Gilat Satellite Networks Ltd. (GILT) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's First Quarter 2017 Results Conference Call. All participants are present in listen-only mode. Following the management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded May 16, 2017. I would now like to turn the call over to June Filingeri, of Comm-Partners, to read the Safe Harbor statement. June, please go ahead.

Thank you, Otiva [ph]. Good morning and good afternoon everyone. Thank you for joining us today for Gilat's first quarter 2017 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, May 16th, and will be available for telephone replay until May 19th at noon. The webcast also will be archived on the Gilat's Web site 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. 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 over the call over to Yona Ovadia. Yona, we are ready to begin.

Thank you, June, and good morning and good day, good afternoon everyone. Thank you for joining us today. I'm very pleased today to report that Gilat achieved very good results for the first quarter of 2017. Revenues increased 21% year-over-year to $63.9 million compared to $52.7 million in Q1 of 2016, and adjusted EBITDA reached $4.2 million or 6.6% of revenues, and a significant increase compared to $763,000 or 1.4% of revenues in the first quarter of last year. This profitability improvement is a result of our effort, both on the business side, where we see more profitable revenue from deals that are the fruit of our new strategy, as well as continued efforts on the operations side to drive costs out of the business. We're of course pleased with these results, which I'll elaborate on in my closing comments. And we are committed to continue our efforts to get back to profitable growth. In the first quarter, there were several important developments in the satellite industry, namely in-flight connectivity industry, China and cellular backhaul that have direct relevance to Gilat and our business going forward. Let me start with in-flight connectivity, which we have identified as a growth engine for Gilat. Last week, Gogo had held a high-profile live urban event for media and analysts about their test plan [ph] the Jimmy Ray. Gogo demonstrated their next generation 2Ku service that is powered by our ISP solutions. I am pleased to report that our ISP modem exhibited unprecedented performance and received high marks from the analysts and media community. For example, Andrew [indiscernible] of Macquarie [ph] commented in a research report published after the event, and I quote, "We observed significant improvement in throughput, speed, and latency on today's test flight with [indiscernible] 2015 likely tied to the use of HTS satellite and the new Gilat 400 megabit per second modem." Andrew further said, when referring to the 10 different speed tests that they conducted, and I'm quoting, "On average, this was roughly five times the speed of our first test flight. We would highlight that some had achieved upward of 90 megabit per second point." End of quote. And I want to thank here Andrew for allowing us to use -- to quote his words from this flight. To the best of our knowledge, these results are the highest performance results ever achieved onboard a commercial aircraft, as well as a demonstration of continuous service and excellent user experience. Gilat's aero modem delivered uninterrupted service across multiple satellites and multiple beams [ph] which again, to our best knowledge, is unique in the industry today. Gogo plans to install Gilat's modem to power the 2Ku solution on more than 1,600 aircraft across 13 airlines commencing this year. We, of course, stand to benefit from this deployment plan that has already been one of the contributors to our results in the first quarter of 2017. In addition to this success in the aero, our mobility strategy is also progressing in the connectivity for the trains market, especially in China. On past calls, we spoke about our Chinese customer, CRRC, the world's largest railway transportation supplier. While I said on previous calls that this project is a complex one and progresses accordingly, I'm pleased to report that CRRC moved to the next phase of testing, and is planning to start passenger trials with two of our antennas in two commercial trains in the second half of 2017. This phase will not only test the equipment, but also explore various business models that will dictate future deployments. Concluding the ISP chapter, mobility remains a growth engine for us, and with the tailwind of existing achievements, we are pursuing new opportunities, and are optimistic about our growth, both in aero as well as other mobility markets. The second satellite industry development is in China, which we have identified as a strategic territory for Gilat. In April, China successfully launched into orbit its first HTS communication satellite, Chinasat 16, operating in the Ka-band, and can accommodate more than 20 gigabit per second of data throughput, and is able to provide 26 user beams covering China and offshore areas. What is exciting to us is that Chinasat Com [ph] is using Gilat's technology for their ground segment system, which we have already installed; once in orbit, testing is complete and deployment starts, Gilat experts to be a strong beneficiary via sales of VSAT and other equipment for both fixed and mobility application including IFC, maritime, and enterprise. In addition to Gilat's key position in the Chinese market with Chinasat and CRRC, Gilat is making a headway in China with full portfolio of in-house aero terminal components including the airborne modem and our dual band Ku/Ka antenna transceivers. We are moving forward with this end-to-end solution in the domestic IFC market in China together with our partner Air Media while we continue to explore additional opportunities and partnerships. The third industry development I would like to discuss is the aerial [ph] cellular backhaul. Our excitement about the market potential in this solution was reinforced by a recent NSR report entitled Satellite Backhaul Crossing the Chasm. In this report, NSR referred to 2016 as an inflection year for cellular backhaul due to the large project being deployed by the likes of SoftBank, Sprint, and Everything Everywhere. Another indication of the satellite market moving into mainstream came in February from Eutelsat CEO Rudolphe Belmer who predicted that new very high throughput satellites will unlock the mass market by delivering fiber-like benefit at fiber-like prices. This is worth highlighting -- I am sorry. It is worth highlighting the fact that these viewpoints are in direct accord with our strategies and headwind [indiscernible] all along. And that each of these tier I customers mentioned in the NSR report, SoftBank, Sprint, Everything Everywhere is implementing its LTE network with Gilat cellular backhaul solution as is Optus in Australia as well as others that were not published. We continue to believe that cellular backhaul over satellite market is materializing. And as such, we continue to pursue additional opportunities and believe that they will contribute further to our growth. Finally, regarding our project in Peru, first quarter revenues were as expected. And we expect to deliver complete regional solutions for certification towards the end of 2017 and in the first half of 2019. And then move to operating -- to ongoing operation of these networks. So in summary, Gilat achieved very strong results in the first quarter of 2017 as evidenced by the increase in revenues and more importantly by the substantial increase of our adjusted EBITDA. Profitability improved year-over-year on the GAAP and non-GAAP basis in the first quarter. And Gilat's management remains committed to achieving both line -- bottom line profitability, both GAAP and non-GAAP. And supporting our commitment are the deals attributed to our new strategies that are starting to bear fruits which encourages us to continue pursing these growth engines with the aim of achieving profitable growth. And we are therefore comfortable with the projected EBITDA targets set for this year. With that, Adi, we are ready to hear 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 include the effect of stock-based compensation, amortization of purchased intangibles, and litigation expenses related to trade secret claims. 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 2017. Revenues for the first quarter of 2017 were $63.9 million. A 21% increase compared to $52.7 million in the first quarter of 2016. In comparison to the first quarter of 2016, our total revenues were 20% lower. The decrease is primarily attributable to seasonality in our business with our first quarter typically our strongest. In addition, we had lower revenues from our project for FITEL in Peru compared to the previous quarter. As discussed previously, revenues from FITEL can vary quarter to quarter depending on the percentage of the project's completion. First quarter FITEL-related revenues were as expected. Our GAAP gross margin in the first quarter of 2017 increased to 27.1% of revenues, from 23.5% in the same quarter last year. The increase in our gross margin is mainly attributable to a different revenue mix. Our gross margin in the previous quarter were 30.1%, which benefited from higher revenue volume. Total R&D expenses on a GAAP basis were $6.7 million, compared to $5.8 million in the same quarter of last year, and $6.5 million in the previous quarter. Sales and marketing expenses were $5.8 million compared to $5.1 million in the same quarter last year, and $6.2 million in the previous quarter. G&A expenses were $4.8 million, compared to $4.4 million in the same quarter last year, and $5 million in the previous quarter. Total operating expenses on a GAAP basis were $17.3 million, compared to $15.4 million in the same quarter last year, and $17.7 million in the previous quarter. GAAP operating profit in Q1 was $18,000, compared to an operating loss of $3 million in the same quarter last year, and operating profit of $6.5 million in the previous quarter. The GAAP loss was $784,000 or a loss of $0.01 per diluted share, compared to a loss of $4 million or a loss of $0.09 per diluted share in the same quarter last year, and net income of $4.5 million or income of $0.08 per diluted share in the previous quarter. On a non-GAAP basis, the operating profit for the first quarter was $2.5 million or 3.7% of revenues, compared to an operating loss of $1.2 million in the same quarter of last year. Non-GAAP operating profit for the previous quarter was $9 million or 11.1% of revenues. Non-GAAP net income for the first quarter was $1.7 million or income of $0.03 per diluted share, compared to a non-GAAP loss of $2.2 million or a loss of $0.05 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $7 million or income of $0.13 per diluted share. Adjusted EBITDA for the first quarter of 2017 was $4.2 million or 7% of revenues, compared to adjusted EBITDA of $763,000 or 1% of revenues in the same quarter last year. Adjusted EBITDA in the previous quarter was $10.8 million or 13% of revenues. As of March 31st, 2017, our total cash and equivalent including restricted cash net of short-term bank loans and credits were $93.1 million, a decrease of $18.5 million from the previous quarter. The decrease is primarily attributable to our FITEL project, in Peru, where we received initial down payment from the government to build the network and finance the project. DSOs which exclude receivables and revenues over our service segment increased to 90 days compared to 89 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled about $210.3 million, compared with $209.8 million at the end of the previous quarter. That concludes our review. Thank you for your attention. I would like now to open the call for questions. Operator, please.

Thank you. Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] The first question is from Kevin Dede of Rodman & Renshaw. Please go ahead.

Hi, gentlemen. Thanks very much for taking my questions. It's Kevin Dede at Rodman. Yona, thanks for detailing the update on the Chinese train system, [ph], I appreciate hearing that, and congratulations on the progress there. I was just a little curious about the second driver that you mentioned in terms of your growth strategy as the HTS satellite in China, and the fact that you've been chosen for the ground segment there, which I think is incredibly appealing. It just seems to me, if I take a step back and I look at it maybe from a geosynchronous view -- sorry for the satellite reference there, but it just seems to me that's not synchronous with the way that the Chinese tend to operate. It just seems to me that they choose to rely on internally Chinese-developed technology. And I'm wondering -- I mean, it's not a matter of when -- or it's not a matter of if, it's just a matter of when. And I'm just wondering what you're doing to protect your IP, and to make sure that even though you're being relied upon for the initial deployment, how you'll be able to stay involved?

Kevin, first, it's a very, very valid question. First, as far as the growth, say, that we're projecting obviously once the satellite is launched, they will look to sell the capacity in all possible applications, be that ISP, maritime, on the ground. And they are already discussing with us acquiring the VSAT and the peripheral equipment that is necessary for that. We have a balance here to maintain. The standard position, not only Chinasat Com, but anybody you did business with in China would be that if we want to make a breakthrough in the Chinese market we have to reduce our prices, and make them significantly lower than whatever they are. So we are here, we need to run a balancing act between the fact that we want to protect our IP versus the fact that we want, of course, to capture as much as possible from the market. At this point in time, we are managing very strict policy of protection of our IP. And without being able to go into detail, we defined a strategy or I would say better, an approach, how to protect our IP, which we will defend at all costs. And we'll make sure that we are compensated this way or the other for technology and the product that we deliver. We may find various forms of cost reduction for the pressures of the market, you know, it's a big marketplace. But under no circumstances will we violate the framework and guidelines we define to ourselves to protect our IP, and I hope that we will strike the right balance.

So will you be manufacturing in China?

We will not be manufacturing. China, we may be assembling in China at some point in time if volumes pick up. But we're not going to transfer the IP into China. We're not going to transfer key components of our product into China. However, it may be at some point we will do assembling.

Okay. Congrats on the work with Global and the IFC advances there. I'm curious about your relationships with other airlines and other airline manufacturers. I know that, especially that Gogo service is available across many airlines. And I'm just wondering if you can talk to the progress you've made with other customers.

Well, we already announced our relationship with Air Media in China. And they're a service provider. And their role in the relationship is to bring the airlines into the agreement. So we're working with them and supporting them on that. We're also in touch with other service providers around the world, but at this point I cannot go into specific names and where those opportunities stand.

Okay, fair enough. If we were just to take a step back, how would you characterize the different initiatives that you're working on, because you detailed quite a few things, and some seem that they could be contributing immediately and some later? I was just wondering what you think we should look for near-term, say, over the next couple of quarters to support your $280 million to $300 million guidance, and what you think we should look for later on. I understand, obviously, with the CRRC and the mobility for train initiative, that's probably a second-half or 2018 initiative. But could you just characterize some of the other things that you think are more near-term?

Yes. I think that we will see more cellular backhaul deal in the coming two quarters. I think also that we will see progress with the service providers of the in-flight connectivity on various front and components. I think we will see continued improvement in our voice stream business. And the underlying assumption is we see continue to improvement in the efficiency of our business and our efforts to drive cost out of the business. So, I think these are the four factors that will work for us in the coming two-three quarters. And I think it all is summarized into the fact that we're comfortable with our revenue but importantly our EBITDA. And we have planned quite detail one how to make sure that we -- quarter after quarter in 2017, we will meet our targets. Particularly, not that I am saying we will miss our target on the revenue side but our focus is on making the -- meeting while scaling profitability prediction.

Kevin, hi. I think it's important to mention that those three lines, [indiscernible], IFC, and our voice streamline of business has significantly better margins than regular enterprise and consumer. Over there, customers are willing to pay not only on boxes but also on technology. And the margins are better, but it's also a growth engine on the top line but also on the bottom line.

Okay. Thanks. That sort of helps get my arms around the -- my last question, which is just to your point [ph] Yona, on you know, operating efficiency and cost efficiency. Is it really -- could you just sort of -- I understand the margin profile now, so thanks for that. But I just wanted to make I understood what you were doing on the cost side to ensure. I know that you've spoken to it in past calls. I was just hoping you wouldn't mind refreshing my memory.

On the cost side, we are continuously [ph] looking for efficiency. We recently replaced our full time key manufacturer and managed to reduce the cost. And we are looking on a daily basis how to be more efficient and how to drive the cost of the product lower so we will be able to be more competitive in the market.

Okay. Fair enough. Thank you very much gentlemen for entertaining my questions and congrats on the nice job and the quarter.

Thanks, Kevin.

Thank you, Kevin.

The next question is from Andrew Spinola of Wells Fargo. Please go ahead.

Hi, I was wondering if you could maybe provide a little additional color on the growth year-over-year. I guess your revenue in the quarter was up 21%. I am just wondering which markets are driving that, or which of your products are driving that? Is it some of the new products you've referenced like the deals with Gogo? Is that what's driving it? Or, is it your traditional business?

Hi, Andrew. It's a combination of two. First of all, we show more focus in our project in Peru, if we are talking about year-over-year, and also in mobility, we saw a very nice growth year-over-year. [Indiscernible] remember that in our business it's not -- you cannot expect to see every quarter quarter-over-quarter or year-over-year change because in some cases we depend on large scale project. So it might be changing between the quarters. But if we are comparing to the first quarter, last year the main change is that our project in Peru and mobility.

Understood. Could you maybe provide some color on the activity you've seen in the enterprise market with your VSAT products? That market has been under a lot of pressure for the operators, lot of pricing pressure. I am wondering how that's translating to your business?

In general, we continue to see the price pressure as you said. It's ongoing battle in every deal. And over there, most of the customers are -- it's a price battle. Less on technology, more on price noted in the cellular backhaul which over there you can see better margin.

Understood. Just to follow-up on that question I guess sort of hoping that at some point the lower price points on the capacity is going to drive more demand. And I am just -- doesn't sound like you are seeing that in the enterprise market. I just wanted to be clear with that. And also as a follow-on, have you seen any difference now that the EPIC satellites were in the sky. Is that driving any additional demand in enterprise or is that just mostly mobility?

As far as EPIC, I think it's mostly mobility. But, we believe that the market currently is developing opportunities, but also see that the trend of reduction. And from what I can tell you, Andrew, is that I see others that are waiting to see whether we hit rock bottom before they are engaging. And if they are waiting to engage, it's a very term because they want to benefit from further reduction. So I think we haven't hit rock bottom yet and at point which we will see -- start to see more opportunities mature. I think that the world is looking at a price going down and saying well, have we reached the bottom or is it -- does it continue, basically at least what we [indiscernible] our customers. We get discussions and extensions which are short termed because everybody wants to see where it is going.

Understood. Thanks very much.

Okay. Thank you, Andrew.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Yona Ovadia to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours after the conference. In U.S. please call, 1888-782-4291. In Israeli, please call 03-925-5918. Internationally, please call 972-392-55918. Mr. Ovadia, would you like to make a concluding statement?

I want to thank you all joining us on the call today and for your time and attention. We hope to see you soon. Look forward to speak to in our next call. Thank you very much. And have a great day.

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