Gilat Satellite Networks - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's second quarter 2024 results conference call. All participants are at present in 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 7, 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 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, please?

Ehud Helft (Head of Investor Relations)

Yeah. Thank you, operator. Good morning and good afternoon, everyone. Thank you for joining us today for Gilat second quarter 2024 results conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, August 7, as a webcast on Gilat's 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 the 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 and 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, as a result of new information, future events, or otherwise, and the company explicitly disclaims any obligation to do so. More detailed information about risk factors can be found in Gilat's report filed with the Securities and Exchange Commission. With that, let me turn to introductions. On the call today are Mr. Adi Sfadia, Gilat CEO, and Mr. Gil Benyamini, Gilat CFO. I would now like to turn the call over to Adi Sfadia. Adi, go ahead, please.

Adi Sfadia (CEO)

Thank you, Ehud, and good day to you. Thank you for joining us today for our second quarter of 2024 earnings call. The second quarter of 2024 was a good quarter for Gilat, in which we showed year-over-year revenue growth. This was primarily through the strong momentum in our defense business, with a significant contribution following the acquisition of DataPath. We expect this strong momentum to continue in the quarters ahead. In addition, another key achievement was our ability to increase our adjusted EBITDA by 10% year-over-year, exceeding $10 million. Most importantly, during the second quarter, we took a major strategic step and announced the acquisition of Stellar Blu Solutions, a leader and first to market in delivering electronically steerable antenna for the in-flight connectivity market.

The closing of the acquisition is on track and expected around the beginning of the fourth quarter this year. In a minute, Gil will discuss the financial elements of the deal in more detail, but before that, I want to discuss why I'm so excited about this acquisition and why this acquisition carries significant potential for Gilat. The acquisition of Stellar Blu culminated many months of deep due diligence, looking at all aspects of the IFC market, the company, its long-term growth potential, and potential synergies with Gilat's existing business infrastructure. This deal has the potential to unlock new strategic customers and create additional significant revenue for Gilat. Just recently, Stellar Blu completed qualification and earned supplemental type certification on the multi-orbit Sidewinder Aero terminal. We have a vision to broaden this product line with a more comprehensive suite of products for the IFC market.

I can share that the company has started delivering the first ESA terminal units to its customers. As such, we expect Stellar Blu to add between $120 million and $150 million in revenues in 2025 and be accretive to our non-GAAP results. Furthermore, we estimate that once Stellar Blu reaches its target manufacturing capacity during the second half of 2025, its EBITDA margin will be above 10%. Assuming closing will happen at the beginning of Q4, we estimate Stellar Blu revenues to be between $25 million and $35 million in Q4 of 2024. I am confident in Stellar Blu's team, its leadership, its offering, and its go-to-market strategy. This acquisition will position us as a market leader for aviation ESA, a market that we believe is set to explode in the coming years.

In the longer term, we can leverage the technology portfolio into other large adjacent markets. Overall, I believe this acquisition can transform Gilat into a high-growth company for the years to come, and I look forward to welcoming Stellar Blu's team to Gilat once we close. As for 2024 outlook, we are reiterating the guidance we gave earlier this year in February 2024. I would note that once we close the Stellar Blu acquisition, we will provide updated guidance to account for the contribution from Stellar Blu in 2024. Now, let's move to the business review of the second quarter of 2024.

In the very high throughput satellite, the VHTS, and the non-geostationary satellite, the NGSO constellations market, we continue to lead the market and grow our business with follow-on multimillion-dollar orders from our strategic partners, the satellite operators, which mainly include SES and Intelsat, among others. This is driven by increasing demand for Gilat SkyEdge platforms as satellite operators expand their networks and deliver a wider range of application to a growing number of users. Recently, we announced that the company was awarded over $9 million in cumulative orders from multiple satellite operators to expand their global Satcom networks by utilizing Gilat, Gilat's innovative and field-proven solutions.

Gilat solutions will enable a wide range of services and applications over GEO, MEO, and LEO, including in-flight connectivity, maritime, land mobility, cellular backhaul, enterprise services, and more.

Also, during the quarter, we announced that SES O3b mPOWER launched its services via Gilat SkyEdge IV platform. SkyEdge IV, the industry-first multi-orbit MEO-GEO system, is enabling SES O3b mPOWER software-defined constellation to deliver services with unparalleled flexibility and scale. Our increased focus on the defense market is already bearing fruit. During the second quarter, we announced that Nicole Robinson has been appointed President of DataPath. Ms. Robinson is an international satellite industry executive with a proven record of driving growth, managing global sales and operational teams, and deploying next-generation technology for the benefit of government and defense organizations, businesses, and communities globally. Q2 was also our second full quarter of consolidating revenues from DataPath into the defense sector under the satellite network segment.

Furthermore, we recently announced several new projects that were awarded to DataPath and Wavestream.

DataPath received over $9 million in orders in support of the U.S. Department of Defense and other agencies participating in field service and technical service program worldwide. DataPath is deploying technical services and field services in Europe, the Middle East, and the United States to support U.S. defense end users' critical connectivity requirements. These orders include both contract extensions and new contracts from various partners and agencies. DataPath was also awarded a multi-year contract of over $5 million from National Defense Organization to upgrade their DKET transportable Satcom network hubs. DataPath's multi-band tactical DKET terminals deliver the operation flexibility, capacity, connectivity, rapid deployability, and controls required to support demanding communication in remote locations.

DKET terminals deliver secure, reliable communication anywhere needed to establish network connectivity to support the mission with minimal manpower.

In addition, Wavestream, one of our U.S.-based subsidiaries, received a significant order from a tier one U.S. global military terminal provider for the MicroStream solid-state power amplifier for satellite communication terminals sold to military throughout the world. We continue to make a great progress in the mobility sector, demonstrating solid year-over-year growth, developing more products, adding more customers, and supporting more verticals. During the second quarter, we received over $14 million in orders from several prominent service providers and system integrators for the IFC products and solutions. This includes network equipment, VSATs, hub, solid-state power amplifier, and additional IFC auxiliary products. These orders from new partnership and existing customers demonstrate the company's leadership position in the growing IFC market for commercial and business aviation.

During the quarter, SES announced its Open Orbits initiative, which will allow the use of Ka-band networks for global IFC connectivity.

I'm optimistic that this initiative will be part of our significant growth in this market. In Peru, we are progressing faster than planned in implementing the Amazonas region's $17 million expansion project. We expect to finish the implementation of this expansion before the end of the year. In addition, we expect to move to the operational phase in the six regions project of Pronatel in the Amazonas region during the third quarter. This follows the completion of the acceptance process, which is currently underway. During the quarter, we received follow-on orders for over $10 million from Internet para Todos, IPT, a consortium comprised of Telefónica and Meta Facebook, to deliver cellular backhaul services across rural areas in Peru.

IpT is a global collaborative initiative to bridge the digital divide in Latin America under a sustainable model that would allow to overcome the obstacles of bringing connectivity to rural and geographically complex areas. Gilat will provide access to high-speed terrestrial connectivity to over 1 million more people living in rural areas. Furthermore, in Peru, we are expecting additional progress in the next few months. This includes the maturity of several large RFPs with Pronatel and the Peruvian government, as well as several project extensions. We are very pleased with the strong pipeline in Peru for the rest of the year. To conclude, the second quarter has been very valuable for Gilat.

Our acquisition of Stellar Blu Solutions has the potential to be a significant growth engine for Gilat, and it will establish us as a market leader for aviation ESA, a market that we believe is set to explode in the coming years. I am pleased with our second quarter results, which include the contribution of our acquisition of DataPath and strong momentum in our defense business. We continue to lead with our next generation platform, the SkyEdge IV, which support multiple orbits, verticals, and applications, including our strategic markets of mobility, cellular backhaul, and defense. We are particularly proud of our contribution to the SES O3b mPOWER service launch. During the second quarter, we made significant progress in expanding our IFC footprint into business and commercial aviation, including the SES Open Orbits initiative.

We have a strong pipeline and expect the materialization of important deals over the coming months.

With that, I will hand over to Gil Benyamini, our CFO. Gil, please.

Gil Benyamini (CFO)

Thank you, Adi. Good day 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 that 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 non-cash stock-based compensation expenses, amortization of purchased intangibles, lease incentive amortization, other non-recurring expenses, other integration expenses, one-time changes of deferred tax asset, other operating income net, and income tax effect on the relevant adjustments.

The reconciliation table in our press release highlights this data, and our non-GAAP information presented excludes these items.

Before moving to the financial highlights, I would like to review the Stellar Blu acquisition and provide you with more financial information on the consideration components of the deal. The initial consideration at closing is $98 million. This will be financed from both internal resources as well as a bank loan, ensuring that we continue to maintain a strong level of working capital. The deal is structured with incentives to deliver accelerated growth, with a focus on three main areas. Parts one and two of the earn-out, which totals to $48 million, covers the ability of the company to successfully execute its plans for the near future, and requires that Stellar Blu ramp up its production line and deliver a great number of ESA terminals, not less than specific margin, and that Stellar Blu brings additional new orders at agreed margins equivalent more or less to its existing backlog.

These conditions, combined with the existing backlog, support our expectations of between $120 million-$150 million outlook for revenues for 2025, and provide further grounds for future growth within the existing markets and customers. Parts one and two of the earn-out are expected to be paid, if due, 12 and 18 months post-signing, respectfully. Part three of the earn-out, which totals an additional up to $99 million, is conditioned upon engaging in new strategic customer agreements with enhanced product offerings, both in and beyond the IFC market. These envisioned agreements would build upon Stellar Blu's proven multi-orbit platform, but apply to new service providers and mobility markets with an opportunity for significantly higher margins, all within 2 years from signing of the purchase agreement.

As Adi mentioned, we believe that this acquisition transforms Gilat to a high-growth company for the years ahead. I will now move to our financial highlights for the second quarter of 2024. Overall, as Adi mentioned earlier, we are very pleased with the strong start of 2024. We reported a 13% year-over-year growth in revenues. This was driven mainly by our current recent acquisition of DataPath. Non-GAAP gross margin was 37%, and our adjusted EBITDA reached $10.1 million, 10% growth over Q2 of last year. We are optimistic about our prospects in the quarters ahead, and we reiterated our guidance for 2024, which I'll cover later. In terms of our financial results in more detail. Revenue for the second quarter was $76.6 million, thirty...

13% higher than those of second quarter of last year, which was $67.6 million. The improvement was driven by growth in the satellite network segment. In terms of the revenue breakdown by segment, Q2 2024 revenues of the satellite network segment were $50.6 million, compared to $40.7 million in the same quarter last year. Q2 2024 revenues of the integrated solutions segment were $13 million, compared to $12.7 million in the same quarter last year. Q2 2024 revenues of the networks, infrastructure, and services segment was $13.1 million, compared to $14.2 million in the same quarter last year. The decrease was due to lower services revenues this quarter. I would now like to summarize our second quarter, both GAAP and non-GAAP results.

Our GAAP gross margin for Q2 2024 was 34.7%, compared to 37.8% in the same quarter last year. The reduction in our gross margin was mainly due to DataPath's gross margin, which are lower than the Gilat average, and the asset associated with the acquisition of DataPath. This was partially offset due to a favorable product and services mix in the current quarter compared to Q2 of last year. GAAP operating expenses in Q2 2024 were $23.8 million, an increase of $3.7 million versus the same quarter last year. This quarter, we have the impact of approximately $2.4 million of amortization of purchased intangibles and other acquisition-related expenses. These impacts are included only in the GAAP numbers.

I also note that this quarter, we have the operational expenses related to DataPath, which we didn't have in the second quarter of last year. GAAP operating income for the quarter is $2.8 million, compared to $5.4 million in the same quarter last year. GAAP net income in the second quarter was $1.3 million, or $0.02 per diluted share. This is compared to a GAAP net income of $4.3 million, or diluted earnings per share of $0.08 in the same quarter last year. Moving to the non-GAAP results, our non-GAAP gross margin in Q2 2024 was 36.8%, compared to 37.9% in the same quarter last year. As I mentioned earlier, the difference is mainly due to DataPath lower gross margin compared to Gilat's average.

Non-GAAP operating expenses in Q2 2024 were $20.9 million, compared with $19.6 million in the same quarter last year, primarily due to the consolidation of DataPath expenses. Non-GAAP operating income for the quarter improved to $7.3 million, compared to $6.1 million in the same quarter last year. Non-GAAP net income in the quarter was $5.6 million, or diluted earnings per share of $0.10. This is compared with $4.9 million, or diluted earnings per share of $0.09 in the same quarter last year. Adjusted EBITDA for the quarter improved to $10.1 million, an increase of 10% compared with the adjusted EBITDA of $9.2 million in the same quarter of last year. Moving to the balance sheet.

As of June 30, 2024, our total cash and cash equivalents and restricted cash, net of short-term debt, were $94.6 million, compared with $98.5 million on March 31, 2024, and compared to $87.8 million as of June 30, 2023. In terms of cash flow, we used $3.5 million by operating activities during the second quarter of 2024. Due to changes in working capital, we expect an operating cash flow, cash inflow in the next quarter. We also made a net repayment of loans of $4.6 million this quarter. DSOs, which excludes receivables and revenues of our terrestrial network construction project in Peru, were 88 days, higher than previous quarter's DSO, which was 76 days. This KPI is within our normal range of up to 90 days.

Our shareholders' equity as of June thirty, 2024, increased to $209.83 million, compared with $281 million at the end of March 2024. Looking ahead, we reiterate our guidance for the year. Our expectations remain for revenue of between $305 million-$325 million, representing year-over-year growth of 18% at the midpoint, GAAP operating income of between $15 millio-$19 million, and adjusted EBITDA of between $40 million-$44 million, representing year-over-year growth of 15% at the midpoint. That concludes my financial review. I would now like to open the call and would be happy to take your questions. Operator, please.

Operator (participant)

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 handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Ryan Koontz of Needham & Company. Please go ahead.

Ryan Koontz (Managing Director)

Good morning. Nice quarter. Thanks for the opportunity on the questions. Can you update us maybe on what your view is of, you know, cross-selling with DataPath? You made a some comment in the prepared remarks, I think, but I didn't, I didn't quite capture what the intention of your, your commentary was. I know that was something that you're working on and sounded like more of a 25-type opportunity, maybe. Can you update us on that?

Adi Sfadia (CEO)

Yeah. Thanks, Ryan, for popping on the call. Indeed, the cross-selling DataPath equipment, it goes both ways. DataPath to bring Gilat's equipment into the DoD, and Gilat to sell DataPath equipment worldwide. We are progressing. We are starting to have a dialogue, both with some of the DoD agencies and promoting DataPath equipment worldwide. To be honest, we are more optimistic these days. We see much more potential than we thought we'd see at the first deal from signing. The first collaboration was between Wavestream and DataPath. It's a $12 million order that we received last quarter. Other than that, there is a pipeline that is...

... and I hope that we'll be able to announce several awards soon.

Ryan Koontz (Managing Director)

Great! That makes a lot of sense. Thanks for that. On the infrastructure business, it sounds like you're progressing there with your customer approvals. How should we think about the gross margin outlook there, post-approval of the Amazonas region?

Adi Sfadia (CEO)

So, usually the construction phase is associated with a lower gross margin than the service or operation part of this business. So, we expect to finish the construction or almost all of it by the end of this year, and naturally, this will push up the gross margin of this segment to be higher next year.

Ryan Koontz (Managing Director)

That's great. Thank you for that. And, you know, on your progress in the LEO market, I wonder if you could, you know, share any anecdotes, whether they're customer-specific or general. Obviously, OneWeb has begun their commercial launch. You know, how should investors think about your current mix of business relative to the LEO market, and how do you see that market developing over the next 18 months from Gilat's perspective?

Adi Sfadia (CEO)

So up until today, most of the business we got on the LEO segment relates to solid-state power amplifiers for constellation gateways. We are not allowed to name name, but we are working with the big big players in this segment. We are right now, we see two very large opportunities from our perspective on the LEO segment, which include SSPA, networks, modems, and also antennas. One of them is OneWeb Gen Two, and the other one is IRIS², which is a European initiative to launch a LEO constellation. We are one of two finalists in OneWeb, and I believe that they should take a decision in the coming quarter or so.

IRIS²

I forgot to mention that also the Satcom Direct antenna development award that we got about a year ago is also related to the OneWeb constellation. Over there, we are developing a ESA terminal for business aviation over OneWeb. So all in all, we are seeing a very nice business, and with the two opportunities, they are very significant for Gilat.

Ryan Koontz (Managing Director)

That's great, Adi. Great update there. Going to follow up on that and your Stellar Blu comments. You know, what should we think of as the key milestones that you're tracking, and what are the greatest challenges with getting the production capacity going on Stellar Blu? It sounds like, you know, with their terrific backlog, it's really just a matter of execution here, and what do you view as the biggest challenges there?

Adi Sfadia (CEO)

So, you know, execution is always the name of the game, and indeed, Stellar Blu is now in the midst of moving from development phase to execution, delivery phase. I can share that they already delivered first unit to the customers. They passed certifications and in the midst of ramping up production. And since we have much more confident today, we even a bit upgrade the initial forecast we gave for next year from $100 million-$150 million to $120 million-$150 million. It's still preliminary, of course, it's not, and not a guidance. I think that as every company to execute and bring more orders, those are the two main challenges of Stellar Blu.

Ryan Koontz (Managing Director)

Got it. And in terms of that ramp, is in terms of supply chain and these sorts of things, are there real challenges there with sourcing, or is it more challenges with regards to you know, any new product in a ramp?

Adi Sfadia (CEO)

...No, it's, we don't see any supply chain, specific issues. It's just, ramping up, new product introduction into the market, which, usually take time. It's, it's not, it's not something that is unique to Stellar Blu. It's, within every company, including with, with Gilat, when we launched a new product. At the beginning, there are challenges on the manufacturing line.

Ryan Koontz (Managing Director)

Yeah. Okay, perfect. That's all I got. Thanks for the commentary.

Adi Sfadia (CEO)

Thank you, Ryan. See you soon.

Operator (participant)

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

Chris Quilty (Co-CEO and President)

Thank you. Nice results, guys. Just to follow up on that last question, maybe it sounds like the supply chain and the manufacturing is going well, but can you touch on the STC process? I think you did mention you're making progress there, but you know, how broadly are you targeting STCs on different airframes? And you know, who is leading that effort? Is that happening internally at Stellar Blu, or do you have partners working on that?

Adi Sfadia (CEO)

It's a combination of Stellar Blu and responsibility of the customers, and it's progressing as we expected. Recently, Stellar Blu announced that they got several certifications, and we see it on track. And I think it's not halting any deliveries. The only thing is ramping up production and starting to deliver more units per month. Now we are talking about a few units per month. Soon, we are talking about 10 units, tens of units, and hopefully, by the second half of next year, we'll be able to deliver more than 100 units per month.

Chris Quilty (Co-CEO and President)

Great. Do you have a couple of housekeeping questions? I know last quarter, you kind of gave us the breakdown of the DataPath contribution, you know, the organic growth versus acquired growth. Can you share that this quarter?

Adi Sfadia (CEO)

Yeah, sure. So, this quarter, as I mentioned, most of the growth came from DataPath. If we look on a quarterly basis, the organic growth was negative 4%. On a six-month basis, it was plus 4% as expected. And I remind everyone that we like to analyze Gilat not on a quarterly basis, but on a longer period kind of analysis due to timing of specific deliveries that might shift a bit to the right or to the left. So generally, we're on track.

Chris Quilty (Co-CEO and President)

Great. And, is the run rate for the amortization reported in the quarter consistent with what we should expect on a go-forward basis, now that DataPath is rolled in and excluding Stellar Blu, obviously?

Adi Sfadia (CEO)

Yeah. So, in general, and as I, you know, said in my script, it's about $2.4 million per Q in these quarters. Usually, there are, I would say, two components that might affect this number. First is the amortization or net income at the end of the day is also affected by Gilat share price, due to the fact that part of the payment is in shares. So it may fluctuate up or down. The second thing is that part of the amortization is associated with backlog, which is usually amortized over up to 18 months.

So, you can expect a drop in this $2.4 million around 18 months after a closing, which will be middle of next year.

Gil Benyamini (CFO)

I think there is a schedule in the 20-F of the amortization.

Adi Sfadia (CEO)

Should be, yeah. But it wouldn't, you know, cover the change in the share price.

Chris Quilty (Co-CEO and President)

Right. And you mentioned backlogs, so I'll ask, and I know you don't provide backlogs, but, you know, excluding, you know, the DataPath, what are you seeing in overall trends in terms of order pipeline this year, you know, relative to your expectations? And, you know, are there any factors? On the defense market, we're not dealing with a continuing resolution in the U.S., in the aviation market, we are dealing with Boeing and late deliveries. You know, are any of those macro factors impacting your outlook, or is it more just company and deal specific?

Adi Sfadia (CEO)

In Gilat, in most of the cases, it's company and deal specific. But what we do see is a strong momentum in the IFC, tied to Intelsat and SES Open Orbits Initiative. We do see a lot of headwinds in the defense, not only through DataPath, also through Wavestream and the satellite networks at Gilat... forecast, we haven't changed our guidance. That means that we are on track with our expectations.

Chris Quilty (Co-CEO and President)

Great, and specific to the cellular backhaul market, you were running really hot, you know, I think a year ago or so with a lot of orders. It feels like that market has sort of slowed down a bit. Is that a correct perception? And do you see any, you know, discrete large opportunities or reasons that the market might pick up a little bit on a go forward?

Adi Sfadia (CEO)

Yeah, I agree that the last quarter on cellular backhaul was a bit slower than usual. But we don't think it's a trend, we think it's a one-off in the industry. You know, based on the analysts who cover the market, everyone expect that this market will grow from $150 million today to around $350 million-$400 million in seven years or so. So, you know, we share the same expectation. We see a nice pipeline. So we really hope that it will return. We do see we're starting to see a lot of 5G opportunities. The 5G will drive significant growth in the years to come.

Chris Quilty (Co-CEO and President)

Remind me, is the SkyEdge IV fully 5G compatible, or is that a new platform upgrade?

Adi Sfadia (CEO)

No, the 5G is fully, the SkyEdge IV is fully, 5G compatible. I remind you that, about a quarter ago in India, we demonstrate, together with SES and, one of the largest Indian, operators, more than 600 Mbps into the handset, which is, on SkyEdge IV, together with the SES, mPOWER. So from speed perspective and latency, we are, already there. Of course, no one will get 600 Mbps to the handset, but, this is up to the operator, not up to us.

Chris Quilty (Co-CEO and President)

All right. You can't put a special mode in there for me?

Adi Sfadia (CEO)

I hear you. I can.

Chris Quilty (Co-CEO and President)

All right. So, a follow-up question, just on, you know, you had talked about the Gilat ESA. When are you guys coming up with a name for that product, so we don't have to call it the Gilat ESA? And, you know, any update there? Obviously, you have that as a project with Satcom Direct. You know, Hughes has sort of come into that market with a, you know, a OneWeb compatible ESA. You know, what is that business jet market looking like? And, you know, what do you think the opportunity size for that product is relative to Stellar Blu?

Adi Sfadia (CEO)

So first of all, our ESA solutions are, they called, in general, ESR, as family. You know, we see a lot of players are getting into the market. But at the end, usually each and every service provider has its own unique terminal. Usually, it's one terminal. In rare cases, you see them working with more than one terminal. I know that HNS is cooperating with Gogo on the BA side. But give or take, this is what we see right now. The business aviation is a very large market with a lot of potential, and I think that there is room for several players over there to grow.

Chris Quilty (Co-CEO and President)

Gotcha. And, I guess maybe final question here, when you look at, the defense market opportunity, clearly, you're, you're still working the DataPath angle, but, have they historically had international exposure, for that business, or was it, you know, sort of the sales channel within Gilat, to move those products, or does that take some, some investment in sales and marketing and overseas distribution for some of those, projects?

Adi Sfadia (CEO)

So historically, give or take, about 10% of DataPath business was internationally. They have some channels worldwide, especially in Europe, and they work direct in some of the Asian countries. But now, where Gilat has a foot on the ground on those countries, we think that we can accelerate the penetration and increase the business. We are already seeing some opportunities in Asia and in Latin America and in other places. And I think that there is a potential to double the DataPath revenues both in the US and internationally.

Operator (participant)

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

Gunther Karger (Hedge Fund Manager)

... Yes, thank you for taking the question. Regarding passenger with aviation communications, concerning the recent shutdown of the commercial air transport system because of communications. Is there any opportunity for Gilat and the upcoming acquisition to serve that market? I'm talking about operational communications between air traffic control centers and the aircraft in between.

Adi Sfadia (CEO)

You know, our terminal serves the passengers. Of course, they can serve also the, the crew, but it's not built in a way to have a secure communication between the traffic control and the, and the, and the crew. Of course, at, at emergency, or if something doesn't work, they can try and use our equipment, but it's not built for that.

Gunther Karger (Hedge Fund Manager)

Thank you. It seems like that could be an enormous opportunity because that's an archaic system, which is creating the problem they've had.

Adi Sfadia (CEO)

Yeah, it's definitely opportunity. We are trying to focus right now on delivering our commitments to the customers, but when reviewing adjacent markets and future growth engines, it's something that we're definitely going to explore.

Gunther Karger (Hedge Fund Manager)

Thanks very much. Good luck.

Adi Sfadia (CEO)

Thank you. Thank you, Gunther.

Operator (participant)

The next question is from Sergey Lukyanov of Freedom Finance. Please go ahead.

Sergey Lukyanov (Chairman of the Management Board)

Hello, everyone. At this moment, I have a couple of questions, and most of them are regarding the Stellar Blu. The first, I'm just wondering, what growth rate and margin do you expect from this one, from next several years after 2025? Maybe at least, rough figures, any thoughts please.

Adi Sfadia (CEO)

The only figures right now that we can share is what I said earlier, is that we expect, assuming we close at the beginning of Q4, we expect Stellar Blu revenues to be between $25 million-$35 million, and 2015, 2025, sorry. Revenues will be between $120 million-$150 million. Once Stellar Blu reaches its capacity milestone on the second half of the year, we expect them to be at above 10% EBITDA.

Sergey Lukyanov (Chairman of the Management Board)

Oh, okay. The second look at the operational expense line, there is some decrease of R&D amount as a percentage of sales for last quarters. Will such situation be stable for next time or Gilat need R&D increasing after Stellar Blu acquisition?

Adi Sfadia (CEO)

So R&D changed a bit, you know, comparing to last quarter. It has some fluctuation due to the, you know, consumption of equipment and so on, and the portion of R&D, which is classified to cost of goods sold in NRE projects, so it might fluctuate a bit. Another thing that affects R&D is grants, which were higher this quarter than last quarter. Not materially, but to some extent higher. So all in all, this was the reason for R&D to decrease a bit.

Sergey Lukyanov (Chairman of the Management Board)

Thanks. And, finally, as it was mentioned several minutes ago, you've already had ESR, 2013 and 2014, the portfolio of ESA, for business relations application. What is the future of this ESA family? Could it be replaced by Stellar Blu products? And, if yes, how could it affect cumulative sales as well?

Adi Sfadia (CEO)

Those are two separate projects. We have no intention to replace neither of the technology. Each one is designed for its own specific customers, and we plan to keep it as is.

Sergey Lukyanov (Chairman of the Management Board)

Okay, thank you very much.

Adi Sfadia (CEO)

Thank you.

Sergey Lukyanov (Chairman of the Management Board)

Thank you.

Operator (participant)

If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. There are no further questions at this time. Mr. Benyamini, would you like to make a concluding statement?

Gil Benyamini (CFO)

Yes, thank you. 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.

Operator (participant)

Thank you. This concludes Gilat's second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.