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spk02: Ladies and gentlemen, thank you for standing by. Welcome to GILAT's third quarter 2023 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be via VIN 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 7, 2023. By now, you should have all received the company's press release. If you have not received it, please contact Gilat's investor relations team at EK Global Investor Relations at 1-646-688-3559 or view it in the news section of the company's website, www.gilat.com. I would now like to hand over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin?
spk01: Yeah, good morning, good afternoon, everyone. Thank you for joining us today for Gilad's third quarter 2023 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern time today, November 9th, November 7th, so in the 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 these earnings calls that are not historical facts, may be deemed forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. All such forward-looking statements, including statements regarding future financial operating results, involve risk 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 explicitly defamed 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. With that said, let me turn to the deductions. On the call today are Mr. Adis Fadia, Gilad's CEO, and Mr. Gil Benyamin, Gilad's CFO. I would now like to turn over the call to Adis Fadia. Adi, we're ready to start.
spk06: Thank you Yehud and good day to everyone. I want to thank you for joining us today for our third quarter of 2023 earning call. I want to take a moment to comment on the tragic events of October 7 and the war in Israel. Our thoughts and prayers are with the victims and families of this horrific attack. We are very proud of our employees' response to this crisis and their dedication to the company during these times. We also want to thank our partners, customers, suppliers and the world community at large for their full-hearted support. Before I discuss the business results of the quarter, I want to emphasize that Gilad is a strong global company with operation and development centers worldwide. Our operation remains unaffected by the recent event in Israel. We continue to closely monitor the situation and have implemented relevant measures and refreshed our business continuity plans to minimize any potential effect, if at all, on our business. Now let's move to the business review of the third quarter of 2023. We are pleased with our results for the third quarter, particularly the continued revenue growth combined with the continued improvement of our profitability. The good performance was due to growing interest in our solutions as well as advancement in the satellite communication space in general. In particular, I would mention the in-flight connectivity market that contributes significantly to our revenue growth and profitability this quarter. We report significantly improved profitability and adjusted EBITDA, demonstrating the operating leverage inherent in our business. In fact, our year-to-date adjusted EBITDA of $27 million already exceeds the adjusted EBITDA from the all of 2022. We are very pleased with the progress made this year, and we expect this trend to continue. Looking ahead, we are narrowing our revenue and profitability expectations for the full year 2023. We expect revenues of between $265 to $275 million. We are increasing our gap operating income to between $29 to $31 million due to one-time income net that Gil Benyaminia, our CFO, will discuss in his comments. And we expect adjusted EBITDA of between $35 to $37 million, representing year-over-year growth of 43% at the midpoint. In the very high-throughput satellite, the VHDS, and the non-geostationary satellite, the NGSO Constellations business, we continue to lead with follow-on multi-million-dollar orders from our strategic partners, the satellite operators. Network expansions and delivery of Gilad multi-orbit next-generation platform, the SkyH4, and the Aquarius VSATs are taking place globally in support of multiple applications such as in-flight connectivity, cellular backhaul, and enterprise. In the third quarter, we secured a new win for millions of dollars for our multi-application platform to support new high-throughput satellites. These satellites will be used primarily for IFC with maritime and stellar backhaul as secondary applications. In our SSDA product line, I am pleased to report that we continue to take progress in a major project with significant potential for a large NGSO constellation. We are on track and expect to pass the qualification process in Q4 this year. This quarter continues to be a strong quarter for Gilad's solar backhaul solution over satellite. A significant award this quarter for approximately $20 million for a contract extension from a Tier 1 MNO in the United States. Gilad continues to support this long-term Tier 1 customer with a multi-year end-to-end managed services contract for satellite-based solar backhaul and emergency response services. Furthermore, A most exciting technical milestone was achieved with CH4 Aquarius VSAT for 5G cellular backhaul in India with Reliance Jio over SCS O3B Empire services. An outstanding performance of 1 gigabits per second was showcased in India's first satellite-based gigafiber service called Geospace Fiber at the India Mobile Congress. The amazing success demonstrates high-speed backhauling services of a satellite to deliver high-throughput connectivity to previously inaccessible geographies within India. I couldn't be prouder of our team who made this happen. During the quarter, we built upon our ongoing activity with Intelsat with an additional multi-million dollar deal to enhance the global network and terrorist modems deployments that operate both on SkyH4 and SkyH2C. In addition, we engage in our SSPA business in several new opportunities for next-generation IFC equipment, which we hope will mature in the next few months. This success, in addition to our ongoing business with another large aerospace integrator, a long-time partner in the IFC market, we have continually relied on Gilad transceivers. In March this year, we signed an agreement to acquire DataPass, Inc., a leading U.S. defense satellite integrator. This is a major step in our initiative to increase our presence in the strategically growing defense market. The acquisition is an important step in the expansion of Gilad business into the U.S. DOD and government sector, as well as into other international government and defense markets. We are progressing very well towards the closing of the transaction. We expect our revenues in the defense sector to increase by approximately $50 million on a yearly basis following the imminent closing of this acquisition. We are now awaiting final regulatory approval, which by recent indication should arrive soon, following which we expect closing to happen this quarter. We further expect that the forthcoming closing of Datapath acquisition will provide a tailwind for major defense opportunities. As I have mentioned in the past, we are putting great focus on the defense market, and we are seeing slow but good progress in this area and expect This extra focus will bear fruit soon. In the third quarter, we already advanced a project with the Ministry of Defense of a country in Southeast Asia. We continue to grow our pipeline and are working on several exciting deals which we hope will materialize in the near future. Furthermore, our enterprise customers worldwide continue to depend on us to enhance their business and new opportunities continue to arise. For example, we received a managed service contract expansion from a large government corporation in Asia-Pacific to provide connectivity for multiple applications across the nation. This includes, but not limited to, enterprise applications with strong opportunities for cellular backup, emergency response, and mobility applications, such as comms on the move and comms on the pause. Providing social inclusion is a big part of our strategy, and we have exemplified also a new deal in the Philippines. A new global network was deployed to provide connectivity to the unconnected, leveraging our SkyH2C platform and Gemini Vsats. In Peru, we are progressing towards completing the construction of the Amazonas region, which is the sixth region awarded to Gilad back in 2018. We expect to enter acceptance process soon, enabling us to deliver the network to PONATEL and to move into the operational phase in the first half of 2024. Furthermore, in Peru, we are expecting additional progress in the next few months. This includes the maturity of several large RFPs with Pronatel and the Peruvian government, as well as several project extensions. We are most pleased with the strong pipeline we have in Peru. To conclude, I am pleased with our ongoing support of our partners, as well as our ability to capture significant new opportunities. We continue to lead with our next generation platform, SkyEdge 4, that support multiple orbits and verticals, including our strategic markets of mobility, cellular backhaul, and defense. We also secured new opportunities for our SSPA business, especially in the IFC segment, and are seeing increased opportunities in that line of business. We have a strong pipeline and expect the materialization of important deals over the coming months. And with that, I hand over to Gil Benyaminia, our CFO. Gil, please.
spk05: Thank you, Eddie. Good morning and good afternoon to everyone. I would like to remind everyone that our financial results are presented on both GAAP and non-GAAP basis. We regularly use supplemental non-GAAP financial measures internally to understand, manage, and evaluate our business and to make operating decisions. We believe 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 non-cash stock-based compensation expenses, amortization of purchased intangibles, amortization of intangible assets related to acquisition transactions, lease incentive amortizations, impairment of health for sale assets, income tax effect on adjustments, one-time changes of deferred tax assets, and other operating income or expenses. 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 2023. Overall, as Adi mentioned earlier, we are very pleased with the strong results of this quarter. We reported a 6 percent year-over-year growth in revenue and a solid improvement in profitability. Non-GAAP gross margin was 41% and our adjusted EBITDA reached $9.5 million, higher by 30% compared to Q3 last year. Given the strong performance to date alongside with expected time of Q4 deliverables and our proximity to the end of the year, we narrowed our revenue and adjusted EBITDA guidance and increased our GAAP operating income guidance, which I will cover later. In terms of our financial results, revenues for the third quarter was $63.9 million, 6% higher than those of third quarter of last year. This was driven by growth in the satellite network segment, mainly from the cellular backhaul, enterprise, and mobility verticals. In terms of revenue breakdown by segments, Q3 2023 revenues of the satellite network segment were $40.7 million, compared to $32.4 million in the same quarter last year. The significant increase mainly resulted from some large deals which were delivered this quarter to our strategic customers in the mobility market, as well as a high volume with our enterprise and solar backhaul customer base. Q3 23 revenues of the integrated solution segment were $11 million compared to $15.7 million in the same quarter last year, The decline was mainly due to a transition period between strategic and large projects in this segment. Q3-23 revenues of the network's infrastructure and services segment were $12.2 million compared to $12.3 million in the same quarter last year. I would now like to summarize our third quarter, both GAAP and non-GAAP results. Our GAAP gross margin in Q3 23 improved to 40.4 percent compared to 38.2 percent in the same quarter last year. The improvement in our gross margin was mainly due to a favorable product and services revenue mix recognized this quarter and the higher level of revenue. I note that revenue margins and profitability may fluctuate between quarters as an outcome of the actual revenue volume and deal mix. GAAP operating expenses in Q3-23 were $13.1 million in the quarter or 20% of revenue, compared with $19.6 million or 33% of revenues in the same quarter last year. The significant decline in GAAP operating expenses was due to a win of a Philippines lawsuit which was settled this quarter and resulted in a one-time other income, as well as a sale of real estate in Bulgaria, and therefore a reduction in GAAP OPEX of $7.4 million. GAAP operating income for the quarter improved to $12.7 million, compared to $3.4 million in the same quarter last year. GAAP operating income in Q3 23, excluding the one-time other income, was $5.3 million, higher by 55% compared to Q3 22. Gap net income in the third quarter was $10.2 million, or diluted earnings per share of $0.18. This is compared to a gap net income of $2.1 million, or diluted earnings per share of $0.04 in the same quarter last year. Gap net income in Q3 23, excluding the one time, other income was $3.8 million, almost double that over the third quarter last year. Moving to the non-gap results. Our non-GAAP gross margin in Q3 23 improved to 40.5 percent compared to 38.3 percent in the same quarter last year. Non-GAAP operating expenses in Q3 23 were $19.8 million compared with $18.7 million in the same quarter last year. Non-GAAP operating income for the quarter improved to $6.1 million compared to $4.4 million in the same quarter last year. Non-GAAP net income in the third quarter was $4.6 million, or diluted earning per share of $0.08. This is compared with a non-GAAP net income of $3 million, or diluted earning per share of $0.06 in the same quarter last year. Adjusted EBITDA for the quarter was $9.5 million, an improvement of 30% compared with an adjustment EBITDA of $7.3 million in the same quarter last year. Moving to our balance sheet, As of September 30, 2023, our total cash and cash equivalents including received cash was $100.3 million, compared with $87.8 million on June 30, 2023, and compared to $69.9 million as of September 30, 2022. We do not hold any debt. In terms of cash flow, we generated $13.8 million from operating activities during the third quarter of 2023, which also includes the collection of the lawsuits award in the Philippines, as I mentioned earlier. DSOs, which exclude receivables and revenue from our terrestrial network construction projects in Peru, were 75 days higher than the previous quarter DSO, which were 63 days. The increase was impacted by an increase in receivables, partially offset with increase in revenues, and is in line with our credit policy. Our shareholders' equity as of September 30, 2023, totalled about $265 million, compared with $255 million at the end of June 23. Looking ahead, as I already mentioned, due to our proximity to year-end, we have narrowed our revenue guidance and adjusted EBITDA guidance range for the year. Given the one-time other income, as mentioned before, we are updating our GAAP operating income target for the year. Our updated expectations show a strong 2023 with revenue of between $265 to $275 million, representing year-over-year growth of 30% at the midpoint. Gap operating income of between $29 to $31 million, representing year-over-year growth of around three times at the midpoint. and adjusted EBITDA of between $35 to $37 million, representing year-over-year growth of 43% at the midpoint. All in all, as Adi mentioned, we are very pleased with our performance to date, and we expect to conclude 2023 as a strong year for Gilad. That concludes my financial review. I would now like to open the call and would be happy to take your 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 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 Ryan Coons of Needham and Company. Please go ahead.
spk03: Thanks for the question, and I'm glad to hear everyone with the company is safe. Can we start maybe with gross margins and maybe talk through some of the puts and takes on gross margins? Look like a nice step up sequentially in September, but maybe I'm reading into the implied guidance for December. It'll be another step down. Maybe is there some product mix issues there that are swinging gross margin around?
spk05: Yeah. Hi, Ryan. As you know, growth margins are affected mainly by volume and mix. The changes during this year between quarters were mainly due to mix changes of our products, while delivering some of the products, for instance, in the IFC and NGSO, usually with higher profit margins and other products with lower ones. Plus we have the Peru effect, which was more stronger in Q2 and lowered the gross margins a bit. So it fluctuates, but I think that what we see now is the trend throughout the year. So I would also say that you know, looking at Gilad on a quarter-by-quarter basis may be a bit misleading, and I would look on a year-to-date basis or trailing 12 months, and I think that this would give a better picture.
spk03: That's fair to think. Thanks for that clarification. And on your recent win in the backhaul, sounds like with a large U.S. operator, Any timing around your expectations for when you might start to see revenue from that?
spk06: Hi, Ryan. Actually, we are seeing revenues already. It's the third extension of this project. Actually, we already entered the seventh year of doing business with that customer, and it's around $1.5 million per quarter, slightly more than that. with some upside every quarter.
spk03: Nice, great. And it sounds like IFC was strong in the quarter. Any more color you can share with us on your progress in the IFC market here in the near term, either in Q3 or the next few quarters?
spk06: In the IFC, what we see is a lot of... A lot of interest. We have several main customers. The main one is Intelsat, and we have a large, very large U.S. integrator who bundles our SSPA with his terminal. And this business continues regularly, and we see almost every quarter additional orders, maybe additional modems, network expansions, or additional SSPAs. We do have some small customers for our baseband and modems and other customers for SSPA. We are seeing a lot of interest on our SSPA product line with some small awards that soon will become very large customers. So we expect to have a strong year in 2023 in general and also a strong year in 2024 in the IFC.
spk03: Great. That's really helpful. And the types of planes you're going on to, is this more going down market kind of business jets?
spk06: Also business jets, yes. Right now the main focus is on the commercial, but also on the business jets.
spk03: Got it. Helpful. I think that's all I had. I'll pass the call for now.
spk06: Yeah, Brian, I just would like to mention another thing. If you remember last quarter, we announced our Satcom Direct deal to develop electronically steered antenna. So we are in the development process and we expect to see revenue within, let's say, 18 months from today. So in 2025, we expect additional growth in this sector.
spk03: Great, and that's for transmission? That's for business jets, yeah.
spk06: Yeah, this is for business jets. Got it.
spk03: All right, great. Thanks for that.
spk02: Thank you. The next question is from Chris Quilty of Quilty Analytics. Please go ahead.
spk00: Speaking of business jets, you guys were the new entrant last quarter with the SATCOM Direct announcement, and this quarter we just got the announcement that Hughes has now jumped into the ring with the Delta order. I'm assuming that's something you couldn't address timing-wise because of your new product, but from what you know competitively, how does the SATCOM Direct product you're developing stack up against
spk06: So first of all, it's news that HNS is getting into the, or being a service provider in IFC. Their main focus is on the regional jets, and they are using the flat panel antenna from Syncom. Satcom Direct, their main focus is on business jets and military jets, and we are developing for them the ESA, the electronically steered antenna. So it's a completely different type of terminal.
spk00: I understand. Do you see any other product line extensions? You know, you're starting at the BizJet level with the SATCOM Direct product. Does it scale up to commercial aircraft?
spk06: The BusinessJet has a smaller antenna, and SATCOM Direct antenna is focused on one web constellation. For GEO, we need a bigger antenna, and... This is part of our roadmap as well, but this antenna for commercial aviation will be for GEO and LEO as well, not only for GEO.
spk00: Gotcha. Switching gears, the Aquarius wasn't a product line you talked about much. I think you did a relaunch with SkyEdge 4 in 21 or 22, is that correct? Yeah. So, you know, has that product line, you know, caught on in the way that the SkyEdge 4 has, or is it just such a ultra high performance, you know, product line that, you know, it just takes much longer for it to gain traction in the market?
spk06: So the Aquarius product portfolio is a new product portfolio. dedicated for SkyH4. We do have several SkyH2C modems that also work on SkyH4, but the Aquarius is the new line of product. It started with Cruise, with SES Empire, but not only. We are now seeing it on cellular backhaul, and we see more In the future, as I mentioned in my notes, we recently demo one gigabyte per second with SCS and Reliance Jio in India. This is a robust achievement and those modems are supposed to be with very high speed performance. of course, fits to the 5G requirements.
spk00: Great. Switching gears again, I think you mentioned, well, first of all, could you just repeat the data path revenue contribution for next year? But I think you indicated that's all classified as the SEND. There may be a very small commercial sliver in there, but From a reporting perspective, can you remind us Gil, does it all land in integrated networks or does it get spread across multiple segments?
spk06: So the data path revenues is around $50 million plus minus 10%. And it's probably will land on the satellite networks, but it's still under
spk00: under accounting review uh so it's it's a bit early to to say all right fair enough and um in general how i mean i know you don't provide uh orders per se uh you know in terms of an order book but you know what have you seen you know as you look through look back i guess over 2023 What have you seen in the trend line towards order strength or weakness over the course of the year? And sort of what are you baking in as you go into Q4?
spk06: So it really depends on the segment. But in general, I would say that our bookings or order in are give or take as expected at the beginning of the year when we put the guidance. We are seeing a lot of traction in IFC and in cellular backhaul. In the defense, we are developing our pipeline. I'm sure you know that the sales cycle is very long in the defense. So we are seeing slow but very good progress, and we hope to have a tailwind once we close the data acquisition. We are seeing some slowness in integrated solution order. But we expect to ramp up in the next quarter or two. And in Peru, it really depends on local RFPs. And we know that the government plans to launch several very large RFPs in the next few weeks. And we also expect some contract extensions and extensions. So we expect... a strong close for the year in Peru.
spk00: Gotcha. You mentioned integrated solutions, and obviously there's been a lot of weakness this year. Can you remind us, I mean, is that certainly most of the defense companies that I deal with have talked about order slowness with the government. Do you think it is more related to the macro government purchasing environment? or is it specific to the programs that you're working on that you've seen some delays?
spk06: I think it's a combination of the two. But I would say that the majority of the slowness is the shift that we are seeing between several large projects which ended during 22, early 23, and other large projects that we awarded we expect them to uplift towards mid or end of next year. So it seems like a transition here.
spk00: Oh, gotcha. That's good color I wasn't aware of. And then I guess final question, and sorry this is a little esoteric, but Gil, it looks like you're... Crap. I'll catch you on that one offline. Never mind.
spk05: No problem, Chris.
spk02: Thank you, Chris. The next question is from Gunther Karger of Discovery Group. Please go ahead.
spk04: Yes, thank you. Excellent quarter. Congratulations. I didn't hear any comment on Peru. Could you give an update on Peru, please? And also, the second question is, I may have missed the comment, do you expect to close on the data path this year?
spk06: So, can you repeat your question again about Peru?
spk04: Yeah, just a general update on Peru. I missed hearing anything on that.
spk06: Sure. So... In Peru, business as usual. We are close to the end of finishing the sixth region, the Amazonas region, that awarded back in 2018. We expect to start the acceptance procedures with the government before the end of the quarter and to final acceptance towards the mid of next year and then to switch to operation phase. In parallel, we see a lot of bids that are coming up soon in the quarter, and we are also expecting several contract expansion and extensions, so we expect to have a strong booking quarter for Peru. As for data pass, indeed, we are progressing towards closing this quarter. We already received CFIUS approval And we're still awaiting one last government approval, which by recent indication, we expect to get it in the next, if not days, then weeks. And there are some leftover of customary closing conditions, which we expect to achieve as well in the next few weeks. So indeed, we are expecting to close the the transaction this quarter.
spk04: Thank you. And also regarding the data path, do you anticipate keeping that operation as a separate subsidiary, or do you expect to integrate that into your military and defense operations?
spk06: Combination of the two. Data path is going to be an important leg in our defense strategy, but we do expect them to continue to work independently and to grow their business while using Gilad and Wavestream resources in the defense in order to increase the overall defense presence of Gilad worldwide.
spk04: Thank you very much, Adil.
spk06: Thank you, Gunther.
spk02: 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. Bignamini, would you like to make your concluding statement?
spk05: 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 at our next call. Thank you very much and have a great day.
spk02: Thank you. This concludes Gilad's third quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.
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