Gilat Satellite Networks Ltd. (GILT) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Second Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, August 7, 2018. I would now like to turn the call over to June Filingeri of Comm-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 Gilat's second quarter 2018 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, August 7 and will be available for telephone replay until August 10 at noon. The webcast will be archived 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 releases with a reminder that statements made on this earning 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. Good afternoon, good morning everybody. Thank you for joining us. I'm pleased to report that the second quarter of 2018 was another positive quarter for Gilat. Building our growth engines and our profitability remained our focus in the second quarter and we continued to make progress on both fronts. To summarize our financial performance, second quarter revenues of $66.5 million were up slightly from the same quarter last year while our fixed network segments which include cellular backhaul and our mobility solutions segment which includes IFC increased 45% and 14% respectively from the second quarter of 2017. As expected the terrestrial infrastructure revenues continued to decline in the second quarter due to the winding down of the construction phase of our first three projects for Fitel in Peru. At the same time, we announced the win of two new regions with Fitel and I will elaborate on this project in Peru in my business review in a few minutes. Our profitability continued to improve in the second quarter as measured by GAAP operating income which increased to $4.1 million versus $1.9 million in Q3 and $3.7 million in first quarter of ’18 while our adjusted EBITDA increased to $8.1 million versus $5.9 million in second quarter ’17 and $7.5 million in first quarter of 2018. Our bottom line also remained strongly profitable on both GAAP and non-GAAP basis with GAAP net income of $2.2 million and non-GAAP net income of $3.7 million in the second quarter. With our continuous progress in building a mix of quality revenues through our strategic growth engines of mobile cellular backhaul and mobility IFC, along with continued efforts to drive costs out of the business, we are confident that we will meet or beat our annual management objectives for 2018 as provided at the beginning of the year for revenues of $285 million to $305 million and EBITDA of $30 million to $34 million. Let me provide more details on the business with this review. The second quarter was also positive from a business perspective due to new as well as continued engagements customers and partners in our main strategy focus areas. I would like to highlight a few developments in these areas. First, regarding Peru. We are pleased to report that Gilat was awarded two new regional telecommunication infrastructure projects in Peru. One in the Amazonas region and the second one in the Ica region for a total value of a little over $153 million. This brings the number of regions we have won from Fitel Peru to six with a total of thirteen regions awarded to-date, winning six out of the thirteen means that Gilat is a major player in providing Peru’s telecommunications infrastructure. I want to stress again that Gilat’s interest in the Peruvian project is not the construction dollars but mainly the realization of higher margin, recurring revenues from services These include maintenance fees from Fitel and from selling network capacity to cellular carriers to address the growing needs for voice, data, and Internet in these regions as well as for the development of platforms of the e-learning, e-health and e-government. Our goal is to turn Peru into a source of secure multi-year significant profitable revenue generated from both secure government fees as well as from selling value added services. As we have mentioned before, we are nearing completion of construction in the first three of these six regions. As Adi will discuss, we will recognize the final construction revenues from these projects once Fitel inspects and approves the acceptance of these projects. Those inspections are progressing more slowly than expected right now and while we continue to push for completion of the inspection by the end of the year, some of the approvals and consequently some of the revenues may move into 2019. As Adi also will discuss, we expect to begin recognizing construction revenues from our new Fitel projects at fourth quarter of 2018. In our strategic area of cellular backhaul, we continue to see momentum with new major customer wins worldwide. Specifically, we recently announced an LTE backhaul deal with Telstra, Australia's leading telecommunications and technology service provider to expand Telstra 4G mobile service throughout remote locations across Australia. Gilat will enable Telstra to provide plentiful affordable broadband to remote areas such as rural farmers, mining companies, and local councils. Additionally, we have been chosen by a tier 1 MNO in Latin America to deliver a cellular backhaul to over 100 remote locations in Latin America during the second half of 2018 two and the first half of 2019 with further expansions expected in the coming years. Here again, we able our customer to offer ample broadband to areas that they cannot economically reach otherwise. In both of these wins, Gilat was selected for its recognized global leadership in large, efficient and reliable LTE networks which is what businesses and residents in these parts of the country expect and are willing to pay for. In our IFC strategic growth engine, we see continued growth in revenues resulting from increased business from our existing customers. There is significant interest in our solutions and we expect to report additional deals soon in this market as well as in the cellular backhaul market. Lastly I'm pleased to share with you that our focus on recovering Latin America is now beginning to bear fruit. In addition to the major MNO which selected Gilat for LTE backhaul that I mentioned earlier, we have signed a partnership with HISPASAT to commercialize high throughput satellite capacity of Amazonas 3 and Amazonas 5 satellites over Brazil. This partnership for the delivery of consumer and enterprise broadband services will make high quality connectivity affordably accessible to the businesses and residents of vast areas of Brazil that currently do not have this service. Gilat’s potential revenue is estimated at tens of millions of dollars over the lifetime of the project. This partnership with HISPASAT in Brazil is in addition to our collaboration with HISPASAT Mexico reported last quarter to provide commercial broadband services throughout Mexico. In conclusion, we remain committed to our target of improving the bottom line. Halfway into our fiscal year of 2018, we believe that the trend of reduction in capacity price continues and may be even intensified by the likely emergence of non-geostationary constellations, new opportunities will continue to be generated. This plus the tailwind of our significant investment in R&D will enable us to have further momentum in our strategic growth engine and meet or beat our 2018 financial targets. With that, we will move to our financial review. 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 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 and motivation of purchased intangibles, litigation expenses related to trade secret claims, and expenses for tax contingencies to be paid under an amnesty program. Reconciliation table in our press release highlights these data and our non-GAAP information presented exclude these items. I will now move to our financial highlights for the second quarter of 2018. Revenues for the second quarter of 2018 were $66.5 million, a small increase compared to $66.2 million in the second quarter of 2017. Revenues in the previous quarter were $67.4 million. Fixed network segment revenues were $36.2 million in the second quarter compared to $24.9 million in the same quarter last year and $37.6 million in the previous quarter. The 45% increase over the same period last year includes substantially higher revenues from cellular backhaul which also had a strong increase from the previous quarter. The year-over-year increase in fixed networks revenues reflects higher profitable revenues from Latin America region including our managed service activity for our project in Colombia for the government. Mobility solutions segment revenues in the second quarter increased to $25 million from $22 million in the same quarter last year and $20.8 million in the previous quarter. The increase from the previous quarter reflects higher IFC revenues. Terrestrial infrastructure projects segment revenues, which include the construction revenues for our projects for Fitel in Peru were $5.3 million in the second quarter compared to $19.3 million in the same quarter last year and $9 million in the previous quarter. As discussed previously, during the construction phase, revenues from Fitel can vary quarter to quarter depending on the percentage of the project completion. We are now in the final stages of the construction phase of the first three regions which are now awaiting Fitel inspection to approve the acceptance of those networks and the move to the operational phase of the project. Those inspections are currently progressing more slowly than expected. Additionally, as Yona has discussed, we have won more regions from Fitel in Peru. We expect to begin recognizing construction revenues from those two new projects towards the end of the year. In total, in the second quarter of 2018, six networks represented 24% of revenues. Mobility solution represented 38% and terrestrial infrastructure projects represented 8% of revenues. In the second quarter of 2017, those percentage were 38% for fixed networks, 33% for mobility solution and 29% for terrestrial infrastructure, demonstrating the shift of our revenue mix towards our area strategic focus. Our GAAP gross margin in the second quarter of 2018 increased to 33.7% of revenue from 29.5% in the same quarter last year. The increase in our gross margin is mainly attributable to a more favorable revenue mix. Our gross margin in the previous quarter was 31.7%. Total operating expenses on a GAAP basis for the second quarter were $18.3 million compared to $17.7 million in the same quarter of last year and in the previous quarter. GAAP operating profit in Q2 was 4.1 million, representing substantial increase from operating profit of $1.9 million in the same quarter last year and up from $3.7 million in the previous quarter. GAAP net income in the second quarter was $2.2 million or $0.04 per diluted share compared with net income of $2.1 million or $0.04 per diluted share in the same quarter last year and net income of $2.3 million or $0.04 per diluted share in the previous quarter. Net income in the second quarter last year included a tax benefit of $1.5 million. On a non-GAAP basis operating income for the second quarter was $5.7 million or 8.5% of revenues compared to operating income of $4.1 million or 6.2% of revenues in the same quarter last year. Non-GAAP operating income for the previous quarter was $5.1 million or 7.6% of revenues. Non-GAAP net income in the second quarter was $3.7 million or $0.07 per diluted share compared to non-GAAP income of $4.6 million or $0.08 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $3.8 million or $0.07 per diluted share. Adjusted EBITDA for the second quarter of 2018 was $8.1 million or 12.2% of revenues compared to adjusted EBITDA of $5.9 million or 8.9% of revenues in the same quarter last year. Adjusted EBITDA in the previous quarter was $7.5 million or 11.2% of revenues. As of June 30, 2018 our total cash and equivalent including restricted cash were $95.8 million, a decrease of $10.7 million from the previous quarter. The decrease is primarily attributable to a decrease in cash related to our projects in Peru of about $12.9 million and CapEx spending of about $2.2 million, offset in part by cash generated from operations excluding our activity in Peru of about $5.4 million. DSOs which include our fixed networks and mobility solutions segment and exclude receivables and revenues of our terrestrial infrastructure projects segment, decreased to 64 days compared to 65 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled about $223.1 million compared to $222.4 million at the end of the previous quarter. That conclude our review. Thank you for your attention. I would like now to open the call for questions. Operator, please.

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

Yes, good morning and good afternoon, of course. Could you give some additional color on the IFC area, particularly with reference to progress in the Gogo contract and specifically, if there's any impact from the reorganization that company is presently undergoing?

Hi, Gunther, this is Yona. I think we are pleased to say that we have seen no adverse impact government situation to our business, maybe to the contrary they have announced more than once that one of the things that has been working for them is they're engagement with Gilat and the performance of the modems that we are providing them in the aero planes and as a matter of fact they are looking for ways to accelerate the rate of installations. So from our perspective, while we definitely sympathize with the situation, we see no adverse impact to our business. With Gogo, we continue to provide them good service, good products, and they continue to buy and pay. So we are of course monitoring the situation, but so far we have not seen any negative implication to our business with them. Now regarding outside Gogo, I think that I can say only that this business is as usual. We see interest in our product and as I said earlier I believe that in the coming weeks and quarter, we will be able to share with the community some updates about our problems there. We are optimistic and I think that we will see continued momentum in this growth engine.

Thank you. I had two of this – I have done an analysis of that area and it seems like they are focusing more of their business into the, what they call the, 2Ku business and they have revised what side to reflect this. Thank you.

Thank you.

[Operator Instructions] The next question is from Michael Hebner of IFS Securities. Please go ahead.

Yeah, good morning. With all of the Chinese, US trade war tariffs and now we're seeing Canada and Australia, talk about Huawei and the Chinese, what are you seeing as you're out there. You're kind of a Switzerland here. Are you seeing you're getting contracts in these places or potentially getting contracts in the Chinese and these other companies aren't?

Hi. It's good to hear that Israel is Switzerland, no doubt. Yes, in general we are doing good business in China. We have the basements of China start sixteen, they are buying VSATs. There is some traction in the Chinese market although we haven't announced anything recently. I think that we can say that as a non-US company we have some advantage versus the US companies in trying to sell to China, but currently we don't see anything beyond this.

The poor situation, what -- I mean is this standard that they're slow-walking this stuff or what's your comment on this and is this going to affect your $285 million to $300 million forecast?

The situation in Peru is that we reached close to the final stages of the project. And in the first three regions we're waiting for Fitel which is the government entity that we engage with to inspect the networks and to provide the acceptance so we can move to the operational phase of the project. Now recently there were elections in the Peru and Fitel managers have been changed and it created some delays. We have learned to accelerate everything and we hope to do a catch up by the end of the year. Some of the operational revenue that we forecasted for 2018 will probably slip to early '19, but it's immaterial because we expected that things like this there might happen. In addition, we won three regions that -- we won two regions for approximately $154 million. Give or take, it's about 65% construction revenues and 35% operational revenues over ten years and as Yona has said, we are able to sell services over the network. New we expect to start the construction phase of those two regions very soon, so this compensate on the slip of the operational revenues from Peru to early 2019.

Okay, thank you.

[Operator Instructions] The next question is a follow up from Michael Hebner of IFS Securities. Please go ahead.

What -- your largest controlling shareholder FIMI private equity, what is their plan with your company? I mean I see up the road -- the other day I see a company in Ann Arbor got taken over, they are doing $100 million in revenue and they got taken over for $2 billion by Cisco. What type of multiple -- I mean what type of -- do these companies in this industry, what type of -- do they trade at multiple sales, multiple of EBITDA? What's your comments?

That's a good question. FIMI is the largest private equity firm in Israel. I can't talk on their behalf on their strategy. Currently they own about 34% of stock and I cannot comment on their behalf.

This is Yona. I would like also to add to that that, you are welcome of course to talk to them directly. At this point they are pretty pleased with the company performance and they give us all the tailwinds necessary to continue and conduct our business. And they like everybody else are looking forward to continuing the trend of improvement in the performance of the company and the profitability of the company. And I think this is the current focus of the board, part of the board or the management and this is what we've been doing in the last two years and we will continue to do going forward. And that's why we said we are comfortable and we are quite sure we will meet or beat our numbers, the profitability numbers. So we get from them just to be clear the tailwinds necessary to conduct our business and continue and focusing on improvement of performance and particularly the profitability of the company.

Your market cap is $480 million, you have $95 million in cash and I see you talk about $10 million kind of being tied up in Peru or 12 million, is there talk of a dividend, A, or, B, you're going to buy something or what's the use of this cash? I mean it seems --

It's a very good question. Let me try to address it. First of all, no, we are not talking about dividends, definitely not. And as I said earlier, I myself and the management of the company in general gets very supportive, tailwinds from the board and particularly see me to conduct our business and definitely we have the maneuvering room to make organic and inorganic moves in order to continue when -- and maybe even accelerate the trend of strengthening the company and increasing profitability. That means that we're not precluding any inorganic moves. It doesn't mean that we are necessarily going to announce, say, something tomorrow morning, but definitely it's on our agenda. And if we find the right opportunity and we believe that this is something that will contribute and accelerate our growth, we will do it. We have the full support of FIMI and the board for that. So definitely it's a tool at our disposal. With the right opportunity, we will make use of the cash we have in the bank for that purpose.

Thank you.

There is a follow up from Gunther Karger of Discovery Group. Please go ahead.

Yes, thank you. With reference again to IFC and aircraft communications, you have installed the satellite portion of the Ku band equipment. This is for onboard entertainment and communications for passengers. But is this not an opportunity also to provide operational communications for the crew for the air, for the pilots and operations as well? Is there any potential business in that aspect?

I would say that this is the business of the service providers. Our equipment is broadband connectivity, so it allows everything you just mentioned from entertainment to connectivity to the customers who pilot connectivity if need. But these are service providers to decide what type of service they are going to provide.

Thank you.

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 1 (888) 295-2634. In Israel, please call 03-925-5904. Internationally, please call (972) 3-925-5904. 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 or speak to you in our next call. Thank you very much and have a great day.

Thank you. This concludes Gilat's Second Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.