Gilat Satellite Networks Ltd. (GILT) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Third Quarter 2017 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, November 14, 2017. I would now like to turn the call over to Ms. June Filingeri of Comp-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 Gila's third Quarter 2017 Conference Call and Webcast. A recording of this call will be available beginning at approximately noon, Eastern Time today, November 14, and will be available for telephone replay until November 17 at noon. The webcast will be archived on the Gilat website for a period of 30 day period. Also, please note that investors are urged to read the forward-looking statements in Gilat's earnings releases with 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 the call over to Yona Ovadia. Yona, we are ready to begin.

Thank you, June, and good morning, good afternoon, and good evening everyone. Thank you for joining us today. As always, I'd like to share with you a brief summary of our financial results followed by a review of the business. However, let me start by saying that we are announcing today an important end-to-end multi-year deal with T-Mobile US, whereby we build and operate a satellite backhaul network based on our leading technology for the cellular services in the U.S. This comes on the heels of three other such deals that we have announced since September namely with the Globe in the Philippines, Sprint in a contract expansion and a tier-1 telco in Latin America. This concludes a truly exceptional fruitful few months in terms of materializing or better accurately - more accurately said, demonstrating through the potential of our cellular backhaul growth engines as we previously communicated. Back to our financial results, I'm pleased to report that Gilat again achieved very good financial results for the third quarter of 2017. Our revenues totaled $69.9 million and our adjusted EBITDA was $7.1 million. Our management continues to focus on profitability achieved by a combination of driving costs out of the business, as well as building a mix of quality and profitable revenues through our strategic growth engines of mobile cellular backhaul and mobility In-Flight Connectivity. In particular, let me note that we achieved GAAP net income of $2.1 million for the quarter as we remained committed to our long-term target of being profitable on a GAAP basis. Based on our strong third quarter achievements, as well as our progress year-to-date we are refining our management objectives for 2017 by narrowing our profitability targets up towards the higher end of the prior range to GAAP operating income of $9 million to $11 million dollars and adjusted EBITDA of $24 million to $26 million, while keeping our revenue objective $280 million to $290 million. On the business side, we're pleased to have announced multiple - multi-year cellular backhaul wins this quarter, as well as have made substantial progress in the IFC space causing me to be optimistic about our pipeline opportunities. On the mobile side, we have spoken in the past about our strategy to add larger long-term projects with recurring revenues with the goal of maintaining a more consistent revenue and profitability stream. We believe that the deals we announced earlier this quarter due to both our LTE cellular backhaul carrier-grade technology that meets the strangest service level requirements in terms of throughput and user experience, as well as our experience in integrating multi-site satellite-based networks into the MNO's cellular network. As we discussed in previous quarters, we're seeing the satellite backhaul is becoming more and more a legitimate part of the cellular network aligned for extended reliable LTE coverage. So, as I mentioned in my opening remarks, T-Mobile awarded Gilat for an end-to-end multi-year project for LTE cellular backhaul for network expansion in rural areas, destinations, highways, and elsewhere where fiber delivery is challenging throughout the continental United States. This win comes on top of three additional service deals with tier-1 and telco, other major telcos from around the world that we've announced over the past few months. First in the U.S., we expanded our contract with Sprint to include the cellular service project in addition to our technology provided for their 3G and 4G network. Second, we secured a deal in the Philippines with Globe, the leading telecommunications company there for a five-year contract for 4G cellular satellite backhaul services. And third, we closed a deal with a major telecom service provider in Latin America to provide an end-to-end services project for rapid rollout of high performance broadband. These wins further prove our belief that satellite-based LTE cellular backhauling is becoming a viable and standard solution for plentiful quality and affordable broadband. I would also like to highlight our role in the recovery efforts after the recent hurricane disasters in Puerto Rico and the U.S. Virgin Islands. We're proud to report that both T-Mobile and Sprint are using Gilat's equipment for their emergency response teams to restore communications to the population there that has been experiencing severe disruptions. Close to 50 of Gilat's results are already installed and more installations underway. In Mobility, we're making progress in the IFC space. We have reached a noteworthy milestone with our customer Gogo with over 150 airplanes already flying with our airborne-modem showing a strong pace of ramp-up. We see a potential of approximately 2000 aircraft providing all with an excellent user experience based on Gilat's solution. Equally important we're making further inroads with our airborne-antennas. We offer today our dual band Ku/Ka antennas with development to be completed early next year and moving into STC certification later in the year. We are very active with our different partners with the goal of a first commercial flight with our Ku/Ka antenna during 2018, plus paving the way to adoption and deployment in the coming years. In addition, we believe that further antenna potential is in electronically-steered antennas, also called ESAs, especially with the emergence of LEO and MEO constellations. Gilat is moving in this direction and has made progress on its RFIC and ESA antenna development programs. We are gradually taking our aero antennas in this direction and I'm optimistic that the interest we're seeing in the marketplace will translate into concrete achievements in the coming quarters. In addition, our business in Peru is progressing as planned and in accordance with the project milestones. Completion of the construction phase in the four regions is expected throughout 2018. These projects will then move to ongoing operations, which are expected to bring us recurring and more profitable revenue. So, in summary, we are pleased with the continuous progress in our financial results in the third quarter along with the momentum we are seeing in our growth engines of cellular backhaul and In-Flight Connectivity as evidenced by the exceptional number of wins that we have announced. I'm most encouraged by our initial achievements in creating the recurring revenue streams via multiple - via multi-year service deals, which is a good point where we can move now to Adi for your report. Adi, please?

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 this non-GAAP financial measures provide a consistent and comparable measure to help investors understand our current and future operating performance. Non-GAAP financial measures mainly exclude the effect of stock-based compensation, amortization of purchased intangibles, litigation expenses related to trade secret claims and expenses for tax contingencies to be paid under an amnesty program. The conciliation table in our press release highlights these data and our non-GAAP information presented exclude these items. I would like now to move to our financial highlights for the third quarter of 2017. The revenues for the third quarter of 2017 were $69.9 million, a 6% increase compared to the $66.2 million in the previous quarter. The revenues for the third quarter of 2016 were $78.6 million due different stages of progress in Peru projects. Our GAAP gross margin in the third quarter of 2017 was 29.1% of revenues compared to 29.5% in the previous quarter and 30.2% in the same quarter of last year. Total R&D expenses on a GAAP basis was $6.9 million compared to $6.2 million in the previous quarter and $6.4 million in the same quarter last year. We continue to invest heavily in R&D to support our strategy in [indiscernible] and IFC. Sales and marketing expenses were $5.8 million compared to $5.6 million in the previous quarter and $6.2 million in the same quarter of last year. G&A expenses were $4.3 million compared to $ 5.9 million in the previous quarter and $11.3 million in the same quarter of last year. G&A expenses in the third quarter of last year included the allowance for doubtful accounts of about $4.6 million and litigation expenses of about $2 million. G&A expenses in the previous quarter included about $600,000 of tax related penalties due to the company's decision to participate in tax amnesty program in Brazil. Total operating expenses on a GAAP basis were $17 million compared $17.7 million in the previous quarter and $23.9 million in the same quarter of last year. GAAP operating profit in the third quarter was $3.3 million compared to an operating profit of $1.9 million in the previous quarter and an operating loss of $229,000 in the same quarter last year. Net income on a GAAP basis was $2.1 million or income of $0.04 per diluted share, the same as previous quarter and compared to a loss $2.2 million or loss of $0.04 per diluted share in the same quarter of last year. On a non-GAAP basis, the operating profit for the third quarter was $4.9 million or 7% of revenue compared to an operating profit of $4.1 million or 6.2% in the previous quarter and operating profit of $3.3 million or 4.2% of revenue in the same quarter last year. Non-GAAP net income in the third quarter was $3.6 million or income of $0.07 per diluted share compared to a non-GAAP net income of $4.6 million or income of $0.08 per diluted share in the previous quarter. And non-GAAP net income of $1.4 million or $0.02 per diluted share in the same quarter last year. Adjusted EBITDA for the third quarter of 2017 was $7.1 million or10.2% of revenues compared to adjusted EBITDA of $5.9 million or 8.9% of revenues in the previous quarter. Adjusted EBITDA was $5.2 million or 6.7% of revenues in the same quarter last year. As of September 30, 2017, total cash and equivalent, including restricted cash net of short-term bank loans and credits was $108.2 million, a decrease of $1.3 million from the previous quarter. DSOs, which exclude receivable and revenues of our service segment decreased to 64 days compared to 71 days in the previous quarter. Our shareholder's equity at the end of the quarter totaled about $214.5 million compared to $212.7 million at the end of the previous quarter. That concludes my review. Thank you for your attention. I would like 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 Martha Masiarz of Wells Fargo Advisors. Please go ahead.

Hi, first of all congrats on your backhaul wins. I just want to ask what's been driving the pickup in the demand for these contracts and how do you see these opportunities going forward?

We certainly hope and believe that we have gained momentum and the wins that we have - we will carry it forward to addition or let book expansions in the current deals as we have seen in the Sprint case as well as additional win. As I mentioned in my previous quarterly conversation, Cellular backhaul is viewed by the telcos as something that they are struggling with. On the one hand the potential is there on the other hand there is a bit of a cautiousness, is this a reality. Every win that we announced fluctuate the market mode and this is the reality as we are convinced that this is the pay and every win gives us more tailwind to persuade others that are hesitating that this is a viable tool and they should be taking advantage of it. So, the net of it is every win is demonstrating our conviction in this tool and every win gives us more tailwind in terms of bringing this message and winning more deals with other telcos around the world.

Okay, great. And then a second question I had was on the mobility market. I know you have been getting traction in the aero market with regional Gogo. And I just wondering do you see yourself expanding into the maritime market?

Not in the short term. Currently we are very busy with our potential in the aero market. We did that of course in the maritime market a few quarters back when we announced a solution with SCS, but currently it is limited to that attempt we are focused where we see the largest potential and opportunities short to mid-term which are the aero, but that doesn't mean that we are excluding our self from the maritime market. We are always looking for the right opportunity and when it presents itself, we will pursue.

Okay all right. Thank you so much.

Thank you.

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

Hi, Yona and Adi, how are you guys doing?

Thank you, Kevin.

How are you?

Great, I am great. That was greets to your good results today. Thanks for taking my question. So Yona, I'm concerned about to look at your financial model as it moves with more of these managed service contracts. I know what you got about gross margin trending under just 30% and 7% operating margin. How do you think that changes over the next year as revenue start swinging toward more manned services?

Hi, Kevin it's Adi, I will take this question. In general, it's too early for us to give guidance for 2018, but in general we would say that we intent to keep together with those services, managed services. We intend to keep the same margins that you see today in the commercial segment. We are not giving quarterly information about it the 20, but we are intended to keep those margins going forward with the managed service. Of course, as long - when we expand those deals and then we would see more and more of margins and it will affect all the gross margin of the commercial.

Okay. Do you think you might speak to a percentage of revenue that's coming in for managed services versus equipment?

It's something we will need proceed during next year, when it will be relevant and most of the - one of agreement that we won, we are now in a ramp up stage and we expect to see them working through the end of Q4 or early Q1. So next year when we will announce the guidance, we will consider if and what to disclose.

So, you want to talk a little bit about how you are managing your sales and marketing activities and addressing sorry Cellular backhaul versus legacy VSAT business?

Kevin in the previous as we defined our strategy, we do not give up on any fortress that we have and consumer and enterprise markets around the world, we hold the line and try to do better while focusing our growth engine. So, we are not giving up on our business in areas that experience ups and downs such as Latin America where we had a few quick, but we are hoping to turn that around. We are doing well in Africa, South East Asia, Australia but in general our strategy is do better as much as we can in the enterprise and consumer business which is more a CapEx based business in around the world while trying to promote and push as much as possible our focus and energies into growth engine where we see a lot opportunity that will translate into a long term recovering revenue. So, we built our teams in a way that the people in the field are doing everything they can to improve on the various fronts with dedicated teams to push forward on our growth engines as an overlay to the teams in the front. So, in general to some other strategy is keep and improve what we have, focused with dedicated teams to push forward where we see the opportunities mainly in cell phone activity, cellular backhaul and if the opportunity presents itself additional markets as was mentioned in previous question, we are focused teams that are pursuing the opportunities in those areas.

So, you are on it. Okay I understand you cellular people in the field that you are not going to give upon the strong relationships that you have and your consumer and enterprise business, very clear. What isn't so clear is I guess that the practical changes that you need to make to address those insulate and cellular backhaul I mean what are other several 350 separate cellular service companies around the world and it would seem to me that a satellite backhaul application would be great in part of rural areas. I am just curious to understand how you are looking at that you are trying to build more and your sales and marketing team or you expecting the existing one just to extend their capability?

Kevin, this is Adi. In general, most of those telcos, except maybe a T-Mobile we are already - are already our customers so we have a good relationship with them. And we are trying approach with Managed Service when we see the opportunity more on a sea level relationship rather than working with procurement in answering bid, it's more of a non-solicitation offer, we try to develop those opportunities, but in general it's combination of the local team on the ground together with local overlay support and headquarter support from our headquarter in Israel.

So, looking at the expense side of it Adi, I guess would you expect to see just an incremental increase through next year?

On sales and marketing, in general I think that we are going to keep more or less our OpEx level - just to say it's too early to say because we are just started the budget process right now, but in general we have no intention to double or to increase significantly none of our OpEx expenses.

Okay, all right. Well thanks very much gentlemen and I will be back in the queue.

Thank you, Kevin.

Thank you.

The next question is from Gunther Karger of Discovery Group. Please go ahead.

Yes, good morning gentlemen. A question regarding China regarding potentially the train business is there any progress report on that aspect with the trains.

Hi, Gunther this is Adi. Let me give a quick status report, high level status report on China. In the trains together with CRRC we are still in a testing and certification process, it's a long process and we don't have end date yet. In addition, we are working to develop our relationship in the IFC. In China we have relationship with Air Media and we are continuing to look for other additional partners. And in addition, in the commercial segment we have a very strong relationship with China Sat. They started to buy our research to build a new satellite, so we expect to see more and more revenues from them in the coming few quarters.

Thank you.

The next question is from Mike Hebner of IFS Securities. Please go ahead.

Yeah, when I was reading some of these numbers I think I picked up you –aero plane, the Gogo stuff you can make that service sixteen times faster. Did you have other metrics on the backhaul what you can do to the cell phone and the broadband, what you are able to bring to the table on that and A; and then B. what is the sizes of these markets if you are going to do a $100 where you are going to do it in mobile backhaul and cellular.

So, addressing the first question we were asked a similar question a few quarters back and our message is very simple. Our equipment can deliver up to 150 megabit per second to the handset, to the end user, to the driver, to the person at the rural area, to etcetera, 150 megabit per second. However, we don't control that. This is a prerogative of our customer T-Mobile, Sprint etcetera. They will decide how much active to - allocate to each user. How much pressure they want to put on every VSAT and there is a result of we how to impact their user experience. We give the tools which are immense tools to our end user, to end customer and so apologize and they decide what is the end user experience. We do not control that. Of course, we encourage them to give as much capacity as possible so that customer satisfaction will be optimal and equivalent to fiber, but at the end of the day that's their business decision. We enable 150 megabit per second to the handset which is by far more than any use, even extensive use would need. So, there is no limitation from our perspective. Actual implementations depend on the business plans of our overall customer. Regarding the second question, we currently focus our energies and our attention to higher potential and higher ARPU customers. Therefore, two of the four wins we announced are in either way. When we try to look at the opportunities and map which ones we attack versus not, which ones of focus versus not, we try to go by the potential for us or obviously ARPU in the U.S. is much higher than Latin America which is higher than South East Asia and accordingly our efforts of course you need to have a recipient at the other end, but we believe that there is business globally and we want to grow our market share. As a result, we go for those who have the higher ARPU is higher profitability areas first and from there we will expand and hope that the momentum we created, and the tail wins we got will help us go to those areas as well.

Good. Now what type various entry do you have versus what type your competitors I mean what type of lead do you think we have against people offering similar services as what we are doing?

Two things, I think that we have to differentiate there is - that I referred to also earlier in my script. The first one which is shortly with this technology, we believe that we have superior technology, but I have no doubt that as we speak others are developing a competing. So, the time window there is a not endless. The other difference is that we are developing which is I think more substantial and difficult to match is our experience in integrating multi-site satellite-based networks into the core network of the telco. It may sound easy, but I assure you it's very complicated, very complicated taking into consideration the very stringent requirements of the telcos and their concerns in protecting their customer base. We will not go into details here, because it's a competitive information. But this knowledge is rare, and we believe that we are leaders in this area and the ability to build such knowledge and such expertise are far more difficult to match compared to just catching up on technology.

Is that why Sprint and T-Mobile seem to be further ahead in owning the spectrum and owning the bandwidth and so that's why they're utilizing your service versus the AT&T's and the Verizon that seem to be slower. So, do you expect Verizon and AT&T to have to finally move?

Well, let's see what the coming few quarters bring in that context.

Good. Thank you.

Thank you.

[Operator Instructions] The next question is a follow-up from Kevin Dede of H.C. Wainwright. Please go ahead.

Hi, Yona, you've mentioned that Ka/Ku for IFS. Now, yeah, you mentioned that you'd be going through trials the end of next year. So, how long do you think it would take before it would deliver revenue? And will this version be steerable, or would that require another iteration for USA?

Kevin, it's Adi again. The Ku/Ka antenna, the Ku/Ka will be commercially available somewhere in mid-2018. So, we expect to see initial revenues I would say in the second half of '18. But this is not the electronically-steered antenna. This antenna is under development. It will be our next generation antenna. I believe that within two years or so it will be commercially available.

Okay. Okay. Thanks. All right, Adi. So, can you talk to the revenue mix of managed services maybe this year or maybe the number of customers that you have on managed services versus your total customer base?

Right now, we announced only for a significant managed service deal. So, this is basically what we have right now. I'm not sure what you mean by - what you mean by mix of revenues. The revenue is a combination of bringing our CapEx and providing end-to-end services including space segment capacity and we are getting - it depends on the model with the customer. It can vary from fixed per site or pay as you go. It depends on the specific deal. We believe there is a very big potential for us both in the top line and also in bottom line later on.

Very good. Okay. Yeah, thanks for the additional color. I appreciate it, Adi.

Thank you.

The next question is a follow-up from Mike Hebner of IFS Securities. Please go ahead.

I'm just trying to get some color. So, when the management is setting down and they're focused on marketing, where do you see the biggest opportunities to focus those resources? I mean is it on - how big is this Gogo market? How many dollars would that bring to us and then the airplane antenna, this new antenna, how big a market is that that we could sell into versus the broadband stuff?

Sure. Okay. It's a big, big question. I'll let Adi answer.

Okay. So, the IFC market, we are - today we have about 4000 and - commercial aircrafts connected to satellite Internet connectivity and we expect to add about 2000 planes. So, based on the research that NSR did, we expect to have in 2026 about 28,000 commercial aircrafts connected. In terms of market size, today the market size is about 300 million and it's going to be soon about 600 million and it's going to stay about 600 million, because the number of aircrafts that are going to be connected this year will stay at around 2000 aircrafts. Now, I cannot give you information about our prices with Gogo, but I can say that the potential with the antennas from our perspective is enormous, because antennas or aircrafts, it's about $200,000 to $300,000 per antenna. It depends on the antenna, the quantity, the commitment, but it's a large portion of this market size. I just mentioned commercial aviation. Of course, there is also business jet and other sub segment in this market that we're also pursuing for opportunities.

So, when I'm driving around my car and I get to these areas, there's no coverage. Is there any transferability? Can you put any antenna on a car that can appease my cell phone services or any broad application to this?

Connected car is one of the dreams of the industry, but I think that we will need - currently the antenna is very expensive if you put it on a car. It should be electronically-steered antenna. That should be very small and should track the satellite. So, currently those kind of antennas are very expensive. It's like putting an antenna of an aircraft on a car. We believe that our technology in the future, the ESA technology, might fit to those kind of solutions, but I think it's way too early to discuss it.

I would like just to add to that. We're actually focused on broadband opportunity. I think in general the whole market is broadband. There is a market for narrowband and I see the typical –I'm sorry, IOT is a typical narrowband opportunity including connected cars. To develop ESA antenna that's saved into the mass market is a very challenging task, which is why we are taking our ESA developments in the direction of IFC antennas, because they're, of course - the price of such an antenna would be acceptably much higher. As far as adopting ESA antennas to the mass market, I think it's a challenge that the industry will continue to struggle in order to find solutions for in the coming few years. We may eventually get there as well with our ESA direction, but it is not our near-term solution. This is a very challenging task to develop an ESA antenna for IOT connected car applications in an affordable price.

Thank you.

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 two hours after the conference. In the US, please call 188-326-9310. In Israel, please call 039-255-901. Internationally, please call 9723-925-5901. Mr. Sfadia, would you like to make your concluding statements?

I would like to thank you all for joining us for this call and for your time and attention. We hope to see you soon as we'll speak to you in our next call. Thank you very much and have a great day.

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