Gilat Satellite Networks Ltd.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Fourth Quarter and Full Year 2020 Results Conference Call. All participants are at present in listen-only mode. Following the managements formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded, February 16, 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 at www.gilat.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Ehud, would you like to begin please?

[Ehud Helft:]

Thank you, operator. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's fourth quarter and full year 2020 results conference call and webcast. A recording of this call will be available beginning at approximately noon, Eastern Time, today February 16th and will be available for telephone replay until February 19th at noon. The webcast will be archived 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 the statements made on this earnings call that are not historical facts may deem 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 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's expressly disclaimers any obligation to do so. More detailed information about the risk factors can be found in Gilat's reported filed with the Securities and Exchange Commission. With that said, 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 over the call to Adi Sfadia. Adi, we are ready to begin.

[Adi Sfadia:]

Thank you, Ehud, and good day to everyone. I would like to thank you for joining us today as for our quarterly earning call. I'm happy to report our fourth quarter 2020 results, as well as to provide a summary of our performance in 2020. During 2020, and especially during the second half of the year, we made major technological achievements and closed on very significant deals, all of which position us very well for 2021 and onward. We reduced our operating cost by close to 20% to better align our costs with the 2020 revenue level, which allowed us to maintain a positive EBITDA over the past three quarters. As you know, in the fourth quarter of 2020, our merger with Comtech was terminated with the settlement that was reached on all pending litigation for payment of $70 million to Gilat by Comtech. We recently shared approximately $55 million of dividend with our shareholders derived from this termination fee, net of transaction and litigation costs.

[Bosmat Halpern:]

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 lease incentives, trade secrets and other litigation expenses, reorganization costs, merger, acquisition and related litigation expenses or income net, 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. And now our financial highlights for the fourth quarter of 2020 followed by our full year 2020 highlights. Overall, our quarterly results showed an improvement over the prior quarter with strong quarterly bookings. We believe they would present a stabilization in our end markets with the exception of the in-flight connectivity or IFC vertical, which is yet to show signs of meaningful recovery. Revenues for the fourth quarter was $42.6 million compared to $78.3 million in the fourth quarter of 2019. The year-over-year decline primarily reflects the continued impact of the COVID-19 pandemic on revenue from IFC in our Mobility Solutions segment. However, when compared to the previous quarter, revenues increased by more than 14% compared to $37.3 million. Fixed networks segment revenues were $25.1 million, compared to $33.2 million in the same quarter last year. The decrease year-over-year is mainly due to the COVID-19 pandemic. We saw an improvement compared with the previous quarter where fixed networks revenues were $22.8 million. Mobility solutions segment revenues were $11.8 million compared to $34.1 million in the same quarter last year, the decrease reflecting the effect of COVID-19 on the travel industry and, ultimately, on the IFC market. However, we did see an increase compared with $9.2 million in the previous quarter. Terrestrial infrastructure project segment revenues, which include the construction revenues for our projects for Pronatel in Peru, were $5.8 million compared to $11.1 million in the same quarter last year and $5.3 million in the previous quarter. COVID-19 and the local lockdowns in Peru caused the slower-than-expected progress. In general, as we have discussed previously, during the construction phase revenues from Pronatel will vary quarter-over-quarter depending on the percentage of the project's completion. To summarize the quarterly GAAP results, our GAAP gross margin was 31% compared to 35% in the same quarter last year and 25% in the prior quarter. The change in gross margin is mainly due to the revenue mix and change in revenue volume, as a portion of our expenses is fixed and does not change in full correlation with the revenue volume. GAAP operating income was $62.7 million compared to operating income of $9.2 million in the same quarter last year, and operating loss of $10.9 million in the previous quarter. We recorded net income of $64.8 million in Q4, as a termination fee from Comtech for the cancellation of the merger agreement. GAAP net income in the fourth quarter was $62.4 million or $1.12 per diluted share, compared with a net income of $24 million or $0.43 per diluted share in the same quarter last year. In the fourth quarter of last year, we recorded a tax benefit of $15.5 million. Net loss in the previous quarter was $11.6 million or a loss of $0.21 per diluted share. Now looking at our quarterly results on a non-GAAP basis. Non-GAAP gross margin was 31% compared to 35% same quarter last year and 25% in the previous quarter. Operating loss for the quarter was $1.6 million compared with an operating income in the same quarter last year of $9.9 million. We saw an improvement compared with the previous quarter's operating loss of $1.9 million. Q4 operating expenses were $15 million compared with $17.3 million in the fourth quarter of last year and $11.4 million in the previous quarter. Throughout 2020, we have put significant efforts in matching our ongoing operating expenses with the reduced revenue levels. Those reductions include reduction in force, temporary salary and FTE reduction, and other cost reduction initiatives, and our success is clear, given the significant reduction in expenses. Q4 operating expenses were higher than those of the previous quarter, mainly due to the fact that we turned our staff to full time starting December, increased sales and marketing expenses as a consequence of the year-end sales commission expenses due to higher level of bookings and to the fact that in the previous quarter, we benefited from collection of doubtful debts. Net loss in the quarter was $1.9 million or $0.03 per diluted share. In the same quarter last year, we reported net income of $9.1 million or $0.16 per diluted share. We improved versus the previous quarter, in which we reported a net loss of $2.6 million or $0.05 per diluted share. Adjusted EBITDA for the fourth quarter of 2020 was $1.1 million, compared with $13.1 million in the same quarter of last year, and an improvement compared with $600,000 in the previous quarter. To summarize our full year results. Revenues were $165.9 million versus $263.5 million in 2019. The decline, as explained earlier, was due to the impact of COVID-19 on our business, mainly in IFC. GAAP gross margin was 25%, versus 36% last year. GAAP operating income, which includes $53.6 million from the Comtech termination fees, net of transaction and litigation expenses, was $37.6 million versus $25.6 million last year. And GAAP net income was $34.9 million versus net income of $36.5 million last year. GAAP earnings per diluted share were $0.63 versus $0.65 last year. On a non-GAAP basis, gross margin was 25% versus 37% last year. Operating loss was $13.7 million versus operating income of $29.2 million, and net loss was $16.4 million versus net income of $24.7 million last year. Loss per diluted share was $0.30 versus earnings per diluted share of $0.44 last year. Adjusted EBITDA loss was $3.3 million in 2020 compared to adjusted EBITDA income of $40.2 million in 2019. Moving to our balance sheet. As of December 31, 2020, our total cash and cash equivalents, including restricted cash, were $160 million, an increase of $38.7 million from the previous quarter. During the fourth quarter, we received $70 million from Comtech as termination fees and paid expenses related to the merger and litigation in the amount of $9.5 million, in addition to $4.2 million paid in previous quarters, bringing the net cash proceeds from Comtech termination payment to $56.3 million in the full year of 2020. In addition, in the fourth quarter, we paid $20 million as a special dividend to our shareholders. An additional $35 million dividend to shareholders was paid on January 14, 2021. This represents a total special dividend payment to shareholders of $55 million, equivalent to $0.99 per share. DSOs, which include our Fixed Networks and Mobility Solution segments and exclude receivables and revenues of our Terrestrial Infrastructure Project segment, decreased to 76 days compared to 84 days in the previous quarter. Our shareholders' equity at the end of the year totaled $233.8 million compared with $225.3 million at the end of the previous quarter. Looking ahead, we are encouraged with the stabilization in our end markets, which enabled us to show quarter-over-quarter improvements in our results. We are also pleased with the strong booking levels in the quarter and we expect the improvements to continue into 2021. As Adi mentioned, we view 2021 as a year of transition and recovery in which we will emerge from the COVID-19 crisis. We hope and expect that towards the second half of the year we will see the return of air travel and with it, IFC-related revenues. We look forward to a year of revenue growth, along with improved profitability, mainly in the second half of 2021. That concludes my financial review. I would now like to open the call for questions. Operator, please?

[Operator:]

The first question is from . Please go ahead.

[Unidentified Analyst:]

Hi, good morning -- actually good afternoon, and congratulations on the results. Question for you on the Wavestream LEO Gateway contract award. Can you give us a sense of what you think the determining factor was in that award? And secondarily, are there opportunities with that same customer on the modem side or was this just simply a bid on the amplifier?

[Adi Sfadia:]

Hi, Chris. Good to hear from you. I think the main factors that make Wavestream the award is the technology and the ability to supply with high quality and Wavestream has proven in the past that they have those capabilities. In this specific constellation, I don't think we have opportunity on the modem side.

[Unidentified Analyst:]

And are there other modem opportunities that you're still pursuing?

[Adi Sfadia:]

Definitely there are several opportunities in the NGSO, both LEO and MEO, that we are pursuing. And I hope that we will be able to report some progress during the coming few months and quarters.

[Unidentified Analyst:]

And do you have an update on progress where you stand with SES on the mPOWER program?

[Adi Sfadia:]

Yes, sure. So we were awarded about a year ago for the ground equipment, the baseband was a large award. We are in development efforts to be able to provide it on time by the end of 2021. In addition, about a quarter ago or three months ago we were awarded a development of point-to-point modem, especially for the maritime and government application. And I think that the potential for us with the SES and mPOWER is still significant and we are working on several opportunities that will mature in the coming few months.

[Unidentified Analyst:]

One other question on Wavestream, I think you mentioned in the press release some ongoing U.S. government or military program wins; now that the WIN-T program is dead, and maybe not fully dead still living in a zombie state, where are those new orders coming from? I mean, what type of programs are specific programs are you seeing demand from?

[Adi Sfadia:]

Yes. Some of them are still going to this WIN-T program, and some -- in some cases, even I don't allow to know exactly where they are going to but DoD programs that we cannot disclose the names.

[Unidentified Analyst:]

Okay. And you mentioned initial 5G demonstrations on the modem side, where are we in that process? You've got great market share on the 4G side, do you expect to see sizeable 5G-related orders in the next year or couple of years for -- or most of the deployments at this time being done more in the urban core where satellite is not needed?

[Adi Sfadia:]

So, I think you already answered it. We've demonstrated our 5G capabilities and we are going to launch additional products and solutions for the 5G architecture and market. But what we see right now is that 5G is deployed may be -- mainly in urban areas where fiber is available. But one thing that we do see on a lot of license requirements worldwide is that the MNOs required to cover with 4G, a lot of rural areas that it will take them a lot of time to have 5G and this is enormous potential over 4G. Later on, I guess at the second stage, we will see 5G backhauling over satellite deployed in rural areas. I think based on some market analysis that we are getting from an analyst to cover the market, just equipment part of the 4G and 5G alone can be in few years more than $200 million a year. And today based on NSR, we hold more than 40% of the overall satellite cellular backhaul market; 2G, 3G and 4G. And if you look only on the 4G, we have more than 80% market share; so with significant increase in the market plus our market share, I think it represents huge opportunity for Gilat. Not taking into account that we are also selling managed service including reselling capacity which provide us also a significant opportunity to increase our top line, and also the bottom line.

[Unidentified Analyst:]

Understand. And final question for you on the maritime market, that's a new market entry for Gilat, I guess in recent years. It sounds like the one win right now was in China, but do you have a strategy to broaden that on a more global basis? And given the fact that there is already very embedded suppliers in that market, iDirect, KVH Proprietary, and Inmarsat has it's ecosystem; what would be your approach to that market?

[Adi Sfadia:]

So, first of all, indeed you are correct that the maritime is a segment or vertical that we haven't played, and it wasn't a significant player. We had recent success in Asia, in China, indeed. And also, as I said point-to-point modem that we are developing for mPOWER is also targeting the maritime market, and I think that with that we can take significant market share together with the CS on that. And we have other opportunities and I think that it's -- it's a very large market, indeed are strong players, but I think with the next generation VSAT that we will announce soon, I think we have a fair share to take decent market share in the maritime.

[Unidentified Analyst:]

Very good. Thank you.

[Adi Sfadia:]

Thank you, Chris.

[Operator:]

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

[Gunther Karger:]

Yes. So good morning and good afternoon. First of all, Adi, congratulations that we've come a long way. And secondly, a question, where are we on the high-speed train segment of the market?

[Adi Sfadia:]

High-speed train was a promise several years ago, we made a lot of progress in China but since then it's a bit -- it's a bit on hold. This mainly depend on the end-user needs and it's like additional add-ons that we can -- we can – the train manufacturer can add. We have some success in Spain of selling our antennas to trains, and several opportunities worldwide, but it's not going to be a significant growth engines where there are few million dollars a year.

[Gunther Karger:]

Thank you, Adi.

[Adi Sfadia:]

Thank you, Gunther.

[Operator:]

There are no further questions at this time. Before I ask Ms. Bosmat Halpern to go ahead with her closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-326-9310; in Israel, please call 03-925-5904; Internationally, please call 972-3925-5904. Ms. Halpern, would you like to make your concluding statement?

[Bosmat Halpern:]

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

[Operator:]

Thank you. This concludes Gilat's fourth quarter and full year 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.