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 given for the question-and-answer session. [Operator Instructions] 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?

Yes. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat’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 7 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 earning 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 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 over the call to Adi Sfadia, we're ready to start.

Thank you, and good day to everyone. I want to thank you for joining us today for our third quarter of 2023 earnings 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 Gilat 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 biggest 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 reported 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 exceed 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…

Thank you, Adi. 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 amortization, impairment of held 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 exclude 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% 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 timing 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…

[Operator Instructions] The first question is from Ryan Koontz of Needham & Company. Please go ahead.

Hi. Thanks for the question and I’m glad to hear everyone in the company is safe. Can we start maybe with gross margins and maybe talk through some of the puts and takes on gross margins. Looks 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?

Yes. Hi, Ryan. So as you know, gross 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 looking at Gilat 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.

That’s fair, Gil. 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.

Hi, Ryan. Actually, we are seeing revenues already. It’s the third extension of this project. We are entering – 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.

Nice. Great. And it sounds like IFC was strong in the quarter. Any more color you can share with us on your kind of progress in the IFC market here in the near-term, either in Q3 or the next few quarters?

In the IFC what we see is 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 its terminal and this business continue regular and see almost every quarter additional orders, maybe additional modems, network expansions or additional SSPAs. We do have some small customers for our basement 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.

Great. That’s really helpful. And the types of planes these are going on to, is this more going down market kind of business jets.

Also business jets, yes. Right now the main focus is on the commercial, but also on the business jets.

Got it. Helpful. I think that’s all I had. I’ll pass the call for now.

Yes. Ryan, 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.

Great. And that’s for transmission of…

Yes, that’s for business jets, yes. Yes, this is for business jets.

Got it. All right. Great. Thanks for that.

Thank you.

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

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 the recent Hughes announcements?

Yes. So, first of all, it’s news that HNS is getting into the – or being service provider in IFC. Their main focus is on the regional jets and they are using 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.

Understand. Do you see any other product line extensions? You’re starting at the bizjet level with the Satcom Direct product. Does it scale up to commercial aircraft?

The business jet has a smaller antenna and Satcom Direct antenna is focused on OneWeb constellation. For GEO, we will 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.

Got you. Switching gears. The Aquarius wasn’t a product line you talked about much. I think you did a relaunch with SkyEdge IV in 2021 or 2022. Is that correct?

Yes.

So has that product line caught on in the way that the SkyEdge IV has? Or is it just such an ultra-high performance product line that it just takes much longer for it to gain traction in the market?

So the Aquarius product portfolio is a new product portfolio dedicated for SkyEdge IV. We do have several SkyEdge II-c modems that also works on SkyEdge IV. But the Aquarius is the new line of product started with cruise with SES mPOWER, 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 gigabytes per second with SES 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.

Great. Switching gears again I think you mentioned, well, first of all, could you just repeat the DataPath revenue contribution for next year? But I think you indicated that's all classified as defense. There may be 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?

So the DataPath revenues is around $50 million plus or minus 10% and probably will land on the satellite networks but it's still under accounting review so it's a bit early to say.

All right, fair enough. In general, how I mean – I know you don't provide orders per se in terms of an order book, but what have you seen as you look back I guess over 2023? What have you seen in the trendline towards order strength or weakness over the course of the year and sort of what are you baking in as you go into Q4?

So it really depends on the segment. But in general, I would say that our bookings or order ins 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 DataPath 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 depend on local RFPs and we know that the government plan to launch several very large RFPs in the next few weeks and we also expect some contract expansions and extensions. So we expect a strong close for the year in Peru.

Got you, 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?

I think it's 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 2022, early 2023 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 year.

Got you. 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, lost it in the model. I'll catch you on that one offline. Never mind.

No problem. Thank you, Chris.

The next question is from Gunther Karger of Discovery Group. Please go ahead.

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 DataPath this year?

So can you repeat your question again about Peru?

Yes, just a general update on Peru, I missed hearing anything on that.

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 of 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 DataPath, indeed we are progressing towards closing this quarter. We already received CFIUS approval. And we still awaiting one last government approval which by recent indication we expect to get it in the next, if not days than weeks. And there are some leftover of customary closing condition which we expect to achieve as well in the next few weeks. So indeed, we are expecting to close the transaction this quarter.

Thank you. And also, regarding the DataPath, do you anticipate keeping that operation as a separate subsidiary, or do you expect to integrate that into your military and defense operations?

Combination of the two, DataPath 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 Gilat and Wavestream resources in the defense in order to increase the overall defense presence of Gilat worldwide.

Thank you very much, Adi.

Thank you, Gunther.

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

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 third quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.