Yona Ovadia - Chief Executive Officer Adi Sfadia - Chief Financial Officer June Filingeri - CommPartners.

Gunther Carter - Discovery Group Michael Hebner - IFS Securities Sami Kassab - Exane BNP Paribas.

Ladies and gentlemen, thank you for standing by. Welcome to Gilat’s third quarter 2018 results conference call. All participants are present in a listen-only mode. Following 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 12, 2018. I would now like to turn over the call to June Filingeri of CommPartners LLC to read the Safe Harbor statement. June, please go ahead..

Thank you, Alana. Good morning and good afternoon everyone. Thank you for joining us today for Gilat’s third quarter 2018 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern time today, November 12, and will be available for telephone replay until November 17 at noon.

The webcast will be archived on the Gilat website for a period of 30 days.

Also, please note that investors are urged to read the forward-looking statements in Gilat’s earnings release with a 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 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. More detailed information about risk factors can be found in Gilat’s reports filed with the Securities and Exchange Commission.

With that said, let me turn to introductions. On the call today are Yona Ovadia, Gilat’s CEO, and Adi Sfadia, Gilat’s Chief Financial Officer. I would now like to turn the call over to Yona Ovadia. Yona, we are ready to begin..

Thank you, June. Good morning, good afternoon and good evening to everybody. Thank you for joining us today. I am pleased to report that the third quarter of 2018 was another positive quarter for Gilat as we made additional progress in building our growth engines and increasing our profitability. Allow me to summarize our financial performance.

Third quarter revenues were $62.8 million, which is down 10% from the same quarter last year mainly due to the delayed revenues from our terrestrial infrastructures in Peru.

Meanwhile, revenues from our fixed network segment, which includes cellular backhaul, increased 18% year-over-year, while our mobility solutions segment including ISC increased 16% from the third quarter of 2017.

Looking at profitability, our continued focus on building quality profitable revenues through our growth engines, coupled with our relentless efforts to drive costs out of the business yielding GAAP operating income of $6 million, an increase of 80% year-over-year, and 44% higher than Q2 2018.

Adjusted EBITDA increased to $9.1 million in the third quarter of 2018 versus $7.1 million in Q3 2017 and $8.1 million in Q2 2018, representing an increase of 28% and 12% over their respective periods.

Our bottom line also remains strongly profitable on both a GAAP and non-GAAP basis in the third quarter with GAAP net income of $8.7 million, including a one-time tax benefit that Adi will discuss, and non-GAAP net income of $5.1 million.

Turning to our annual management objectives for 2018, we have revised our revenue range to $265 million to $275 million to take into account delays in revenues in Peru due to their continued slow pace of project inspection by Fitel of our initial sweep projects coupled with the extra caution we’re exerting related to our two recently won projects, which I will of course elaborate shortly.

At the same time, we have increased the range of GAAP operating income to $22 million to $24 million from $17 million to $21 million, and EBITDA to $35 million to $37 million from $30 million to $34 million as we see the fruit of our disciplined emphasis on profitability. Let me provide more details on our business, firstly HDS and broadband.

We continue to make additional and significant progress in materialization of our focus on broadband connectivity, particularly with new HDS business around the world. First is a major deal in Russia this quarter with Gazprom Space Systems, also known as GSS, for broadband connectivity across the Russian territories.

GSS plans to launch its new HDS Ka satellite called Yamal 601 in February 2019 for which Gilat was selected to provide the ground segment. The current phase of the deal is for only a third of the satellite capacity and is valued at about $18 million.

I’d like to emphasize that this project together with previously reported projected in the region makes Gilat a dominant player in the Russian Ka band satellite market. Secondly in Japan, we were awarded a multi-million dollar deal this quarter with SKY Perfect JSAT for mobility and fixed services.

JSAT is Asia’s largest satellite operator and it will be providing a broad range of new services, including government, utilities, banks and hospitals as well as broadband connectivity for several mobility applications.

Third in China, Gilat will now provide the ground segment to China Satcom also for its new satellite, China Sat 18 to be launched mid next year. With this launch, full Ka HDS coverage will be provided all over China by China Satcom, which will be solely supplied by Gilat’s platform.

This means for example that every plane that flies domestically or in and out of China and needs HDS Ka will need a Gilat modem.

These successes are on top of several other HDS wins already deployed around the world, thus further demonstrating Gilat’s leadership in providing a high performance, highly efficient ground network that serves multiple applications. Moving onto IFC, we have reached a significant milestone this quarter in IFC growth engines.

Gilat’s dual band antenna terminal, known also as Ku/Ka, has passed the standard for environmental testing of avionics hardware and received the DO-160 certification.

This means that this terminal, which is unique in its ability to switch instantaneously and with uninterrupted user experience between bands, is now certified for installation on commercial aircraft, providing opportunities to HDS operators, IFEC service providers, and airlines who want leverage IFC opportunities with the flexibility to use both the Ku or Ka bands.

We believe that this unique dual terminal provides opportunities worldwide. One of these immediate opportunities that we are optimistic about is in China, where we are working with a strong local partner, Air Esurfing, a subsidiary of Air Media.

As you may know, Air Esurfing announced recently that they won IFC projects for several Chinese airlines and that they have developed for them a comprehensive solution based on Gilat’s dual band antenna.

Moving on to cellular backhaul, in our cellular backhaul growth engine we have had several network extensions and expansions at our large customers worldwide. In addition we have a healthy pipeline of new deals and we expect to report them in the coming months. Moving onto Peru, I would like to elaborate on the situation in Peru.

As previously reported, in June 2018 we were awarded two additional regional telecommunications infrastructure projects for the government agency of Fitel in Peru, and those regions are across Ica and Amazonas. As stated in today’s earnings release, the losing party recently appealed the award and obtained a preliminary injunction against it.

Gilat has been informed by Fitel that it believes that the injunction was improperly obtained and is opposing it. Gilat is not a party in either action and we firmly believe, based on advice of counsel, that the chances of success of the losing party are remote; yet, we decided to exercise caution and reduce our revenue targets for 2018.

Our revised revenue targets also take into account the slow pace of inspections and approval by Fitel of our initial three projects for them, as I mentioned earlier in my remarks.

Further, I would like to clarify that the delayed revenues are reported mainly under our construction segment, and I want to stress again that these are low margin revenues that are not our main interest but rather part of the operation high margin revenues that will arrive in 2019, although delayed.

Finally, I also want to emphasize that we strongly believe and expect that we will overcome these recent delays in the coming few months, and we remain optimistic and committed to making Peru a source of recurring profitable revenue for Gilat.

Moving onto non-geostationary, also known as NGSO, as part of our ongoing HDS and VHDS business, we are also involved in the next wave of satellite constellations.

As non-geostationary satellites are being developed and launched, Gilat is leading in the developing and demonstrating broadband connectivity solutions for multi-orbit constellations and is in discussion with most, if not all of the LEO and MEO players.

One of the high points of our activity in this area of NGSO was last month when Gilat cooperated with Global Eagle in the first ever live in-flight testing with a Telesat LEO satellite.

The testing was carried out on Global Eagle’s Albatross test aircraft and yielded a continuous uninterrupted broadband connectivity plus a switchover between a Telesat GEO satellite and its LEO satellite. The test included secure real time video chatting using Skype and WhatsApp in parallel, as well as secure internet browsing.

With this milestone, Gilat’s solution has now proved its technical and technological advantage of supporting not only multiple application satellites’ band and beams, but also a world first transition between satellites of multiple orbits.

In conclusion, we are confident in our strategy and remain focused on our growth engines of cellular backhaul, IFC and HDS and VHDS, and continue to conduct a balancing act of significant investments in R&D to maintain our product leadership while continuously improving profitability. With that, Adi, we’re now ready for your report. Please go ahead..

Thank you Yona, and good morning and good afternoon 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 purchase intangibles, litigation expenses related to trade secrets claims, expenses for tax contingencies to be paid under an amnesty program, and deferred tax benefit that was recorded for the first time.

Reconciliation tables in our press release highlight these data and our non-GAAP information presented exclude these items. I will now move to our financial highlights for the third quarter of 2018.

Revenues for the third quarter of 2018 were $62.8 million compared to $69.9 million in the third quarter of 2017, reflecting lower revenues from our terrestrial infrastructure segment which includes the construction phase of our project in Peru partially offset by higher year-over-year revenues from our fixed networks and mobility solutions segments.

Revenues in the previous quarter were $66.5 million.

Fixed network segment revenues were $34.9 million compared to $29.6 million in the same quarter last year, representing an 18% year-over-year increase mainly due to increased revenues from our cellular backhaul solutions and from our Latin America region, including our activity in Colombia for the government.

Fixed network revenues in the previous quarter were $36.2 million. Mobility solutions segment revenues were $21.8 million compared to $18.9 million in the same quarter last year and $25 million in the previous quarter. This 16% increase in the revenues year-over-year reflects higher IFC revenues.

Terrestrial infrastructure project segment revenues, which include the construction revenues for our projects for Fitel in Peru, were $6 million compared to $21.4 million in the same quarter last year and $5.3 million in the previous quarter.

As discussed previously, during the construction phase revenues from Fitel can vary quarter to quarter depending on the percentage of the project completion.

We are now in the final stages of the construction phase for the first three regions and our current progress is slower than originally expected with part of the networks awaiting Fitel inspection and acceptance and approval of those networks. Once received, those projects can move to the operational phase.

Those inspections are currently progressing significantly more slowly than expected. They are now expected to conclude during the first half of 2019 at which point operations which begin and with it service revenues. In addition, as previously reported, we were awarded two additional projects in Peru from Fitel totaling $153.5 million.

We were recently informed that the companies which were a part of the consortium whose bid was rejected by the government have sought to overturn the award. Additionally, they have sought and obtained a preliminary injunction against the award.

We were not officially served with the notice concerning the injunction request and we are not a party in either action. We have been informed that Fitel, the government authority that issued the bid for them believes that the injunction was improperly obtained and they are opposing it.

Based on legal advice, we believe that the likelihood of success of the losing company is remote; nonetheless, we decided to exert caution and updated our revenue objective for the year. The overall impact of those delays in Peru on our revenues is about $25 million from our original expectation for the year.

Turning now to our third quarter 2018 revenues as a percentage of total revenues, fixed networks represented 56% of revenues, mobility solutions represented 35%, and terrestrial infrastructure projects represented 9% of revenues.

In the third quarter of 2017, those percentages were 42% for fixed networks, 27% for mobility solutions, and 31% for terrestrial infrastructure, demonstrating the shift of our revenue mix towards our areas of strategic focus. Our GAAP gross margin in the third quarter of 2018 increased to 38.5% of revenues from 29.1% in the same quarter last year.

The increase in our gross margin is mainly attributable to a more favorable revenue mix and lower revenues from our projects in Peru, which have lower margins during the construction phase. Our gross margin in the previous quarter was 33.7%.

Total operating expenses on a GAAP basis for the third quarter were $18.2 million compared to $17 million in the same quarter last year, and $18.3 million in the previous quarter.

GAAP operating profit was $6 million, representing a substantial increase from operating profit of $3.3 million in the same quarter last year and up from $4.1 million in the previous quarter.

GAAP net income in the third quarter was $8.7 million or $0.16 per diluted share compared with net income of $2.1 million or $0.04 per diluted share in the same quarter last year and $2.2 million or $0.04 per diluted share in the previous quarter.

Net income in the third quarter of 2018 includes a deferred tax benefit of $4.1 million that was recorded for the first time in our U.S. subsidiary, Wavestream, due to its continuous profitability and its ability to utilize NOLs in the near future.

On a non-GAAP basis, operating income for third quarter was $6.5 million or 10.3% of revenues compared to operating income of $4.9 million of 7% of revenues in the same quarter last year. Non-GAAP operating income for the previous quarter was $5.7 million or 8.5% of revenues.

Non-GAAP net income in the third quarter was $5.1 million or $0.09 per diluted share compared to non-GAAP net income of $3.6 million or $0.07 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $3.7 million or $0.07 per diluted share.

Adjusted EBITDA for the third quarter of 2018 was $9.1 million or 14.5% of revenues compared to adjusted EBITDA of $7.1 million or 10.2% of revenues in the same quarter last year. Adjusted EBITDA in the previous quarter was $8.1 million or 12.2% of revenues.

As of September 30, 2018, our total cash and equivalents, including restricted cash, were $103.3 million, an increase of $7.5 million from the previous quarter. During the quarter, we generated about $9.6 million from operating activities, out of which about $5.5 million was from our Peruvian activity and $4.1 million was from our satellite activity.

The increase was offset by capex spending of about $2.9 million. DSOs, which includes our fixed networks and mobility solutions segments and excludes receivables and revenues of our terrestrial infrastructure project segment, increased to 73 days from 64 days in the previous quarter mainly due to some large customer payments that slipped to early Q4.

Our shareholders equity at the end of the quarter totaled about $233.5 million compared to $223.1 million at the end of the previous quarter. That concludes our review. Thank you for your attention. I would like now to open the call for questions.

Operator, please?.

[Operator instructions] The first question is from Gunther Carter of Discovery Group. Please go ahead..

Yes, good morning and good afternoon, gentlemen and ladies. Great report.

One question - is there any update on the Chinese railroad systems that you’ve got an agreement with?.

Hi Gunther, nice to have you with us again. No, there is no real update on the railroad opportunity. It’s still in the same situation of testing phase within the customer, no real progress. CRC is the name of the customer here..

Thank you..

The next question is from Michael Hebner of IFS Securities. Please go ahead..

Yes, I see the world as we’re looking at this 5G and infrastructure, people are worried about China, and it seems to be your company is able to play both sides with them, getting western contracts and Asian contracts.

Any comments, are you seeing anything out there?.

I’m not sure if you have anything particularly specific in mind, but I think that the landscape, when you look at it in China, the most lucrative market by far but also the most confusing, I would say, is the IFC market. This market has yet to be unlocked.

Most of the airlines in China offer connectivity only for international flights in and out of China while domestic flights do not offer this service. Just to remind you, there are as we speak today about 3,000 planes flying domestically, so there is massive opportunity there but the market is still locked, waiting for something to happen to open up.

When will this happen? Your guess is as good as mine.

It could be a week, it could be a decade, but definitely this is the number one opportunity and we, among many others, are looking at this opportunity because we have the baseline for China Satcom, we have now the dual band antenna that has been certified, and we have our partnership with Air Media, so this is definitely a lucrative opportunity that is being carefully watched by all of the service provides in the world, be that Gogo, Panasonic, Immarsat, Honeywell, everybody else as ourselves.

Secondly, our second opportunity there is a continuation of satellites being launched the Chinese government with their China Satcom weather affiliates.

This is more long term but also a good opportunity for us because we think we have the presence in China, the relationship, but more importantly the technology that these new constellations and new satellites would need..

So this 5G stuff that’s rolling out, when do you start to see some revenue opportunities from this?.

Okay, I’m sorry, I did not realize you were referring to 5G. .

No, I mean both of these things.

You’re talking about that, but now as Verizon and everybody is moving on this 5G front, new question - what do you see, are people starting to spend money and are we starting the cellular backhaul with the satellites, are we picking up revenue on this front yet?.

I think not yet. I think that the satellite industry will take some time to follow the mobile operators that offer terrestrial 5G connectivity. The reason I think, there are several reasons but one major one is the delays in communication that are caused by the fact that the GEO constellations are 34,000 or 36,000 kilometers - that creates latency.

5G offers instantaneous response, so I think that it will take a while until the GEO satellite operators will figure out a way to overcome this hurdle and to provide service that does not have latency, and it’s even likely in my opinion that 5G over satellite will be best served by the LEO constellations but these are, as you surely know, a few years down the road.

In any case, from our perspective we are preparing our platform to support 5G. This is a part of our R&D roadmap - of course, this is central to our R&D roadmap going forward, but for that we need a partner, which is the satellite.

As I mentioned, GEO will have a difficult time dealing with the latency challenge and more likely the NGSO constellations will deal with it better. Any guess is good here - it could be three years, it could be five years down the road..

Good, thank you..

We have a follow-up question from Gunther Carter of Discovery Group. Please go ahead..

Yes, thank you.

With the evolving situation with Gogo, is there any update for your business with Gogo at this time?.

Actually no, no update. Our business with Gogo is business as usual. Recently they announced their financials, which is that they are progressing, everything is on track. We see no delays, not in orders and not in payments. .

We have good business with Gogo. We continue to have good business with Gogo. We are pleased..

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. The next question is from Sami Kassab of Exane..

Good morning gentlemen, it’s Sami Kassab at Exane BNP Paribas. I have two questions. The first one, can you comment on the tests you’ve done with Global Eagle in Telesat and perhaps remind us of the main benefits of LEO versus GEO when it comes to IFC.

Secondly, can you comment on satellite wholesale capacity pricing - are you still seeing pricing declining or are they flattening out? Thank you..

Okay, I’ll answer the second question first. In general, the trend of price, capacity price going down, we think that the trend continues.

There are some periods of time when it’s faster or slower, it also depends on geography, but in general there is more capacity up there, therefore price has been and in our opinion will continue to go down, and that’s the start of the realities that everybody is learning to live with.

As far as Telesat, first as I said, this is the world’s first demonstration of connectivity between an airplane and a LEO satellite, where the difficulty of course is the fact that the satellite is moving, not only the airplane, and still you have to track it and stay connected.

We managed to do that in cooperation with Global Eagle and we have proven that connectivity with LEO constellations is feasible, and not only feasible but we managed to demonstrate applications that are demanding high volumes of data, like WhatsApp, like Skype, and of course other social media applications.

Now, the benefit of LEO as we see it is in several dimensions. First of all, latency. LEO constellations are between 800 to 1200 kilometers compared to 36,000 kilometers of the GEO constellation. That means a drastic reduction in latency and therefore applications will require a very low latency confined solution in LEO, not necessarily in GEO.

Secondly, they offer massive amounts of capacity which means further reduction of capacity price, and this is something that many around the world are looking for and certain applications that are not affordable today GEO hopefully will be affordable on LEO.

What would the price go to? I cannot speak of that, I have my own assumptions, but better ask the operators of the LEO constellation. The third one is the ability to provide inter-satellite connectivity. I think this will create at least in some of the LEO constellations sort of an internet in the sky which offers also very rapid speed times.

All of that is a lot of big promise and therefore many people are expecting market disruption once these constellations are operational. Of course, the big question is which of these constellations will be operational and when, as they are multi-billion dollar investments.

Just to summarize, in our belief, we don’t know that all constellations or planned constellations will be successful. We think that not all of them will fail, so we try to work with those who will be successful..

Thank you very much..

We have a follow-up question from Michael Hebner of IFS Securities. Please go ahead..

I didn’t see the backlog information.

Did you not put that out, or did I miss that in the report?.

No, we are not disclosing our backlog information..

Okay, I mean, the future orders and everything looks fine? You like where you’re going?.

Generally speaking, yes. The business looks good, you see the results in our financials. We gave updated EBITDA, we raised our EBITDA targets for the year. Yes business looks good..

What did you say the revenue for the quarter because of the Peru situation, what would that have added to it if it would have been there?.

Oh, this specific quarter? A few million dollars. For the year, as I said in my official note, it’s a sum to about $25 million. .

What’s your best guess when this is going to be resolved? What is your counsel telling you down there?.

We are talking about seven regions over there. We believe that part of it, we will be able to solve during Q1 and the rest close to the end of the first half of the year. We are working closely with the government trying to support them with their inspection needs.

We are progressing in everything that is up to us, and I believe that in the first half of the year, we’ll be able to overcome the hiccups that we have over there..

Okay, thank you..

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr.

Adi Sfadia to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5904. Internationally please call 972-3-925-5904. Mr.

Sfadia, would you like to make your concluding statement?.

I want to thank you all for joining us for the 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 Gilat’s third quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect..