Gilat Satellite Networks Ltd. (GILT) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Fourth Quarter 2022 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instruction will be given for the question and answer session. [Operator Instructions]. As a reminder, this conference is being recorded, February 14, 2023. 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?

Good morning, and good afternoon, everyone. Thank you for joining us today for Gilat's fourth quarter 2022 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, February 14, 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, would you like to begin.

Thank you, Ehud, and good day to everyone. I would like to thank you for joining us today for our fourth quarter of 2022 full year earnings call. We are pleased with the results reporting fourth quarter revenues of $73 million, bringing us the full year revenue of about $240 million, which is year-over-year growth of 12%. Most importantly, we are particularly happy with the solid improvement in profitability across the board, with first quarter adjusted EBITDA of more than $10 million bringing us to a full year adjusted EBITDA of more than $25 million, which represents significant year-over-year growth of 64%. Today, we are introducing our 2023 guidance. Following our solid growth in 2022, we expect continued revenue growth with further significant increase in profitability in 2023. We expect revenue of between $260 million to $280 million representing year-over-year growth of 13% at the midpoint. GAAP operating income of between $15 million to $19 million representing year-over-year growth of 70% at the midpoint and adjusted EBITDA are between $30 million to $34 million representing year-over-year growth of 27% at the midpoint. I will now focus on some of the business achievements and discuss some of the recent highlights. The new era of satellite communication continues to be a major focus area for us, as we are strengthening our strategic partnership with the satellite operators. Furthermore, it is mostly, we're going to see growing market expectation and interest in Gilat's multi-orbit, multi-service platforms to SkyEdge IV. The satellite operators continue to launch Smart Software-Defined Satellites and NGSO constellations. I am pleased to report the HISPASAT, the leading global Spanish operators selected Gilat SkyEdge IV platform for it's highly flexible Amazonas Nexus high-throughput satellites. This will enable HISPASAT to offer the highest performing satellite based fixed data and mobility services. We see a potential of multimillion dollar orders as a result of this strategic partnership extension. This is another testament to the elastix [ph] ability of Gilat platform to work in harmony with the newest Smart Software-Defined satellites. We continue working closely with our partner SES and are well-positioned for the upcoming O3b mPOWER service launch and see additional opportunities for further extension. In our SSPA product line, we are on-track with previously reported major project with potential of hundreds of millions of dollars for large NGSO constellation. On these major NGSO development project we demonstrate our product performance to the customers into the elastix satisfaction. In addition, we received an additional multimillion dollar order from a leading satellite operator to deploy our SSPA product line in support of Low Earth Orbit constellations. We continue to see a great growth potential in this VHTS and NGSO market. The ground segment market alone consisting of basement equipment, SSPAs and antenna is estimated by industry analysts, NSR, to be a multibillion dollar market. We see a solid gross potential in this new era of satellite communication and are on-track to meet our goal of capturing strong position in this mega market. In the mobility market, we were very successful this quarter in three fronts. In in-flight connectivity segment, we had strong quarter with about $20 million of orders for both our basement and transceiver for the clients. Intelsat continue to expand the global ISP network. This network will include both SkyEdge IV and SkyEdge II-c working together, demonstrating a great advantage to our partners on upward compatibility, while protecting the past investors. Furthermore, we received orders from a large global aerospace system integrator, who continue to rely on our transceivers for in-flight connectivity. In the maritime segment, we are continuing our close and productive partnership with SES. In Q4, we introduced the premium Maritime Service to cruise lines with SkyEdge IV. The service will operate over both the GEO satellite and MEO constellation. And finally, for current mobility, we received a multimillion dollar order for SATCOM expansion on trains in Asia-Pacific. Gilat on the move antenna terminals, who chosen to provide internet to train passengers as we travel across the region. Gilat technology is ready and proven to facilitate the market transition to 5G. Furthermore, we continue to lead the 4G market segment with more than 75% market share. We see great potential in the 4G market, expect to increase our presence with additional business win to strengthening our leadership in this market even further. To this point, both SES and Intelsat have chosen Gilat's platform as the lead technology fulfilling our backhaul global projects. In Q4, we enlarge our reach and extended contract saving multimillion dollars of orders for equipment and expansion of managed service contract in Asia and Latin America. In addition, we supported our longtime partner in Brazil, in achieving their goal to be the first network operator providing coverage to all 100% of Brazilian cities. Gilat completed connectivity to over 1500 rural sites, empowering teams to provide 4G coverage to all Brazilian 5,570 municipalities. We are growing our enterprise business with IoT mission critical connectivity infrastructure for Tier 1 utility company in Europe. Furthermore, our enterprise customers worldwide continue to depend on us to enhance their business. For example, we received an order of thousands of VSAT from a service provider in India. We continue to be active in the defense and government segment and have growing pipeline. During Q4, we received an important multimillion dollar order and we see a nice potential going forward. I am pleased with the progress we are making in this segment, as we continue to be on-track with this multi-year process. We have increased our investment and focus in this area and expect to grow our market share over the next few years. In Peru, we were successful in delivering high-quality services, working smoothly in providing high level of service despite the difficult political and local environment. Our fifth project, the internet [ph] work is already operative [Indiscernible] and for Pronatel approval to accept the network and to allow us to provide services to customers. We are expected to grow our social inclusion involvement into further to a $7 million award we received during the quarter from Antamina, one of the largest copper and zinc mines in the world. We are progressing with the implementation of this social inclusion e-learning project and are expected to provide service to the students during 2023. Furthermore, we have received additional orders from the Ministry of Education that they've been using our services for over a decade. Despite political turmoil and a challenging local environment, which includes strikes blockages and lockdown, we are able to continue with the services and business and we are expecting a political variable change to resume important future government projects. To summarize 2022, we had a strong Q4 bringing to a closure of an excellent year. We demonstrate 12% yearly growth in revenue, and we significantly accelerated our profitability with 64% year-over-year increase. We continue to see growing traction on our products and services among new customers, as well as existing ones. During the year we launched SkyEdge IV, our next generation platform and achieved remarkable market acceptance on the leading satellite operators. With this leading technology, we intend to capture the lion's share of this multibillion dollar market. Already in 2022 we delivered SkyEdge IV system to over 20 gateways worldwide, enabling hundreds of gigabytes per second of capacity and have already secured tens of millions of dollars worth of contracts awards. I am pleased with a great progress in the mobility market, the IFC sector has recovered and is fast growing. We enjoy the record year in orders of tens of millions of dollars from Intersat to the worldwide Aero network and former leading global aerospace system integrators for transceivers. In the maritime sector, we secured the new win for SkyEdge IV to enable maritime application. And we are making excellent progress with SES on cruise premium maritime service In Cellular Backhaul we also had recorded year with tens of millions of dollars coming from existing partners and new mobile operators. And in defense, we are making progress with important wins and growing pipeline. I would like to take this opportunity to thank our Chairman of the Board of Director, Mr. Isaac Angel for his great contribution over the past two years and to wish you success as he retires from our board. The board has appointed Mr. Ami Boehm as Chairman of the Board effected upon Mr. Angel's departure. On behalf of Gilat, I would like to welcome Mr. Boehm, who has been invaluable board member for the last 10 years. And I'm most pleased that will now gain even more from his vast experience. Looking ahead, we expect to grow both our top and bottom line in 2023, as the satellite communication sector strongly gained traction. We are increasingly optimistic and as our guidance demonstrate we expect to maintain our strong momentum. We are entering 2023 with a very strong backlog and a good pipeline, and therefore expect further growth in all of our strategic markets and are looking forward to a strong 2023. And with that, I hand over to Gil Benyamini, our CFO, 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 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, lease incentive amortization, litigation expenses, income related to trade secrets claim, restructuring and reorganization costs, merger acquisition and related litigation income or expenses, impairment of health for sale asset, other expenses, income tax effect on adjustments, one-time changes of deferred tax assets and one-time tax expense related to the release of historical tax draft earnings. The reconciliation table in our press release highlights these data and our non-GAAP information presented towards these items. I will now move to our financial highlights for the fourth quarter of 2022 followed by our full year 2022 highlights. Overall, as Adi mentioned earlier, we are very pleased with the continued improvement in our results and especially the strong improvement in our full calendar year revenue and profitability year-over-year. I'm pleased to say that despite the macroeconomic headwinds and global supply chain issues, our performance in the quarter and the full year -- full calendar year shows that we've been able to mitigate most of these issues without significant impact on our profitability. Even though 2023 contain some potential macro challenges ahead, we believe that we can overcome these challenges and continue to improve our financial performance furthermore, in 2023, In terms of our financial results in 2022, revenues for the fourth quarter were $72.6 million, 8% higher of those of the fourth quarter of the last year, which was $67 million. For the year, revenues were $239.8 million, up 12% versus $216 million in 2021. The improvements were driven by growth in all of our segments and mainly from VHTS and NGSO, IFC and Solar Backhaul Vertical. In terms of the revenue breakdown by segments, in Q4, 2022. revenues of the satellite network segment was $36.4 million compared to $32.3 million in the same quarter last year. Q4 2022. revenues of the integrated solution segment were $16.3 million, relatively similar to the same quarter last year. And Q4 2022 revenues of the network's infrastructure and services segment were $19.9 million, compared to $18.3 million in the same quarter last year. The improvement was mainly due to the higher recurring revenues during the operating phase of the project, partially offset by a decrease in the revenues of the construction phase, which is expected as we're close to finishing the construction phase and to moving to the operating phase in the last [Indiscernible]. I would now like to summarize our fourth quarter GAAP and non-GAAP results. Our GAAP gross margin in Q4 2022 improve to 38.2% compared to 36.8% in the same quarter last year. The improvement in our gross margin was due to the favorable products and services mix recognized this quarter and the higher volume of revenue. GAAP operating expenses in Q4 2022 were $21.6 million in the quarter compared with $19.3 million in the same quarter last year. The increase is mainly due to higher R&D expenses incurred in order to support our current and future growth. GAAP operating income for the quarter improved to $6.1 million, compared to $5.4 million in the same quarter last year. GAAP net loss in the fourth quarter was $6 million, or diluted loss per share of $0.11, this compared to GAAP net income of $2.1 million, or diluted income per share of $0.04 in the same quarter last year. Q4 2022 results include a one-time tax provision of $12.9 million that was recorded with respect to historical truck earnings. Those earnings are exempt from taxes and distributable dividends. Once distributed, the company should pay the related corporate taxes that were exempted [ph]. The company chose to take advantage of the temporaries Israeli tax relief that expires in November 22, and to pay significantly reduced tax rate to allow in the future certain actions such as distribution of dividends, shares buyback or acquisitions for foreign companies without paying an additional substantial corporate tax. GAAP net income in the fourth quarter, excluding this one-time provision was $6.9 million, and this is compared to a GAAP net income of $2.1 million in the same quarter last year. Moving to non-GAAP results. Our non-GAAP gross margin in Q4 2022 improve to 38.3% compared to 37% in the same quarter last year. Non-GAAP operating expenses in Q4 2022 were $20.7 million, compared with $18.2 million in the same quarter last year. Non-GAAP operating income for the quarter grew to $7.1 million, compared to operating income of $6.6 million in the same quarter last year. Non-GAAP net income in the fourth quarter was $7.9 million, or diluted income per share of $0.14. This is compared with a net income of $5.6 million or income per share of $0.10 in the same quarter last year. Adjusted EBITDA for the quarter was $10.1 million, compared with an adjusted EBITDA of $10.4 million in the same quarter last year. And for the year the adjusted EBITDA was $25.2 million, compared with an adjusted EBITDA of $15.4 million in 2021. Moving to our balance sheet. As of December 31st, 2022, our total cash and cash equivalents including short-term deposit and restricted cash were $87.1 million, compared with $69.9 million of September 30, 2022, and compared to $86.6 million in December 31st, 2021. We do not hold any debt. In terms of cash flow, we generated $16.8 million from operating activities during the fourth quarter of 2022. DSOs which excludes receivables and revenues of our terrestrial network construction projects in Peru were 72 days, lower than the previous quarter DSOs which were of 89 days. The decrease was impacted by both increase in revenues, as well as decrease in receivables due to higher collection in the last quarter. Our shareholders equity as of December 31st, 2022 totals about $244 million, compared with $248 million at the end of 2021. Looking ahead, as Adi already mentioned, we're expecting strong 2023 with revenue between $260 million to $280 million, representing year-over-year growth of 30% at the midpoint, GAAP operating income of between $15 million to $19 million, representing year-over-year growth of 70% at the midpoint, and adjusted EPS of between $30 million to $34 million representing year-over-year growth of 27% at the midpoint. 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, guys, congratulations. Adi, I think in your commentary, you mentioned a record year in the cellular backhaul market. Was that in terms of revenues, or orders or market share, or how did you measure that?

The record year were in terms of orders, I don't remember the exact amount of revenues, but usually most of the solar backhaul revenue is booked to ship in a relatively small time. So it's either few weeks or maybe a shift to the quarter.

Good. And so, maybe that brings up a question on inventory. The inventory levels have been a little bit elevated over the last year or so. Should we expect those to stay at that level or supply chain issues start to clear, should they come down?

So, indeed, inventory went significantly up in the last I think 18 months. But it was intentional, because of supply chain, we took a decision to buy -- to inventory and order for 24 months ahead. Now, we are starting to see a bit of a ease on the supply chain, but not as expected. We believe that in the second half of the year, we'll start to see a significantly reduced lead time, which will allow us to reduce our inventory as well.

Okay, great. And if I back-up maybe on the segment level, obviously, good revenue growth in aggregate. But should we expect that to show up in one particular segment over another, whether satellite networks, integrated solutions or the network infrastructure?

I would expect the gross going further to be in the satellite network, mainly the satellite network, and also slightly in the integrated solution. In Peru, we reached to the level of revenues, $50 million recurring revenues. And we expect to finish the construction of the network towards the end of the year, maybe it's will slip too early next year. And with that, around $15 million to $20 million of construction revenues a year will disappear.

Understand. And if I remember, you are hoping to get that fifth region completed by the end of this year, but just due to the political situation and probably first quarter, second quarter, and then the sixth region by the end of the year?.

Correct. We already finished the ICA region at the beginning of Q4, but due to the political turmoil in Peru, and since the government project, it takes them much more time to accept the network. And then, it use to take -- we do expect them to accept the network during the coming quarter, maybe in April, but we are still under audit. Most of the audit already finished, as always, there are some reject that we need to fix, but it's immaterial. And we believe that they will accept the network in the next two to three months.

Great. And just a question on any changes in the CapEx spending. And when we think about cash flow for next year. Should we think about it is been sort of in line with the revenue growth or do you expect to get some balance sheet leverage on a go forward basis?

So, our CapEx has been increasing in the last year mainly due to investments in their CapEx in the Peru in projects that we buy the CapEx, and in the next step is we enjoy revenues. We believe that CapEx level shouldn't increase significantly in the future.

And cash flows?

So, with cash flows, we expect to keep positive cash flow in line with the increase of EBITDA.

Great. And that will do it for now. Thank you.

Thank you Chris.

[Operator Instructions] Please standby while we pause for more questions. There are no further questions at this time. Mr. Benyamini, would you like to make the concluding statement?

Thank you, everyone, for joining us for the conference call. And we hope to see you soon or stick with you on our next call.

Mr. Benyamini, there's a additional question, would you like to take it?

Sure.

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

Yes. Thank you. I don't have a question. I have a statement. I've observed the company for quite a number of years, and I must congratulate Adi and his management on excellent performance in the quarter and the year, and in potentially vastly improved communications. I think you're on your way. Thank you so much.

Thank you Gunther.

Okay. So, I want to thank you all for joining us today on this call and for your time and attention. We hope to see you soon. We'll stick to you in our next call. Thank you very much and have a great day.

Thank you. This concludes Gilat's fourth quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.