Gilat Satellite Networks Ltd. (GILT) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Second Quarter 2022 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, August 9, 2022. 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?

Thank you, operator. Good morning, and good afternoon, everyone. Thank you for joining us today for Gilat's Second Quarter 2022 Results Conference Call and Webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, August 9, 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 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, let me turn to introductions. On the call today are Mr. Adi Sfadia, Gilat's CEO; and Mr. Gil Benyamini, 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 for joining us today for our second quarter of 2022 earnings call. We are pleased with our results for the second quarter. We are particularly happy with our solid improvement in profitability and with a strong growth in our adjusted EBITDA. Second quarter revenues were $55.5 million, slightly above the second quarter of last year. Adjusted EBITDA improved to $5.3 million, more than double compared to an adjusted EBITDA of $2.4 million a year ago. Adjusted EBITDA represents a margin of 9.5% of revenues compared to 4% a year ago. More importantly, looking ahead, we are well on track with our expectations for 2022, which is turning to be a strong recovery year for Gilat. We are, therefore, reiterating our 2022 annual guidance of revenues, operating income and adjusted EBITDA. I will now focus on some of the business achievements and discuss some of the recent highlights. I'm excited to share that we had a strong quarter in the current new era of satellite communication. Gilat is expanding its strategic relationship with satellite operators and has received during the second quarter about $20 million in additional orders for our next-generation platform, SkyEdge IV. SkyEdge IV continued to show strong market acceptance for multi-orbit multi-service applications. SkyEdge IV was designed and built to capitalize on the large opportunities of the launch of GEO Very High Throughput Satellites and NGSO constellations. We have grown pipeline, and we continue to compete on important GEO VHTS opportunities for additional major satellite operators. We see solid growth potential in this new era of satellite communication, and we are on track to meet our goal of capturing a strong position in this mega market. The ground segment market alone is estimated to be a multibillion-dollar market opportunity over the next few years according to industry analyst NSR. In our SSPA product line, we continue as planned with 2 previously reported major projects with a potential of hundreds of millions of dollars for large NGSO constellations. We saw a strong quarter for the mobility market, including both for the IFC and Maritime segments. As the business continued to pick up, we received multimillion dollar orders from key customers for both our SkyEdge IV platform and our SSPA product line. As the current demand for air travel is booming, Intelsat commercial aviation has expanded its strategic partnership with Gilat. Additional order we received to expand Intelsat service and increase user experience for air travelers in Asia Pacific. In addition, multimillion dollar orders we received from key customers for IFC HSPA solutions. On the Maritime front, we are working hand-in-hand with SES to introduce premium Maritime service to cruise lines. and we expect the first ship to go online this quarter. The service will operate initially over GEO satellite and the plan is that next year, it will also include mPOWER NGSO constellation. This is an example of Gilat's unique advantage with SkyEdge IV as the first to support both GEO and MEO constellations. The mobility market is a strategic market for Gilat. I'm optimistic that Gilat technology will provide the needed capabilities for us to continue to be the leading solution for Internet connectivity during travel in the year and increased our penetration into the American market. In the cellular backhaul segment, Gilat continued to lead with a growing business of more than $10 million in orders in the second quarter to expand existing projects in Latin America and Asia Pacific. Tier 1 mobile operators continue to rely on Gilat's leading cellular back-end solution to increase their coverage to thousands of new sites providing a reliable, excellent 4G user experience. Gilat's technology is ready and proven to facilitate the market transition to 5G and the transition from 4G to 5G is expected to take place in the coming years. We are optimistic that this will create new business opportunities for Gilat. Gilat has continued to focus on the defense business, and I'm excited to share that we are making good progress with a very large defense program. In addition, we received follow-on orders to expand the defenseforce.com network business in Asia. Gilat equipment will be used to expand tactical subcon solutions as well as address mission-critical [indiscernible] needs. Furthermore, we are making significant progress with our product line for unmanned aerial vehicles. In Peru, this quarter, Gilat received an expansion of the large contract with Internet Para Todos the consortium for existing of Telefonica and Facebook, among others, to expand internet connectivity in Latin America. The contract with Gilat is for providing cellular backhaul services over the Internet being deployed at more than 100 new sites and more than 800 sites in total to provide coverage to rural areas through Gilat's access network. This extension demonstrates our ability to execute our vision to profitable recurring revenues in Peru. In the enterprise segment, we signed an agreement to enable the Central Asian government to provide digital services over satellite. Gilat will facilitate the connection of rural villages to the government network and will enable access to to remote digital services thus assisting in bridging the digital device. Finally, I'm pleased to say that we continue to have a strong backlog and a healthy pipeline and we have good visibility into the remainder of 2022. We expect to show in the second half of the year significant growth both in revenue and profitability. We, therefore, feel comfortable reiterating our 2022 annual guidance. This is even as we consider the challenges such as the supply chain turmoil and our continued strong investment in R&D, that enable us to prepare for the worth of opportunities we see ahead. And with that, I'd like to hand over to our CFO, Gil Benyamini. Gil, 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 a 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 that these non-GAAP financial measures provide consistent and comfortable 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 leased incentive, litigation expenses or income related to the trade secret claims, reorganization costs, merger, acquisition and related litigation costs, adjustments of assets that are held for sale 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 information -- these items. I will now move to our financial highlights for the second quarter of 2022. Overall, as Adi mentioned earlier, we are pleased with the continued improvement in our results for the quarter. The results show continued recovery in the revenue and strong improvement in the gross margin and profitability. This demonstrates that we remain on track. We're optimistic about our prospects in the quarters ahead, and we reiterate our guidance for 2022. While our performance demonstrated a very solid improvement, there remain global macroeconomic headwinds, including ongoing electronic component supply constraints as well as price increases across the board. I'm pleased to say, however, that our performance in the quarter shows that we have been able to mitigate these issues without significant impact to date in terms of our financial results. Revenue for the second quarter was $55.5 million, slightly above those of the second quarter of last year, which were $54.8 million. In terms of the revenue breakdown by segment, Q2 '22 revenues of the satellite network segment, which provides advanced broadband satellite communication networks and associated professional services, turnkey solutions and managed services in the cellular backhaul, enterprise IFC and defense markets were $26.9 million compared to $34.4 million in the same quarter last year. The reason for the decline was mainly due to large deals delivered in Q2 2021. Q2 '22 revenues of the Integrated Solutions segment which provides equipment, product systems and solutions for the mission-critical defense broadcast advanced on-the-move and on-the-port satellite communication solutions, including for airborne and ground mobile were $15.7 million compared to $12.1 million in the same quarter last year. The improvement in this segment was primarily driven by higher revenues from the NGSO and in-flight connectivity market. Q2 '22 revenues of the network's Infrastructure and Services segment, which provides mainly terrestrial and satellite network construction and operation services were $12.9 million compared to $8.3 million in the same quarter last year. The improvement was mainly due to higher recurring revenues during the operating phase of the project, partially offset by a decrease in revenues during those construction phase as well as operation revenues from new products. I would now like to summarize our second quarter GAAP and non-GAAP results. Our GAAP gross margin in Q2 '22 improved to 35.6% compared to 30.3% in the same quarter last year. The strong improvement in the gross margin was due to favorable product and services mix recognized this quarter. GAAP operating expenses in Q2 '22 were $18.3 million in the quarter compared with $17 million in the same quarter last year. The increase is mainly due to investment in R&D efforts that will support our current and future growth. GAAP operating income for the quarter improved to $1.5 million compared to an operating loss of $0.4 million in the same quarter last year. GAAP net income in the second quarter was $0.5 million or diluted income per share of $0.01. This is compared with net loss of $0.2 million in the same quarter last year. Moving to non-GAAP results. Our non-GAAP gross margin in Q2 '22 improved to 35.8% compared to 29.8% in the same quarter last year. Non-GAAP operating expenses in Q2 '22 were $17.4 million compared with $16.6 million in the same quarter last year. Non-GAAP operating income for the quarter improved to $2.4 million compared to an operating income of $0.1 million in the same quarter last year. Non-GAAP net income in the second quarter was $1.4 million or diluted income per share of $0.03. This is compared with a net income of $0.3 million or income per share of $0.01 in the same quarter last year. Adjusted EBITDA for the quarter improved to $5.3 million compared with an adjusted EBITDA of $2.4 million in the same quarter of last year. Moving to our balance sheet. As of June 30, 2022, our total cash and cash equivalents, including short-term deposits and restricted cash were $71.4 million compared with $77.3 million on March 31, 2022. We do not hold any debt. In terms of cash flow, we used $3.3 million for operating activities during the second quarter of 2022. DSO, which excludes receivables and revenue of our Terrestrial Infrastructure Products segment remain at the same level similar to the previous quarter and were 95 days compared to 93 days in the previous quarter. The company has not changed its credit terms with its customers, and we do not see an unfavorable change of our collection. We expected the DSO to decrease during the next quarter as substantial milestones correlated to our collection schedule will be achieved. Our shareholders' equity as of June 30, 2022, totaled to $246 million compared with $247 million in March 31, 2022. Looking ahead, as Adi already mentioned, we reiterated our guidance for the year. Our expectations remain for a strong 2022, with revenues at between $245 million to $265 million and adjusted EBITDA between $20 million to $24 million. That concludes my financial review. I would now like to open the call for questions. Operator, please.

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

Congratulations on the orders for the SkyEdge IV. Can you give us an idea of what applications you're seeing demand from?

Chris, nice to talk to you again. Actually, the main application from the beginning of the year was in-flight connectivity, maritime and cellular backhaul. Of course, Enterprise and Consumer is also applicable because the platform is a multi-application platform. But right now, the main demand is IFC, Maritime and cellular backhaul.

And can you remind me is Intelsat one of the customers for SkyEdge IV?

Yes. Intelsat is one of the largest customers, SES and others.

Right. And speaking of IFC, obviously, your business is highly leveraged to Intelsat. Can you give us a sense of how you feel about their deployment of new hardware this year and opportunities outside of Intelsat that you're pursuing?

As we announced at the beginning of the year, the main orders we received from Intelsat there was for IFC, especially for IS-40e, the new satellite and the deployment is currently on plan. In addition, we increased -- expand our deployment for Intelsat worldwide this quarter in Asia.

Great. So a high-level question here. Obviously, in the quarter, we had the Intelsat-OneWeb merger announcement. Can you give us your thoughts on how that may impact your company?

First of all, mergers in the -- in our business and market is we see more and more. It's not a surprise for us this kind of merger. And we thought something like that could happen because Eutelsat was a large investor in OneWeb. Generally, I can say that we are seeing continued consolidation in the satellite market. We have a good relationship with Eutelsat. And we hope that the merger can open opportunities for us also with OneWeb base . I think that at one point in time, they will need GEO, LEO switchover and we need a dedicated network for that. And I think Gilat SkyEdge IV can be the optimal network for them. But of course, this is just at the beginning, we are far from seeing this mature.

Great. And speaking of GEO LEO switchover hybrid networks, any progress to report on the electronically steered antenna in terms of development or customer testing?

Last quarter, we announced that we finished our program with Airbus. Development is continuing, but -- and we see a lot of demand in the market. But right now, there is no customer who is willing to hold -- support finishing the design. At the end, you can develop those kinds of antennas up until a specific point where you need a customer to make sure that it fits the exact trade and the exact aircraft. So we have -- we are continuing to progress, but not as we wanted.

Great. On the defense market, you've talked about both the UAV market and you mentioned a large defense opportunity in this call. Can you clarify, are those opportunities primarily around the SSPA product line? Or are some of these larger programs that would include more of a managed communication suite?

In general, defense is becoming a strategic segment for Gilat. We do see a lot of business in the SSPA line of business. But we are competing on several programs. One of them is very large that is mainly a modem and network products. And we see more and more demand for both SkyEdge SkyEdge IV platform for defense organization worldwide.

Great. And final question on Peru. It sounds like you've picked up some additional add-on contracts there. How do you see the demand environment there or perhaps better to ask the funding environment for some of the programs, I think most of which are government access programs.

Right. So in Peru, we have a very good business. We already in operation in 4 regions. We recently announced that we finished the fifth region, and we are waiting for Pronatel, which is the government entity that we are working with to inspect the network and hopefully, we'll be able to start operation probably towards -- during Q4. And the sixth region is expected to be announced on -- during 2023. We reached to our target of $50 million recurring revenues. Most of it is already in backlog, and we'll see this run rate from mid next year mature to our top line. As for government funding, the fact that there is instability in the Peruvian government, let's say, either halt or significantly slow in the new RFPs that we are seeing over there. The deal with RPT is with a private sector in Peru. So over there, we continue to see the regular demand that we saw in the past.

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

Thank you. I want to thank you all 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 Second Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.