Gilat Satellite Networks Ltd. (GILT) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's first quarter 2019 results conference call. All participants are present in a 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 14, 2019. I would now like to turn the call over to June Filingeri of Comm-Partners LLC to read the Safe Harbor statements. June, please go ahead.

Hi. Thank you. Good morning and good afternoon everyone. Thank you for joining us today for Gilat's first quarter 2019 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, May 14 and will be available for telephone replay until May 17 at noon. The webcast will be archived on the Gilat's 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 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. Good morning, good afternoon and good evening everybody. Thank you for joining us. As you may have seen in our announcement earlier today, I am pleased to share with you that Gilat achieved positive results for the first quarter of 2019 as we continue to focus on building a mix of high quality revenues through our growth engines of broadband, mobile cellular backhaul and mobility IFC as well as improving profitability. In addition, Gilat received market recognition for our leadership in the 4G LTE cellular backhaul. As a result, we achieved adjusted EBITDA of $8.2 million versus $7.5 million in the first quarter of 2018 as well as GAAP operating income of $4.5 million versus $3.7 million in the first quarter of 2018, an increase of 21.7%. We also reported revenues of $62.1 million. The 7.8% decrease in total revenues versus the first quarter of 2018 mainly reflecting lower infrastructure revenues from our project for Fitel in Peru. As planned, we are winding down the construction phase in our first three regions of Huancavelica, Apurimac and Ayacucho and preparing to move to the operational phase in these regions throughout 2019. We are pleased to see our other growth engines largely compensating for the reduction in construction revenues and I will elaborate on our progress in Peru in a few moments. Moving on to a review of the business. In our focus area of mobility IFC, we see continued progress further solidifying and expanding our leadership in the fast growing IFC market. First, Gilat continues to supply Gogo with aero-modems for their 2Ku solution, reaching more than 1,100 aircraft at the end of the first quarter with a backlog of approximately additional 900 aircrafts. Additionally, Honeywell has selected Gilat's aero-modem for its JetWave satellite communication solution. The integration of Gilat's aero-modem will enable Honeywell to offer its JetWave solution within territories as well as roam in-and-out of territories where Gilat's ground network is deployed. The Honeywell-Gilat solution will be deployed first in China over Gilat's already deployed HTS Ka network for both domestic and cross-border flights and then expected to expand to additional regions around the globe. To summarize the IFC section, I want to emphasize that securing Honeywell as an additional major customer to our aero-modem along with our long time partner Gogo as well as other opportunities is a testament to Gilat's recognized global HTS and IFC leadership while making a headway in realizing Gilat's vision of providing broadband worldwide with unparalleled passenger user experience. This quarter was also a good quarter in our strategic growth engines of cellular backhaul. We received a deal with TIM Brasil to enable 4G services for their agriculture IoT business. The initial forecast calls for 1,000 Gilat VSATs to complement 4G TIM in the Field cellular coverage program. Gilat also continued as the front-runner in the 4G LTE satellite backhaul market with extensions of projects with existing customers as we received additional orders worldwide from Asia, Africa, Australia and the Americas. I am gratified to report that Gilat was recognized by the industry analyst NSR in a report published in April 19 last month as the world leader in shipments of cellular backhaul over satellite, achieving a 35% market share in modem shipments. NSR further points out and I am quoting, "being able to differentiate with a compelling managed service offer is key to gain business and defend healthy margins." Gilat's cellular backhaul strategy focuses on Tier 1 MNOs deploying LTE networks throughout the globe and we offer just exactly that, fully turnkey solutions providing managed services in numerous deployment in the Americas and Asia. In the area of broadband, Gilat expanded its business this quarter with Eutelsat in Russia. Beeline Russia, a Veon brand and one of the leading Russian mobile network operators, will utilize Gilat's advanced technology and Eutelsat network communication services in KA band to provide high-speed broadband connectivity for multiple applications to address the Beeline business offering with affordable cost in areas without terrestrial connectivity. The broadband service will extend mobile coverage, give Internet access, enable Wi-Fi points, video surveillance, telephony services, cloud PBX and organize virtual private networks. Additional progress has been achieved in the broadband area in other regions as well in Australia where we recognized revenue in the first quarter for the first major deal that was secured last year with NBN and we are progressing with gateway deployments around this project according to schedule. In LATAM, we are expanding our business with our partner Hispasat to include additional service providers with thousands of VSATs providing Internet to schools and other enterprises. I would like also to say a couple of words on NGSO. We view NGSO and specifically LEO and MEO as natural expansions of Gilat's broadband strategy and a significant growth opportunity. This quarter, we had achieved the first ever successful test that was conducted demonstrating 5G connectivity over a LEO satellite, powered by Gilat's modem over Telesat's LEO test satellite. The successful test was done at the 5G Innovation Centre at the University of Surrey conducted by a Tier 1 European operator, demonstrating 5G backhauling by Gilat over a LEO satellite. This achievement of 5G connectivity is in addition to our previously reported first ever and successful demonstration of live in-flight communications and exceptional maritime connectivity over Telesat's Phase 1 LEO satellite and it further demonstrates the benefit of Gilat's continued investment in leadership in the negligent areas of NGSO and 5G. As we have announced previously, we have significantly increased R&D investments in 2019 to maintain our current technology advantage as well as to press forward with our product roadmap including our IFC antennas as well as NGSO baseband in support of opportunities in LEO, MEO and 5G. In Peru, we are progressing with acceptance testing for the first three regions which we have won from Fitel, Huancavelica, Ayacucho and Apurimac and are on track to complete the construction of these regions in 2019. We are also finalizing the fourth regions, Cusco and completion is expected in the first half of 2020. Meanwhile, we are also making progress in building the Ica and Amazonas networks, which we won in 2018. As we have said in the past, our interest in Peru is not the construction dollars but mainly the operational fees. With acceptance of these regions in 2019 and 2020, we look forward to moving to the operational phase of these regions which yield higher margins. We remain committed to making Peru a source of recurring profitable revenue for Gilat. And so in summary, we are encouraged by the opportunities ahead in our growth engines of cellular backhaul, mobility IFC and broadband and with this solid start of the year, we reiterate our management objectives for 2019 of revenue range between $275 million to $295 million, GAAP operating income of between $23 million and $27 million and adjusted EBITDA between $38 million and $42 million. And with that, Adi, we are ready for 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 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, amortization of purchased intangibles, amortization of lease incentive litigation expenses or income related to trade secret claims, expenses for tax contingency to be paid under an amnesty program and initial recognition of deferred tax assets with respect to carryforward losses. The reconciliation table in our press release highlights this data and our non-GAAP information presented exclude these items. I will now move to our financial highlights for the first quarter of 2019. Revenues for the first quarter of 2019 was $62.1 million, about 8% lower compared to $67.4 million in the first quarter of 2018, mainly due to lower revenues recognized on the Fitel project in Peru. Our fixed segment revenues which include cellular backhaul revenues for the first quarter of 2019 were $36.4 million compared to $37.6 million in the same quarter last year and $35.4 million in the previous quarter. Our mobility solution revenues for the first quarter were $20.5 million compared to $20.8 million in the same quarter last year. Mobility revenues in the first quarter of 2018 were $29.6 million. The decrease is primarily due to seasonality in our business with our fourth quarter typically our strongest and the first quarter our lightest. Terrestrial infrastructure project segment revenues were $4.8 million compared to $9 million in the same quarter last year and $4.8 million in the previous quarter. As discussed previously, revenues from Fitel can vary quarter-to-quarter depending on the percentage of the project's completion. In total, in the first quarter of 2019, fixed networks represented 59% of revenues, mobility solution represented 34% and terrestrial infrastructure represented 7% of revenues. In the first quarter of 2018, those percentage were 56% for fixed network, 31% for mobility solution and 13% for terrestrial infrastructure, demonstrating the shift of our revenue mix towards our areas of strategic focus as well as the wind down of the construction phase of our initial projects in Peru. Our GAAP gross margin in the first quarter of 2019 increased to 37.9% of revenues from 31.7% in the same quarter last year. The increase in our gross margin is mainly attributable to a more favorable revenue mix in addition to lower construction revenues for Fitel in Peru which has significantly lower margins in the construction phase. Our gross margin in the previous quarter was 37.3%. Total operating expenses on a GAAP basis for the first quarter were $19.1 million compared to $17.7 million in the same quarter of last year and $18.5 million in the previous quarter. GAAP operating profit in Q1 was $4.5 million compared to an operating profit of $3.7 million in the same quarter last year and $7.5 million in the previous quarter. GAAP net income was $2.8 million or income of $0.05 per diluted share, compared to net income of $2.3 million and $0.04 per diluted share in the same quarter last year and net income of $5.3 million or $0.09 per diluted share in the previous quarter. On a non-GAAP basis, operating income for the first quarter was $5.6 million or 9% of revenues compared to an operating income of $5.1 million or 7.6% of revenues in the same quarter last year. Non-GAAP operating income for the previous quarter was $7.9 million or 11.3% of revenues. Non-GAAP net income in the first quarter was $4 million or $0.07 per diluted share compared to non-GAAP net income of $3.8 million or $0.07 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $5.7 million or $0.10 per diluted share. Adjusted EBITDA for the first quarter was $8.2 million or 13.2% of revenues compared to adjusted EBITDA of $7.5 million or 11.2% of revenues in the same quarter last year. Adjusted EBITDA in the previous quarter was $10.5 million or 15.1% of revenues. As of March 31, 2019, our total cash and equivalent including restricted cash were $104.3 million before distributing a cash dividend of approximately $25 million in early April. DSOs which include our fixed networks and mobility solutions segment and exclude receivables and revenues of our terrestrial infrastructure segment increased to 75 days compared to 71 days in the previous quarter. Our shareholders equity at the end of the quarter totaled about $219.4 million after the reduction of payable dividend, compared with $239.1 million at the end of the first quarter of 2018. That concludes 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 Carter of Discovery Group. Please go ahead.

Hello. Good morning and of course good afternoon. So the only comment I have is to congratulate you on setting your goals and executing them so well. Thank you.

Thank you Gunther.

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

Yes. Good morning. Every time, I think there's been three or four calls now, what are you doing to reach out to the investment community to get more people interested in this? It seems like a lot of people are interested in 5G and this backhaul stuff.

We are doing the regular stuff, trying to use media, trying to meet investors, present in IR conferences, the regular stuff, investing a lot of effort both on the media and the investor community.

What are you seeing in 5G? Like what type of backhaul, what type of increased stuff? When are these phone companies and various players going to start spending on this?

I am sorry. What was the question again?

As you are looking forward, are you seeing more money coming into the industry? I see that Elon Musk is putting up these little flying satellites and I see in your press release that people are using your business. So, what types of opportunity are you seeing with the 5G and these low flying satellites?

Well, I think that there is a tectonic change, a change that will apply in the industry once those constellations are operational because the amount of capacity that these constellations will add is much bigger than what is up there today. And I am sure that as a result, many things will happen among which are, first of all, reduction of the cost of capacity. Secondly, the reduction and the abundance of capacity will create more demand because it's more affordable in larger part of the world. And as a result, the consumption of the average person in the world and particularly in territories that are hard to reach will go up probably significantly up. This creates new markets and this is part of our strategy to try and capture these markets. So we are currently competing, for starters, on the baseband platforms for these NGSO operators and we are in discussions with some of them. We are also promoting the use of this capacity and particularly 5G with the telcos which are our prime market, when we talk about cellular backhaul. And we also believe that it will positively influence the IFC market which is another strategic growth area for us. So in general, from our perspective, once the NGSO constellations are operational, the affordability and the availability of capacity will be such that it will be a boost to our business and therefore we are adapting our technology to support 5G, to support large pipelines and we believe that there will be a need for this investment. The only thing I would just be cautious about is, we are not talking about those constellations up there and operational in 2019 or 2020. Some of them may be partly operational in 2021, but then it will intensify in 2022, 2023 and so forth. So it will take a few years for this to mature, but I am definite, unquestionably it's going to revolutionize the market.

So in your opinion like now at home we can get broadband. We get to use whatever we want. Most of the satellite services where you get broadband from, they limit you to so much per month. So in the future the satellite companies are going to be able to offer unlimited like the cable companies?

I think that the models are beginning to move to unlimited. If you look at North America, what we see the large operators offering instead of reduced cost, they are offering more capacity which is natural. So they are moving from a certain amount to unlimited in an effort to defend the price. And I think that like I said, I think they will be able to hold the line by only so much. In a question of years, it's not months but not too many years, I think there will be a significant price reduction in parallel to increase in available capacity.

Thank you.

[Operator Instructions]. There are no further questions at this time. Before I ask Mr. 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 1-888-326-9310. In Israel, please call 03-925-5900. Internationally, please call 972-3-925-5900. Mr. Sfadia, would you like to make your concluding statement.

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

Thank you. This concludes Gilat's first quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.