Welcome to Gilat's First Quarter 2018 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, May 15 , 2018. I would now like to turn over the call to June Filingeri of Comm-Partners LLC to read the Safe Harbor statement. June, Please go ahead.

All right. Thank you. Good morning, good afternoon, everyone. Thank you for joining us today for Gilat's first quarter 2018 conference call and web cast. A recording of this call will be available beginning at approximately noon Eastern Time today, May 15, and will be available for telephone replay until May 18 at noon. The webcast will be archived on the Gilat 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, and the company expressly disclaims any obligation to do so. More detailed information about risk factors can be found in Gilat's reports filed with the Securities and Exchange Commission. With that said, let me turn to introductions. On the call today are Yona Ovadia, Gilat's CEO; and Adi Sfadia, Gilat's Chief Financial Officer. I 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 everyone. Thank you for joining us and I am sure that today we will have a smooth and uninterrupted call, so hope it will be productive. I am pleased to report, that the first quarter of 2018 was a very good quarter for Gilat, giving us a solid start of the year. To summarize our financial performance, revenues grew 5.4% year-over-year to $67.4 million. GAAP operating income reached $3.7 million versus $18,000 in Q1 of 2017, while adjusted EBITDA increased 78% year-over-year, reaching $7.5 million, or 11.2% of revenues. We also remain strongly profitable on a GAAP basis in the first quarter, with net income of $2.3 million versus a loss of $800,000 in Q1 2017. On a non-GAAP basis, net income increased to $3.8 million compared to $1.7 million in the same quarter last year. Our ability to achieve this level of profitability in the first quarter, which is typically the lightest quarter of the year, shows our continued progress in building the mix of quality revenues, through our strategic growth engines of mobile cellular backhaul and mobility ISP, along with continued efforts to drive costs out of the business. To offer greater visibility into our business, we have moved to new reporting segmentation beginning with the first quarter of 2018, a segmentation that better reflects our strategy and our organizational and operational structure. Our CFO, Adi, will elaborate on the new operating segments in his comments. However, let me just say briefly, that the new structure has three segments consisting of fixed networks, mobility solutions and terrestrial infrastructure projects. This structure is more directly aligned with our business, and as such, provides greater visibility and better demonstrates the progress that we are making in each of our growth engines, as…

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 our 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 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 2018. The revenues for the first quarter of 2018 were $67.4 million, a 5% increase compared to $63.9 million in the first quarter of 2017. Effective with the first quarter of 2018, we have changed our operating segments to more accurately reflect our management focused organization alignment, customer base and end markets. The three segments are Fixed Networks, Mobility Solutions, and Terrestrial Infrastructure Projects. We believe, that these changes are consistent without the businesses viewed by the chief operating decision maker, and as a result, the company's operation can be more effectively managed. Fixed Network segment, includes our broadband satellite networks equipment activity, including our cellular backhaul solutions and services for telcos, as well as our products and solutions for enterprises, consumers, and governments worldwide. It further includes our network operation and managed services activity in Peru and Colombia, which were previously reported as part of the service segment. Our fixed network revenue for the first quarter of 2018 was $37.6 million compared to $26.9…

[Operator Instructions]. The first question is from Andrew Spinola of Wells Fargo. Please go ahead.

Thanks. I have a pretty high level question, Yona, I wanted to start with. You made the comment about investing heavily in R&D, and it was up quite a bit in the quarter year-over-year and trying to get a better sense of what you are investing in and where you see the best opportunities, and kind of high level, what those markets are. But can you maybe drill down a little bit on your R&D spend, and tell me why you see -- various areas, you think Gilat can sort of be a winner?

Well, I think the answer is multilayered, and I would say first of all that we -- as we analyze the markets, we are targeting and we analyze the market trends, we believe that there will be bigger demand and there will be an overall trend of price erosion. Therefore, we must prepare for these trends, as we see already the pressure to provide bigger throughput for lesser cost. Therefore, we defined the three design themes, that I elaborated on earlier, which are spectral efficiency, cost per bit and strong VSATs. We believe that, with the markets going to broadband and more capacity at lower costs, this will be the prerequisite in all directions we go. So these are the design themes. Now, where are we going with our platform? First of all, the world is moving from HTS to VHTS, from high throughput to very high throughput. Again, as exemplified by YSAT-3, Jupiter-3 etcetera, etcetera, these are high throughput satellites, very high throughput satellites. You need those characteristics, and this is one market we are targeting. Secondly, we are preparing for the NGSO constellations. As we mentioned earlier, we believe that -- while there is a lot of doubt, our belief is that not all will fail. So that will be successful, and therefore, we have to prepare for the NGSO constellations, that includes Beam Hopping, that includes onboard processing, network virtualization, etcetera, this is the second market we are targeting. Aiming farther, the other market we are expanding into, is ESA antennas, which is mandatory for NGSO constellations to be successful, and we are beginning our path into -- our journey into that area, and we are -- we believe that we have made the initial steps, and we believe, that we will be part of the booming world of ESA antenna providers.

I guess, just sort of the follow-on to that question, as I am thinking about your financials with R&D up quite a bit, and some of your operating expenses down, how should we think about where those different line items trend, as you go after this opportunity?

Hi Andrew, it's Adi. I think that more or less the current run rate of R&D, as you can see in Q1 and Q4, will continue until the end of the year, more or less.

So at these absolute levels you are saying?

Yeah, it's the absolute level of around $8 million to $8.5 million a quarter.

Okay. And is there still more opportunity on the sales and marketing and G&A side to take costs out, or is it similar for those line items for the rest of the year as well?

I think G&A more or less will stay the same level. Sales and marketing, as we are investing more and more in sales and marketing, we expect it to increase a little bit.

Got it. And can you may be elaborate a little bit on why gross margin? You mentioned gross margin improved this quarter on mix. Can you remind me what some of your higher margin revenue lines are, and what maybe specifically drove the better gross margin this quarter?

In general, our product in our growth area, for cellular backhaul and in-flight connectivity drives a bit of a higher margin. Especially, we are focusing on developed countries and less on the developing countries. Although their customers know and appreciate better technology, and are willing to pay premium for better products.

And then on revenue, I guess to make your guidance on the top line, you need to sort of show an acceleration from Q1. Is that -- do you have the awards in backlog at this point to give you the visibility of that, or is this business from existing customers or do you need to win business to make that, and what's your visibility to those opportunities?

It's a combination of backlog and existing customers. In general, I would say that, more than 75% of our focus is already -- is recognized all in backlog. So we have pretty good visibility until the end of the year. As we say that, remember, that in some cases, we need to get acceptance on customers, so it can slip quarter-to-quarter or even year-to-year. But in general, not like other years, we have a very good visibility to our top line and bottom line this year.

Got it. And Yona, just in general, can you comment on sort of the RFP activity in the mobile network opportunities, DLT backhaul? I know it's an attractive space for you guys. How has it been looking in the last three months?

It's looking more or less the same. We are progressing with existing customers, and the pipeline is increasing. Most of the customers who bought equipment for cellular backhaul as example, will expand the network, and the pipeline is increasing on a monthly basis. So I think, it will continue to support our growth.

Last question for me; the CapEx was higher this quarter, and I think your model is changing somewhat, where you are taking on more CapEx with some of these service contracts. Do you have a sense, was this a one-off quarter of higher level of CapEx, or is this is a run-rate going forward, where you might do something like $12 million or $14 million this year in CapEx?

The CapEx this quarter includes deployment of several managed service transactions that we want late Q3 and early Q4. I would expect 2018 CapEx to be higher than 2017. But I am not sure we will continue to keep the $3 million, unless we will win another big managed service transaction.

Okay. Thank you very much.

Thank you, Andrew.

The next call is from Michael Hebner of IFS Securities. Please go ahead.

Good morning. With all the news on Trump and the ZTE and Huawei and 5G and countries making a strategic interest; seems like that would create some opportunity for you. Are you seeing anything in that arena, on the big picture?

I think that the satellite industry is still in the process of analyzing and trying to identify the right opportunities for 5G, in that context, it's a little bit behind cellular world. So I think, that at this point in time, we, as everybody else are part of the forums and the processes that try to define the best fit of 5G into the satellite domain. But at this point, I don't think there was any concrete opportunity. Maybe, when we see the NGSO constellations of LEO and MEO with thousands and thousands of beams, 5G coming into materialization. But I think that in a few years down the road, at this point, I think it's -- for the industry in general, 5G is a little bit of [indiscernible] in order to translate it into specific opportunities.

So when you are looking at -- you have got the profitability under control now, you are making money, so what are we doing on the sales side to get something move in 15 -- I mean it’s a massively growing industry. How are we going to start growing our revenue at a higher rate?

Well, first, as I explained in my response to Andrew's question, we are investing a lot in R&D, because, this is a foundation. We need to have a product that maintains our leadership position, and not only that, but create a platform fit to compete in new spaces, like NGSO constellations and also penetrating into new territories in various antenna. So first of all, we will continue to invest relatively heavily in R&D. That's something that will remain high in our priority list Secondly, we intend to expand, as we said in previous calls and on this call, to expand our efforts from certain areas, where we already made some success like North America to Europe to Latin America and others, because we believe there is potential there, that we will not be able to capture, we are so focused on the previous territory, that we are operating in. As far as strategic options, we are all the time looking. There is definitely another vehicle or another tool at our disposal to accelerate our growth. And that's something that's on our radar, and when the right opportunity arrives, we will take advantage of it.

Good. What about investor relations? It seems like you are not doing much on that front? I mean, are you doing anything more, going to any shows, how are you enhancing -- got some good profitability, how are you enhancing that?

We are doing the best we can on that front. We invest a lot in meeting investors, attending shows, and we will continue to do so. Maybe not everything is visible. We are traded both in NASDAQ and in Tel Aviv, and we plan to do a road show in June. So maybe we will be able to meet with you.

Have you hired any more salespeople? So on this side, we always could have a plan. But you usually need somebody out there selling that plan? Do we have any more salespeople? Are we going to add any more salespeople? It does seems like you have some good products here, to get the stuff out there?

Definitely. We are constantly at the process of expanding our sales force. This is an immediate derivative of our plan to expand from North America, as I mentioned earlier, to Europe, to Latin America and other parts of the world. So the intent is to improve our sales team and to expand it and we do it all the time. This is a critical component of our plan to expand into new territories and into new product lines. Definitely, we are searching and hiring every day of the year.

So if we had 10 salesmen last year, how many do we have this year? Do we have a number?

We do not share that number.

Okay. Good. All right. Thank you for your time.

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

Hi Yona and Adi. Thanks for taking my call. I guess, just back on the 5G commentary Yona, agreed that, there is just a greater amount of bandwidth required, and I guess I am wondering what the technical requirements are in going from HTS to VHTS and how you are handling that? And specifically in, I guess in -- as you'd respect for efficiency, what sort of modulation orders are you changing, and how fast do you think you can get your bandwidth to increase?

We could go into technical discussion. But without confusing the forum, I would say the following; first of all, we are currently in the midst of upgrading our network and our user terminals to be fully compliant with S2X, which is the new standard to address a VHTS satellite, at least on the outbound. On top of that, this will be a process that will be complete by the end of 2018, and therefore the full hub and VSAT product line will be fully compliant with S2X, as I said, by the end of this year. In the coming years, we intend also to invest further in the inbound, in order to expand the pipe, if you will, on the inbound as well, and bring that into fully compatibility and support of satellites, which will be the size and ability to deliver, such as Jupiter-3, such as the new user satellite, and as VHTS satellite, plus as well, with the capacity that will be delivered by and power the new O3b constellation and also Telesat and OneWeb sat constellations. Not all of them are -- still out there bidding, but at least, we want to be ready from a platform perspective. As far as the VSAT themselves, we also continue to invest, the ultimate goal is to get to 1-gig up for VSAT. But it will be the high end of the product, again to reflect the ability to transmit and receive a lot of bandwidth for every end user. I think these are the highlights of our technical goals, we can go into more detail. But I think it gives you the order of magnitude of what we are aiming in the coming two to three years, in terms of product roadmap. I believe, that this will be supported adequately with VHTS and NGSO constellations, that will be out there in the coming two to three years.

Okay. Thanks Yona. On the airborne terminal and the D.C. show, could you give us just a little more color on the upshot? Were you able to talk to more manufacturers? Were you able to talk more airline specifically? Can you give us a sort of a status report on where you are?

Yeah. I don't want to be -- don't want to disclose customers and potential customers' information, but we had a very successful show in China. We presented the dual-band terminal. We presented it to most, if not all of the major airlines in China, as well as domestic and international service providers. There is a lot of interest. We believe that the antenna and the solution is ready for HPC and should start HPC in the coming weeks and months. Therefore, be ready for commercial flights, early 2019. We also believe that there will be commercial interest in the antenna in the coming months and towards the beginning of 2019, as there will be a deployment. I do not want to go into details of one, two, three or how many customers and who they are. This is obviously confidential, nor volumes. But we are very optimistic regarding our completion of the antenna on time, certification and deployment into commercial use. At this point, this is all I can say, but we are optimistic, that there will be customers to this very-very unique and high performance antenna.

Okay. I understand the China perspective, but could you give me or could you offer any more insight on what's happening, say in North America, Europe?

Yes. Unfortunately, I cannot go into detail here as well, for a different reason. As you know, we are co-developing this antenna with Hughes Network, and these territories, where they have the selling right of the antenna. So while I have the data, I cannot share it with you. You will have to -- I will have to defer you to Pradman in order to tell you where they stand on these efforts. This is their -- as part of our agreement, they have the exclusive rights to market the antenna in those territories.

Okay. Thanks Yona. Thanks for reminding me. Fair enough. Adi, thank you for the new segmented presentation, but when the Peruvian moves from construction to service, and you start looking at service generated revenues, will those revenues flow into fixed networks, or do you continue to expect to break them out?

No. Those revenues will flow to fixed networks. It's part of our overall operation in Peru. We have relatively large operation today, that will deal with these networks and other satellite networks that we have in Peru. It's managed together, it's tied together. You cannot break it.

Okay. Apologies Yona for flipping back and forth, but on the airborne terminal, in some of those contracts, do you hope to include a service portion? I know that you have spoken to this in the past, and I was hoping you wouldn't mind reminding me?

Sure. Currently, our strategy is to offer services on the solar backhaul enterprise side of the house, not on the IFC [indiscernible] antenna size. So currently, we are not targeting a service. This is not part of our strategy. We are still in our buildup and penetration phase. But if the opportunity comes, we will not say no, but we are not actively pursuing no. But we are definitely on the enterprise and cellular backhaul side.

Okay. Thank you gentlemen for taking my questions. Appreciate it greatly.

Thank you.

Thank you, Kevin.

[Operator Instructions]. The next question is from Gunther Karger of Discovery Group. Please go ahead.

Yes, thank you. Regarding the in-flight services area, particularly, the segment that you service with a global contract; how is that general business going currently, and what is the outlook for that business?

This business is growing quarter-over-quarter, and year-over-year, we are expected to grow -- we gave guidance of Mobility revenue to grow on average about 15% year-over-year in 2018, after significant growth of 40% year-over-year in 2017. We expect to continue to grow.

Thank you. A follow-on question on that, regarding the antenna developments that the prior gentlemen might have covered, but I wasn't sure. Remember, you were developing an antenna system that is flushed with a fuselage. Is this the antenna developer that was referred to that's now under development?

No, I think you are mixing two different projects. The one that you referred to, is experimental development, together with Airbus and currently, we have nothing to share on it.

Okay. Thank you, Yona.

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 U.S., please call 1888-326-9310. In Israel, please call 03-925-5901. Internationally, please call 972-3925-5901. Mr. Sfadia, would you like to make your concluding statement?

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

Thank you. This concludes Gilat's first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.