Gilat Satellite Networks Ltd.
Q1 2023 Earnings Call Transcript

Published: 9 May 2023

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s First Quarter 2023 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, May 9, 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 EK Global Investor 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 EK Global Investor Relations. Mr. Helft, would you like to begin?

[Ehud Helft:]

Yeah, good morning and good afternoon, everyone. Thank you for joining us today for Gilat’s first quarter 2023 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, May 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 Sfadia:]

Thank you, Ehud, and good day to everyone. I want to thank you for join us today for our first quarter 2023 earnings call. 2023 started very well for Gilat. The first quarter of 2023 was another quarter in which we showed solid year-over-year revenue growth. Our growth was broad, across multiple business areas in total 15% compared to the same quarter last year. Adding to that, the significant improvement in our profit margins, with gross margins reaching a multi-year high of 42% and adjusted EBITDA of $8.4 million, more than tripled the adjusted EBITDA of the same quarter last year. As you can imagine, I’m very pleased with the results of the first quarter. Looking ahead, we are increasing our profitability expectation for the year. We expect GAAP operating profit of between $16 million to $20 million and adjusted EBITDA of between $31 million to $35 million, while keeping the revenues guidance at the same level of between $260 million to $280 million. 2023 is turning out to be a very strong and profitable year for Gilat. I’m pleased to highlight 3 major activities achieved this quarter

[Gil Benyamini:]

Thank you, Adi. Good morning and good afternoon to everyone. I would like to remind everyone that our financial results are presented on both 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 that 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, income or expenses, income related to trade secrets claim, restructuring and reorganization costs, merger acquisition and related litigation income or expenses, impairment of health for sale assets, 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 this data and our non-GAAP information presented excludes this item. I will now move to our financial highlights for the first quarter of 2023. Overall, as Adi mentioned earlier, we’re very pleased with the strong start of 2023. We reported a 15% year-over-year growth in revenue and a significant improvement in profitability. Non-GAAP gross margin was at a multi-year high at 42% and our adjusted EBITDA reached $8.4 million more than 3X over Q1 last year. We’re well on track with our revenue targets for the year and today we also increased our GAAP operating profit and adjusted EBITDA guidance, which I’ll cover later. In terms of our financial results, revenues for the first quarter were $59 million, 15% higher than the first quarter of last year, which were $51.4 million. The improvement was driven by growth in the Satellite Network segment, mainly from the VHTS and NGSO, IFC and cellular backhaul vertical. In terms of the revenue breakdown by segment Q1 2023 revenues from the Satellite Network segment were $33.5 million compared to $24.8 million in the same quarter last year. Significant increase mainly resulted from the large deals delivered this quarter to our strategic customers in the IFC and Maritime markets. Q1 2023 revenues of the Integrated Solutions segment were $12.9 million compared to $13.7 million in the same quarter last year. Q1 2023 revenues of the Network Infrastructure and Services segment were $12.5 million compared to $12.9 million in the same quarter last year. I would now like to summarize our first quarter both GAAP and non-GAAP results. Our GAAP gross margin in Q1 2023 improved to 42% compared to 32% in the same quarter last year. The improvement in our gross margin was due to a particularly favorable product and services mix recognized this quarter, and the higher level of revenue. Please be aware that revenue margins and profitability may fluctuate between quarters and as an outcome of the revenues volume and the mix. It’s recommended to analyze the profitability according to the trailing 4 quarters and in light of the annual guidance. The gross margin in the trailing 4 quarters was 38.6% compared to 33.4% in the trailing 4 quarters that ended on March 31, 2022. GAAP operating expenses in Q1 2023 were $17.7 million in the quarter at a relatively similar level of those of the same quarter last year. We’ve received a first payment of approximately $3 million for the first 2 arbitrations won against Pronatel and the Ministry of Communications in Peru in 2018 and in 2022 for a total amount of approximately $29 million, which is included only in the GAAP numbers and offset much of the increase in the operating expenses in the quarter. GAAP operating income for the quarter improved $7 million compared to an operating loss of $1 million in the same quarter last year. GAAP net income in the first quarter was $5.6 million or diluted earnings per share of $0.10. This is compared to a GAAP net loss of $2.5 million or a loss per share of $0.04 in the same quarter last year. Moving to the non-GAAP results, our non-GAAP gross margin in Q1 2023 improved to 42% compared to 32% in the same quarter last year. Non-GAAP operating expenses in Q1 2023 were $19.5 million compared with $16.7 million in the same quarter last year. The increase was mainly due to an increase in R&D expenses to support our long-term business growth. Non-GAAP operating income for the quarter improved to $5.3 million compared to an operating loss of $0.3 million in the same quarter last year. Non-GAAP net income in the first quarter was $3.8 million or diluted earnings per share of $0.07. This is compared with a net loss of $1.8 million or loss per share of $0.03 in the same quarter last year. Adjusted EBITDA for the quarter was $8.4 million over 3X improvement compared with an adjustment EBITDA of $2.5 million in the same quarter last year. Moving to our balance sheet, as of March 31, 2023, our total cash and cash equivalents, including restricted cash were $89.7 million compared to $87.1 million on December 31, 2022 and compared to $75.1 million as of March 31, 2022. We did not hold any debt. In terms of cash flow, we generated $6.2 million in operating activities during the first quarter of 2023. DSOs, which exclude receivables and revenues of our terrestrial network construction projects in Peru, were 77 days higher than previous quarter’s DSO, which were 72 days. The increase was impacted by decrease in revenues, partially offset by decrease in receivables due to higher collection in the quarter. Our shareholders’ equity as of March 31, 2023 totaled about $250 million compared with $244 million at the end of December 2022. Looking ahead, as I already mentioned, we have increased our GAAP operating income and EBITDA guidance for the year. Our expectations remain for a strong 2023 with revenues of between $260 million to $280 million, representing year-over-year growth of 13% at the midpoint; GAAP operating income of between $16 million to $20 million, representing year-over-year growth of 81% at the midpoint; and adjusted EBITDA of between $31 million to $35 million representing year-over-year growth of 31% at the midpoint. That concludes my financial review. I would now like to open the call and we’re happy to take your questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Chris Quilty of Quilty Space. Please go ahead.

[Chris Quilty:]

Thanks, guys. Great quarter, here. I just wanted to follow-up on Satellite Networks business, which seemed to be the real revenue strength. I think you mentioned that there were a couple of large programs in IFC and Maritime, I think. Should we view that as sort of a one-time list there or do you feel good about sort of an upward trajectory through the balance of the year?

[Adi Sfadia:]

Hi, Chris. This is Adi. Indeed, we said last time that we had a record deal both in IFC and cellular backhaul in order in 2022. And we’re now seeing the outcome in revenues. We had also a very strong quarter both in IFC and cellular backhaul during this quarter. So we’ll see continued strong revenues from both cellular backhaul and IFC during the year. We also have Maritime revenues, but it’s not as high end. It will take time to be a significant growth engine. In addition, we see a lot of business from the satellite operators for NGSO and VHTS satellites related or not related to IFC and cellular backhaul, so altogether drives the growth in revenues this quarter and the growth in profitability.

[Chris Quilty:]

Great. And I think one more launch with O3b mPOWER and SES expects to turn on service in Q3. How does that impact you in terms of terminal sales? Are you seeing a pole now in advance of shipments or do you expect that to happen more in line with the service launch?

[Adi Sfadia:]

I think it’s a combination. First, I know the SES and satellite operator needs to be ready for service launch, so they need to deploy a lot of equipment, especially on the gateway side. And modems, I guess, we see more revenues once the services is launched, when they will start to deploy with customers.

[Chris Quilty:]

And where are you with the gateway rollout on mPOWER?

[Adi Sfadia:]

Progressing, there is two types of gateways, the regional one and local one. So the regional ones are already deployed and the local ones it depend on the business SES brings from each and every country, so it’s vary between the expectation for the new business over there.

[Chris Quilty:]

Okay. I noticed that the inventories were up a little bit in Q1. Was that a timing related issue or do you have big orders going out in Q2?

[Adi Sfadia:]

I think it’s a combination of the two. First, we’re now seeing the increase after we said in the last, I think 18 months that we are starting to buy inventory for 24 months, because of the lead time. So we’re starting to see inventory coming to our warehouses. There are several projects that we bought inventory and we see the revenues in the coming few quarters. Gil, do you want to something to add?

[Gil Benyamini:]

Yes, I can say that in general our inventory management is based on the delivery forecast. And it also reflects our actual growing business. And as Adi said part of the growth is due to the mitigation of the supply chain issues that we’ve dealt with.

[Chris Quilty:]

Great. While I have you just a question on the OpEx, as you know, it looks like both R&D and SG&A were up pretty big on a percent basis year-over-year, but it’s more flattish on a sequential basis. Is it fair to assume that this is a better run rate through the balance of the year for a lot of the OpEx? Or are there any seasonal issues or whatnot we should look for?

[Adi Sfadia:]

Yeah, I think, on delve of a sales and marketing and G&A, it’s should be give or take flattish throughout the year, but we do expect R&D on a yearly basis to grow. We have several large projects that we need to deliver. We are getting awards of additional project that will require us to continue and recruit headcount. So I expect R&D to grow, just as a reference, we have tens [ph] of open positions in R&D both in Israel and worldwide just to accelerate development and be able to deliver what we promised to our customers, and it’s already factored in our guidance.

[Chris Quilty:]

Great. Final question and I guess a little bit forward looking, but when the DataPath acquisition closes, is it fair to assume that all those revenues will get folded into Integrated Solutions?

[Adi Sfadia:]

Good questions. It’s still under discussion here and we haven’t decided yet, how it’ll reflect in the segment. I guess, once we’ll be close to the acquisition, we’ll divide on that.

[Chris Quilty:]

And I guess maybe to follow on that, I mean, you already have the Wavestream business here in the U.S. How will – is there any opportunity for integrating the overhead or facilities or anything between those two?

[Adi Sfadia:]

Facilities is going to be a bit challenging, because it’s a two different location. But from overhead perspective, no doubt that we’ll try to optimize and share relevant resources, we have no intention of reducing headcount mainly because of the fact that we are very lean and mean in our day-to-day management, we haven’t increased our headcount when everyone did that. We’re doing it only based on relevant, I think, that there is a lot of synergies between DataPath and Wavestream; and DataPath and Satellite Networks. And we’ll optimize on that. I think that the most synergy that we see is on the top-line when we can drive our revenues into the defense market.

[Chris Quilty:]

Got you. I forgot one last important question. Obviously a big announcement around the IFC and the flat panel antenna contract. If I recall, a couple years ago, you guys were primarily looking at that product line you had to built out, and design to a certain point, but had indicated that you really weren’t going to make big investments until you saw a direct customer opportunity, obviously that opportunity has arrived. Is it fair to assume that you’ll have some incremental R&D to bring that product up to operational specs, or is there some NRE involved in there?

[Adi Sfadia:]

It’s a combination of increasing our R&D NRE revenues, and it’s about 24 months development and certification cycle, and then the significant amount of units to be delivered every year. It’s a very large potential for us and it’s opened the door for us for future investment in this growing ESA market segment. Everything is already factored in the guidance that we gave.

[Chris Quilty:]

Great. And remind me this is a KU or a KA?

[Adi Sfadia:]

This is a KU.

[Chris Quilty:]

Great. Thank you.

[Adi Sfadia:]

Thank you.

[Operator:]

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

[Gunther Karger:]

Yes. Thank you, and again congratulations on excellent quarter. I had two questions. Question one, with the upcoming merger between SES and Intelsat. Will that have any material impact positive or negative for Gilat? And the second question is regarding defense business globally, if you could make any comment on any specific new projects globally in the defense area?

[Adi Sfadia:]

Hi, Gunther, nice to hear from you again. So I think both SES and Intelsat is a strategic customer for us. Such a merger combined company will be even significant larger customer. I think it’s really to say what such move will do to our business on the long-term. I think on the short- and the mid-term, I don’t expect any change in their purchasing decisions. We work closely with both of them. The product is part of our roadmap. We have a lot of backlog to deliver and we have a lot of expectation from them to the next few quarters in the year. In general, we see this as a positive in many ways. At the end, it’s always easier to interact with one large customer on all fronts. But on the other end, it’s always one customer process additional risk. So to make a long story short we consider this a positive effect on Gilat. For your second question about a large defense program, and a lot of program that we are participating in the RFP, there is several of them are very large, but we cannot at this point give more information on them. I hope, in June, we’ll be able to announce some awards, and then we’ll see where we’re going to.

[Gunther Karger:]

Thank you, Adi. And with regard to the defense question, I meant to include also the homeland security and disasters recovery type of programs, anything in that area?

[Adi Sfadia:]

Yeah, so disaster recovery, we do see a lot of business especially in Asia. We even announced a month ago program like that, usually it’s not a huge program, several million dollars, I believe, we saw that in back in the Philippines and other countries. And we are tracking those projects. Some of them are considered to be several backhaul like cellular on wheels and solutions like that.

[Gunther Karger:]

Thank you, and continue good luck.

[Adi Sfadia:]

Thank you, Gunther.

[Operator:]

The next question is from [Alon Laft of Metta] [ph]. Please go ahead.

[Unidentified Analyst:]

Hi, can you hear me?

[Adi Sfadia:]

Hi, Alon, how are you?

[Unidentified Analyst:]

Good. Thank you. Thank you for having the option to ask questions. First of all, about the guide, I mean, $260 million to $280 million, does it include any portion of DataPath revenues or it is not? If so, why is it increasing? And if not, what should be the prospect for that, assuming that the QC the deal is closed?

[Adi Sfadia:]

So in general, the numbers are pre-DataPath acquisition and once the deal will close, we’ll update our guidance, but I expect around $50 million per can. So now you can divide it in quarter around $1,250 million per quarter.

[Unidentified Analyst:]

Okay. Thank you. And then about the gross margin you jumped there, I mean, you said that we should look at the early 12 months, but maybe some explanation, more detailed explanation about what are the specific items that contribute to the gross margin to the very large increasing cost margin, and to what extent it should support expansion going forward?

[Gil Benyamini:]

So, as I said before analyzing on a quarterly basis is a bit or maybe problematic, because of the fluctuation and the way that we recognize revenues. In this quarter, comparing to Q1 of last year most of the change was due to favorable deal mix meaning deliveries of products with the higher growth margin. And this comes mainly from the IFC market, which has the higher growth margins than Gilat’s average. Looking forward, we do believe that over time the gross margins will grow with the growth of volume. And as we discussed in the last call in our new platform, the SkyEdge IV, we have higher software component. And as it deploys you’ll see that impacting our in our product mix. And we believe that we can reach steady growth margins in the area of 40% in the longer term. In addition to that, in the business of Peru, as Adi mentioned, we got the submission of the fifth project. Now we’re on the sixth and last project construction and construction revenues are associated with lower growth margins. So as this – will these revenues are expected to be in the next year, and then we’ll move only to the operations, and with that it’ll push the gross margin average higher as well.

[Unidentified Analyst:]

Thank you. What should we assume about the capital expenses once that Peru is done?

[Gil Benyamini:]

So, Peru expenses are not CapEx. So our CapEx level should be around the same level of last year.

[Adi Sfadia:]

I think it’s important to understand that, I would say that the CapEx level of Gilat, it really depends on projects, especially managed service projects. Some of them are in Peru, we need to invest at the beginning and later on to see revenues, and this can create a lot of fluctuation in the capital. The regular run rate without manage service. It’s between $6 million to $7million, $8 million. And then managed services really depend on the project. It can be few hundred up to several millions, it depend on the project and the potential from the project.

[Unidentified Analyst:]

Understood. About tax rate, we’ve seen a large tax rate in this quarter. Is it something that we should expect also going forward?

[Gil Benyamini:]

I think that the tax rates, first of all, the taxes of Gilat comprised of many countries. And so, it has impact of several tax regimes. I think that in this quarter the tax rate is quite normal. Last quarter we had one onetime tax expense because of releasing the draft earnings in Israel. But looking at this quarter, this is quite normal.

[Unidentified Analyst:]

I see. So what kind of effective tax rate should we assume?

[Gil Benyamini:]

I will say that we should rely on this quarter’s tax we can assume it looking forward.

[Unidentified Analyst:]

Okay. Last question, I mean, you spoke about the data initiative also. Intelsat spoke about a project they have, which should be deployed with Alaska Airlines, maybe a bit of color, to what extent there is an overlap between the project or it’s different, different angles to the same segments.

[Adi Sfadia:]

First of all, the deal for the terminal is not with Intelsat. In Intelsat, every new customer that they bring in, they need to usually increase their ground equipment with us and buy modems to be installed on the aircraft. So the dealer they announce will drive more business for Gilat, but not related to the ESA terminal, Intelsat by terminals from other vendors, their main vendor is Sincom [ph].

[Unidentified Analyst:]

Okay. Thank you very much.

[Adi Sfadia:]

Thank you, Alon.

[Operator:]

The next question is a follow-up question from Gunther Karger of Discovery Group. Please go ahead.

[Gunther Karger:]

Yes. Thank you for taking my question. With regard to China is there any further delay regarding the China Airways, the IFC projects and the high speed rail projects?

[Adi Sfadia:]

Yeah. On the speed rail project, no. I would say that this project is dead a long time ago. On, in-flight connectivity, we are mainly cooperating with the service providers which has also deployment in China. So if Intelsat will get an award from Chinese airlines, they will use our, our equipment. We do have also pay installed China. So there are also some opportunities with local providers.

[Gunther Karger:]

Thank you, Adi, and good luck.

[Adi Sfadia:]

Thank you, Gunther.

[Operator:]

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

[Gil Benyamini:]

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.

[Operator:]

Thank you. This concludes Gilat’s first quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.