Welcome to Gilat's second quarter 2019 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 August 6th, 2019. I would now like to turn the call over to June Filingeri 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 second quarter 2019 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, August 6th, and will be available for telephone replay until August 9th at noon. The webcast will be archived on the Gilat website for a period of 30 days. 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.
As 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, good evening, everybody. Thank you for joining us today. I'm pleased to report that Gilat achieved continued improvement in profitability in the second quarter of 2019, as we continue to focus on building a mix of high-quality revenues through our growth engines of broadband, mobile cellular backhaul, and mobility in-flight connectivity. I'm especially pleased to share with you two significant milestones that we recently announced. First, in the area of in-flight connectivity, we have now entered into the business aviation antenna market segment, and this further strengthens Gilat as a major IFC player in this fast-growing satellite communication market. Secondly, we reached a critical milestone in Peru with approval to enter the operational phase of the three-region telecom projects awarded to Gilat in 2015 by FITEL. I will elaborate more on both of these accomplishments in a few moments.
Summarizing our financial performance in the second quarter, GAAP operating income totaled $4.9 million, adjusted EBITDA was $8.9 million, and revenues totaled $59.7 million, and we continued to deliver bottom-line profitability with GAAP net income of $3.4 million or $0.06 per diluted share. Based on our performance year to date and our current outlook, we reiterate our management objectives for 2019, namely revenues ranging between $275 million-$295 million, GAAP operating income of between $23 million and $27 million, and adjusted EBITDA between $38 million and $42 million. Moving to the business section and starting with mobility. As I've discussed with you several times in the past, we view aero antennas and in the long term, particularly ESA antennas, to be a key component of our IFC growth engine.
I'm pleased to share with you that we have entered the business aviation antenna market with an initial award of tens of millions of dollars from a Tier 1 business aviation service provider for our tail-mount antenna, with further potential of additional significant revenues from follow-on orders. The business aviation segment requires premium service and therefore calls for a high-end solution that must be based on innovative technology. We are proud to have met the rigorous requirements of our customer and confident in our ability to deliver on the high performance and reliability needs of this market. Further, we're looking forward to the huge opportunity that this market offers. As per the NSR report from 2018, by 2028, over 5,000 business jets are expected to use satellite broadband communication.
I would also like to note that this milestone not only adds to Gilat a new IFC market segment, but it also is increasing our portfolio with an airborne tail-mount antenna in addition to our leading airborne modem as part of our long-term roadmap to ESA antenna. Going back to our traditional market of baseband to the aviation market, we continue to see great potential here too as evidenced in our May 13th announcement of our business with Honeywell. However, more recently, the demand to provide free Wi-Fi to passengers has been a hot topic with large U.S. airlines. Last May, Delta announced plans to offer free Wi-Fi in early 2020. Other airlines, such as Southwest and Alaska Airlines, already have free in-flight messaging, and most recently, United's CEO discussed their intent to make Wi-Fi free for their customers.
It is quite likely that other airlines will follow as passenger demand for always-on connectivity surges. Free Wi-Fi not only increases the take rate, shifting from mainly business travelers to a mix of business and leisure travelers, but also likely to change the usage models. Free Wi-Fi expands the usage from primarily email and messaging to running higher bandwidth applications such as streaming and social media, which promises to become the norm during travel. Needless to say, this trend has potentially important implications for the satellite industry, including Gilat. Industry estimates call for a significant increase of the required IFC bandwidth and therefore also for additional equipment, and particularly equipment that can provide excellent satellite resource utilization, such as Gilat's high-performance field-proven Taurus modem that easily meets the demand for hundreds of concurrent passengers, providing hundreds of megabits per second and high processing power.
We therefore are optimistic about our pipeline of IFC projects, both in the traditional business of baseband as well as in the new business of aero antennas. Moving on to the second big event of the quarter, as I mentioned in my opening remarks, we have turned a corner in our projects in Peru. By way of overall background, Gilat has won six regions in Peru with a plan announced in February of this year to move to the operational phase in three regions, namely Huancavelica, Ayacucho, and Apurímac in 2019. In the fourth region of Cusco in the first half of 2020, while continuing construction of the fifth and sixth region of Ica and Amazonas.
In line with this plan, last month, we received approval to enter the operational phase in the first three regions of Huancavelica, Ayacucho, and Apurímac, and to start delivery of broadband internet services to over half a million people in those regions. Entering this phase enables Gilat to unlock access to revenue of approximately $12 million per annum of operation fees for a period of 10 years, as well as to start selling services over the network. In fact, we already have started efforts to sell network services over the infrastructure that we have built and recently started to operate, and we believe that we will report progress on these efforts in the coming weeks and months.
As I've said multiple times in the past, our interest in Peru projects is not the construction dollars, but mainly the operational fees and the ability to sell additional services over the network, all of which yield higher margins. With this significant milestone, we are realizing our objective to turn Peru into a source of secure, multi-year, profitable revenue and to deliver on our corporate values of contributing to bridging the digital divide in Peru and worldwide. Moving on and briefly covering Gilat's cellular backhaul business, we were awarded an expansion project further to our managed services cellular backhaul project with Globe Telecom, the leading telco in the Philippines. The new three-year, multimillion-dollar contract is for delivery of broadband to essential community institutions such as schools and hospitals via satellite-based Wi-Fi.
This expansion demonstrates yet again our conviction that the declining price of satellite capacity, along with strong ground segment equipment such as that supplied by Gilat, provides telcos worldwide an additional and legitimate tool for delivering cost-effective, quality broadband to their customers. We continue to see potential in this market, and we believe we will be able to report additional progress soon. Finally, on non-geosynchronous satellite orbits, abbreviated as NGSO. NGSO is becoming a reality as the list of NGSO constellations grows and new large players such as SpaceX and Amazon enter the market and influence the market dynamics. Gilat sees growing opportunity in this market and is heavily engaged in it as we position ourselves as a significant player in the ground segment market that is opening up and requires high performance, better efficiency, and reduced cost per bit.
We therefore continue to invest significantly in R&D, taking our platform to the next level and offering the market a best-in-class baseband and VSAT platform, as well as electronically steered array antennas for NGSO. In summary, we are encouraged with the two critical milestones achieved in the first half of 2019 in the aero antenna win, as well as the turning corner in Peru. We remain committed to our plan to continue to build high-quality revenues with continuing to improve bottom-line results. With that, Adi, we move to you.
Thank you, Yona. 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 purchased intangibles, 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 carryforward losses. The consideration table in our press release highlights this data. Our non-GAAP information presented excludes these items.
I will now move to our financial highlights for the second quarter of 2019. Revenues for the second quarter of 2019 were $59.7 million, compared to $66.5 million in the second quarter of 2018. Revenues in the previous quarter were $62.1 million. Fixed Network Segment revenues, which include cellular backhaul revenues, were $30.4 million in the second quarter, compared to $36.2 million in the same quarter last year, and $36.4 million in the previous quarter. The decrease in revenue is mainly due to lower revenues from the Latin America region, especially due to finalizing our project in Colombia, as well as temporary delays in closing some expected deals. Mobility Solution Segment revenues in the second quarter were $22.6 million, compared to $25 million in the same quarter last year, and $20.9 million in the previous quarter.
Second quarter 2019 revenues were impacted by some delays in shipments from our FITEL subsidiary, which we expect to catch up within the next quarter or two. Terrestrial Infrastructure Project Segment revenues were $6.7 million, compared to $5.3 million in the same quarter last year, and $4.8 million in the previous quarter. As discussed previously, revenues from FITEL can vary quarter to quarter, depending on the percentage of the project's completion. As previously announced, as Yona mentioned, we have received acceptance from FITEL for the transport networks of the first three regions we won in early 2015, in addition to an operational approval for the transport and the access networks in those regions. The acceptance triggered a $38 million payment, out of which we already received about $23 million in July.
In addition to the operational revenues from FITEL, we can start selling services over the network, especially cellular backhaul, which should carry high margins. Those future revenues will be recorded in the fixed network segment. Construction revenues from our remaining projects for FITEL in Peru will continue to be recorded in the terrestrial infrastructure project segment. In total, in the second quarter of 2019, fixed networks represented 51% of revenues, mobility solution represented 38%, and terrestrial infrastructure projects represented 11% of revenues. In the second quarter of 2018, those percentages were 54% for fixed networks, 38% for mobility solution, and 8% for terrestrial infrastructure. Our GAAP gross margin in the second quarter of 2019 was 36.8% of revenues, compared to 33.7% in the same quarter last year. The increase in our gross margin is mainly attributable to a more favorable revenue mix compared with the year-ago quarter.
Our gross margin in the previous quarter was 37.9%. Our total operating expenses on a GAAP basis for the second quarter were $17.1 million, compared to $18.3 million in the same quarter of last year, and $19.1 million in the previous quarter. GAAP operating profit in Q2 was $4.9 million, compared to operating profit of $4.1 million in the same quarter last year, and $4.5 million in the previous quarter. GAAP net income in the second quarter was $3.4 million, or $0.06 per diluted share, compared with net income of $2.2 million, or $0.04 per diluted share in the same quarter last year, and net income of $2.8 million, or $0.05 per diluted share in the previous quarter.
On a non-GAAP basis, operating income for the second quarter was $6.3 million, or 10.5% of revenues, compared to an operating income of $5.7 million, or 8.5% of revenues in the same quarter last year. Non-GAAP operating income for the previous quarter was $5.6 million, or 9% of revenues. Non-GAAP net income in the second quarter was $4.8 million, or $0.09 per diluted share, compared to non-GAAP net income of $3.7 million, or $0.07 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $4 million or $0.07 per diluted share. Adjusted EBITDA for the second quarter of 2019 was $8.9 million, or 14.9% of revenues, compared to adjusted EBITDA of $8.1 million or 12.2% of revenues in the same quarter last year. Adjusted EBITDA in the previous quarter was $8.2 million, or 13.2% of revenues.
As of June 3rd, 2019, our total cash and equivalent, including restricted cash, was $69.5 million, a decrease of $34.8 million from the previous quarter. The decrease is primarily attributable to a dividend payment of about $25 million and to a decrease in cash related to our project in Peru of about $11.5 million, and CapEx spending of about $1.6 million, offset in part by cash generated from our operation, excluding our construction activity in Peru, of about $3.2 million. DSO, which include our fixed networks and mobility solutions segment and exclude receivables and revenues of our terrestrial infrastructure project segment, increased to 83 days compared to 75 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled about $223.2 million, compared to $219.6 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.
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the headset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Gunther Karger of Discovery Group. Please go ahead.
Yeah. Excuse me. Hello. The question has to do with tariffs, trade wars, and unpredictable trade policies of the U.S., particularly with the Trump administration regarding China. Does this, in any way, positively or negatively impact Gilat's business worldwide?
Hi, Gunther. Nice to hear from you again. No, actually, we don't feel any pressure from or expect any influence of the trade war between China and the U.S., at least not in the near future. Actually, we hope to a bit benefit in it because we are not an American company, and it will not affect our ability to sell in China. Other than that, we don't see any influence.
Thank you. That was my assumption as well. Thank you.
The next question is from Kevin Dede of H.C. Wainwright. Please go ahead.
Hi, Yona and Adi. Thanks for taking my call. I was curious about the commercial versus private mix in your aircraft antenna business. I know you talked about great opportunities on both sides. I was just wondering if you could talk to exactly where you're putting your priorities, given the interest in the commercial airline fleets in the U.S. versus the large private fleets.
Hi, Kevin. We believe that the business aviation market is more of a blue ocean than the commercial aviation market. Therefore, it's a path to create and win business. That segment will be easier than in the commercial aviation. We think that we have right now more opportunities than one that we announced in the business aviation. Through that, we want to create a presence in the market. We want to create acknowledgment that Gilat has a leading product. With that, expand to commercial aviation. Commercial aviation was and remains on our agenda. However, we think that the path to that part of the market is through business aviation, where there is a, as I said, more of a blue ocean. There is opportunity that we can capture. There is revenue that we can realize. From there, expand.
Both of these markets are part of our long-term plan, the easier path we thought was through Business Aviation, where we see huge potential and less of offerings. Definitely not the best-in-class product that we bring to the table. I want to stress, this is on the antenna side. We keep pushing hard on both fronts from the modem perspective. As I mentioned, we have Gogo, we have announced Honeywell, and we believe we'll achieve more wins in the coming months.
Okay. You started to touch on the technological differences. I was wondering if you could just convert that to the bandwidth that you have to deal with, and Right. Obviously, you're not going to need the same throughput on the business side.
No, of course not. The business aviation market is, of course, typically private jets, corporate jets, things of that nature. They don't come close to what a commercial flight would use, but they need high quality, no interruptions, and varying degree of connectivity depending on their needs. The solution we bring to market, we announced earlier this week, addresses that part of the business. The technology remains the same, both on the antenna side as well as on the modem side. The technology that we have can fit business aviation and commercial aviation. It's just a question of the size of the antenna that you put on the airplane and the strength of the modem that you have inside the airplane. From our perspective, the technology we developed and the innovation we're bringing to the table addresses both markets.
We have no issue and no challenges in meeting the demands of both markets, but as I said, the easier path into the market was through business aviation, and we have a significant player that is working with us. That's the first achievement that we have. I believe more will follow.
Just from a profitability perspective, are both segments pretty much the same from a margin perspective?
In terms of margin, yes, more or less the margins are the same. I would stress that the antenna's margin is a bit lower than margins on baseband, because the product is significantly more expensive than the modems.
Last question from me, Yona and Adi. Congratulations on the work in Peru. I was wondering if you could offer some insight on how that progress has translated to business development opportunities, given that you've been able to help an important partner build a considerable network and prove it. How has that opened doors for you?
It's opened a lot of doors in Peru. There is a lot of demand there for bandwidth in the rural areas. This is why the government is investing about $2 billion in putting fiber all across Peru. Now, the fact that we managed to get the ATP after about a year delay, the acceptance, and we've recently started the operation, it's going to affect, first of all, our revenue, because it's unlock about $12 million in recurring revenue on a yearly run rate. In addition, the pipeline of services that we can sell over the network is increasing. We could not sell anything because the network were idle. Now they're working, and we see a lot of interest from the local MNOs and other service providers, and I guess in few months, we'll be able to start selling those services as well.
Very good. Okay. Thank you, Adi.
Thank you.
Congratulations, guys, and thanks again for taking my questions. Thank you.
Thank you. Bye. The next question is from Michael Hebner of IFS Securities. Please go ahead.
Yes, good morning. I was wondering about the cash situation and the balance sheet. I see you used, cash used, last year you, for the six months, you had $18 million provided, and this time you had a negative $2.4 million, and trades payable, wrong way, $3 million, inventories, wrong way, $6 million, advances from customers, wrong way, by $8 million. I'd assume the cash is going to be replenished by the $23 million we received in the quarter.
Yes. I think you did the math right. Last quarter, since we had to progress in the acceptance in Peru, we had to pay a lot of vendors in order to run and close everything. This is why you see about $12 million decrease in our cash in Peru. We already got 23 out of it in July and another 15 we should get in the coming few weeks. I think it's a decrease, but I guess until the end of the year, we'll continue to see an increase in cash generation from operating activity. As for inventory and, in my notes, I said that we had some delays in shipments in our Wavestream subsidiary. This caused a bit of inventory increase. Nothing that worries us.
We're already seeing these days how they catch up, and I believe they will do all the catch up until the end of the year. Trade receivables and payables, it's ongoing business, depend on payment term with each vendor or customer.
Okay. You got the antenna business. Why not the modem business? Who's the competitor there that's getting the modem business?
Actually, we are selling full terminal, which include antenna, box amplifiers, and modem.
Okay, it's just a package deal. Just a description.
Yeah. It's a full terminal.
Now-
We sell full terminal, everything included.
Good. Okay, good. Now, like the big picture going forward here, where do you see You've talked about other things, you've got the $200 million or $300 million in revenue, $275 million to $200 million. Where do you see the business coming in new markets, new things, 5G, whatever? Where do you see the growth in the business here?
I think that the growth will come from several different vectors. First of all, cellular backhaul is very important growth engine for us, both in terms of top line and bottom line. In-flight connectivity, with or without the new antenna, is a growth engine, and we expect it to continue to grow in the coming few years. In addition, we are aiming to enter into the NGSO, and winning a deal in NGSO means a lot of revenues to Gilat, but it's not something that will happen tomorrow morning. Even if we win tomorrow morning, there is a development time, and it will take time until we see the revenues. In addition, the bread and butter, the broadband services and the product that we are selling, we believe it will continue to grow, not in high double digits, but definitely continue to grow.
Where do you see having a distinct advantage where your product is better than the marketplace? Do you have any vision in that front?
I think that, first of all, from an IFC perspective, our modem is, in our humble opinion, the best in the market. I think that as we talk today, the number of airplanes flying as we speak with a Gilat modem is significantly higher than any other competitor in the marketplace. We are very proud of our IFC technology. We think it's the best in the market, and the proof is in the fact that Honeywell has selected our product, and we believe we'll get more traction in the market. We want to grow and accelerate our growth with IFC, and therefore, we penetrated the antenna market, and we believe that our antenna for the BA market is the best in the market, and significantly, if I may say so.
We are quite proud of the product we have, we developed, and the innovation we brought to our customer. We intend to take this product further and to expand later on into the commercial aviation market. This is on the IFC side. On the NGSO side, these are long cycles that will take a long time to win and further time to materialize into revenues. However, we are currently planning a platform that will be, in our opinion, the best in the market for NGSO. NGSO is a huge market. If you look at the number of players in the market, we are starting with mPOWER for SES, and then we have Telesat, we have Amazon, we have OneWeb, we have LeoSat and many others. The market is very, very significant from our perspective.
We're investing a lot in R&D in order to build the platform that will take a significant portion in that market. That platform, by the way, is also the catalyst for our entry into the next generation of products, which will be 5G enabled. We think that there will be short distance between our NGSO platform and 5G. We are preparing ourselves for that as well. I think from a technology perspective, I would just summarize it saying that we continue to invest in R&D in significant percentage of our revenues. Currently, we are exceeding, I think, 13% or 14% of our revenue, and we intend to keep it, if not to grow it. Therefore, I'm not aware of any other player that invests so much in R&D in order to keep our edge and our advantage in the growth engines that we're focused on.
I believe that we will continue to maintain technological advantage compared to other alternatives in the marketplace, which will pave our way into continued growth in the growth vectors that we identified.
Did I see on your balance sheet, the statement that your R&D spending was actually down over six-?
It's not down. In some cases, we need to categorize R&D cost as cost of goods sold in case we are providing some development services uniquely to a specific customer, and he pays for that. This quarter, we had some revenue that required R&D to invest, and it's part of COGS. I believe that even starting from next quarter, we'll see R&D in the same ratio you saw in the previous quarter.
Okay. Thank you.
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. We have a follow-up question from Gunther Karger of Discovery Group. Please go ahead.
Thank you. The question deals with the recent military order from the U.S. Army. It's been some time since Gilat has gotten business in this sector, and I'm just wondering if this order was a one-shot thing, or is it the beginning of a re-entry or a resurgence in that particular military market?
Yes, Gunther, actually it's a good question. First of all, it's a very important order for us. Indeed, the U.S. military and defense, in general, wasn't a growth engine in the last few years, but we are still serving this market. We haven't announced a lot of deals, but we are still serving this market. This is important deal, and it looks like a new beginning. I can't say it's going to be the next growth engine, but no doubt there is a lot of budget spending in the U.S., and we have plans to take our decent part of it.
Thank you. A follow-up on that, if I may. The U.S. is one market, and what the policy has been evolving under the Trump administration is trying to get other countries that participate in programs to pick up an increased share of their expenses and commitments. What I'm asking here is, does this increase worldwide in defense spending at the expense of possible reduction in foreign military aid by the U.S. have any positive impact on your business?
No, Gunther, we don't see any impact on our business.
Thanks.
Thank you.
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 two hours after the conference. In the U.S., please call 1-888-326-9310. In Israel, please call 03-925-5900. Internationally, please call 972-3-925-5900. Mr. Sfadia, 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 in our next call. Thank you very much and have a great day.
Thank you. This concludes Gilat's second quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.