Gilat Satellite Networks Ltd. (GILT) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Third Quarter 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 9, 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 and 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. Good morning, good afternoon, everyone. Thank you for joining us today for Gilat's Third Quarter 2021 Results Conference Call and Webcast. A recording of this call will be available beginning at approximately noon Eastern time today, November 9 as a webcast on 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 release 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 Act Reform 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 the 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 explicitly disclaim 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. And with that, let me turn to introductions. On the call today are Mr. Adi Sfadia, Gilat's CEO; and Ms. Bosmat Halpern, Gilat's CFO. I would now like to turn the call over to Adi Sfadia, Adi, we are ready to begin.

Thank you, Ehud, and good day to everyone. I would like to thank you all for joining us today for our third quarter 2021 earnings call. I am pleased with our results this quarter, which continue to show progress and recovery with improvement in our gross profitability and return to operating and net profit. We grew revenue by 34% year-over-year to $50 million, and our adjusted EBITDA was $4 million significantly above the third quarter of last year and about $1.5 million above the previous quarter. I'm excited to share that this quarter was a very strong quarter in our strategic focus areas of non-geostationary orbit constellations and the very high throughput satellites. Furthermore, during this quarter, we had some substantial strategic gains and new customer wins. We continued recovery and progress in all our markets, including in the IFC segment. These gains will be reflected in our financial performance in future quarters. The global supply issues, components scarcity and price increases are affecting the satellite industry as well. Like others, we are facing some significant headwinds, however, are making great efforts to overcome these challenges. Thus far, we have been mostly successful and we hope that this will continue to be the case until the ease that is expected towards the second half of next year. As I explained last quarter, in order to materialize the significant opportunities we are already experiencing and see ahead, we are increasing our R&D investment to better support future growth. Now we'll focus on some of the business achievements in more detail and discuss some of the recent highlights. In the last few months, we have been experiencing significant activity in the strategic non-geostationary orbit satellite constellation and the very high throughput satellite segment. Specifically, the third quarter was a very strong quarter for Gilat in those segments. We continued this quarter to receive order of approximately $17 million on a leading satellite operator for support of a low orbit constellation to be delivered later on in 2022 and beyond. In addition, we have major projects on our pipeline, which we hope to secure several in the coming quarters. These projects will utilize our next-generation platform, new GEO and NGSO modems and solid-state power amplifiers. Furthermore, we are making additional investments in putting in sufficient effort in R&D that are supporting major progress with the ground segment for the SES O3BM power satellite constellation and other projects in our pipeline. We expect to start seeing significant revenues from the SES mPOWER project in the coming quarters. As a leading provider for this market, we see solid growth potential comprising of hundreds of millions of dollars in market opportunities that we expect to materialize in the coming years. Mobility is a major focus area and growth engine for Gilat. In the IFC market, we are seeing initial feats of recovery evidenced by significant orders summing for more than $15 million from several key players with delivery plans for 2022 and beyond. This will support our future growth. Upon an industry recovery, we expect the mobility segment to return to be a substantial part of our business as passengers increasingly demand reliable high-speed Internet connections during travel, and the expectation of connectivity all the time and anywhere has only strengthened during the pandemic. Gilat is highly committed to this strategic market and we view the pandemic impact over the past as temporary issue. However, we do believe it will still take some time for the IFC industry to return to its pre-COVID levels and for Gilat IFC segment to recover to its full potential. In Peru, we were awarded approximately $28 million in multiyear service agreements by Pronatel for operating the regional transport networks to support broadband connectivity and services across the 4 regions of Ayacucho, Apurimac, Huancavelica and Cusco. With these wins, we are meeting our stated goal of about $50 million in annual recurring revenues run rate from Peru, ahead of the stated objectives. During the quarter, Gilat continued to lead the 4G cellular backhaul over satellite market segment as tier 1 global mobile operators expand their networks with orders totaling multimillions of dollars. Gilat's well-recognized solution supports leading mobile operators worldwide with applications such as emergency response and coverage to remote regions and at times, as an obligation to ask their local government mandates. This market segment has strategic value for Gilat, and as such, we see great potential to expand our leadership as market adoption of 5G is growing. In the enterprise segment, with a significant way with SES for a multimillion-dollar contract for multiple broadband applications in Latin America. Gilat's multi-service platform was chosen to support SES thorough backhauling enterprise a universal service obligation projects in the regions of Andean, and in rural Argentina. In addition, Gilat continued to secure orders totaling multimillion of dollars for a variety of enterprise applications throughout the world, including in the United States, Russia, India, Australia and the Philippines. Overall, when I'm looking into the future with the recent wins and the strong momentum we are seeing across our business, I'm increasingly confident that we'll show significant top line growth and double-digit growth in adjusted EBITDA in 2022. And I'm sure that this is only the beginning of a long growth step ahead of us in the years to come. And with that, I'd like to hand over 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 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, amortization of purchased intangibles, amortization of leasing incentives, litigation expenses or income related to trade secrets claims, reorganization costs, merger acquisition and related litigation costs and settlement 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 third quarter of 2021. Overall, as Adi mentioned earlier, we are pleased with the results, and we are increasingly positive about our prospects in the future -- in the quarters ahead. Our quarterly results showed solid year-over-year improvement in both revenue margins and profitability. While we face some short-term headwinds, given the electronic component supply constraints affecting the global economy, which I will discuss in a few minutes, our improving performance so far this year demonstrates that we are moving in the right direction. In terms of our financial results. Revenues for the third quarter were $49.9 million, up 34% when compared to $37.3 million in the third quarter of 2020. In the prior quarter, revenues were $56.9 million. The year-over-year increase was driven by revenue growth from Cellular Backhaul, NGSO, defense and enterprise broadband markets. In terms of revenue breakdown by segment. Fixed Networks Segment revenues were $22.3 million compared to $22.8 million in the same quarter last year and $30.8 million in the previous quarter. Mobility Solutions Segment revenues were $21.6 million compared to $9.2 million in the same quarter last year and $19.9 million in the previous quarter. The improvement in this segment was primarily driven by strong revenue growth from NGSO and defense markets, while in-flight connectivity or IFC remains weak. Terrestrial Infrastructure Projects Segment revenues, which include the construction revenues for our projects for Pronatel in Peru were $6 million compared to $5.3 million in the same quarter last year and $6.2 million in the previous quarter. Now looking at our quarterly results on a GAAP basis. GAAP gross margin improved to 35% compared to 25% in the same quarter last year and 29% in the previous quarter. GAAP operating income for the quarter was $918,000 compared with an operating loss in the same quarter last year of $10.9 million, which included costs related to the Comtech merger deal of $8.2 million. In the previous quarter, the operating loss was $337,000. GAAP net income in the quarter was $168,000 or $0.00 per diluted share. In the same quarter last year, we reported net loss of $11.6 million or $0.21 per share, which included costs related to the Comtech merger deal. In the previous quarter, we reported a net loss of $129,000. To summarize the quarterly non-GAAP results. Our non-GAAP gross margin improved to 35% compared to 25% in the same quarter last year and 29% in the previous quarter. We had $16.2 million in non-GAAP operating expenses in the quarter compared with $11.4 million in the third quarter of last year and $16.6 million in the previous quarter. I note that last year due to COVID-19 pandemic, we had made temporary cost reductions, which mainly consisted of a reduction of our global workforce to 80% work scope. In December 2020, we returned all our employees back to 100%. Further, I would like to note that this quarter, we benefited from cost-related grants. We increased the investment in R&D to ensure timely delivery of the existing large projects we have been awarded, mainly in NGSO constellations and also to capture other opportunities we see ahead of us. Non-GAAP operating income was improved to $1.5 million compared to an operating loss of $1.9 million in the same quarter last year, and operating income of $183,000 in the previous quarter. Non-GAAP net income in the third quarter was $712,000 or earnings of $0.01 per diluted share. This is compared with a net loss of $2.6 million or a loss of $0.05 per share in the same quarter last year. In the previous quarter, we reported a non-GAAP net income of $391,000 or earnings of $0.01 per diluted share. Adjusted EBITDA for the quarter improved to $4 million compared with an adjusted EBITDA of $562,000 in the same quarter of last year. In the previous quarter, we reported an adjusted EBITDA of $2.5 million. Moving to our balance sheet. As of September 30, 2021, our total cash and cash equivalents, including short-term deposits and restricted cash were $85.4 million compared with $82 million as of June 30, 2021. In terms of cash flow, we generated about $5 million from operating activities. DSOs, which include our Fixed Networks and Mobility Solutions segments and exclude receivables and revenues of our Terrestrial Infrastructure Projects segment were 66 days compared to 65 days in the previous quarter. Our shareholders' equity at the end of the third quarter totaled about $229.2 million compared with $228.7 million at the end of the previous quarter. Similar to other companies, we are experiencing the global shortage of electronic components and materials, which has been intensifying since early 2021 across many of our suppliers. Components lead times continue to increase and scarcity is increasing the component prices. The extent of these shortages is unprecedented and is expected to persist for the immediate future. I stress that this is a global-wide issue affecting everyone in the market. Given our careful planning and prudent inventory management, we have been mostly able to manage the impact so far, and I hope that we will be able to maintain this and we'll, of course, keep you updated. All in all, we are encouraged by a return to growth and profitability, and the strong backlog and Python momentum, which cause us to believe that 2022 will be a very strong year for Gilat with significant growth, both in revenue and in adjusted EBITDA. That concludes my financial review. I would like now to open the call for questions. Operator, please?

[Operator Instructions] The first question is from Chris Quilty of Quilty Analytics.

Congratulations on the strong bottom-line results, especially in light of the sequential downtick in the Fixed Network business. Can you help us understand what components of that business were down sequentially? And were those issues sort of temporary contract delays or timing? And should we expect Q4 to move back towards the sort of run rate you were at earlier in the year?

Yes. Chris, it's Bosmat. So yes, the sequential decrease that we see, as you know, Gilat is very difficult to measure quarter-over-quarter. The way our business is run is that we may have very large projects, which are deployed in one quarter and then the next quarter may be a bit lower. So usually, it is better to look on a year-over-year basis. When we look at the Fixed Network Segment this quarter, actually, we had some significant deployments in Q2 for CBH and enterprise in LatAm and Asia, and some of the deployments we were going to do this quarter were delayed to next quarter. We do believe that next quarter is going to be the strongest quarter of the year, and we will see this going back up in Q4.

Got it. So mostly just timing-related issues.

Exactly

Also, I think this is the best gross margin that you posted in quite a while. And again, in light of a little bit of a revenue shortfall in the quarter, can you detail for us what contributed? Was it simply a mix-related issue to the margins?

Sure. So as you know, our margins are always very volatile between the different deals in regions and segments. So it's also -- quarter-over-quarter, it changes a lot. The different revenue mix significantly shifts our margins. We had this quarter a more favorable mix of deals, which contributed to our gross margin. And as I said, we also benefited from COVID-19-related grants, which helped the margin and also the mobility segment revenue were higher, which usually contributes more to our margins.

Great. And can you remind us, within the Fixed Network Segment, the general margin profile of the subsegments or the markets that fall within Fixed Network, how they rank?

Yes, sure. So what we mostly have – we talk about the Cellular Backhaul. The Cellular Backhaul is the highest margin of those sub-segments, if you call it, it’s above the average of the – we have enterprise and by the way, enterprise in the pro operations, which are about the average margin of the fixed segment. And then we have the consumer, which is lower of Gilat’s business, which is the lower margins of all of those subsegments.

Great. Also, I think you mentioned during the call and I didn’t – I missed the number, but significant orders in the IFC market. Was it 15, 1-5 million?

Yes, yes, slightly above $15 million. And we are seeing slightly more traction in this segment. I guess we all understand that returning to pre-COVID level will take a while and probably only on the second half of next year. Only this week, the international flights to the U.S. opened. So it will take some time, but we do see some more traction and received some large orders to be delivered in 2022 onwards, so which will affect our revenue and growth next year.

Great. And were those orders with existing legacy customers or new customer wins?

Mainly with existing legacy customers.

Great. And another question on the script. I think you mentioned orders for LEO constellation to be delivered in 2022. What was that number?

Slightly above 17, 1-7.

Understand. And those are existing – those are orders under your existing contracts that you have, not a new win, correct?

Correct. Those are existing contracts.

Good. And then I guess final question on Peru, you indicated that you hit the $50 million run rate. And presumably, that is at the exit of Q3. So it should be reflected in Q4, a higher revenue moving forward, Q4 and into next year?

Correct. $15 million but it’s a run rate. So we will see a run rate of slightly above 14 Q4. You need to take ¼ of it. And once we will get into operational phase in ICA and Amazonas, we will need the $50 million per year. So – but in terms of backlog, we have about $50 million a year.

Great. And actually, one final question. Can you give us a sense of the book-to-bill in the quarter, either corporate-wide or if there’s any significant outliers amongst the segments?

Yes, it was significantly above 1. We call it book to revenue because billing and revenue in Gilat is not always tied together, but it was significantly above 1.

The next question is from Gunther Karger of Discovery Group.

Yes. Congratulations on very good results. Question is – a lot of questions, could you make some comments on the military or the defense business to see how that’s going?

Yes, sure. As we said in the last several earnings calls, we are investing more and more in the defense segment, which we haven’t invested for – in the last several years. We source several very nice wins in Asia, Middle East and some in LatAm. We are trying to duplicate it in other places in the world, mainly for baseband sales and antennas. It’s not – it’s something that we won’t be able to measure quarter-over-quarter because to penetrate a new defense organization takes a lot of time and require a lot of investment in some cases, a specific development and security measures. But in general, we expect a lot from this segment in the coming years.

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

Yes. I want to thank everyone for joining us on 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 Third Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.