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spk04: Ladies and gentlemen, thank you for standing by. Welcome to GELOT's third quarter 2021 results conference call. All participants are at present in listen-only mode. Following the management's formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded November 9th, 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 1646-688-3559 or view it in the news section of the company's website, www.gilad.com. I would now like to hand over the call to Mr. Ehud Helf of GQ Investor Relations. Mr. Helft, would you like to begin, please?
spk02: Good morning. Good afternoon, everyone. Thank you for joining us today for Gilad's third quarter 2021 results conference call and webcast. The recording of this call will be available beginning at approximately noon Eastern time today, November 9, 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 the 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 Delegation Act reform 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 the 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 exclusively disclaims any obligation to do so. More detailed information about risk factors can be found in Gilad's report filed with Securities and Exchange Commission. And with that, let me turn to introductions. On the call today are Mr. Adis Fadia, Gilad's CEO, and Ms. Bosmat Harpen, Gilad's CFO. I would now like to turn the call over to Adi Saadia. Adi, we are ready to begin.
spk01: Thank you, Ehud, and good day to everyone. I would like to thank you all for joining us today for our third quarter 2021 earning call. I am pleased with our results this quarter, which continue to show progress and recovery with improvement in our gross profitability and the return to operating and net profit. We grew revenue by 34% year-over-year to $50 million, and our adjusted EBITDA was $4 million, significantly above the third quarter of last year, and about $1.5 million above the previous quarter. I'm excited to share that this quarter was a very strong quarter in our strategic focus areas of non-geostationary orbit constellations and the very high throughput satellites. Furthermore, during this quarter, we had some substantial strategic gains and new customer wins. We continued recovery and progress in all our markets, including in the IFC segment. These gains will be reflected in our financial performance in future quarters. The global supply issues, component scarcity, and price increase are affecting the satellite industry as well. Like others, we are facing some significant headwinds, however, are making great efforts to overcome these challenges. Thus far, we have been mostly successful and we hope that this will continue to be the case until the ease that is expected towards the second half of next year. As I explained last quarter, in order to materialize the significant opportunities we are already experiencing and see ahead, we are increasing our R&D investment to better support future growth. Now we'll focus on some of the business achievements in more detail and discuss some of the recent highlights. In the last few months, we have been experiencing significant activity in the strategic non-geostationary orbit satellite constellation and the very high throughput satellite segments. Specifically, the third quarter was a very strong quarter for Gilad in those segments. We continue this quarter to receive orders of approximately $17 million from a leading satellite operator for support of a low Earth orbit constellation to be delivered later on in 2022 and beyond. In addition, we have major projects on our pipeline, of which we hope to secure several in the coming quarters. These projects will utilize our next-generation platform, new GEO and NGSO modems, and solid-state power amplifiers. Furthermore, we are making additional investments and putting in substantial efforts in R&D that are supporting major progress with the ground segment for the SCS-03BM power satellite constellation and other projects in our pipeline. we expect to start seeing significant revenues from the SES Empire project in the coming quarters. As a leading provider for this market, we see solid growth potentials comprising of hundreds of millions of dollars in market opportunities that we expect to materialize in the coming years. Mobility is a major focus area and growth engine for Gilad. In the IFC market, we are seeing initial feeds of recovery evidenced by significant orders summing for more than $15 million from several key players with delivery plans for 2022 and beyond. This will support a future growth. Upon an industry recovery, we expect the mobility segment to return to be a substantial part of our business as passengers increasingly demand reliable high-speed internet connections during travel and the expectation of connectivity all the time and anywhere has only strengthened during the pandemic. Gilad is highly committed to this strategic market and we view the pandemic impact over the past as a temporary issue. However, we do believe it will still take some time for the IFC industry to return to its pre-COVID levels and for Gilad's IFC segment to recover to its full potential. In Peru, we were awarded approximately $28 million in multi-year service agreements by Pronatel for operating the regional transport networks to support broadband connectivity and services across the four regions of Ayacucho, Apurima, Huancavelica, and Cusco. With these wins, we are meeting our stated goal of about $50 million in annual recurring revenues run rate from Peru ahead of the stated objective. During the quarter, Gilad continued to lead the 4G solar backhaul of the satellite market segment. as Tier 1 global mobile operators expand their networks with orders totaling multi-millions of dollars. Gilad's well-recognized solution supports leading mobile operators worldwide with applications such as emergency response and coverage to remote regions, and at times, as an obligation to answer local government mandates. This market segment is strategic value for Gilad, and as such, we see great potential to expand our leadership as market adoption of 5G is growing. In the enterprise segment, we have a significant win with SCS for a multi-million dollar contract for multiple broadband applications in Latin America. Gilad's multi-service platform was chosen to support SCS in cellular backhauling, enterprise, and universal service obligation projects in the regions of Andin and in rural Argentina. In addition, Gilad continues to secure orders totaling multi-million of dollars for a variety of enterprise applications throughout the world, including in the United States, Russia, India, Australia, and the Philippines. Overall, when I'm looking into the future with the recent wins and the strong momentum we are seeing across our business, I'm increasingly confident that we'll show significant top-line growth and double-digit growth in adjusted EBITDA in 2022. And I'm sure that this is only the beginning of a long growth path ahead of us in the years to come. And 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 third quarter of 2021. Overall, as Adi mentioned earlier, we are pleased with the results and we are increasingly positive about our prospects in the quarters ahead. Our quarterly results showed solid year-over-year improvement in both revenue margins and profitability. While we face some short-term headwinds given the electronic component supply constraints affecting the global economy, which I will discuss in a few minutes, Our improving performance so far this year demonstrates that we are moving in the right direction. In terms of our financial results, revenues for the third quarter were $49.9 million, up 34% when compared to $37.3 million in the third quarter of 2020. In the prior quarter, revenues were $56.9 million. The year-over-year increase was driven by revenue growth from cellular backhaul, NGSO, defense, and enterprise broadband markets. In terms of revenue breakdown by segment, fixed network segment revenues were $22.3 million compared to $22.8 million in the same quarter last year and $30.8 million in the previous quarter. Mobility solution segment revenues were $21.6 million compared to $9.2 million in the same quarter last year, and 19.9 million in the previous quarter. The improvement in this segment was primarily driven by strong revenue growth from NGSO and defense markets, while in-flight connectivity, or IFC, remains weak. Terrestrial infrastructure project segment revenues, which include the construction revenues for projects for PRONATAL in Peru, were $6 million, compared to $5.3 million in the same quarter last year and 6.2 million in the previous quarter. Now looking at our quarterly results on a GAAP basis. GAAP gross margin improved to 35% compared to 25% in the same quarter last year and 29% in the previous quarter. GAAP operating income for the quarter was $918,000 compared with an operating loss in the same quarter last year of $10.9 million which included costs related to the ComTech merger deal of $8.2 million. In the previous quarter, the operating loss was $337,000. Gap net income in the quarter was $168,000, or 0 cents per diluted share. In the same quarter last year, we reported net loss of $11.6 million, or 21 cents per share. which included costs related to the ComTech merger deal. In the previous quarter, we reported a net loss of $129,000. To summarize the quarterly non-GAAP results, our non-GAAP gross margin improved to 35% compared to 25% in the same quarter last year and 29% in the previous quarter. We had $16.2 million in non-GAAP operating expenses in the quarter compared with $11.4 million in the third quarter of last year and $16.6 million in the previous quarter. I note that last year, due to COVID-19 pandemic, we had made temporary cost reductions, which mainly consisted of a reduction of our global workforce to 80% worth scope. In December 2020, we returned all our employees back to 100%. Further, I would like to note that this quarter we benefited from cost-related grants. We increased the investment in R&D to ensure timely delivery of the existing large projects we have been awarded, mainly in NGSO constellations, and also to capture other opportunities we see ahead of us. Non-GAAP operating income was improved to $1.5 million compared to an operating loss of $1.9 million in the same quarter last year, and operating income of $183,000 in the previous quarter. Non-GAAP net income in the third quarter was $712,000, or earnings of one cent per diluted share. This is compared with a net loss of $2.6 million, or a loss of five cents per share in the same quarter last year. In the previous quarter, we reported a non-GAAP net income of $391,000, or earnings of one cent per diluted share. Adjusted EBITDA for the quarter improved to $4 million, compared with an adjusted EBITDA of $562,000 in the same quarter of last year. In the previous quarter, we reported an adjusted EBITDA of $2.5 million. Moving to our balance sheet. As of September 30th, 2021, our total cash and cash equivalents, including short-term deposits and restricted cash, were $85.4 million, compared with $82 million as of June 30, 2021. In terms of cash flow, we generated about $5 million from operating activities. DSOs, which include our fixed networks and mobility solution segments and exclude receivables and revenues of our terrestrial infrastructure project segment, were 66 days compared to 65 days in the previous quarter. Our shareholders' equity at the end of the third quarter totaled about $229.2 million, compared with $228.7 million at the end of the previous quarter. Similar to other companies, we are experiencing the global shortage of electronic components and materials, which has been intensifying since early 2021 across many of our suppliers. Components' lead times continue to increase, and scarcity is increasing the component prices. The extent of these shortages is unprecedented and is expected to persist for the immediate future. I stress that this is a global wide issue affecting everyone in the market. Given our careful planning and prudent inventory management, we have been mostly able to manage the impact so far and I hope that we will be able to maintain this and will of course keep you updated. All in all, We are encouraged by a return to growth and profitability and the strong backlog and pipeline momentum which causes us to believe that 2022 will be a very strong year for Gilad with significant growth both in revenue and in adjusted EBITDA. That concludes my financial review. I would like now to open the call for questions. Operator, please.
spk04: 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 handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Chris Quilty of Quilty Analytics. Please go ahead.
spk05: Thank you and congratulations on the strong bottom line results, especially in light of the sequential downtick in the fixed network business. Can you help us understand what components of that business were down sequentially and were those issues sort of temporary contract delays or timing? And should we expect Q4 to move back towards the sort of run rate you were at earlier in the year?
spk00: Yeah, hi Chris, it was Matt. So, yeah, the sequential decrease that we see, you know, as you know, Gilad is very difficult to measure quarter of a quarter. The way our business is run is that we may have very large projects which are deployed in one quarter, and then the next quarter may be a bit lower, so usually it is better to look on year-over-year basis. When we look at the fixed network segment this quarter, actually we had some significant deployments in Q2 for CBH and enterprise in LATAM and Asia, and some of the deployments we were going to do this quarter were delayed to next quarter. We do believe that next quarter is going to be the strongest quarter of the year, and we will see this going back up in Q4.
spk05: Got it. So mostly just timing related issues.
spk00: Exactly.
spk05: Also, I think this is the best gross margin that you've posted in quite a while. And again, in light of a little bit of a revenue shortfall in the quarter, can you detail for us what contributed? Was it simply a mix related issue to the margins?
spk00: Sure. So as you know, our margins are always very volatile between the different deals and regions and segments. So it's also, you know, quarter of a quarter, it changes a lot. The different revenue mix significantly shifts our margins. We had this quarter a more favorable mix of deals, which contributed to a gross margin. And as I said, we also benefited from COVID-19-related grants, which helped the margin and also the mobility segment. Revenue were higher, which usually contributes more to our margins.
spk05: Great. And can you remind us, you know, within the fixed network segment, you know, the general margin profile of the, you know, the subsegments or the markets that fall within fixed network, how they rank?
spk00: Yeah, sure. So what we mostly have, we talk about the cellular backhaul. The cellular backhaul is the highest level. margin of those sub-segments, if you call it. It's above the average of the fixed. We have enterprise, and by the way, enterprise and the pro-operations, which are about the average margin of the fixed segment. And then we have the consumer, which is lower of Gilas business, which is the lower margins of all of those sub-segments.
spk05: Great. Thanks for that detail. Also, I think you mentioned during the call, and I missed the number, but significant orders in the IFC market. Was it $15.5 million?
spk01: Yeah, slightly above $15 million. And we are seeing slightly more traction in this segment. I guess we all understand that Returning to pre-COVID level will take a while and probably only on the second half of next year. Only this week, the international flights to the U.S. opened. So it will take some time, but we do see some more traction and received some large orders to be delivered in 2022 onwards. So it will affect our revenue and growth next year.
spk05: Great. And were those orders with existing legacy customers or new customer wins?
spk01: Mainly with existing legacy customers.
spk05: Great. And another question on the script. I think you mentioned orders for Leo Constellation to be delivered in 2022. What was that number? 1717. Understand. And those are existing, those are orders under your existing contracts that you have, not a new one, correct?
spk01: Correct. Those are on existing contract.
spk05: Good. And then I guess final question on Peru. You indicated that you hit the 50 million run rate. And presumably that is at the exit of Q3, so it should be reflected in Q4, you know, a higher revenue moving forward Q4 and into next year?
spk01: Correct, $15 million, but it's a run rate. So we will see a run rate of slightly above 40 in Q4. You know, you need to take one-fourth of it. And once we will get into operational phase in ICA and Amazonas, we'll hit $50 million per year. But in terms of backlog, we have about $50 million a year.
spk05: Great. And actually, one final question. Can you give us a sense of the book to bill in the quarter, either corporate-wide or if there's any significant outliers amongst the segments?
spk01: Yeah, it was significantly above one. We call it book to revenue because billing and revenue in Gilad is not always tied together, but it was significantly above one.
spk05: Great. Thank you.
spk01: Thank you, Chris.
spk04: The next question is from Gunther Karger of Discovery Group. Please go ahead.
spk03: Yes. Congratulations on that. Very good. The question is, Adi, could you make some comments on the military or the defense business to see how that's going?
spk01: Yes, sure. As we said in the last several earning calls, we are investing more and more in the defense segment, which we haven't invested in the last several years. We saw several very nice wins recently. in Asia, Middle East, and some in Latam. We are trying to duplicate it in other places in the world, mainly for baseband cells and antennas. It's something that we won't be able to measure quarter over quarter because to penetrate a new defense organization takes a lot of time and requires a lot of investment. In some cases, specific developments and security measures. But in general, we expect a lot from this segment in the coming years.
spk03: Thank you, Ali.
spk01: Thank you, Gantt.
spk04: If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Ms. Halperin, would you like to make your concluding statement?
spk00: Yeah. I want to thank everyone 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.
spk04: Thank you. This concludes GILAT's third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.
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