Welcome to Gilat's Third Quarter 2019 Results Conference Call. All participants are at present in listen only mode. Following the management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded November 19, 2019. I would now like to turn the call over to June Filangeri of Comm Partners LLC to read the Safe Harbor statement.
June, please go ahead.
Thank you. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat's Q3 2019 conference call and webcast. A recording of this call will be available beginning approximately noon Eastern Time today, November 19, and will be available for telephone replay until November 22 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 releases 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 Adis Fadia, Gilat's Chief Financial Officer. I would now like to turn the call over to Yonah Avadia. Yonah, we are ready to begin.
Thank you, June. Good morning, good afternoon and good evening everybody. Thank you for joining us today. I'm very pleased to share with everyone that the Q3 was marked by no less than 4 landmark achievements that demonstrate Gilat's progress over the last quarters years. The first is becoming a prominent player in the ground segment for non geostationary orbit, also abbreviatedly known as SGSO satellites, as SCS chose our platform for its O3B EMPower medium earth orbit constellation.
The second one is in the aero mobility where we are encouraged by the clear directions of airlines to offer free Wi Fi, which is already starting to generate significant demand for Gilat equipment in this quarter. The 3rd achievement is the signing of a $10,000,000 multiyear services contract in Peru, materializing our vision of making Peru a profitable recurring revenue engine for Gilat over the networks that we have built. The last one is the substantial progress we continue to demonstrate in improving profitability. In fact, we have attained a record achievement of a double digit 1,000,000 of dollars of adjusted EBITDA, dollars 10,100,000 to be exact. This has been achieved only once before since we made growth and profitability one of the pillars of our strategy and we have every intention of repeating this going forward.
Summarizing our financial performance for the Q3, GAAP operating income totaled $7,000,000 adjusted EBITDA grew to $10,100,000 and revenues totaled $63,400,000 We also achieved bottom line profitability with GAAP net income of $6,300,000 or $0.11 per diluted share. We have updated our management objective for 2019 as follows: reiterating GAAP operating income of between $23,000,000 $27,000,000 and adjusted EBITDA of between $38,000,000 $42,000,000 while reducing the revenue range to between $260,000,000 $270,000,000 the adjustment in revenue objectives is due to delay in several key orders, particularly in Latin America and Southeast Asia, coupled with delivery constraints that we have since mostly resolved. And let me move now to the business section and elaborate on our progress this quarter. I would like to start out with an outstanding achievement for Gilat in reaching a landmark in fulfilling our strategy to be a significant player in the NGSO constellations. Gilat multi orbit GEO and NGSO platform was selected by SCS for its revolutionary EMPOWER MEO constellation with a multimillion dollar contract for Gilat.
We expect deployment of Constellation services to start in roughly 2 years. Gilat was selected for one reason only. The fact that we brought to the table technological innovation and our innovation ground rubber design significantly reduces cost per bit, provides best in class petrol efficiency and demonstrate a step function in modern performance. All are vital for the revolutionary multi terabit high performance constellation such as Empower. This win positions Gilat at the forefront of ground networks for NGSO constellation and put Gilat in an excellent position to win additional opportunities in the vast market that NGSO creates.
But further than that, Gilat's product roadmap will serve not only NGSO, but also the new generation of GEO satellites, namely HTS and VHTS, thus creating more opportunity for Gilat. Moving to mobility, the mobility aero market was a positive driver for our revenue growth in the Q3 and continues to be a major growth engine for Gilat. As mentioned last quarter, the plan by a number of U. S. Airlines to offer free Wi Fi is a tailwind and a major opportunity for Gilat.
This is due to a significant expected usage increase and particularly a usage shift to a mix of business and leisure travelers. Free Wi Fi is likely to enhance the usage of higher bandwidth applications such as streaming and social media. To support this trend, there will be an increase in their IFC bandwidth requiring additional equipment that can provide excellent satellite resource utilization. Gilat is well positioned with our field proven high performance solution that easily met the demand of 100 of concurrent passengers providing 100 of megabit per second with an excellent user experience. As I said in my opening remarks, we are already starting to see significant demand as a result of this trend.
We also believe that there will be further acceleration of our business in aero as we expand our business and product portfolio for aero antenna as we see announced as we have announced an entry into the business aviation terminal market last quarter through a major contract with a Tier 1 business aviation service provider. Moving on to Peru, as I discussed with you last quarter, we turned a critical corner and moved from the construction phase to the operational phase in 3 regions, namely Joaquin Valley, Ayacucho and Apurimac to start service delivery to over 500,000 people. As part of the completion of construction, we received this quarter, the Q3, another payment of about $28,000,000 in addition to a partial release of bank guarantees. Also, we remain confident in our plans to complete the construction phase and move to the operational phase in the 4th region of Cusco in the first half of twenty twenty. However, I'd like to remind everyone that our interest in Peru is not the construction dollars, but the profitable recurring revenue from operations and sales of services over the network.
And indeed, I'm most pleased to report that our plans are materializing and we already were awarded a $10,000,000 5 year project for 3 gs, 4 gs backhaul services in Peru over the infrastructure and network that Gilat recently started to operate. We expect this contract will significantly expand over time to additional multiple 1,000,000 of dollars as well as selling additional services to other interested parties over our network. We are of course very pleased to see the pipeline grow and to see our vision of selling profitable services over our network starting to materialize so soon. In enterprise, we have bridged another important milestone this quarter in Australia with NBN. With the launch of NBN's business satellite services aiming to meet the connectivity demand for businesses and government customers throughout regional and rural Australia.
The commercial launch of this flagship project initiate the commencement of our managed services to NBN delivering revenue of tens of 1,000,000 of dollars over a 10 year period. During the launch event last month, NBN CEO, Stephen Ryu said, we are doubling our commitment to regional Australia with a focused business unit responsible for engaging with regional customers and meeting their needs. This successful launch coupled with a declared focus on regional and rural areas of Australia provides significant opportunity for further growth with Gilat's multi service platform for cellular backhaul, mobility services and enterprise offerings. We expect that this additional opportunity will translate into significant additional business for Gilat in the coming quarters years. Moving on to cellular backhaul.
On the cellular backhaul front, Gilat continues to be recognized as the global leader with the announcement this quarter of the selection by the largest mobile carrier in Japan, NTT DOCOMO. Gilak was awarded the project in partnership with Sky Perfect JSAT Corporation, Asia's largest satellite operator to expand NTT DOCOMO's LTE footprint to islands and other hard to reach regions. This success joins major T1 wins worldwide and specifically strengthen Gilat's leadership in Japan and adds to our long time customers SoftBank and KDDI who continue to expand their networks, providing superior user experience as expected by their customer base throughout Japan. Moving on to China, our involvement in China is another area in which we would like to report progress. As you surely know, China Satcom owns and operates the most capable and extensive Ka band spot beam satellite system in China with plans to launch several additional VHTS satellites in the coming years.
Gilat and China start from reaching an agreement to work together to deploy Gilat's DVB S2X technology for efficient and high performance satellite communication on its Ka network throughout China. Thus, meeting our commitment to provide the innovation required to support our partners in delivering the high performance needs for IFC as well as other markets such as cellular backhaul, enterprise and others. Before I conclude, let me return to our 4th notable achievement this quarter, the substantial growth in our adjusted EBITDA, the continued progress we have made to date and especially in the Q3 is due to the relentless execution of our strategy to focus on targeted growth engine reduce operating costs, while continuing to invest in R and D to maintain our technology and product leadership. We fully intend to continue to execute this strategy going forward. And so in closing, we are pleased with our momentum in the marketplace and in parallel with our continued improvement to our bottom line.
We are engaged these days in planning our work plan for 2020 and we will base it on the same guidelines of the existing growth engines with continued if not increased investment in maintaining our product leadership and an improvement of both the top line as well as the bottom line. And with that, Adi, we are ready for your report. Please go ahead.
Thank you, Yonah, 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 purchasing tangibles, amortization of lease incentive, litigation expenses or income related to trade secret claims, reorganization costs, expenses for tax contingencies to be paid under an amnesty program and initial recognition of deferred tax assets with respect to carry forward losses.
The reconciliation table 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 Q3 of 2019. Revenues for the 3rd quarter of 2019 were $63,400,000 compared to $62,800,000 in the Q3 of 2018, reflecting higher revenues from our Mobility Solutions segment, mainly in flight connectivity and higher revenues from our terrestrial infrastructure project segment, which include the construction phase of our projects in Peru, partially offset by lower revenues in our fixed networks. Revenues in the previous quarter were $59,700,000 Fixed network segment revenues were $27,300,000 compared to $34,900,000 in the same quarter last year. The decrease is mainly due to lower revenues from our Latin America region, especially our activity in Colombia where our governmental project concluded earlier the year.
Fixed networks revenues in the previous quarter were $30,400,000 Mobility Solutions segment revenues were $27,100,000 compared to $21,800,000 in the same quarter year and $22,600,000 in the previous quarter. The increase in our revenues year over year reflects higher IFC revenues. Terrestrial Infrastructure Project segment, which include the construction revenues of our project for Fitel in Peru were $9,000,000 compared to $6,000,000 in the same quarter last year and $6,700,000 in the previous quarter. As discussed previously, during the construction phase, revenue from Fitel can vary quarter to quarter depending on the percentage of the project completion. During Q3 and early Q4, we concluded the construction phase of the networks in the first three regions we won in early 2015 and passed the acceptance of Fitel.
With that, we are starting the operational phase, which will contribute to our Q4 fixed networks revenues and 2020 top line. As percentage of total revenues, fixed networks represented this quarter 43% of revenues, same as Mobility Solution. The restaurant infrastructure project represented 14% of revenues. In the Q3 of 2018, those percentage were 56% for Fixed Networks, 35% for Mobility Solution and 9% for terrestrial infrastructure. Our GAAP gross margin in the Q3 of 2019 was 36.7% of revenues compared to 38.5% in the same quarter last year.
The decrease in our gross margin is mainly attributable to a less favorable revenue mix and higher revenues from our project in Peru this quarter, which have lower margins during the construction phase. Our gross margin in the previous quarter was 36.8%. Total operating expenses on a GAAP basis for the 3rd quarter were $16,300,000 compared to $18,200,000 in the same quarter last year and $17,100,000 in the previous quarter. GAAP operating profit was $7,000,000 compared to operating profit of $6,000,000 in the same quarter last year and up from $4,900,000 in the previous quarter. GAAP net income in the 3rd quarter were $6,300,000 or $0.11 per diluted share compared with net income of $8,700,000 or $0.16 per diluted share in the same quarter last year.
Last year net income includes a deferred tax benefit of $4,100,000 Net income for the previous quarter was $3,500,000 or $0.06 per diluted share. On a non GAAP basis, operating income for the Q3 was $7,500,000 or 11 0.8 percent of revenues compared to operating income of $6,500,000 or 10.3% of revenues in the same quarter last year. Non GAAP operating income for the previous quarter was $6,300,000 or 10.5 percent of revenues. Non GAAP net income in the 3rd quarter was $6,800,000 or $0.12 per diluted share compared to non GAAP net income of $5,100,000 or $0.09 per diluted share in the same quarter last year. Non GAAP net income for the previous quarter was $4,800,000 or $0.09 per diluted share.
Adjusted EBITDA for the Q3 of 2019 increased to $10,100,000 or 15.9 percent of revenues compared to adjusted EBITDA of $9,100,000 or 14.5 percent of revenues in the same quarter last year. Adjusted EBITDA in the previous quarter was $8,900,000 or 14.9 percent of revenues. As of September 30, 2019, our total cash and equivalents including restricted cash were $84,200,000 an increase of $14,700,000 from the previous quarter. During the quarter, we generated about $17,200,000 from operating activities offset in part by CapEx spending of about $2,100,000 DSOs, which include our Fixed Networks and Mobility Solutions segments and exclude receivables and revenues of our terrestrial infrastructure project segments, increased to 86 days compared to 83 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled about 228 point $1,000,000 compared with $223,200,000 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.
Thank you. First question is from Gunther Karger from Discovery Group. Gunther, please go ahead.
Yes. So good morning or good afternoon. I don't have a question. I just have a statement. Congratulations on doing excellent work.
Thank you.
Thank you, Gunther.
Next question is by Michal Hebner of McNally Financial. Michal, please go ahead Michael, sorry. Next question is by Michael Hebner. Michael Hebner, please go
ahead. Yes. Last year you paid a dividend or something or I've seen a dividend. Is there any plans of future dividends because I see that's one of the reasons why your cash went down
$24,000,000 Yes, indeed in early Q2 we paid 25 close to 25 $1,000,000 of dividend. The dividend was declared as a special dividend. We haven't yet adopted ongoing policy for dividend payment. For now, I don't know what will happen next year.
Yes, I was disconnected from the call. Have you guys given guidance for what's the what are we looking at for 2020? When are we going to see some numbers on that?
So in general, now we started to work on our 2020 annual operating plan and budget. So it's too early to provide guidance to the market. All I can say is that we expect to see the same EBITDA growth that we saw in the last few years on average.
Now the MPOWER, you said that we're not going to receive revenue on that for 2 years or it's not operational. Could you put some more color around that?
Yes. In general, the satellites are going to be launched in about 2 years. In the meantime, we have some development to do. So once the satellite will be up in the air, we will need to provide the ground equipment to support it. Okay.
Now the Peru, what kind of reoccurring revenue are we expecting to get out of there and when do we expect that to really start to launch
out? Okay. So in Peru, we won $550,000,000 project, about 2 third is one time construction revenues and about $220,000,000 are operational revenues, yearly maintenance for a period of 10 years for the entire 6 projects together. So that gives you about a yearly run rate of $22,000,000 In addition, we have about $10,000,000 to $12,000,000 recurring revenue from managed service, mainly satellite business that we provide today. In addition, we started to sell services over the network.
We recently announced a $10,000,000 deal with one of the network operator in Peru that gives more than $2,000,000 a year. And actually we expect this more than double or even triple within few years, because it's initial order for a few 100 sites. We expect them both to increase the sites and to buy more capacity and later on to renew the agreement from 5 years to up to the 10 years that we maintain the network. All in all, together with additional opportunities and potential in Peru, we believe that by the end we will have all networks up and running. We will have about $50,000,000 per year, highly profitable in Peru, recurring revenues.
Thank you.
Thank you, Mike.
There are no further questions at this time. I'm sorry. Next question is Chris Reimenschneider from Wells Fargo. Chris, please go ahead. Hi.
Chris Raymond Schneider, Wells Fargo. Just can you give us a little update on the 5 gs race with the federal communication, SCC, wanting to control the lucrative airwaves versus Intellistat and SCS? How will that affect our business?
For now, I think it's not relevant for Gilat, those regulations. In general, I would say that in 5 gs, we are investing a lot and examining the market and technology. Our project today are 5 gs ready and we continue to invest to make sure that we will be at the top of the technology to make sure that we will penetrate the market and take significant market share as we did in the 4 gs. Other than that, it's too early to say. Okay.
I answered your question.
A couple of years out. Sorry. And that's a few years out?
2 to 4 years. I must be honest with you. 5 gs with satellite, first we take Manhattan with fiber and later on we pass to the rural. What we do believe will happen is that we will see more and more in urban areas deployment of 5 gs, we'll see a lot of shift from 2 gs and 3 gs rural areas to 4 gs. And we believe that this 5 gs deployment will give us a significant tailwind in the 4 gs.
5 gs revenues over satellite, we will see here and there not a lot, but significant one, I think it's 3 to 4 years at least from today.
Okay, very good. Thank you.
Thank you, Chris.
Next question is by Michael Hebner of McNally. Michael, please go ahead.
It looks like with the speeds that the satellites are able to produce, do you see a lot and again with all over the world and you're not going to be able to put these 5 gs towers, it seems like the satellites going to give a lot greater opportunity. What's your thoughts on that?
No doubt 5 gs will bring a lot of opportunity for satellite equipment companies. Again, as I said, it's 4 years from today and I think that with the NGSO constellation, it will much more relevant for satellites and geostationary, especially because it solves the latency issue that we have with the geostationary satellites.
One question I always ask on every conference call, what are you doing? I mean, you guys are doing such a great job and you have such great numbers. What are you doing to reach out to the investment community to get some more sponsorship and following of your stock?
We are doing everything that is in our power, except of participating in conferences and making one of 1 with investors both in Israel and the U. S. And actually we recently returned from the Needham Conference in New York. We are considering several media companies that will help us distribute our message to wider audience and not only to investors. Other than that, we are doing everything that we can.
Good. Thank you for your time guys. Great quarter.
Thank you, Michael.
There are no further questions at this time. Before I ask Mr. Adi Sfadia to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin 2 hours after the conference. In the U. S, please call 1-eight eighty eight-three twenty six-nine thousand three hundred and ten.
In Israel, please call 039,255,904. Internationally, please call 972 39255904. Mr. Swadia, would you like to make your concluding statement?
I want to thank you all for joining us for 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.
Thank you. This concludes Gilat's Q3 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.