that impact you in terms of your terminal sales, are you seeing a pull now in advance of shipments? Or do you expect that to happen more in line with the service launch? .

I think it's a combination. First, the SES and satellite operator needs to be ready for service launch. So they need to deploy a lot of equipment, especially on the gateway side. And the modems, I guess, we'll see more revenues once the service is launched when they will start to deploy with customers. .

And where are you with the gateway rollout on mPOWER?

Progressing. There is 2 types of gateways, the regional one and a local one. So the regional ones are already deployed, and the local ones, it depends on the business SES brings from each and every country. So it's vary between the expectations for new business over there.

I noticed that the inventories were up a little bit in Q1. Was that a timing-related issue? Or do you have big orders going out in Q2? .

I think it's a combination of the two. First, we are now seeing the increase after we said in the last, I think, 18 months that we are starting to buy inventory for 24 months because of the lead time. So we are starting to see inventory coming to our warehouses. There are several projects that we bought inventory, you will see the revenues in the coming few quarters. Gil, you have something to add?

Yes, I can say that in general, our inventory management is based on the delivery forecast. And it also reflects our actual growing business. And as Adi said, part of the growth is due to the mitigation of the supply chain issues that we've dealt with.

Great. While I have you just a question on the OpEx. It looks like both R&D and SG&A were up pretty big on a percent basis year-over-year, but it's more flattish on a sequential basis. Is it fair to assume that this is a better run rate through the balance of the year for a lot of the OpEx? Or are there any seasonal issues or whatnot we should look for? .

Yes. I think so in terms of sales and marketing and G&A, it should be, give or take, flattish start there. But we do expect R&D on a yearly basis to grow. We have several large projects that we need to deliver. We are getting awards of additional projects that will require us to continue and recruit headcount, so I expect R&D to grow. Just as a reference, we have tens of open positions in R&D both in Israel and worldwide just to accelerate development and be able to deliver what we promise to our customers. And it's already factored in, in our guidance.

Great. Final question, and I guess, a little bit forward-looking, but when the DataPath acquisition closes, is it fair to assume that all those revenues will get folded into Integrated Solutions?

Good question. It's still under discussion here, and we haven't decided yet how it will be reflected in the segments. I guess that once we'll be close to the acquisition, we'll advise on that.

And I guess maybe to follow on that, I mean you already have the Wavestream business here in the U.S. How will -- is there any opportunities for integrating the overhead or facilities or anything between those two?

Facilities is going to be a bit challenging because it's two different locations. But from overhead perspective, no doubt that we'll try to optimize and share relevant resources. We have no intention of reducing headcount mainly because of the fact that we are very lean and mean in day-to-day management. We haven't increased our headcount when everyone did that. We are doing it only based on relevant needs. I think that there is a lot of synergies between DataPath and Wavestream and DataPath and satellite networks and we will optimize on that. I think that the most synergy that we see is on the top line where we can drive our revenues into the defense market.

Got you. I forgot one last important question. Obviously, a big announcement around the IFC and the flat panel antenna contract. If I recall, a couple of years ago, you guys were primarily looking at that product line. You had built out, you had designed to a certain point, but had indicated that we really weren't going to make big investments until you saw a direct customer opportunity. Obviously, that opportunity has arrived. Is it fair to assume that you'll have some incremental R&D to bring that product up to operational specs? Or is there some NRE involved in there?

It's a combination of increasing R&D, NRE revenues and it's about 24-month development and certification cycle and then a significant amount of units to be delivered every year. It's very large potential for us, and it's opened the door for us for future investment in this growing ESA market segment. Everything is already factored in the guidance that we gave. .

Great. And remind me, this is a Ku or Ka?

This is a Ku.

The next question is from Gunther Karger of Discovery Group.

Yes. And again, congratulations on an excellent quarter. And 2 questions. Question one, with the upcoming merger between SES and Intelsat, will that have any material impact, positive or negative on Gilat? And the second question is regarding defense business, globally. If you can make any comment on any specific new projects globally in the defense area?

Nice to hear from you again. So I think both SES and Intelsat are a strategic customer for us, such a merger combined company will be even significant larger customer. I think it's early to say what such move will do to our business on the long term. I think on the short and the midterm, I don't expect any change in their purchasing decisions. We work closely with both of them, the product is part of our road map. We have a lot of backlog to deliver, and we have a lot of expectation from them to the next few quarters and years.

In general, we see this as a positive in many ways. At the end, it's always easier to interact with one large customer on all fronts. But on the other hand, it's always one customer poses additional risk. So to make a long story short, we consider this as a positive effect on Gilat. As for your second question about the large defense program, there are a lot of programs that we are participating in -- there is -- several of them are very large, but we cannot at this point give more information on them.

I hope that soon, we'll be able to announce some awards and we'll see where we are going to.

With regard to the defense question, I meant to include also the homeland security and disaster recovery type of programs. Anything in that area?

Yes. So disaster recovery, we do see a lot of business, especially in Asia. We even announced a month ago a program like that. It's -- usually, it's not a huge program, several million dollars per year. We saw that in -- back in the Philippines and other countries. And we are tracking those projects. Some of them are considered to be cellular backhaul like cellular on wheels and solutions like that.

The next question is from (inaudible).

First of all, about the guide, I mean, $260 million to $280 million, does it include any portion of DataPath revenues or it is not? And if so, why is it increasing? And if not, what should be the prospects for that, assuming that in Q3 the deal is closed?

So in general, the numbers are pre DataPath acquisition. And once the deal will close, we will update our guidance. But I expect around $50 million per year, you can -- so now you can divide it in the quarterly, so around $12 million to $15 million per quarter.

Okay. And then about the gross margin, you jumped there. I mean you said that we should look at the 12 months, but maybe some explanation -- more detailed explanation about what are the specific items that contribute to the gross margin -- to the very large increase in gross margin? And to what extent, it should support the expansion going forward?

As I said before, analyzing Gilat on a quarterly basis is a bit or may be problematic because of the fluctuation and the way that we recognize revenues. In this quarter, comparing to Q1 of last year, most of the change was due to favorable deal mix meaning deliveries of products with higher gross margin and this comes mainly from the IFC market, which has higher gross margins than Gilat's average.

Looking forward, we do believe that over time, the gross margins will grow, with the growth of volume. And as we discussed in the last course in our new platform, the SkyEdge IV, we have a higher software component. And as it deploys you'll see that impact in our product mix. And we believe that we can reach steady gross margins in the area of 40% in the longer term.

In addition to that, in the business of Peru, as Adi mentioned, we got the submission of the fifth project. Now we're on the sixth and last project construction and construction revenues are associated with lower gross margins. So as these will -- these revenues are expected to be in the next year and then we'll move only to the operations. And with that, it will push the gross margin average higher as well.

What should we assume about the capital expenditures once the Peru is done?

So Peru expenses are not CapEx. So our CapEx level should be around the same level of last year.

Well, I think it's important to understand that I would say that the CapEx level of Gilat, it really depends on projects, especially managed project -- managed service projects. Some of them are in Peru that we need to invest at the beginning and later on to see service revenues and this can create a lot of fluctuation in the CapEx -- in the regular run rate without managed service, it's between $6 million to $7 million, $8 million. And then managed services, it really depends on the project. It can be a few hundreds up to several million. It depends on the project and the potential from the project.

Understood. About the tax rate, we have seen a large tax this quarter. Is it something that we should expect also going forward?

I think that the tax rate -- first of all, the taxes of Gilat are comprised of many countries. And so it has impact of several tax regimes. I think that in this quarter, the tax rate is quite normal. Last quarter, we had a onetime tax expense because of releasing the trust earnings in Israel. But looking at this quarter, this is quite normal. .

I see. So what kind of effective tax rate should we assume? .

I would say that we should rely on this quarter's tax rate and we can assume it looking forward.

Last question, I mean you spoke about the ESA initiatives. Also Intelsat spoke about a project they have, which should be deployed with (inaudible) maybe a bit of color to what extent there is an overlap between the project or it's different angle to the same to the same segment?

So first of all, the deal for the terminal is not with Intelsat. And Intelsat every new customer that they bring in, they need to usually increase their ground equipment with us and buy modems to be installed on the aircraft. So the deal they announced will drive more business for Gilat but not related to the ESA terminal. Intelsat buys terminals from other vendors, their main vendor is Syncom.

The next question is a follow-up question from Gunther Karger of Discovery Group.

Yes. With regard to China, is there any further (inaudible) regarding the China Airways, the IFC projects and the high-speed rail projects?

Yes. On the Speed Rail project, no, no, I would say that this project is there a long time ago. On in-flight connectivity, we are mainly cooperating with the service providers which has also a deployment in China. So if Intelsat will get an award from Chinese airlines, they will use our equipment. We do have also basebands that installed with China stuff. So there are also some opportunities with the local service providers.

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

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 First quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.