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After falling to a 52-week low in mid-October 2022 of just under $5.00 per share, Gilat Satellite Networks Ltd. (NASDAQ:GILT) has since bounced off that low and is now trading at approximately $6.00 per share.
Its last earnings report was mixed, and didn’t give its share price the boost it was hoping to from its revenue miss. Some of that was attributed to delays in some orders, which should be delivered in 2023. Assuming it meets expectations, that could result in better-than-expected results in some reporting periods of 2023, as well as full-year results.
When looking at the wins in the third quarter, it’s noticeable that many of them are across different verticals, which in my opinion represents strengths and weaknesses for the company, and could be a short-term headwind, but further out as the GILT gains experience from them, it could lay a solid foundation to build from over the long haul.
In this article, we’ll look at some of its third-quarter numbers, a few of its recent wins, and why it’s going to take some time to grab significant market share in any one vertical.
Some third-quarter numbers
Revenue in the third quarter was $60.35 million, up 21 percent year-over-year, but missing by a fairly hefty $6.85 million. Full-year revenue was downwardly revised to a range of $240 million to $245 million.
The reason for revenue being downwardly revised was, for the most part, from large orders the company received in the quarter being later than anticipated. Those orders will be delivered in 2023. Other headwinds were ongoing supply chain issues and slower-than-expected progress with some of its projects in Peru.
The delay in orders to the latter part of the third quarter could be a tailwind for 2023 when these large products start to have an impact on the top and bottom lines of GILT, and could result in exceeding expectations if it continues to grow outside its third-quarter wins.
Adjusted EBITDA was $7.3 million, a gain of 88 percent over the adjusted EBITDA of $3.9 million in the third quarter of 2021. Adjusted EBITDA in the reporting period was 12 percent, up from the 8 percent in adjusted EBITDA recorded last year in the third quarter.
Gross margin in the quarter was 38.3 percent; operating income margin was 7.2 percent; and net income margin was 5.1 percent. All of them were an improvement year-over-year.
Its GAAP operating income outlook was narrowed and adjusted upward to a range of $8 million to $10 million. Its adjusted EBITDA outlook was also narrowed and upwardly adjusted to a range of $23 million to $25 million, up 56 percent year-over-year at midpoint.
Cash and cash equivalents at the end of the third quarter were $70 million, down from $85 million last year at the end of the third quarter.
Breaking down its segments, revenue in Satellite Networks was $$32 million, up about $9 million from the $23 million in revenue generated in the third quarter of 2021. Revenue in the segment for the first nine months was $84 million, a little higher than the $83.2 million in revenue from the first nine months of 2021.
Revenue in Integrated Solutions was $15.6 million in the third quarter, about $1 million above the $14.7 million generated last year in the same reporting period. Revenue in the segment for the first nine months was $45 million, up about $12 million from the first nine months of 2021.
Network Infrastructure and Services ended the third quarter with revenue of $12 million, slightly up from the $11.9 million in revenue in Q3 2021. Revenue in the segment for the first nine months was $38 million, up approximately $7 million from the same period last year.
With Satellite Networks revenue showing little growth, the other two segments became a higher percentage of overall revenue in the first nine months of 2022. Now the combination of Integrated Solutions and Network Infrastructure and Services account for 50 percent of revenue generated by GILT.
One thing worth watching here is if the improvement in its gross margin, operating margin and net margin is correlated to that changing mix. If so, and Satellite Networks as a percentage of revenue declines while the other two segments grow, it could result in a significantly improved bottom line for GILT. It’s definitely something worth watching over the next year.
Different verticals, different geographies
The major thing I want to touch on in this article is the company competing in different verticals across different geographies. Many times we’ve all heard the idea that geographic and vertical diversification is a competitive advantage.
While it’s true that it can mitigate some risk associated with overreliance on any specific market or product line, it’s also true that it can result in a company being spread too thin if it tries to be all things to all people.
When asked about the top countries GILT does business with, it listed the U.S., Japan and Peru as the major markets it works in on a consistent basis. Outside of those markets, geographic diversification usually changes from quarter to quarter.
Concerning verticals, based upon some of the recent announcements the company made in its earnings press release, it is getting wins in a variety of verticals across a diversity of markets.
For example, it reported a big win for UAV terminals, another to expand 4G coverage for mobile operators in Latin America, an e-learning project with Antamina, and a satellite connectivity project for Brazilian-based energy giant Petrobras, among others.
All of these will add to revenue going forward, but when operating in such different market segments spread across geographically diverse areas, I think the application of GILT’s products and services to provide solutions in many different verticals will be a temporary headwind as the company goes through a learning curve in how to efficiently and profitably solve the problems of its customers.
One example of that is its electronically steered antenna; it’s looking for an “anchor customer” in order to speed up its development. Management added that “the antenna needs to be tied very closely with the customer and his needs.”
That’s another way of saying there are customization aspects to the product that requires very specific solutions based upon what the customer wants. I see this across many of the products and services offered by GILT, and because of that, the learning curve could be steep in a number of the verticals it competes in, which means in the short term it could be a headwind, but once it has a much larger knowledge and experience foundation laid in the verticals it wins business in, it’ll set the stage for potential explosive growth over the long term.
Conclusion
GILT has been struggling over the last couple of years, with its share price trading at almost the same level it was in December of 2020. It has rebounded off its 52-week low, but in the near term I’m not seeing a lot of catalysts that would push the company into a sustainable, significant growth trajectory.
But as it grows out its customer base, gains experience in a number of verticals, and enters into new markets, it’s setting the stage for a prolonged season of growth that should reward patient investors.
For 2023, with some of its large projects being agreed upon later in the third quarter, it does have the potential to provide a tailwind if the company can maintain momentum during that time period.
One good sign for the company is that as it grows revenue, it has started to increase margin as well. If it can continue to do so, it’s going to attract the attention of more investors, and the increased trading volume would probably boost its share price in the years ahead.
While I get the sense the company is a little disjointed at this time from growing pains, I think it has a lot of potential to grow in the years ahead. I don’t think it’s going to enter into a period of high growth in the near future, but over time it should be a consistent performer for patient investors.
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