Gilat Satellite Networks Ltd.

Q1 2021 Earnings Conference Call

5/4/2021

spk02: Ladies and gentlemen, thank you for standing by. Welcome to DLAC's first quarter 2021 result conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. For upper year assistance during the conference, please press star zero. As a reminder, this conference is being recorded May 4th, 2021. By now, you should have all received the company's press release. If you have not received it, please contact Gilad'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 at www.gilad.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?
spk05: Yeah, thank you, operator. Good morning and good afternoon, everyone. Thank you for joining us today for Gilad's first quarter 2021 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern time today, May 4, as a webcast on Gilad's website for a period of 30 days. Also, please note that investors are urged to read the forward-looking statements in Gilad's earnings release with a reminder that statements made on this earnings call are not historical facts. and 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 Gilad, and which may cause actual results to differ materially from anticipated results. Gilad 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 Gilad's report filed with the Securities and Exchange Commission. And with that, let me turn to introductions. On the call today are Mr. Adis Fadia, Gilad's CEO, and Mrs. Basmat Harpen, Gilad's CFO. I would now like to turn the call over to Adi.
spk01: Thank you, Ehud, and good day to everyone. I would like to thank you for joining us today for our first quarter of 2021 earning call. I'm encouraged by the improvement of our first quarter of 2021 revenues versus the previous quarter. While the first quarter is seasonally the weakest one of the year, we are seeing a positive progress and momentum across all our business units, when compared with the previous quarter. The exception is the IFC segment, which is yet to show a recovery. Revenues in the quarter were $44.7 million, which were 5% better than the previous quarter and slightly below the same quarter last year, as last year we benefited from IFC backlog that we delivered. Looking ahead, we do expect to see a continued sequential growth trend in revenues throughout 2021. with a boost from the IFC segment once it starts its recovery, which we do hope it will be towards the end of this year. We expect that NGSO and cellular backhaul will be the main market segment that will drive growth in 2021 and beyond. And we also see strong potential for the defense business to support our growth in a more meaningful way than in the past. Moreover, looking into 2022, We believe that it will be a year of significant growth for our company as our NGSO projects will materialize and we believe that IFC will recover. On the bottom line, our adjusted EBITDA loss in Q1 was $1.4 million, compared with a loss of $5 million in the same quarter last year. As our revenues continue to recover in 2021, we would expect much of this growth to benefit our bottom line. The lower EBITDA level this quarter in comparison to the previous quarter was primarily due to the increase in expenses and the less favorable dollar-shekel exchange rate. Expenses are higher because, thankfully, life in Israel are mostly returned to normal and our employees are back to full-time work, mainly from the office, with associated expenses. We have very important projects, mainly in Leo and Mio constellations, in which we are currently investing significant R&D efforts and which will enable us to have significant revenue in the coming few quarters. We also see many opportunities ahead of us and want to make sure we are well positioned to capitalize on those as well, and therefore we are investing increased efforts in R&D in order to better support our future growth. Now I'd like to focus on some of the business achievements and highlights. The non-geostationary orbit satellite constellation and the very high throughput satellites continue to be a major strategic focus area and growth engine for Gilad. This quarter, we received additional multi-million dollar order from a leading satellite operator for support of low Earth orbit constellation. As we reported in the past, Gilad subsidiary Wavestream was chosen as the vendor of choice to supply Gateway solid-state power amplifiers for this project. We are on schedule with the development of the ground segment for the SES-03B Empire satellite constellation and expect to start seeing significant revenue from this project in the upcoming quarters. As a leading provider for NGSO and VHTS market, we see significant growth potential for Gilad, comprising of hundreds of millions of dollars of market opportunities. We believe that we are well positioned to win additional NGSO and VHTS business as the opportunities mature. Gilad continued to lead the cellular back-end industry, and according to a new report by industry analyst NSR, Gilad is the number one vendor in modem shipments with a market share of approximately 40%. According to Gilad analysis based on NSR report, we continue to lead the 4G market with 80% market share. Furthermore, as we reported, Gilad was awarded over $5 million from Tier 1 mobile network operator in Japan for cellular back-end expansion to quickly provide coverage to rural areas and to support emergency response in case of natural disasters. In addition, we are seeing significant expansion and follow-on orders from our Tier 1 MNOs around the globe, including in Latin America, Europe, Australia, and from leading mobile operators in Japan. This is a testament to the great value our customers see in our solutions as they continue to expand their networks. We are confident in our ability to continue to lead the industry with the transition to 5G. For this, we launched this quarter our next-generation family of VSATs, Aquarius, in support of 5G networks and NGSL constellations. The multi-orbit ultra-performance VSATs provide over 2 gigabit per second of concurrent speed and support seamless satellite handover. As we stated previously, we view 5G adoption as a market with huge potential for Gilad. The addressable market size is expected to reach more than $300 million per year for satellite equipment only for 4G and 5G cellular backhaul, and more than $6 billion a year for satellite equipment and services including satellite capacity in a few years. We believe that the 5G adoptions, initially in cities, will drive significant 4G deployment over satellite backhauling in the suburban and rural areas, where terrestrial coverage is less feasible. At the second stage, 5D deployment of the satellite will spread to rural areas as well, answering the promise of universal coverage. In the enterprise segment, Gilad just announced a strategic agreement valued at tens of millions of dollars, including potential of significant project expansions with a large government corporation in Asia-Pacific. The equipment and the multi-year managed service contract will enable connectivity for multiple applications across the nation. In addition, we saw significant achievements in Latin America with several projects totaling multi-million dollars in support of broadband connectivity for education to the most remote regions of the continent. With these efforts, we join our partners in a common goal of bridging the digital divide and promoting the vision of equal opportunity for children everywhere. Among other enterprise projects around the globe, Gilad was chosen to provide a satellite network of thousands of Vsats to energy plants of a multinational leading energy company. We are also seeing growing opportunities in the IoT market segment for which our solution is an excellent fit. We secured a large expansion order for an IoT project in Latin America and we are increasing our pipeline with prospects in Europe and Asia Pacific. As is well known, and we mentioned in our previous conference call, the mobility market segment, especially IFC and maritime, was mostly heavily hit by the COVID-19 pandemic. Saying that, we continue to view this segment as strategic for Gilad and view the pandemic effect as temporary. Upon an industry recovery, we expect this segment to grow in importance as air passengers increasingly demand reliable high-speed internet connection during travel. We expect this trend to be further strengthened with the introduction of free Wi-Fi for IFC, which will significantly increase take-up rates and will provide a strong tailwind to the industry and to Gilad. During the quarter, Gilad reached an important milestone in achieving DO-160G certification as successfully tested by Global Eagle Entertainment. The major IFC service provider tested the high-power IFC transceivers developed and manufactured by our subsidiary Wavestream. Production units are planned to be shipped to Global Eagle for usage in commercial aircraft later this year and onwards. In Peru, I am pleased to report that we have now passed the acceptance test in the region of Cusco, the fourth project that was awarded in late 2015, both with the transport and the access networks. followed by a payment of more than $12 million in early April and additional payment of about $7 million to be further received in the coming few weeks. Following this acceptance, we are now in the operational phase of four out of six regions we were awarded. This is a very significant step towards achieving our goal of recurring revenues of over $50 million in Peru. We are also progressing with the additional two last regions awarded us in 2018 – Although this progress is significantly affected by the pandemic restrictions in Peru, which are still very much in effect, we do expect to finish the construction phase of these last two regions in early 2023. As we reported last quarter, we see growing opportunities in the defense segment worldwide. We are making significant progress in materializing these opportunities, and I expect to be able to report further progress and wins in the near future. In summary, we are busy and continue to win new projects across all our target markets. We have a lot to look forward to in the quarters ahead. Specifically, looking out through the current year, we expect to see ongoing improvements in revenues quarter over quarter, and we believe that these improvements will benefit our profitability throughout the current year. At the same time, we are focused on capitalizing and staying ahead of many opportunities that we see in our end markets, which we believe will further secure our long-term future growth. I am excited with our potential for the coming quarters and years. With that, I'd like to hand over to Bosmat. Bosmat, we are now ready for your report. Please go ahead.
spk00: 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, 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 carry forward losses. The reconciliation table in our press release highlights this data, and our non-GAAP information presented excludes these items. I will now move to our financial highlights for the first quarter of 2021. Overall, as Adi mentioned, Our quarterly results showed an improvement in revenue over the previous quarter, and this is already the second quarter with continued sequential growth. We see the trend going in the right direction and a stabilization of our end markets. The exception remains the in-flight connectivity, or IFC vertical, which we believe will start to recover towards the end of the year. Revenues for the first quarter were $44.7 million, compared to $47.7 million in the first quarter of 2020. We saw an increase in our revenue from enterprise broadband and cellular backhaul solutions compared to the first quarter of last year. However, the decline versus last year primarily reflects the impact of the COVID-19 pandemic on revenue from IFC in our mobility solution segment. Bear in mind that the full impact of the pandemic was not apparent until the end of the first quarter last year. Revenues in the current quarter were slightly improved over that of the previous quarter, which were $42.6 million. In terms of the revenue breakdown by segment, fixed network segment revenues were $25.3 million compared to $23 million in the same quarter last year. We saw a slight improvement compared with the previous quarter, where fixed network revenues were $25.1 million. I remind everyone that that Q1 is usually the weakest quarter of the year, while Q4 is the strongest. In 2021, we believe that this segment will show significant improvement over 2020. Mobility solution segment revenues were $11.1 million compared to $19.2 million in the same quarter last year. The decrease... The decrease... The decrease... mainly in the IFC market. Compared to previous quarter, we saw a slight decrease from $11.8 million. Terrestrial infrastructure projects segment revenues, which include the construction revenues for our projects for Pronatal in Peru, were $8.3 million, compared to $5.5 million in the same quarter last year and $5.8 million in the previous quarter. We achieved a significant milestone in this quarter, receiving the acceptance for the transport network of Cusco, our fourth awarded region in Peru, and after the end of the quarter in April, we also received the acceptance of the access network of the same region. This milestone is very important from a business perspective, since this marks the start of the operational phase for this region, on top of the first three regions which we are already operating, and also from a cash perspective, since a significant part of our payments for this project are based on achieving this milestone. As for the remaining two regions, although their progress has been affected by the pandemic restrictions in Peru, we do expect to finish the construction phase of these last two regions in early 2023. As we have discussed previously, during the construction phase, revenues from Puanatal will vary quarter to quarter depending on the percentage of the project's completion and on receiving acceptance for the different regions. To summarize the quarterly GAAP results, our GAAP gross margin was 28% compared to 19% in the same quarter last year and 31% in the previous quarter. GAAP operating loss was $3.7 million, compared to operating loss of $10.8 million in the same quarter last year, and operating income of $62.7 million in the previous quarter, which included income related to the legal settlement with ComTech, net of related expenses of $64.8 million. Gap net loss in the first quarter was $5.1 million, or loss of $0.09 per share, compared with a net loss of $11.8 million, or loss of 21 cents per share in the same quarter last year. In Q4, Gilad had a gap net income of $62.4 million, or $1.12 in diluted earnings per share, and this included the net income from the settlement with Comtech. Now looking at our quarterly results on a non-gap basis. Non-gap gross margin was 28% compared to 19% in the same quarter last year and 31% in the previous quarter. Non-GAAP operating loss for the quarter was $3.8 million, ahead of an operating loss in the same quarter last year of $7.6 million, and in the previous quarter, the operating loss was $1.6 million. I note that we had $16.2 million in operating expenses in the quarter, compared with $16.5 million in the first quarter of last year and $15 million in the previous quarter. Our operating expenses were higher than those of the previous quarter, mainly due to the fact that we returned our staff to full-time work from December 2020 and also due to inferior dollar-shekel exchange rates. As Adi mentioned before, we are investing significant efforts in R&D to ensure timely delivery of existing large projects where I've been awarded, mainly in Leo and Mio constellations, and also to capture additional significant opportunities we see ahead of us. Non-GAAP net loss in the quarter was $5.2 million, or 9 cents per share. In the same quarter last year, we reported net loss of $8.6 million, or 15 cents per share. In the prior quarter, we reported a net loss of $1.9 million, or 3 cents per share. Adjusted EBITDA for the quarter of 2021 was a loss of $1.4 million, compared with an adjusted EBITDA loss of $5 million in the same quarter of last year. In the prior quarter, we reported an adjusted EBITDA profit of $1.1 million. Moving to our balance sheet. As of March 31, 2021, our total cash and cash equivalents, including restricted cash, were $75.6 million, a decrease of $40.4 million from that of year-end 2020. The decrease was primarily due to the payment of a dividend to shareholders of $35 million, and the last payment due on our loan of $4 million in January 2021. I would like to point out that in the past two quarters, we have paid a total of $55 million, or 99 cents per share, in special dividends to shareholders. In terms of operating cash flow, we generated around $300,000 from operating activities. After the end of the quarter, we received a payment of approximately $12.4 million, and expect to receive in the next few weeks additional payment of around $7 million in Peru after achieving the milestone of the fourth network. DSOs, which include our fixed networks and mobility solution segments, and exclude receivables and revenues of our terrestrial infrastructure project segment, increased to 77 days compared to 76 days in the previous quarter. Our shareholders' equity at the end of the first quarter totaled $228 compared with $233.8 million at the end of 2020. Looking ahead, all in all, we are encouraged with what is now a second quarter of a gradual, sequential improvement in our revenues. We view 2021 as a year of recovery in which we will emerge from the COVID-19 crisis. We look forward to continued sequential revenue growth and improve profitability for 2021 and much more so in 2022. That concludes my financial review. I would like now to open the call for questions. Operator, please.
spk02: Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the headset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Chris Quilty of Quilty Analytics. Please go ahead.
spk04: Good afternoon. I wanted to follow up real quickly on the terrestrial contract awards. Are those booked as one-time revenue, or are they amortized over some period of time? And was I correct in both of those should come through in the second quarter?
spk01: Hi, Chris. The terrestrial section is, from our perspective, the one-time construction revenues. I remind you that we were awarded six regions in Peru around – $550 million, which around 230 million or so are one-time construction revenues over a period of three years, three or four years for each region. This is going to be end by the end of 2022, maybe early 2023. The second part, $222 million, is operational revenues for activating and maintaining the network for a period of 10 years. Now, each region has two networks. One is the transport, and the other one is access networks. And the 220 million is for operating only the access networks. As for the transport network, the government needs to issue an RFP or to award it to Gilad later on, to operate the transport. This is another potential for Gilad of several million dollars operational revenues for each region.
spk04: I understand. And the 50 million steady state would represent only the recurring revenues and not the construction revenues?
spk01: Correct. Correct. We expect to reach this run rate, I would say, towards the end of next year. Today, I think we are much more than halfway there. Just from the projects, we have more than $22 million per year. We signed several months ago an agreement with the IPT, Internet Para Todos, which is a consortium of Telefonica and Facebook, to support... links to 4G deployment worldwide sorry not worldwide in the regions that we were awarded this is another more than 5 million dollars a year and we have another satellite and terrestrial recurring revenues from old projects that we were awarded of another 5 million so all in all we are more than 30 million today with a
spk04: Great. Just to follow up on the in-flight connectivity business, when you look at your current customers there in terms of hardware shipments, have you gotten any indications that they're starting to lay out a roadmap of when they're going to be accepting more equipment for installation?
spk01: Not yet. We do have a conversation with them. We do see that they ask more questions, meaning that internally something is starting to go into the right direction. But we haven't got yet the forecast and the orders, except here and there, you know, for maintenance-related and things like that. But... From our perspective, this segment is still not recovered yet. And as we predict right now, we believe that it will be towards the end of this year.
spk04: And towards the end of this year, you'll get back to the pre-COVID run rate or you think you'll start initial shipments beginning?
spk01: I think we will start initial shipments. To return to pre-COVID run rate, I would say that it should happen towards the mid-next year, assuming the world will recover from the COVID. We need to remember that in Israel, it seems like the pandemic is behind us, and in the U.S., it seems in the right direction, but other places in the world are still significantly affected by the pandemic. Latin America is We see in the news what is going on in India, so I think we are far from recovering from the pandemic.
spk04: I understand. And I know you've done this in the past, but can you review for the mobility segment what the breakdown looks like there, either in terms of buy-in market application or buy equipment slash service revenues in that revenue bucket?
spk01: In mobility, we mainly sell equipment. We do have around 10% of the revenue. It's service revenues, but it's mainly maintenance, post-contract support.
spk04: And by end market application, I mean, IFC is down, I imagine, 80% or more from prior levels and Where are you seeing the continued revenue strength or do you think you will see strength in the near term?
spk01: I'm not sure I fully understand the question. Can you please repeat it?
spk04: Well, I'm saying within the mobility segment, you've recently won some contracts on the maritime side. And, you know, are there other either land mobility or? government applications that would fall into that mobility bucket that might get the revenues moving before the core IFC business really comes back online?
spk01: Yeah, so let's recap for a second what we have in our mobility. In the mobility, we have IFC revenues, we have defense revenues on the move and on the pause, and we have our NGSO business. So in the NGSO business, we recently announced several orders with Wavestream, our U.S. subsidiary, that provide solid-state power amplifiers for NGSO Gateway. So this business is increasing quarter over quarter. The development of the Empower Constellation is progressing and our expectation is towards the end of this year, early next year, to start seeing revenues. Right now it's on the development phase. We do see a lot of pipeline and opportunities with the defense in Israel and worldwide. We do have some initial success, which we'll be able to announce soon. and we are in RFP process of several large opportunities, which I believe we'll be able to win some of them. And this revenue will come later on this year and next year.
spk04: And a follow-up on the NGSO business. You've had several announcements of contract wins, but having a hard time sizing the how much of those wins have been booked this year and what might land next year in terms of timing. Can you give us a sense, in terms of order of magnitude, how much NGSO-related revenues might be up next year, or let's say even in 21 versus 20 and, again, looking out in 22? I'm just trying to understand how that's going to stagger out over time.
spk01: I think two or three months ago, we announced that Wavestream was awarded an agreement of more than $50 million. I guess this will be spread over two and a half years or so before a significant expansion. Empower, we haven't disclosed the amount, but it's a potential of tens of millions of dollars of equipment and later on services. And this does not include the modems and the expansion. Right now, it's for around 10% of the constellation. So over there, there is a significant potential. And I would say that... It's mainly revenues will start next year because the satellites are not yet in orbit. They haven't launched them yet. So the potential over there is big. I believe that they will rather quickly fill a large part of them, and they will need to acquire more and more visas. There are, in addition, several opportunities both on the SSPA and on the baseband, that we are in RFP and bidding process, and I believe we will be able to win some of them. So I believe that NGSO is going to be a significant market segment within Gilad, several tens of millions every year growing.
spk00: Just to add one thing to what Adi just said, the order that we received already from Empower, most of it will be already delivered probably in early 2022, maybe even earlier, but at least it's early 2022, and this is the order that he described before.
spk04: Great. So without giving specific percentages, it appears 2021 will be up over 2020, and likewise, 2022 will also be a growth year going forward.
spk01: Yeah, I think that based on the, you know, if you sum all the information I just gave, I think that 22 will see significant growth over 21. Great.
spk04: One other IFC-related question. You've done a lot of development work on your phased array antenna, which will become increasingly important as these NGSOs come into service. Where do you stand there in testing and customer decisions?
spk01: So, that's a very good question. In ESA, we are one of the most progressed companies with our technology. We are able to demonstrate even on, I think that the only ESA with no moving part that was demonstrated on a commercial flight or in flight is Gilad. But right now, customer decisions are far from being taken. Most of them, the antenna is the most expensive part in the solution. And right now, there are trials, there are several opportunities, but I think we are far from having a customer decision to replace or to start a new project. We reached to a point that additional significant development need to be tied with... customer decision based on the relevant aircraft that the antenna will be installed in. I guess maybe in two or three quarters we will know more where we stand with the potential that we now see.
spk04: Great. And a final question. You mentioned that you expect to announce or see some defense order activity picking up. Two questions, is that international in general or U.S. or IMOD? You know, what markets are you selling into? And second question, you know, are there any unique products that you've had to develop for the DoD market or are these simply repurposing some of your commercial products, maybe layering on, you know, some cyber or encryption capability?
spk01: We are working in all the market segments, geographic markets that you just mentioned, less in the DOD, although we have some opportunities over there, especially to WaveStream. We are working in Israel, of course, but in other places in the world. It's mainly our start-up SATCOM equipment, antennas, and productizing our commercial solutions to defense needs.
spk04: And so all that productization is R&D work that has been done, or do you have a significant amount of work to do?
spk01: Most of the R&D is being done, but as you know, every... Ministry of Defense has their own requirements. So almost every deal that we see and saw in the past in the defense segment requires some customization, localization, and things like that.
spk04: Great. Thank you, and congrats on the results.
spk01: Thank you, Chris.
spk02: The next question is from Gunther Karger of Discovery Group. Please go ahead.
spk03: Yes, hello. The question concerns IFC. You had a contract with GOGO to supply its entire fleet with the . Now, GOGO has sold that division to Intelsat. Did you contract transfer over to Intelsat, or does that now have to be redone from scratch?
spk01: Our agreement with Gogo was moved to Intelsat and today we are in discussion both with Intelsat and the Gogo team under Intelsat. I remind you that we built to Gogo one of the largest, if not the most large, largest, uh, uh, satellite, uh, network worldwide supporting, uh, more than, um, uh, 15 satellites, I think, and, uh, hundreds of beams. Everything is managed by, with, uh, Gilad, uh, total network, uh, management system, and everything was moved with, uh, Gogo Commercial Aviation under, uh, Intelsat.
spk03: Uh, thank you. So it sounds like, uh, with that move and, uh, Intelsat, uh, being global, that actually could expand rather than contract. Would that be a correct assumption?
spk01: Correct. I would believe that this will support to strengthen our relationship both with GoGo and Intelsat.
spk03: Thank you.
spk01: Thank you, Hunter.
spk02: If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. There are no further questions at this time. Ms. Halpern, would you like to make your concluding statement?
spk00: 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.
spk02: Thank you. This concludes GLAT's first quarter 2021 result conference call. Thank you for your participation. You may go ahead and disconnect.
Disclaimer

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