Gilat Satellite Networks Ltd. (GILT) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Second Quarter 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded August 10th, 2021. By now, you should have all received the company’s press release. If you have not received it, please contact Gilat’s Investor Relations team at GK Investor & Public Relations at 1-646-688-3559 or view it in the News section of the company’s website www.gilat.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

Yes. Thank you operator. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat’s second quarter results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today August 10, as a webcast on 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 release with a reminder that statements made on this earnings call they are not historical facts and maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Form 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 those 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 this. More detailed information about the risk factors can be found on Gilat’s reports filed with the Securities and Exchange Commission. And with that, let me turn to introductions. On the call today are Mr. Adi Sfadia, Gilat’s CEO; and Mrs. Bosmat Halpern, Gilat’s CFO. I would now like to turn the call over to Adi. Adi, we are ready to begin.

Thank you, Ehud and good day everyone. I would like to thank you for joining us today for our second quarter of 2021 earnings call. I am very pleased with our result this quarter which demonstrate a solid improvement and return to profitability in our business. We showed strong revenue growth of 49% year-over-year and 27% quarter-over-quarter. The improvement was throughout our income statement which includes gross margins and the return to profitability or non-GAAP basis with positive EBIT, was $200,000 and adjusted EBITDA of $2.5 million. Our performance was driven by the cellular backhaul, NGSO, enterprise broadband and defense market which have shown significant progress and we expect this momentum to continue for the foreseeable future. We also made significant progress in the mobility market and in our operation in Peru, securing significant deals. Looking ahead throughout 2021, we expect to continue our growth trend in both revenues and profitability. We expect the cellular backhaul NGSO and our operation in Peru will be met, the main growth drivers for the remainder of 2021 and beyond. Now ever looking further out into 2022, we believe that it will be a year of significant growth for our company as our NGSO project further materialize and our mobility segment growth was many time and different opportunities and the expected recovery of IFC. In order to material the significant opportunities we see ahead, we are investing increased efforts in R&D to better support our future growth. Now, we'll focus on some of the business achievement in highlight for the quarter. Mobility is the major focus area in growth engine for Gilat. We recently secured the multi-million dollar agreement with FCS for our next generation mobility platform. This is a breakthrough in solidifying our leadership in the mobility market, enabling supply of initial maritime services to some of the world's top cruise lines and maritime service providers. Collectivity will be delivered by our multi-orbit platform utilizing the O3BM power constellation and other SES GEO satellite including SES-17. In the IFC market, we are seeing initial feasible recovery. This remain a highly strategic market for Gilat and we view the show of them impact from the pandemic over the past few quarters is temporary issue. However, we do believe it will still take some time for the IFC in this and to return to its pre-COVID levels and for Gilat IFC segment to recover to its full potential. In the defense segment, we are seeing growing global opportunities as we mentioned last quarter. We closed several important multi-million dollar bills in both Latin America and Asia, further more we were awarded a $5 million contract by Tier-1 US Terminal Provider to power tactical Satcom terminals for military to worldwide. This is in addition to our ongoing successful supply of high-quality military communication product to the U.S. Department of Defense and the U.S. Army from our U.S. subsidiary Wavestream. In Peru, we received a $30 million award from PRONATEL to provide public free Wi-Fi services across 100s of sites in the regions of Ayacucho, Apurimac, Huancavelica, and Cusco. This two-year project has potential for further expansion to hand 2000s of additional sites and extensions for additional use. We are making significant progress with our strategy to deliver services over the network and as such expect to meet our previously stated goal of $50 million in annual recurring revenues on Peru. The non-GEO stationary orbit satellite constellation and the very high throughput satellite segments continue to be a major strategic focus area in growth engine for Gilat. As a winning provider for this market, we see solid growth potential comprising of 100s of millions of dollars in market opportunities for which we are making very significant progress in several fronts. We continue to receive multi-million dollar orders from a leading satellite operator for support of low earth orbit constellation. As reported in the past, our subsidiary Wavestream was chosen to supply gateway solid-state power amplifiers for this project. We also continue our development of the ground segment for the SES O3BM power satellite constellation and expect to start seeing significant revenue from this project in the coming quarters. The cellular backhaul segment continue to be a strategic importance to us. We saw significant expansion in full-on orders during the quarter from our Tier-1 MNO globally. This is a testament to the great value that our customers sees in our solution as they continue to expand their networks. I would like to highlight our leading MNO customer in Latin America who expanded a multi-million dollar IoT project for additional coverage provided by Gilat cellular backhaul solution. The mobile operator expand its agriculture IoT network to adjust the critical need for enable better communication between the field and the office. On the 5G front, the market adoption of 5G is growing, we see strong potential for Gilat to expand its leadership. This is -- this will initially be with the drive towards additional 4G deployment and as a next step with 5G as it spread to rural areas. In North America, we closed the deal estimated at over a $5 million with Pacific Dataport to provide broadband coverage in Alaska for everyone everywhere. This strategic environment will utilize Gilat multi-application platform to provide both fixed and mobility applications. In the enterprise segment, we also closed important deals in Latin America including one with Telefonica. In summary, as you can see, it has been a very active and successful quarter for Gilat and am particularly satisfied with our solid strategic and financial performance over the past quarter. The strength was driven by cellular backhaul NGSO and Defense market enabling very strong revenue growth and our return to profitability or non-GAAP and EBITDA level, following the COVID-19 downturn over the past year. Furthermore, we won a new service project in Peru which will bring us recurring revenues in the future as well as new contract in defense and maritime markets. We expect our momentum to continue for the remainder of 2021 providing continued growth in both revenues and profits. Moreover, looking further out into 2022 and beyond, we expect significant growth primarily in the following market segment. In the NGSO and VHTS segment, we see opportunities of 100s of millions of dollars for which we're making very significant progress. In the mobility segment, we expect to strengthen our leadership with the SES award for our mobility and maritime platform as well as we expect the recovery of the IFC market as air travel picks up. In the cellular backhaul over satellite segment, we are the global leaders in 4G and LTE and as such we expect to enjoy the growing opportunity as markets adopt 5G for which we have proven technology. In the Defense segment, we believe that our gain momentum with global wins this quarter as further potential of 10s of millions of dollars. I'm excited with our potential and look forward to reporting on our progress over the coming quarters and news. And with that, I'll like to handover to Bosmat. Bosmat, we are now ready for your report, please go ahead.

Thank you, Adi. Good morning and good afternoon to everyone. I would like to remind everyone that our financial results represented both on the GAAP and non-GAAP basis. We regularly use supplemental non-GAAP financial measures internally to understand managing and evaluate our business and to make operating decision. We believe these non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating performance. These non-GAAP financial measures should be considered in addition to and not in lieu of comparable GAAP financial measures. Non-GAAP financial measures mainly exclude the effect of stock-based compensation, amortization of purchasing tangible, amortization of leaving incentive, litigation expenses or income related to trade secrets claims, reorganization cost, merger acquisition and related litigation costs and impairment and initial recognition of differed tax assets with respect to carry forward losses. The reconciliation table in our press release highlights this data and our non-GAAP information presented exclusive items in accordance with Reg G requirements. I will now move to our financial highlight for the second quarter of 2021. Overall, as Adi mentioned earlier, we are pleased with the results. Our quarterly results showed continued sequential improvement and strong year-over-year improvement in both revenue and profitability. Notably, we're very happy to have returned to profitability on a non-GAAP basis in the quarter which we expect to maintain and improve in the coming quarters. The trend indicates that we are moving in the right direction and even while the COVID pandemic remains in the background, there is a clear stabilization of our end markets. Our improvement does not yet have the significant contribution of the inflight connectivity or IFC vertical which remains weak. In terms of our financial results, revenues for the second quarter were $56.9 million up 49% when compared to $38.3 million in the second quarter of 2020 and up 27% compared to $44.7 million in the previous quarter. The increase was driven by revenue growth from enterprise broadband, cellular backhaul, NGSO and defense market. In terms of the revenue breakdown by segment, fixed network segment revenues was $30.8 million compared to $21.8 million in the same quarter last year. We also saw an improvement compared with the previous quarter for fixed network revenues were $25.3 million. This results demonstrate the significant improvement in the business we've been seeing in this segment and we expect that it will show continued improvement in the second half of 2021. Mobility solution segment revenues were $19.9 million compared to $14 million in the same quarter last year. Compared to previous quarter, we saw an increase from a $11.1 million. The improvement in this segment is driven by revenues from NGSO and defense markets while IFC remains weak. Terrestrial infrastructure project segment revenues which includes the construction revenues for our projects in Peru, for PRONATEL, is $6.2 million compared to $2.5 million in the same quarter last year and $8.3 million in the previous quarter. To summarize the quarterly GAAP results, our GAAP gross margin improved to 29% compared to 25% in the same quarter last year and 28% in the previous quarter. GAAP operating loss improved to $300,000 compared to operating loss of $3.5 million in the same quarter last year and operating loss of $3.7 million in the previous quarter. GAAP net loss in the second quarter improved to $100,000 or $0.00 per share compared with a net loss of $4.2 million or loss of $0.08 per share in the same quarter last year. In the previous quarter, we had a GAAP net loss of $5.1 million or loss of $0.09 per share. Now, looking at our quarterly results on a non-GAAP basis. Non-GAAP gross margin improved to 29% compared to 25% in the same quarter last year and 28% in the previous quarter. I'm very encouraged as I said before by a return to profitability on the non-GAAP basis while we continue to invest significantly in R&D. non-GAAP operating income for the quarter was $200,000 compared with an operating loss in the same quarter last year of $2.6 million. In the previous quarter, the operating loss was $3.8 million. I note that we had $16.6 million in non-GAAP operating expenses in the quarter compared with $12.2 million in the second quarter of last year and $16.2 million in the previous quarter. The second quarter of last year included temporary cost reductions which mainly consisted of reduction of our global workforce to 80% work scope. We returned all our employees to 100% work scope in December 2020. We continue to invest significant effort in R&D to ensure timely delivery of the existing large projects we've been ordered, mainly in LEO and MEO constellations and also to capture other opportunities we see ahead of us. Non-GAAP net income in the quarter was $400,000 or $0.01 per share. In the same quarter last year, we reported net loss of $3.3 million or $0.06 per share. In the previous quarter, we reported a net loss of $5.2 million or $0.09 per share. Adjusted EBITDA for the quarter improved to $2.5 million compared with an adjusted EBITDA of $100,000 in the same quarter of last year. In the previous quarter, we reported an adjusted EBITDA loss of $1.4 million. Moving to our balance sheet. As of June 30th, 2021, our total cash and equivalence in short-term deposits including restricted cash or a $82 million compared with $75.6 million at the end of the previous quarter. In terms of cash flow, we generated $8.4 million from operating activity. DSOs, which include our fixed networks and mobility solutions segments and exclude receivables and revenues of our Terrestrial infrastructure project segment decreased to 65 days compared to 77 days in the previous quarter. With regard to our inventory, as you probably known and heard, there is a global shortage of electronic components and materials which has been ongoing now since early 2021 and is effecting us and numerous other company. However, given our careful planning and prudent inventory management, we have been able to manage the impact thus far and we continue to work hard and are leveraging a strong cash position to ensure we have sufficient inventory available to meet the demand for our solutions. Our shareholders equity at the end of the second quarter to both $228.7 million compared with $228.1 million at the end of the previous quarter. Looking ahead, all-in-all, we are encouraged with a continued sequential improvement in our results on both the top and bottom line. As Adi mentioned, we view 2021 as a year of recovering which we emerge from the COVID-19 crisis. We look forward to a year of continued revenue growth and improved profitability in 2021 and much more so in 2022. That concludes my financial review. I would now like to open the call for questions. Operator, please?

Thank you. [Operator Instructions] The first question is from Chris Quilty from Quilty Analytics. Please go ahead.

Thank you, and congratulation on the good results. Question for Bosmat, on the last point you mentioned around the chip shortages. Are you seeing improvements or is the situation getting worse there and how should we think about that in terms of either restricted sales capability or impact on margins for the balance of the year.

Hi, Chris. Thank you, for the question. Right now, we mainly are in control of those shortages. We do see an impact of the lead times of our equipment and that's why we are managing that by ordering ahead of time. Sometimes we need to order a year in advance. I do not expect it to have material impact on our margin or on our results as we manage it correctly. However, I do expect that our inventory levels will slightly grow because of those shortages.

Also shall we have the cash to fund that? And I guess on a similar angle with the resurgence of the delta variant, are you seeing any impact on your business in terms of trends either globally by region or by market activity.

Hi Chris, this is Adi. The delta version variant, I think two months ago we say that the COVID is behind us with result of a vaccine and vaccination rate. And now we see that we are far from finishing this episode. We started to meet some customers and now it seems like due to the restriction in Israel and worldwide we need to reduce our travel significantly again. But from business perspective, more or less it's the same in the last six months. We don’t see additional effect but again I learnt from the last 15 months that every month you learn something new. But right now, it's the same situation as it was in the last six months.

Right. And a follow-up on I think you had stated in the script that you expect Peru to be the primary growth driver in the back half for the year. Is that expected to come on the terrestrial side or services and will that have any kind of a material impact on the gross margins that you reported in the back half of the year relative to the first half?

The growth should come from services mainly from services. Most of them on the terrestrial network that we are building and it's growing to increase our margin especially in Peru. The effect on the consolidated P&L, will be it depends on the all the revenue mix, not only on Peru. But if we take Peru as a standalone, Peru margin should increase significantly with winning additional service bid and I guess that it will also increase our overall gross margin.

Right. And congrats on the new defense wins. Can you help us to understand are those wins that you're seeing in the defense segment generally new program starts or these programs where you're going in and taking away business competitively?

Its combination of all those. In the U.S., there are some programs that we're continue to get orders. In some cases, it's a new project under existing programs around. If we consider a program a huge budget basket under the DoD. But we do see more-and-more business outside of the U.S. especially for broadband solution, a gateway, in-house and VSATs for non-U.S countries. And we do see some new programs in the DoD that we're now trying to find our way in.

Right. I know you don’t typically provide book-to-bill per se but can you give us a sense of what the order trend is looking like either in the quarter or year-to-date. And I would guess, generally at a top level and specifically with regard to IFC whether you're seeing any early leads there of order activity picking up?

In the last few quarters, on average our book-to-revenue ratio was higher than one which I think its good situation. On IFC, we are seeing initial fills of orders for both SSPA, the box and amplifiers and also for baseband but it’s the beginning. We hope it’s a beginning of a trend. To be honest, the delta variant now probably will delay again the recovery by a quarter or two until people will understand where it's going to take us.

And are you changing your strategy at all with regard to the IFC market, obviously Intelsat the former Gogo large anchor customer but in terms of your approach to the airline customers, are you working primarily to partners or directly and has anything changed post COVID with the opportunity set there?

Well, it seems our strategy haven’t changed. We -- here and there we do talk with the end users but we are primarily focused on supporting our partners, Honeywell, Gogo, and new Global Eagle, supporting their requirements. We do participate in some of the new RFPs that service providers each of them in the last few months and probably we'll issue additional in the next few quarters but we have no intention to go directly to the airlines.

And final question on the NGSO market. Obviously FCS with mPOWER is the big growth driver going into 2022. But are there additional opportunities out there obviously Telesat and Amazon being the largest potential opportunities but are there other potential constellations or competitive wins that you see in the next say 12 to 24 months?

Yes. Without naming names, we are working with I think except SpaceX, we are working with all there we are trying to work with all the big satellite operators. There are a lot of new initiatives, startups, that raising a little money either with IPO, private money or under stocks, and we have a discussion with them as well. I do believe that we'll see a success in getting onwards in the next few quarters.

Great, congratulations.

Thank you, Chris.

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

Hi, yes. Good morning and congratulations on continued excellent results.

Quite, thank you Gunther.

Regarding the defense military business. I know that, that a year ago so that business was wrongful reminder. Since then, I've noticed the increasing number of wins. At the present time, what percentage of total business is represented by the defense and military worldwide?

Indeed, few quarters ago, the defense business was relatively minor and we are saying I think in the last two or three quarters that we are seeing more-and-more traction from defense worldwide. We had several award, seeing it second quarter, this quarter was the strongest one. In terms of revenue, it's not a data that we provide but we do see a increased portion of defense revenues. It's becoming a trend although I can't say it's a quarterly -- it's a quarter-over-quarter trend. I remind everyone that our business is there vary from quarter-to-quarter and both total and in margins depend on the revenue mix. But we do see a lot more-and-more business from the defense coming in.

Yes, thank you, Adi.

Thank you, Gunther.

[Operator Instructions] There are no further questions at this time. Ms. Halpern, would you like to make your concluding statement?

Yes, thank you. I want to thank everyone for joining us on this call and for your time and attention. We hope to see soon or speak to you in the next call. Thank you very much and have a great day.

Thank you. This concludes Gilat's second quarter 2021 results conference call. Thank you, for your participation. You may go ahead and disconnect.