Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Fourth Quarter 2023 Results Conference Call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded February 26, 2024. 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 at1646688-3559 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?.

Yes. Good morning, and good afternoon, everyone. Thank you for joining us today for Gilat's fourth quarter 2023 results conference call and webcast. A recording of this call will be available beginning at approximately noon eastern time today, February 26, 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 Gilat's earnings release. With a reminder that statements made on this earnings call are not historical facts and may be deemed forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements regarding statements regarding future financial operation 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.

And with that said, 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 over to Adi. Adi, we're ready to begin..

Thank you, Ehud, and good day to everyone. I want to thank you for joining us today to discuss our fourth quarter and full year 2023 results. Before discussing the quarter's business results, I want to reemphasize my comments on the previous quarter that Gilat is a strong global company with operation and development centers worldwide.

Our operations remain unaffected by the recent events in Israel. Now let's move to the business review of the fourth quarter of 2023 and the full year results. We are very pleased with our fourth quarter and 2023 full year results. We ended 2023 with strong Q4 results.

We are reporting fourth quarter revenues of $75.6 million, bringing us to a full year revenues of about $266.1 million, which is year-over-year growth of 11%.

Most importantly, we are particularly proud of the strong improvement in our profitability across the board, with fourth quarter adjusted EBITDA of about $9.4 million, bringing us to a full year adjusted EBITDA of $36.4 million, which represents a significant year-over-year growth of 44%.

This is a solid demonstration of the operating leverage inherent in our business model, combined with a more favorable revenue mix sold during this year. I'm pleased with our Q4 achievements in the IFC and defense verticals. In the IFC, we managed to gain two new awards from strategic customers that extended our product portfolio.

In the defense vertical, we ended the year with important wins for SkyEdge IV systems, SSPA, transportable hubs and the first order for our next-generation military model. The fourth quarter was also a strong quarter for our operations in Peru with a more than $17 million award from Pronatel to expand Amazonas regional project.

Looking back over the year, we progressed with our strategy to be the partner of choice for the satellite operators by winning and extending key strategic VHTS and NGSO deals.

We also progressed significantly with our strategy to expand our market share in the defense vertical with the acquisition of DataPath in the United States, which we believe will be a significant long-term growth asset for Gilat.

We extended our market leadership in the in-flight connectivity vertical and our dominance in the satellite-based cellular backhaul vertical. We continue to release new exciting products in all of our business lines. Overall, 2023 represent a key growth year from both a strategic and financial perspective.

And over the next few minutes, I will summarize our progress. Our solid revenue growth and strong adjusted EBITDA performance in 2023 due to the continued growing market interest in the satellite communication sector, specifically for our solutions. Looking ahead to 2024, we expect another year of top line and profit growth.

Our guidance for 2024 is as follows. We expect revenues of between $305 million and $325 million, representing approximately 18% year-over-year growth at the midpoint. We expect an adjusted EBITDA of between $40 million to $44 million, representing year-over-year growth of 15% at the midpoint. Our acquisition of DataPath was concluded in mid-November.

The acquisition is a major milestone in Gilat's strategic initiative to increase its presence in the growing defense communication market powered by satellite connectivity. It allows us to better penetrate to the United States Department of Defense and government sectors, as well as into another international government and defense markets.

DataPath is a U.S.-based system integrator and a market leader in secure communication systems, services and end-to-end solutions for mission-critical operations over satellite. DataPath and Gilat brings strong competencies and synergies in system engineering, software development and mechanical engineering. DataPath is a key enabler to the U.S.

DoD and government mission-critical sector. It provides and maintains its SATCOM systems such as portable and transportable ground stations and related services.

I'm happy to say that we already see a good level of business progress at DataPath as witnessed by booking of more than $20 million since we closed the acquisition in mid-November until today. Looking at some of the other market verticals we support.

In the very high throughput satellite, the VHTS and the non-geostationary satellite, the NGSO constellation business, we continue to lead with follow-on multimillion dollar orders from our strategic partners MEO [ph] and GEO networks.

Furthermore, we are competing on additional large-scale opportunities for next-generation MEO and LEO platforms and user terminals. This platform signals the digital transformation of ground systems to the cloud, 5G NTN and the staged transition to all software offerings.

Network expansions and deliveries of Gilat multi-orbit next-generation platform, Sky IV are taking place globally to support multiple applications, such as in-flight connectivity, cellular backhaul, enterprise and social inclusion. 2023 was another record year for Gilat cellular backhaul solution over satellite.

We received a renewal and extension of a contract of approximately $20 million from Tier 1 MNO in the United States. We are continuing this multiyear agreement as end-to-end managed service provider of satellite best cellular backhaul and emergency response for this long-term leading customers.

We remain the leading global 4G cellar backhaul over satellite solution provider, demonstrating unparalleled technology delivery and operation capabilities. Our superior technology enables a smooth transition to 5G backhaul over multi-orbit constellation and VHTS satellites.

During the fourth quarter, Gilat SCS and one of the largest MNOs in the world demonstrated the operation of the SkyEdge IV plus for 5G cellular backhaul on MEO constellation that delivered more than 600 megabit per second speed directly to the handsets. In mobility, we are progressing both in IFC and cruise verticals.

We see growth potentials with new operators and system integrators globally.

Our Wavestream subsidiary is making significant progress with two new awards for strategic customers, one very large system integrator and another large IFC terminal manufacturer that is extending its portfolio to also support IFC terminal auxiliary [ph] Earlier in the year, we won a strategic ESA deal for the business aviation market with Satcom Direct, and we are optimistic about the growth of this market.

As I have just mentioned, we are putting significant focus on the defense market segment and DataPath acquisition is a prime example. We are seeing good progress in this area and expect this extra focus will bear fruit soon. We expect our DataPath revenues to exceed $45 million in 2024. We recently announced that the U.S.

Army awarded our U.S.-based subsidiary, Wavestream, a $20 million contract for the sustained anytime anywhere satellite connectivity program.

We will provide an additional 51 Ka-band box for the long-term sustainment of thousands of mobile satellite transportable terminals, enabling a continued communication on the post solutions across diverse climate and harsh conditions around the globe.

We also received a multimillion dollar order for our SkyEdge IV system from a leading military government organization. This is the first order we have received for our SkyEdge IV plus platform for the defense vertical. The SkyEdge IV can potentially become an important part of the net-centric battlefield.

Moreover, we embarked on developing a next-generation military modem to succeed our GLT product line. This more than will use state-of-the-art resilience waveform to allow secure communication anywhere. In addition, through Wavestream, we're introducing a new high-power SSPA product line called Endurance.

The Endurance BUC is hot-swappable, rack mount design, the can cover multiple commercial and military frequency bands with a switchable upconverter. We believe that the Endurance product line will take market share from the current products based on TWTA technology, installed base and future upgrades.

Our enterprise customers worldwide continue to depend on us to enhance their business and new opportunities continue to arise. The industry is facing intense competition from Starlink.

To overcome this challenge, we are working with our partners to explore the multiservice capabilities of our deployed platforms and use common network infrastructure to support the enterprise customers. We already see initial business from this approach and expect more in 2024.

In Peru, we are progressing with the construction of the Amazonas networks. We aim to deliver the network to Pronatel and moving to fully operational mode during the second quarter of 2024.

During the last quarter, we received more than $17 million expansion to the Amazon network from Pronatel, expanding the network deployment, including a service agreement for 10 years to address the growing needs of Internet in additional parts of the Amazonas region.

The expansion will include connectivity to 35 new localities and dozens of new public institutions, including schools and health centers. We are expecting additional progress in Peru over the next few months. This includes the maturity of several large program RFPs with Pronatel and the Peruvian government and several project extensions.

To conclude, I'm happy with our strong progress for both a strategic perspective and a financial one in 2023.

We continue to lead with our next-generation platform in the growing satellite connectivity market, our SkyEdge IV platform, which supports multiple orbits and verticals, including our strategic markets of mobility, cellular backhaul and defense is making in great inroads and seeing strong and growing traction among existing and new customers.

In particular, we are very excited about the new potential in our defense business, especially given the closing of the DataPath acquisition and our next-generation military model initiative. We continue to secure new opportunities for our SSPA business, especially in the IFC vertical and are seeing increasing opportunities in this line of business.

Overall, as we move into 2024, we believe it will be a year in which many opportunities of the LEO vertical will turn into wins and orders. We have a strong pipeline and expect the materialization of important deals over the coming months and quarters. And with that, I hand over to Gil Benyamini, our CFO. Gil, please..

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 if and when applicable, the effect of noncash stock-based compensation expenses, amortization of purchased intangibles, amortization of intangible assets related to acquisition transactions, lease incentive and amortization, impairment of held for sale assets, other expenses, onetime changes of deferred tax assets, onetime tax expense related to release of historical tax trapped earnings, other operating expenses or income and the income tax effect on the relevant adjustments.

The reconciliation table in our press release highlights these data, and our non-GAAP information presented excluded these items. I will now move on to our financial highlights for the fourth quarter of 2023, followed by our full year 2023 highlights. Overall, as Adi mentioned earlier, we are very pleased with our performance in 2023.

We ended the year with a continued improvement in our results and especially the strong year-over-year improvement in revenue and profitability.

I'm pleased to say that despite the macroeconomic headwinds and geopolitical challenges, our performance shows that we have been able to mitigate most of these issues without a significant impact on our profitability.

And even though 2024 may contain some potential macro challenges ahead, we believe that we are well positioned to overcome these challenges and continue to improve our financial performance as we move through 2024. This was a significant quarter for Gilat as we closed the strategic acquisition of DataPath, which we believe will accelerate our growth.

In terms of our financial results. Revenues for the fourth quarter were $75.6 million, 4% higher of those of the fourth quarter of last year, which were $72.6 million. This DataPath acquisition, which closed on November 16 this year, contributed modestly to our quarterly revenue in line with expectations.

For the year, revenues were $266.1 million, up 11% versus $279.8 million in 2022. The improvements were driven by growth in all of our segments and mainly from the VHTS and NGSO, IFC and cellular backhaul verticals.

In terms of revenue breakdown by segment, Q4 2023 revenues of the Satellite Network segment were $53.5 million compared to $36.4 million in the same quarter last year. Q4 '23 revenues of the Integrated Solutions segment were $9.5 million compared to $16.3 million same quarter last year.

The decline was mainly due to transformation period between strategic and large projects in the segment. Q4 revenues of the Network Infrastructure & Services segment were $12.6 million compared to $19.9 million in the same quarter last year. The decline was mainly due to deliveries that slipped to 2024.

I would now like to summarize our fourth quarter results, first on a GAAP basis, and then I'll cover the non-GAAP numbers. Our GAAP gross margin in Q4 '23 remained similar to the last year, 38.2%. GAAP operating expenses in Q4 '23 were $26 million in the quarter compared with $21.6 million in the same quarter last year.

The increase is mainly due to higher R&D expenses incurred in order to support our current and future growth. GAAP operating income for the quarter was $2.9 million compared to $6.1 million in the same quarter last year. GAAP net income in the fourth quarter was $3.4 million or diluted income per share of $0.06.

This is compared to GAAP net loss of $6 million or a loss per share of $0.11 in the same quarter last year. Moving to non-GAAP results. Our non-GAAP gross margin in Q4 '23 improved to 39.1% compared to 38.3% in the same quarter last year. Non-GAAP operating expenses in Q4 '23 were $23.4 million compared with $20.7 million in the same quarter last year.

Non-GAAP operating income in Q4 '23 was $6.1 million compared to an operating income of $7.1 million in the same quarter last year. Non-GAAP net income in the fourth quarter was $6.5 million or diluted income per share of $0.11. This is compared with net income of $7.9 million or income per share of $0.14 in the same quarter last year.

Adjusted EBITDA for the quarter was $9.4 million compared with an adjusted EBITDA of $10.1 million in the same quarter last year. For the year, adjusted EBITDA was $36.4 million compared with an adjusted EBITDA of $25.2 million in 2022. Moving to our balance sheet.

As of December 31, 2023, our total cash and cash equivalents and restricted cash net of loans were $95.3 million compared with $100.3 million on September 30, 2023, and compared to $87.1 million in December 31, 2022.

The reduction is mainly due to $5.7 million that was used to the DataPath acquisition and $9.5 million of debt we assumed as part of the acquisition agreement. In terms of cash flow, we generated $10 million from operating activities during the fourth quarter of 2023.

DSOs, which exclude receivables and revenues of our terrestrial network construction projects in Peru was 63 days, lower than the previous quarter DSO, which were up 75 days. Decrease was impacted by both increase in revenue as well as decrease in receivables due to higher collection in the last quarter.

Our shareholders' equity as of December 31, 2023, totaled to about $275 million compared with $244 million at the end of 2022. Looking ahead, as Adi already mentioned, we're expecting a strong 2024 with revenue of between $305 million to $325 million, representing year-over-year growth of 18% at the midpoint.

GAAP operating income of between $15 million to $19 million and adjusted EBITDA of between $40 million to $44 million, representing year-over-year growth of 15% at the mid-point. That concludes my financial review. I would now like to open the call for questions.

Operator?.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And the first question is from Ryan Koontz of Needham & Company. Please go ahead..

Hi, thanks for the question. Let's see some housekeeping first, with respect to Q4, I assume the GAAP step-up in G&A there was mainly related to acquisition expenses.

Is that correct?.

Some of it is acquisition expenses and some of it - I mean, mainly it is acquisition expenses, yes..

Okay. Thanks. And on the guidance for '24, can you maybe walk us through some of the puts and takes on some of the segments.

Are you still expecting in the ballpark of $50 million from DataPath? And are there other major programs or segments of the business that are contributing to the upside or we talked about the macro caution, which areas of the business you think are most affected there?.

Yes. So in general, we expect growth in all of our business segments. We don't provide the guidance by segment, but we do expect growth in all of our segments, both organic and of course, inorganic by DataPath. As I mentioned, the DataPath contributed a relatively modest amount in 2023 in the last 6 weeks of the year.

Next year, we expect about $45 million, as Adi mentioned, from DataPath. And of course, as it is the first year of acquiring it, we applied some conservative assumptions over that as well and reach our guidance..

Okay. That's fair.

And any updates for us on some of the big drivers there for your business, whether it's sort of the LEO opportunities or some of the IFC programs you're attached to? Anything you can share there that would get investors excited about the story?.

Yes. I think the main progress is that those several RFPs that we are competing on are still in progress. We believe that awards or decision is going to be towards the -- for some of them towards the mid of the second quarter and for some towards the end of the year.

In fact, all of our large partners are having new RFPs for new technology and existing technology, and we expect most of it to mature during the year. In some of them, we are the incumbent, so we feel comfortable.

And in some -- especially on the LEO, on OneWeb and IRIS² in Europe, we are competing against several other companies, but we believe that we have a superior technology and the potential from each and every opportunity over there is hundreds of millions of dollars and can change the future of Gilat..

Sure. That's great to hear. So it sounds like you're not baking in those assumptions into your '24 guidance, any of these changes in your current....

It's a combination of the two. The ongoing business with our strategic partners, it's baked into our guidance in a way. We are having a discussion with them and we understand what is their forecast and putting our assumption on top of it. On the LEO part, even if we get -- once we get the award, it's a matter of several years of development.

So the effect on 2024 will be minimal. And then we'll have around 3 years of develop -- developing the platform. It's a completely new platform. And then we'll start seeing a significant top line contribution..

Okay. Great. That's helpful.

And in terms of Peru and the network infrastructure business, how is that tracking as far as your expectations for '24? I know you're not guiding by quantitatively, but anything you can share with us about how the program is progressing?.

So we have the original Amazons networks that we are in the final stages. We accepted process as part of the network and about to finish the second part of the network during Q1, and we expect to deliver the network and start operational phase by the end of the second quarter.

The new award of the $17 million comprise of around 60% of construction, which should carry until early next year and then additional 10 years of operation. The rule of thumb, we expect that the Peru revenues to modestly grow in 2024, over 2023 results..

Okay. That's really helpful, Adi. Thank you. I'll get back with you..

The next question is from Chris Quilty of Quilty Space. Please go ahead..

Thanks. Gentlemen.

I think is this the first time you've really talked about the opportunity with IRIS²? Or has that been previously in some of your expectations?.

No, we are talking about IRIS² for quite some time. Last quarter, we said that we received the eligibility. We have a very large -- in order to be eligible to participate in the program, you need to have -- to be a European company, and we have significant operation in Europe, and we strengthened our operations in Europe.

And we expect to continue to increase our operation. We have a large operation in Bulgaria. We are building a large operation in Madrid, in Spain. We received the eligibility. And IRIS² started to launch several RFI/RFPs and we started to answer them. But I think it's in stages, and it will take time until the final RFP and award will occur.

I suspect it won't happen before the end of this year..

Got you. And when you were referring earlier to a 3-year development time frame, was that referring to the IRIS² program? Or was that one of the other NGSO programs where....

I think as a rule of thumb, developing a new platform, not enhancement to existing platform is usually around 3 years. Now there is a request in the market to shift to cloud. There is a request in the market to move to virtualization, virtual modem, SDR modems than the 5G NTN. So the shifts like this require a lot of development.

And the rule of thumb, it's around 3, maybe 4 years..

Understand.

So this is essentially the replacement -- future replacement for SkyEdge IV?.

If you will talk to the product team, they will say no. But for IRIS², it will be a totally new platform for OneWeb Gen2, it will be a totally new platform. For our long satellite operators partners at the first stage, it will be a significant enhancement to the existing platform, shifting more and more capabilities into the public cloud.

And later on, there will be a shift also to 5G..

Understand. And I think last quarter, you had mentioned possible beginning of a rollout during Q3 with one of your NGSO customers.

Was that -- did that rollout happen? Or what's the progress there and expectations for incremental growth in '24?.

So the rollout haven't started yet. The customer is expecting to launch service during 2026. And we expect to get production unit orders towards, let's say, before the end of the year. We do have a substantial amount of units that we need to deliver as part of the original order.

And I can tell you that right now, our power amplifier is the only one that is working with the test satellite that this customer launched..

Great. And a question for you, Gil.

Can you give us perhaps like a ballpark of D&A for this year with the DataPath acquisition?.

Yes. We expect to see about $3 million of depreciation, plus about $5 million of stock-based related expenses to the deal. So all in all, it should be about $8 million in the GAAP expenses that we should expect to see next year with respect to the acquisition..

And that's $8 million in total or not incremental?.

It's incremental. I mean, it's included obviously in the guidance for the operating income. One of the reasons that it decreased, it's incremental. And actually, it is also affected -- hugely affected by the stock price of Gilat, so it might change as well. But currently, according to our expectations, it should be around $8 million..

Understand.

And when you look at the IFC market, where do you see the best opportunities there? Is that with existing players? Or have you made -- are you targeting inroads with additional systems integrators?.

So we see a lot of growth with existing partners and also using our platform to shift to other application and take advantage of the fact that our platform is a multi-application platform.

We are seeing nice business from several new customers on the SSPA side, but also on the network and on the modem side, not a big one yet, but each one of them can become a significant revenue generator in the next several years.

So we are seeing a lot of orders for our SSPA, a lot of orders for the auxiliary for ESA, like frequency control unit and the power supply unit and things like that. And also orders from [indiscernible]. I remind you that earlier in the year, we signed the agreement with Satcom Direct.

And now we are in the development phase, but we expect to see deliveries towards mid next year, which support revenue growth, especially in the IFC segment..

Great. And I guess final question here.

Looking at the DataPath acquisition, that obviously brings along a higher level of backlog and perhaps orders that you can identify? Is there any intention to provide a little bit more details either book-to-bill or backlog for that business on a go-forward basis?.

Yes. It's something that we are considering internally and once we will be able to share, we will share it..

Got you. And final question, Gil.

I know you've provided this before, but I just want to assure where DataPath is going to land in terms of segment reporting?.

It's included under the Satellite Networks segment results..

Great. Awesome. Well, thank you, gentlemen..

Thank you..

Thank you, Chris..

[Operator Instructions] There are no further questions at this time. Mr. Benyamini, would you like to make your concluding statement..

Yes. 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..

Thank you. This concludes Gilat's fourth quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect..