Gilat Satellite Networks Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Gilad's second quarter 2022 results conference call. All participants are 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 August 9th, 2022. 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, 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?

Thank you, Operator. Good morning and good afternoon, everyone. Thank you for joining us today for Gilad's second quarter 2022 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern time today, August 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 a reminder that statements made on this earning 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 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 which factors can be found in Gilad's report filed with the Securities and Exchange Commission. With that, let me turn to introductions. On the call today are Mr. Adis Fadiyat, Gilad's CEO, and Mr. Gil Benyamin, Gilad's CFO. I would now like to turn the call over to Adi Sadia. Adi, we are ready to begin.

Thank you, Ehud, and good day to everyone. I would like to thank you for joining us today for our second quarter of 2022 earning call. We are pleased with our results for the second quarter. We are particularly happy with our solid improvement in profitability and with a strong growth in our adjusted EBITDA. Second quarter revenues were $55.5 million, slightly above the second quarter of last year. Adjusted EBITDA improved to $5.3 million, more than double compared to an adjusted EBITDA of $2.4 million a year ago. Adjusted EBITDA represents a margin of 9.5% of revenues compared to 4% a year ago. More importantly, looking ahead, we are well on track with our expectations for 2022 and which is turning to be a strong recovery year for Gilad. We are therefore reiterating our 2022 annual guidance of revenues, operating income and adjusted EBITDA. I will now focus on some of the business achievements and discuss some of the recent highlights. I am excited to share that we had a strong quarter in the current new era of satellite communication. Gilad is expanding its strategic relationship with satellite operators and has received, during the second quarter, about $20 million in additional orders for our next-generation platform, SkyH4. SkyH4 continues to show strong market acceptance for multi-orbit, multi-service applications. SkyH4 was designed and built to capitalize on the large opportunities of the launch of GEO satellite and NGSO constellations. We have a growing pipeline and we continue to compete on important geo-VHTS opportunities for additional major satellite operators. We see solid growth potential in this new era of satellite communication, and we are on track to meet our goal of capturing a strong position in this mega market. The ground segment market alone is estimated to be a multi-billion dollar market opportunity over the next few years, according to industry analyst NSR. In our SSPA product line, we continue as planned with two previously reported major projects with a potential of hundreds of millions of dollars for large NGSO constellations. We saw a strong quarter for the mobility market, including both for the IFC and maritime segments. As the business continued to pick up, we received multi-million dollar orders from key customers for both our SkyH4 platform and our SSPA product line. As the current demand for air travel is booming, Interstat Commercial Aviation has expanded its strategic partnership with Gilad. Additional orders were received to expand Interstat's service and increase user experience for air travelers in Asia Pacific. In addition, multi-million dollars orders were received from key customers for IFC SSPA solutions. On the maritime front, we are working hand-in-hand with SCS to introduce premium maritime service to cruise lines, and we expect the first ship to go online this quarter. The service will operate initially over geosatellite, and the plan is that next year it will also include Empire NGSO Constellation. This is an example of Gilad's unique advantage with SkyH4, as it's the first to support both GEO and MEO constellations. The mobility market is a strategic market for Gilad. I am optimistic that Gilad technology will provide the needed capabilities for us to continue to be the leading solution for Internet connectivity during travel in the air and increase our penetration into the maritime market. In the cellular backhaul segment, Gilad continued to lead with a growing business of more than $10 million in orders in the second quarter to expand existing projects in Latin America and Asia Pacific. Tier 1 mobile operators continue to rely on Gilad's leading cellular backhaul solution to increase their coverage to thousands of new sites, providing a reliable, excellent 4G user experience. Gilad's technology is ready and proven to facilitate the market transition to 5G. As the transition from 4G to 5G is expected to take place in the coming years, we are optimistic that this will create new business opportunities for Gilad. Gilad is continuing to focus on the defense business, and I am excited to share that we are making good progress with a very large defense program. In addition, we received follow-on orders to expand the Defense Force SATCOM network business in Asia. Gilad's equipment will be used to expand tactical SATCOM solutions, as well as address mission-critical C4I needs. Furthermore, we are making significant progress with our product line for unmanned aerial vehicles. In Peru this quarter, Gilad received an expansion of a large contract with Internet Paratodos, a consortium consisting of Telefonica and Facebook, among others, to expand Internet connectivity in Latin America. The contract with Gilad is for 4G server backhaul services over the Internet being deployed at more than 100 new sites and more than 800 sites in total to provide coverage to rural areas through Gilad's access network. This extension demonstrates our ability to execute our vision to profitable recurring revenues in Peru. In the enterprise segment, we signed an agreement to enable a Central Asian government to provide digital services over satellite. Gilad will facilitate the connection of rural villages to the government network and will enable access to citizens to remote digital services, thus assisting in bridging the digital divide. Finally, I am pleased to say that we continue to have a strong backlog and a healthy pipeline and we have good visibility into the remainder of 2022. We expect to show in the second half of the year significant growth both in revenue and profitability. We therefore feel comfortable reiterating our 2022 annual guidance. This is even as we consider the challenges such as the supply chain turmoil and our continued strong investment in R&D that enable us to prepare for the wealth of opportunities we see ahead. And with that, I'd like to hand over to our CFO, Gil Benyamini. Gil, please go ahead.

Thank you, Adi. Good morning and good afternoon to everyone. I would like to remind everyone that our financial results are presented both on a GAAP and a 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 comfortable 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 the trade secret claims, reorganization costs, merger, acquisition, and related litigation costs, adjustments of assets that are held for sale 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 second quarter of 2022. Overall, as Adi mentioned earlier, we are pleased with the continued improvement in our results for the quarter. The results show continued recovery in the revenue and strong improvement in the gross margin and profitability. They demonstrate that we remain on track. We are optimistic about our prospects in the quarters ahead and we reiterate our guidance for 2022. While our performance demonstrates a very solid improvement, there remain global macroeconomic headwinds, including ongoing electronic component supply constraints, as well as price increases across the board. I'm pleased to say, however, that our performance in the quarter shows that we have been able to mitigate these issues without significant impact to date. In terms of our financial results, revenue for the second quarter was $55.5 million, slightly above those of the second quarter of last year, which were $54.8 million. In terms of the revenue breakdown by segments, Q2-22 revenues of the satellite network segment, which provides advanced broadband satellite communication networks and associated professional services, turnkey solutions, and managed services in the cellular backhaul, enterprise, IFC, and defense markets, were $26.9 million compared to $34.4 million in the same quarter last year. The reason for the decline was mainly due to large deals delivered in Q2 2021. Q2 2022 revenues of the integrated solution segment, which provides equipment, products, systems, and solutions for the mission-critical defense, broadcast, advanced on-the-move, and on-the-post satellite communication solutions, including for airborne and ground mobile, were $15.7 million, compared to $12.1 million in the same quarter last year. The improvement in this segment was primarily driven by higher revenues from the NGSO and inflight connectivity markets. Q2-22 revenues of the networks infrastructure and services segment, which provides mainly terrestrials and satellite network construction and operation services, were $12.9 million, compared to $8.3 million in the same quarter last year. The improvement was mainly due to higher recurring revenues during the operating phase of the project, partially offset by a decrease in revenues during those construction phases, as well as operation revenues from new projects. I would now like to summarize our second quarter gap and non-gap results. Our GAAP gross margin in Q222 improved to 35.6% compared to 30.3% in the same quarter last year. The strong improvement in the gross margin was due to favorable products and services mix recognized this quarter. GAAP operating expenses in Q222 were $18.3 million in the quarter compared with $17 billion in the same quarter last year. The increase is mainly due to investment in R&D efforts that will support our current and future growth. GAAP operating income for the quarter improved to $1.5 million compared to an operating loss of $0.4 million in the same quarter last year. GAAP net income in the second quarter was $0.5 million or diluted income per share of one cent. This is compared with net loss of $0.2 million in the same quarter last year. Moving to non-GAAP results, our non-GAAP gross margin in Q2 2022 improved to 35.8% compared to 29.8% in the same quarter last year. Non-GAAP operating expenses in Q2 2022 were $17.4 million compared with $16.6 million in the same quarter last year. Non-GAAP operating income for the quarter improved to $2.4 million compared to an operating income of $0.1 million in the same quarter last year. Non-GAAP net income in the second quarter was $1.4 million or diluted income per share of $0.03. This is compared with a net income of $0.3 million or income per share of $0.01 in the same quarter last year. Adjusted EBITDA for the quarter improved to $5.3 million, compared with an adjusted EBITDA of $2.4 million in the same quarter of last year. Moving to our balance sheet, as of June 30, 2022, our total cash and cash equivalents, including short-term deposit and restricted cash, were $71.4 million, compared with $77.3 million on March 31, 2022. We do not hold any debt. In terms of cash flow, we used $3.3 million for operating activities during the second quarter of 2022. DSO, which excludes receivables and revenue of our terrestrial infrastructure project segment, remain at same level, similar to the previous quarter, and were 95 days compared to 93 days in the previous quarter. The company has not changed its credit terms with its customers, and we do not see an unfavorable change of our collection. We expected the DSO to decrease during the next quarter as substantial milestones correlated to our collection schedule will be achieved. Our shareholders' equity as of June 30, 2022, totaled $246 million, compared with $247 million in March 31, 2022. Looking ahead, as I already mentioned, we reiterated our guidance for the year. Our expectations remain for a strong 2022 with revenues at between $245 to $265 million and adjusted EBITDA of between $20 to $24 million. That concludes my financial review. I would now like to open the call for questions. Operator, please.

OK. 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 pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Chris Quilty from Quilty Analytics. Please go ahead.

Thanks. Congratulations on the orders for the SkyEdge 4. Can you give us an idea of what applications you're seeing demand from?

Hi, Chris. Nice to talk to you again. Actually, the main application from the beginning of the year was the in-flight connectivity. maritime and cellular backhaul. Of course, enterprise and consumer is also applicable because the platform is a multi-application platform. But right now, the main demand is IFC maritime and cellular backhaul.

And can you remind me, is Intelsat one of the customers for SkyEdge 4?

Yeah, Intelsat is one of the largest customers, SCS and others.

Great. And speaking of IFC, obviously your business is highly leveraged to Intelsat. Can you give us a sense of how you feel about their deployment of new hardware this year and opportunities outside of Intelsat that you're pursuing?

As we announced at the beginning of the year, the main orders we received from Intelsat earlier this year was for IFC, especially for IS-40E, the new satellite. And the deployment is currently on plan. In addition, we increased, expanded our deployment for Intelsat worldwide this quarter in Asia.

Great. So a high-level question here, obviously, inter-quarter, we had the Utilsat OneWeb merger announcement. Can you give us your thoughts on how that may impact your company?

Sure. First of all, you know, mergers in our business and market, we see more and more. You know, it's not a surprise for us, this kind of merger. And we thought something like this could happen because UtahSat was a large investor in OneWeb. Generally, I can say that we are seeing continued consolidation in the satellite market. We have a good relationship with YutoSat and we hope that Merger can open opportunities for us also with one web-based event. I think that at one point in time they will need GEO, LEO, switchover, and we need a dedicated network for that. And I think GILAT SkyH4 can be the optimal network for them. But, of course, this is just at the beginning. We are far from seeing this mature.

Great. And speaking of GeoLeo switchover hybrid networks, any progress to report on the electronically steered antenna in terms of development or customer testing?

um last quarter we announced that we finish our program with airbus um development is continuing uh but um and we see a lot of uh demand in the market but right now there is no a customer who is willing to uh order or support the finishing the design at the end you can develop those kind of antennas up until a specific point where you need a customer to make sure that it fits the exact radium and the exact aircraft. So we are continuing to progress, but not as we wanted.

Great. On the defense market, you've talked about both the UAV market and mentioned a large defense opportunity today. in this call. Can you clarify, are those opportunities primarily around the SSPA product line, or are some of these larger programs that would include more of a managed communication suite?

In general, defense is becoming a strategic segment for Gilad. We do see a lot of business in the SSPA line of business, but we are competing on several programs. One of them is very large, that is mainly modem and network products. And we see more and more demand for both SkyH2C and SkyH4 platform for defense organization worldwide.

Great. And final question on Peru. It sounds like you've picked up some additional add-on contracts there. How do you see the demand environment there, or perhaps better to ask the funding environment for some of the programs, I think most of which are government access programs?

Right. So, you know, in Peru we have a very good business. We're already in operation in four regions. We recently announced that we finished the fifth region, and we are waiting for PONATEL, which is the government entity that we are working with, to inspect the network, and hopefully we'll be able to start operation probably during Q4. And the sixth region is expected to be announced done during 2023. We reached to our target of $50 million recurring revenues. Most of it is already in backlog, and we'll see this run rate from mid-next year mature to our top line. As for government funding, the fact that there is instability in the Peruvian government is let's say, either halt or significantly slow in the new RFPs that we are seeing over there. The deal with LPT is with the private sector in Peru. So over there, we continue to see the regular demand that we saw in the past.

Great. Thank you for the update.

Thank you, Chris. Looking forward to speak with you in the future.

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. Mr. Binyamini, would you like to make your concluding statement?

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

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