Gilat Satellite Networks Ltd. (NASDAQ:GILT) Q3 2022 Earnings Conference Call November 14, 2022 9:30 AM ET
Company Participants
Ehud Helft – EK Global Investor Relations
Adi Sfadia – Chief Executive Officer
Gil Benyamini – Chief Financial Officer
Conference Call Participants
Gunther Karger – Discovery Group
Martin Levin – EML Associates
Caleb Henry – Quilty Analytics
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s Third Quarter 2022 Results Conference Call. All participants are present in a listen-only mode. Following the managements’ formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions]
As a reminder, this conference is being recorded November 14th, 2022. 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 please?
Ehud Helft
Yes. Thank you, operator. Good morning and good afternoon everyone. Thank you for joining us today for Gilat’s third quarter 2020 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today November 14th as a webcast on Gilat website for a period of 30 days.
Also please note that investors are urged to read the forward-looking statements in the last earnings release with a reminder that statements made on this earning call there are no historical effects may deem forward-looking statements within the meaning of the Private 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 Gilat and which may cause actual results to differ materially from anticipated results.
Gilat 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. Our detailed information about the risk factors can be found in Gilat’s reports filed with the Securities and Exchange Commission.
And with that, let me turn to introduction on the call today are Mr. Adi Sfadia, Gilat’s CEO and Mr. Gil Benyamini, Gilat’s CFO. I would now like to turn the call to Adi Sfadia. Adi, we are ready to begin.
Adi Sfadia
Thank you, Ehud and good day to everyone. I would like to thank you for joining us today for our third quarter of 2022 earnings call. We are pleased with the results of the third quarter.
We are particularly happy with the solid improvement in profitability across the board as well as the growth in our revenues and bottom-line. Third quarter revenues were $60.4 million, 21% above the third quarter of last year.
Non-GAAP gross margin, operating income margin, and net income margin were 38.3%, 7.2%, and 5.1% respectively all improved versus the same quarter of last year. Adjusted EBITDA improved to $7.3 million, 88% above our adjusted EBITDA of $3.9 million in the third quarter last year. Our adjusted EBITDA margin was 12% versus 8% in the third quarter a year ago.
Looking ahead we increased and narrowed our profitability expectation for 2022, which is turning out to be a strong year of recovery and growth for Gilat. Our revenue expectation are adjusted to between $240 million to $245 million, representing year-over-year growth of 13% at midpoint.
GAAP operating income expectations are narrowed and adjusted upward to between $8 million to $10 million and adjusted EBITDA expectations are narrowed and adjusted upward to between $23 million to $25 million, representing year-over-year growth of 56% at midpoint.
I will now focus on some of our business achievements and discuss some of the recent highlights. The new era of satellite communication continues to be a primary focus for Gilat. We are continuing to expand our strategic relationship with the satellite operators. I am pleased to say that we are seeing a growing interest and strong market traction for our next-generation ground platform the SkyEdge IV.
The need for a multi-orbit multi-service software defense platform that works in harmony with the newest smart software-defined satellites that are currently being launched is the must to provide the communication needs of today and tomorrow. We continue working closely with our partner SCS and are well-positioned for upcoming O3b mPOWER launch and see additional opportunities for further expansions.
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 new mega market. The ground segment market alone is estimated to be a multibillion-dollar market opportunity over the next few years according to industry analyst NSR.
In our SSPA product line, we are on track with previously reported major projects with a potential of hundreds of millions of dollars for large NGSO constellation. The mobility business continued to pick up for Gilat as we received multi-million dollar orders from key customers for both our SkyEdge IV platform and our SSPA product line.
I’m excited to share a new win for SkyEdge IV to enable maritime applications. The service provider joined the growing list of industry leaders who have chosen to adopt our platform due to its high-performance multi-orbit and rubbing capabilities. Gilat is making further headway in the IFC market segment with orders of over $12 million from a large global aerospace system integrator who for years has continued to rely on Gilat’s Ka-band AeroStream family of transceiver products to enable in-flight connectivity. With these new orders, Gilat is growing its lead in the IFC market.
In cellular backhaul segment, Gilat continues to lead with orders of millions of dollars from both new customers and network expansions from existing customers. We saw a growing interest in Africa from a new customer with whom we signed a multiyear multi-million dollar contract in the quarter to deliver connectivity to remote area in Africa.
Gilat technology is ready and proven to facilitate the market transition to 5G saying that we continue to see great potential in 4G market and expect to further increase our presence with additional business wins, thus strengthening our leadership in this market even further. As a satellite market become ready over the coming years for the transition from 4G to 5G, we are optimistic that this will create additional new business opportunities for Gilat.
In the enterprise segment, we were awarded several contracts of millions of dollars in several sectors including utilities and banking. Sencinet a large service provider in Brazil chose Gilat for a project with both Petrobras, Brazil’s largest oil and gas company and a leading financial service company. In Europe, a leading global communication integrator chose Gilat’s SkyEdge II-c platform to empower a Tier-1 utility company to provide all weather IoT telemetry information critical infrastructure across hundreds of remote sites on the national distribution network.
Gilat continued to be active in the defense market with growing pipeline. This quarter, we closed a multiyear multi-million dollar strategic agreement with a major defense company and the world-leading UAV manufacturer. Gilat will provide its next-generation BRP60 terminal for unmanned aerial vehicles. In addition, we closed a deal with a new US service provider, which support mission-critical application for the United States National Warning System. Gilat’s network will support thousands of federal state and local agencies to enable emergency services.
Furthermore, a US integrator select our newly launched defense hub network SSPAs for US Army Satcom project. With this achievement, we accept follow-on orders of millions of dollars in the coming years and the ability to pursue other US Army program with an addressable market of more than $100 million. I am pleased with the progress we are making in the defense and government sector. As we increase our investment and focus in this area, we expect to grow our market share over the next few years.
In Peru this quarter, we completed the construction of the Ica region. Ica is the fifth region Gilat completes out of the six regions awarded. We are now waiting for supervision approval and acceptance of the network in order to move to the operational phase and initiate the Internet services to schools, health center and others. This is an important step towards our goal of a healthy recurring revenue stream in Peru.
We also received a multimillion-dollar award from Antamina, one of the largest copper and zinc mines in the world. The project consists of connectivity and services to thousands of students in the Municipality of San Marcos, a rural area near Antamina mine in Peru.
In summary, we are very pleased with the development and our financial results in the third quarter. Our end markets continue to improve and grow. The new era of satellite communication is developing quickly and we are increasingly capturing a strong market position in the ground segment of this growing market. In terms of financial results, we are very pleased with our performance in the quarter. We recorded revenue growth of 21% year-over-year as well as significant improvement in profitability across the board. We focus on deals with higher margins and higher profitability as reflected in our gross margin, operating income margin and net income margins, which all significantly higher than the — of Q3 last year as well as those of the previous quarter.
We have narrowed the revenue guidance and adjusted it slightly downward, now expecting revenues to be between $240 million to $245 million, which is 13% year-over-year growth at midpoint. The slight adjustment downwards was primarily due to some of large orders that received later than we expected in the quarter, which will be delivered next year, continued to supply chain disruption and slower progress than expected on construction and implementation phases in some of our projects in Peru.
Nonetheless, since we delivered higher-margin deals, we’ve experienced higher levels of profitability, which is more than compensated and allowed us to narrow and adjust upwards the adjusted EBITDA guidance range to $23 million to $25 million. All-in-all, as you can see we are increasingly optimistic about both our near and longer term prospects and we look forward to realizing the growth opportunity ahead of us.
And with that, I’d like to over to Gil Benyamini our CFO. Gil go ahead.
Gil Benyamini
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, list incentive amortization, litigation expenses, income related to trade secrets claims, restructuring and reorganization costs, merger, acquisition, and related litigation expenses, impairment of held-for-sale assets, other expenses, income tax effect on adjustments, and one-time changes of deferred tax assets. The reconciliation table in our press release highlights this data and our non-GAAP information presented exclude these items.
I will now move to our financial highlights for the third quarter of 2022. Overall as Adi mentioned earlier, we are pleased with the continued improvement in our results and especially the strong improvement in our profitability. The results show continued growth in revenue and strong improvement in our gross operating and net margins, while our performance demonstrates a 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 and year-to-date shows that we’ve been able to mitigate most of these issues without a significant impact on our profitability.
In terms of financial results, revenue for the third quarter was $16.4 million 21% higher of those of the third quarter of last year, which were $49.8 million. In terms of revenue breakdown by segment, Q3 2022 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 market were $32.4 million, compared to $23.2 million in the same quarter last year.
The reason for the increase was mainly due to large strategic deals delivered in Q3 2022. Q3 2022 revenues of the Integrated Solutions segment, which provides equipment, products systems and solutions for mission-critical difference broadcast advanced on the move and on the pole satellite communication solutions including for airborne and ground mobile were $15.7 million, compared to $14.7 million in the same quarter last year. The improvement in the segment was primarily driven by higher revenues from the NGSO and in-flight connectivity markets.
Q3 2022 revenues of the network’s Infrastructure and Services segment, which provides mainly terrestrial and satellite network construction and operation services were $12.3 million, compared to $11.9 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 the construction phase.
I would now like to summarize our third quarter GAAP and non-GAAP results. Our GAAP gross margin in Q3 2022 improved to 38.2% compared to 35.1% in the same quarter last year. The strong improvement in our gross margin was due to the favorable product and services mix recognized this quarter and a higher volume of revenue.
GAAP operating expenses in Q3 2022 were $19.6 million in the quarter compared with $16.7 million in the same quarter last year. The increase is mainly due to investment in R&D efforts to support our current and future growth, and also due to a COVID grant received in Q3 2021.
GAAP operating income for the quarter improved to $3.4 million, compared with $0.8 million in the same quarter last year. GAAP net income in the third quarter was $2.1 million, or a diluted income per share of $0.04. This is compared to a breakeven net income and diluted income per share in the same quarter last year.
Moving to non-GAAP results. Our non-GAAP gross margin in Q3 2022 improved to 38.3% compared to 35.3% in the same quarter last year. The strong improvement in our gross margin was due to favorable deal mix recognized this quarter and higher volume of revenues.
Non-GAAP operating expenses in Q3 2022 were $18.7 million, compared with $16.2 million in the same quarter last year. As we said in the last few quarters, we are increasing our R&D investment in order to support the opportunities in front of us. We expect this investment to grow in the coming few quarters.
Non-GAAP operating income for the quarter improved to $4.4 million, compared to an operating income of $1.3 million in the same quarter last year. Non-GAAP net income in the third quarter was $3 million, or diluted income per share of $0.06. This is compared with a net income of $0.6 million, or income of $0.01 per share in the same quarter last year. Adjusted EBITDA for the quarter improved to $7.3 million compared with an adjusted EBITDA of $3.9 million in the same quarter last year.
Moving to our balance sheet. As of September 30, 2022 our total cash and cash equivalents, including short-term deposits and restricted cash were $69.9 million, compared with $71.4 million on June 30, 2022. We do not hold any debt. In terms of cash flow, we generated $4.7 million from operating activities during the third quarter of 2022.
DSOs which exclude receivables and revenues of our terrestrial network construction projects in Peru were 89 days slightly lower than previous quarter DSO which were of 95 days. The decrease is mainly due to increase in revenue whereas receivables remained in the similar level. Our shareholders’ equity as of September 30, 2022 totaled about $249 million, compared with $246 million in June 30, 2022.
Looking ahead, as Adi already mentioned, we adjusted and narrowed the range of our 2022 revenue guidance with expectations of between $240 million and $245 million, representing year-over-year growth of approximately 13% at the midpoint. We also increased and narrowed the adjusted EBITDA range to between $23 million to $25 million, representing year-over-year growth of approximately 56% at the midpoint.
That concludes my financial review. I would now like to open the call for questions. Operator, please?
Question-and-Answer Session
Operator
Thank you. ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Gunther Karger from Discovery Group. Please go ahead.
Gunther Karger
Yes. Congratulations on the excellent quarter. And — yes so far a question regarding the defense business. Historically that’s been rather minimal, and lately I’ve noticed that some increase in business acquisitions in the sector. What percentage of the total revenue is presently the defense military business? And, what do you expect it to rise to over the next year?
Adi Sfadia
Hi, Gunther, nice to hear from you again, and thank you for the warm congratulations. Indeed defense business was not in our focus in the last few years. In the last year, or so it’s become more and more in our focus, we are investing both in R&D and sales and marketing, to promote and refresh our product portfolio. Yet, it’s not a big portion of our revenues. It’s not a number that we are disclosing right now, but we expect defense to become a significant growth engine for Gilat in the next two to three years. It’s important to say that, in defense and I’m sure you’re aware the selling cycles are long and it takes time for investment to become fruitful. But we are sure that, the defense can become a significant part of Gilat revenue growth in the next two to three years.
Gunther Karger
Thank you, Adi. As a follow-up item on that, the trend in defense and military technologies is trending towards the unmanned remote type of operations. And I believe that’s accelerating. That’s one point. And the other part is the current unrest, with regard to the Ukraine war. Is the Ukraine war accelerating this trend, or what’s your comment on that?
Adi Sfadia
So, I agree with the first comment that unmanned solution require, a satellite communication and we are seeing this trend as well in opportunities in the market. As for Ukraine, of course, the satellite communication supported Ukraine during the war. But we doesn’t feel it yet. What we do feel is increased demand for our SKUs and RFIs regarding satellite communication for the defense sector. So we believe, this is part – will be part of our growth potential in the next few quarters.
Gunther Karger
Thank you, Adi. And best wishes for the coming New Year.
Adi Sfadia
Thank you very much.
Operator
[Operator Instructions] The next question is from Martin Levin of EML Associates. Please go ahead.
Martin Levin
Hello. This is Martin Levin, I’m calling from the United States. And I’m curious about how – it sounds like you have projects underway in numerous different countries. I’m curious about the top five countries that you’re dealing with at this time?
Adi Sfadia
Nice to meet you. The top five countries, yeah, we have business worldwide. And in general, it’s – we are not focused on one or two countries. Every quarter, it’s a different all those comes from different countries or top five. I can say that, we have significantly business in the United States. We have significantly business in Peru. We have a decent business in Japan and Australia, but it’s vary between the quarters. Those are the main that we see every – repeatedly almost every quarter, US, Peru, Japan. Other than that every quarter most of the orders come from different countries.
Martin Levin
Okay. Thank you so much. And I also congratulate you on a wonderful year so far and look forward to hearing your results in the coming year.
Adi Sfadia
So thank you very much. Thank you very much.
Operator
The next question is from Caleb Henry of Quilty Analytics. Please go ahead.
Caleb Henry
Hi. Just a short question from me. I was wondering if are any updates that Gilat can offer on the electronically steered antenna that was being developed for the aviation market. I recall last you mentioned that there was – you’re waiting for sort of an anchor customer to help develop that. Has there been any progress on that front or any plans to further that technology?
Adi Sfadia
Hi, Caleb. Yes. Indeed in the electronically steered antenna we are waiting for anchor customer in order to accelerate the development. At the end the antenna needs to be tied very closely with the customer and his needs. Having said that, we have several opportunities and we progress with the development both for ESA antenna for IFC and also for electronically steered antenna for military and defense use. I hope that we will be able to get the award we expect and we’ll announce it once it would be relevant.
Caleb Henry
Okay. The defense antenna, does that have a similar stipulation? In other words, you would need a defense customer to basically anchor it and sort of guide the development. Or is that something that you can create independently and then go to the market rate?
Adi Sfadia
Our plan is to build a product that will be available off the shelf. But we figure that every customer will have several specifications that we need to adjust the antenna fully but it won’t be a major adjustment as we expect it to be in the ISP.
Caleb Henry
Okay. Thank you.
Operator
There are no further questions at this time. Mr. Benyamini, would you like to make your concluding statements.
Gil Benyamini
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.
Operator
Thank you. This concludes Gilat’s third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.
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