Gilat Satellite Networks - Earnings Call - Q2 2025

Transcript

Speaker 5

Ladies and gentlemen, thank you for standing by. Welcome to Gilat Satellite Networks' second quarter 2025 results conference call. Participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded August 26, 2025. By now, you should have all received the company's press release. If you have not received it, please 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. Alex Vialta of Alliance Advisors IR. Mr. Vialta, would you like to begin, please?

Speaker 4

Thank you, Operator, and good day to everyone. Thank you for joining us for Gilat Satellite Networks' earnings conference call for the second quarter of 2025. With us on today's call are Mr. Adi Sfadia, Gilat CEO, and Mr. Gil Benyamini, Gilat CFO. The earnings press release was issued earlier today, and if anyone has not received a copy, I invite you to visit the company's website at gilat.com, where you'll find the release in the investor relations section. Before turning the call over to management, I'd like to remind everyone that some statements made during the conference call contain forward-looking statements based on current expectations. Actual results could differ materially from these projected as a result of various risks and uncertainties.

The potential risks and uncertainties that could cause actual results to differ materially include uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in U.S. and foreign military spend, acceptance of our new products on a global basis, and disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather, or other factors not under our control. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Gilat's financial results is included in the company's filings with the SEC, including the latest quarterly report on Form 10-Q.

In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Gilat CEO Adi. Please go ahead, Adi.

Speaker 6

Thank you, Alex, and good day, everyone. Thank you for joining us today to discuss Gilat Satellite Networks' second quarter 2025 results. Please note that we are posting a PowerPoint presentation on our website with all the data we will discuss today. The second quarter not only showed strong performance but also validated our growth strategy across each of our growth engines. Our priorities in 2025 remain on capturing the growing opportunities emerging from our acquisition of Stellar Blu earlier this year and investing in Gilat Defence to better position to drive revenue growth in 2026. These drivers, along with our strong presence in VHTS and NGSO constellations, continue to fuel our growth and strengthen our market leadership. Second quarter revenues reached $105 million, a 37% increase year over year, which includes about $36 million in revenues from Stellar Blu.

Adjusted EBITDA was $11.8 million, 17% above the same quarter last year, including Stellar Blu's expected ramp-up losses of about $1.5 million. Excluding Stellar Blu loss, our adjusted EBITDA for the second quarter was about $13.3 million, representing a 32% year-over-year increase. Stellar Blu's yearly performance remains on track, with revenue expectations of between $120 million and $150 million. Now on to the business review. In the second quarter, our Defence Division continued to set the foundation for future growth. Continuing geopolitical tension and shifting global security priorities are promoting governments to increase their defence spending and allocate more of their budget to secure satellite communications. This is generating increased interest in mission-critical satcom solutions, and Gilat Defence is well-positioned to meet these evolving operational needs. We are seeing active engagement from customers across multiple regions, including North America, Europe, and Asia-Pacific.

Gilat Defence is also extending our global footprint by leveraging top-line synergies between Gilat, DataPath, and Wavestream by offering a broader range of solutions to defence customers. In the second quarter, over $8 million in Gilat DataPath systems were ordered by the Israeli Ministry of Defence, demonstrating the strong value of our technology and the applicability of our solutions to diverse mission requirements. During the second quarter, Gilat DataPath was awarded a contract to provide field service and technical services in support of the U.S. Army. The award includes an initial order of more than $7 million, with an option to extend the program for up to five years, reaching an estimated order of up to $70 million. With a clear strategy, a growing global presence, and an unwavering focus on mission-critical connectivity, Gilat Defence is positioned for substantial growth and long-term impact in this essential sector.

Turning to our commercial business, Q2 was a milestone quarter driven by strong booking strategic wins and continued adoption of our next-generation satellite communication platform. Our momentum reflects both the accelerating transformation of the industry and Gilat's success in aligning the technology and solutions with the needs of our customers. One of the most significant announcements this quarter was the signing of a $40 million contract for a virtualized SkyH4 platform. This landmark agreement not only demonstrates the trust our customers place in Gilat, but also highlights a critical industry shift in how satellite communication infrastructure is being deployed. SkyH4 virtualization empowers operators to move to cloud-native software-defined environments designed for scale, agility, and interoperability with next-generation satellites. Evolving to a software-only cloud-based platform elevates Gilat's positioning with higher value, improved margins, and provides the option to sell through a platform-as-a-service business model.

During the second quarter, we announced over $47 million in orders from tier-one satellite operators. These orders underscore the surging demand for Gilat multi-orbit ground segment technologies, driven by increasing demand for IFC solutions and the widespread adoption of GEO, MEO, and LEO architectures. Operators are making substantial investments in ground systems that can seamlessly manage multi-orbit connectivity across a range of use cases, including fixed-border mobility solutions and critical government services. These orders also span multiple regions and program types, including both network expansions and new deployments, highlighting the global relevance of our technology and the growing trust in our platform to support mission-critical services. Moving on to Stellantis Blue, we announced receiving $27 million in orders from our Stellantis Blue portfolio. With more than 150,000 cumulative flight hours and deployment of over 225 terminals, Gilat's Sidewinder ESA terminal is exceeding expectations for performance, reliability, and user experience.

Production ramp-up is progressing slowly, and we expect to see more units delivered in Q3 and Q4 this year with better margins. Stellar Blu continues to work closely with its partners to secure new fleet wins. We are confident these efforts will yield positive results soon. Looking ahead, we remain focused on expanding our leadership across key verticals and deepening our relationship with strategic partners. With strong customer demand and a differentiated technology portfolio, we believe Gilat Satellite Networks is well-positioned for continued growth in our commercial business. Q2 was an outstanding quarter for Gilat Kabu, highlighted by the award of more than $60 million in new orders from Pronatel. As a reminder, these orders were delayed last quarter.

The awards are for upgrading the regional network infrastructure that was originally awarded to us in 2016, bringing high-speed internet to more than 800 public institutions, including schools, healthcare, and police stations across more than 280 localities. This award reflects Gilat Kabu's continued partnership with the Peruvian government and our longstanding commitment to digital inclusion, demonstrating once again the key role Gilat Kabu plays in delivering meaningful nationwide impact. Digital inclusion is a key priority worldwide, and the expertise developed by Gilat Kabu in connecting remote and underserved communities is now being leveraged in other regions around the world, allowing us to replicate proven models and accelerate similar projects globally. In Peru, we still expect to receive several large RFPs and orders from existing project expansions and renewals in the coming few quarters.

I am pleased to say that we continue to have a strong backlog and a healthy pipeline of opportunities in all divisions. On the strengths of our results here today, improved visibility, and business momentum, we are resetting our full-year guidance. We are narrowing our revenue range to $435 million to $455 million for a higher revenue growth rate of approximately 46% at the midpoint. We have also narrowed our adjusted EBITDA guidance range, now targeting between $50 million to $53 million for a higher growth rate of approximately 22% at the midpoint. Gilat remains strategically well-positioned for sustained growth, supported by strong demand for secure, high-performance connectivity across commercial and defense markets.

As satellite networks evolve, expanding in capacity, shifting to multi-orbit GEO, MEO, and LEO architectures, and moving towards software-defined infrastructure, our portfolio is uniquely equipped to meet these emerging requirements with the scalability, flexibility, and reliability our customers expect. Gilat Defense continues with a focused roadmap and expanding sales resources to broaden engagement and awareness of our technological expertise and our role in supporting the mission-critical satellite connectivity needs of governments and defense agencies in the U.S. and allied countries. In our commercial division, we are meeting the growing industry demands for virtualized software-defined ground infrastructure that enables more agile, scalable network deployments. Our multi-orbit platforms are delivering seamless connectivity across GEO, MEO, and LEO constellations, positioning Gilat as a key enabler of next-generation satellite networks. At the same time, Gilat's Sidewinder ESA terminal continues to gain traction with ongoing progress in integration and certification across multiple aviation segments.

In Peru, we play a vital role in expanding access to digital inclusion services, strengthening public infrastructure, and supporting long-term national connectivity goals. Our local presence and trusted partnership with the Peruvian government remains a key differentiator as we help close the digital divide in underserved regions. We are very happy with the progress we are making across the company and remain focused on advancing our priorities, deepening customer relationships, and delivering meaningful results as we support the evolving needs of a rapidly changing satellite communication market. I will hand over the call to Gil Benyamini, our CFO. Gil, please go ahead.

Speaker 4

Thank you, Adi. Good morning and good afternoon to everyone. Before I dive into the numbers, I would like to remind everyone that our financial results are presented both on GAAP and non-GAAP basis. I will now walk through our financial highlights for the second quarter of 2025. As Adi mentioned, we're very pleased with our second quarter performance. We closed the second quarter and the first half of the year, delivering sustained improvements in our results, giving us strong momentum going forward. In terms of our financial results, revenues for the second quarter were $105 million, a 37% increase compared to $76.6 million in Q2 2024. In terms of revenue breakdown by segments, Q2 2025 revenues for the commercial segment were $69.1 million compared to $43.4 million in the same quarter last year.

The 59% increase was primarily due to the contribution of Stellantis Blue, which we acquired in early January this year. Stellantis Blue generated $36 million, which was partially offset by the termination of our activity in Russia in 2024. Q2 2025 revenues for the defense segment were $20 million, similar to the second quarter last year. Q2 2025 revenues for the Peru segment were $15.9 million compared to $13.9 million in Q2 2024. Our GAAP gross margin in Q2 2025 decreased to 30.4% compared to 34.7% in Q2 2024. The decrease is primarily due to lower margins in Stellantis Blue as it ramps up production, as well as amortization of purchased intangibles. GAAP operating expenses in Q2 2025 were $26.2 million compared to $23.8 million in Q2 2024.

The increase is primarily due to consolidation of Stellantis Blue, amortization of purchased intangibles, partially offset by other income, which included profits from an arbitration that were recognized in Q2 2025. As a result, GAAP operating income in Q2 2025 was $5.7 million compared to GAAP operating income of $2.8 million in Q2 2024. GAAP net income in Q2 2025 was $9.8 million or a diluted income per share of $0.17 compared to GAAP net income of $1.3 million or a diluted income per share of $0.02 in Q2 2024. Moving to our non-GAAP results, our non-GAAP gross margin in Q2 2025 decreased to 32.9% compared to 36.8% in Q2 2024. Non-GAAP operating expenses in Q2 2025 were $25.2 million compared to $20.9 million in Q2 2024. The non-GAAP operating income in Q2 2025 was $9.3 million compared to $7.3 million in Q2 2024.

Non-GAAP net income in Q2 2025 was $12 million or a diluted income per share of $0.21, compared to a net income of $5.6 million or income per share of $0.10 in Q2 2024. Adjusted EBITDA in Q2 2025 was $11.8 million compared to an adjusted EBITDA of $10.1 million in Q2 2024. Our Q2 2025 organic adjusted EBITDA, excluding Stellantis Blue losses, was approximately $13.3 million, a 32% increase compared with Q2 2024. Moving to our balance sheet, on January 6, 2025, the company secured a $100 million credit line from the bank consortium, from which we utilized $60 million to finance the acquisition of Stellantis Blue. As a result, as of June 30, 2025, total cash, cash equivalents, and restricted cash were $65.4 million or approximately $5.5 million net of loans compared to $3.8 million on March 31, 2025.

In terms of cash flow, we provided $5.1 million from operating activities in Q2 2025. BSOs, which exclude receivables and revenue of our terrestrial network construction projects in Peru, were 60 days, a decrease from 75 days in previous quarters. Our shareholders' equity as of June 30, 2025 totaled $316 million compared with $300 million at March 31, 2025. Looking ahead, as Adi mentioned, we're narrowing our guidance range and raising the guidance midpoints for 2025 revenue and EBITDA. Revenue is now expected to be between $435 million and $455 million, representing year-over-year growth of 46% at the midpoint. The adjusted EBITDA is expected to be between $50 million and $53 million, representing year-over-year growth of 22% at the midpoint. That concludes my financial review. I would now like to open the call for questions. Operator, please.

Speaker 5

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you are dialing in, please press star one. If you've connected via Zoom, please use the raise hand button located at the bottom of the screen. Please stand by while we poll for your questions. The first question is from Ryan Koontz of Needham & Co. Please go ahead.

Great. Thanks for the question. I wanted to ask about the ramp at Stellantis Blue. Obviously, doing well there. How are you feeling about the second half ramp, your ability to meet customer demand? From a margin perspective, improving margins on Stellantis Blue, can you give us a rough idea of where those margins are at today and where you expect them to be at the end of the year? Particularly on a non-GAAP basis would be really helpful. Thank you.

Speaker 6

Hi, Ryan. Good to hear from you again. I think that the production ramp-up in Stellantis Blue is progressing. As you remember, last quarter we said that there is one specific component that our vendors are struggling with. We are seeing better results in the third quarter, and our internal solution is in certification stages and will be ready for shipment towards the end of this quarter. We definitely see a ramp-up in Stellantis Blue's ability to deliver in the third quarter and even more in the fourth quarter. As for the overall margins, I will let Gil give you the input.

Speaker 4

Our margins are ramping up a bit slower than expected, mainly due to the component challenge. We see them ramping. We started the year still at a low rate pace, and now we're moving to a regular production pace. I guess that we'll see towards the third and even more in the fourth quarter and in the beginning of next year, we'll see a more material improvement in the margin of the product.

Great. That's helpful. Thank you. On your virtualization win for SkyH4, what's the fulfillment model look like there? Are you just shipping software to COTS hardware? Are you having to ship appliances with that? How do you think about pricing and utilization there? Do you sell licenses? Can it be sold on a consumption-based or even a subscription-based model? What's happening with the virtualized SkyH4, please?

Speaker 6

The initial order that we received is basically to operate our software on a cloud commercial off-the-shelf equipment. It will be, from a revenue recognition perspective, a license sale or a CapEx sale. It's a one-time sale plus ongoing maintenance services. Future upgrades will be also software-only. The overall business is that the price is give or take the same price as if we sell the hardware, but in this case, the customer needs to bring its own hardware. In most of the cases, most of the customers will prefer to build their own private cloud, but it will be able also to run it on a public cloud. We also have several flexible business models, including where we build the cloud for the customers, provide our licenses, and do some kind of a platform of a service or a subscription-based or consumption-based model.

Based on our history, most of the customers at the end want to buy it in a CapEx mode, but we are open for a recurring revenue business model as well.

That's great. Thanks for that. Maybe just one last question on Peru. Are there any major decisions coming in the second half of this year that you think can improve that business top line?

Yes. I think that the order that we received this quarter will delay at least from late December and will help us ramping up Peru's revenues in 2025. We do expect another large order in the next few weeks or the next two months. In addition, there are several large RFPs that are expected to be issued by the Peruvian government, and we expect to participate in those RFPs. Even if we take some of them, it will help us to generate significant growth in Gilat Kabu, Peru.

Great. Thanks for all that. That's all the questions I have.

Thank you, Ryan.

Speaker 5

The next question is from Louie DiPalma of William Blair. Please go ahead.

Adi and Gil, good afternoon.

Speaker 6

Hi, Louie. How are you?

Great. What are the main contributors to the improved outlook that weren't in the prior guidance or the different assumptions? Should we assume that the new programs that you've won in terms of the revenue carry over into 2026?

Can you repeat the first question? You were a bit disconnected.

Yeah, no problem. What are the main contributors to the improved guidance?

Okay. The main contributor, you know, we started the year with a relatively high range of the guidance because of the acquisition of Stellantis Blue and the unknowns in this acquisition. Today, we have much better visibility both to Stellantis Blue and Gilat. The last recent business award, the significant award that we announced, and the backlog that we have, including the opportunities that we feel comfortable in our pipeline, gave us the assurance that we can increase our guidance for the year. Now, as for your second question, some of the awards that recently we received will be dragged as well into 2026, and some of it even further, like Peru, which is building the network or upgrading the network, and then another four to five years of recurring services.

Fantastic. You discussed, I believe you said that there are now 225 Stellantis Blue Sidewinder ESA terminals that have been deployed, which I assume means are flying. What is the backlog now for future shipments? It seems that you've won, and you announced, and you discussed on today's call several new contracts, and you have regional contracts with American Airlines, Air Canada, and I believe also Alaska Airlines. What is the backlog? What was the backlog at the end of the quarter?

It's not the data that we are providing on a quarterly basis, but when we acquired Stellantis Blue, we said that we have close to slightly below 1,000 aircraft in backlog. You can do the math. There are additional awards that our customers already received but haven't placed a PO with Gilat. We do expect to have large orders in the next few weeks or coming quarter.

Great. Also related to Stellantis Blue, what is the status of the different milestone payments associated with the acquisition?

Okay. I'll remind everyone that we have three types of earnouts. The first earnout milestone ended at the end of the second quarter and was to reduce the operational risk and the new product introduction risk. Stellantis Blue had to deliver 350 terminals before the end of the second quarter, which they failed, or Gilat failed to do. We delivered only 225 aircraft because of several reasons, mainly because of the production ramp-up and some vendors' inability to deliver products on time. The first earnout payment is not going to be paid. The second earnout is to get new orders of summing to a range of between $120 million to $140 million, and it's until the end of the fourth quarter this year. I think it's too early to tell if we will meet the earnout milestone or not. We do see a strong pipeline with our customers.

We do expect to get a significant amount of orders before the end of the year. I believe that there is a very good chance that Stellantis Blue will be able to meet the milestone. Of course, it needs to be in the profitability that was set in the agreement. The cost reduction initiatives that we are taking, including shifting some of the production internally and developing some substitute products to a very expensive one, need to happen, and we are on our way of doing so. The third earnout is until mid-2026 and is signing up to four strategic agreements. Each one is about $25 million. Strategic agreements need to be at least $35 million of orders in significantly better profitability than the existing one, and to be a door opener to a new market.

It should be, for example, line fit with Airbus, a significant order from defense customers, and other tier-one vendors in the market. We have an ongoing discussion with several strategic customers, but it's really too early to say. Almost a year.

Great. That is super helpful. One final question. It seems that Eutelsat has signed an agreement to raise significant funding from different parties to support OneWeb Gen 2 or the general OneWeb constellation. What is your view of how OneWeb Gen 2 and IRIS² will proceed? Do you believe that OneWeb Gen 2 and IRIS² are going to be the same constellation? What are the potential opportunities for Gilat Satellite Networks associated with both of these plans?

Based on the discussion we held with Eutelsat in the last several quarters, they want to integrate OneWeb Gen 2 and IRIS² together, the same as SES with their MEO-100 and IRIS², because IRIS² is going to be a multi-orbit constellation. They want to tie together, and they won't take any decision on OneWeb Gen 2 before they know exactly what is going on with IRIS². As for IRIS², we received the first RFI this quarter for the end-user terminal, and additional RFIs will follow, and then RFPs. We do believe that awards will be granted not before mid-year next year. IRIS² is, I think, almost fully subsidized or financed by the EU regulators, and the €12 billion project, I think 40% or so comes from the operators, from Eutelsat, SES, and Hispasat, and the rest is coming from the European Committee.

All in all, we believe that IRIS² will be a bit delayed, but they will launch the constellation, and then OneWeb Gen 2 will follow.

Great.

Gilat Satellite Networks, it's a very.

One question.

Gilat Satellite Networks, it's a sure.

Go ahead. Thank you. One final one. The Intelsat-SES merger recently closed, and I know it only closed a few weeks ago, but have you observed any changes in customer behavior as both SES and Intelsat are fairly large customers of yours? How would you assess the impact of the deal?

Yeah. We'll just add one small thing about IRIS². I think it's an extremely important and very large opportunity for Gilat. We have a decent EU presence, which will give us the right qualification to participate in the programs. As such, we received the RFI. We do see that this is a top priority for Gilat to get an award over there. As for the Intelsat and SES merger, indeed, I think they are three or four weeks into the merger. What we see today is that the people that we used to work on both sides are there. From a customer perspective, the relationships are very strong. We keep on seeing a lot of interest on both sides, both from Intelsat and from SES for Gilat equipment on the terminals, on the ISA side, on the SkyH4 side, and also on the SkyH2C for IFC side.

We do expect to see significant business from the combined company in the next few months.

Fantastic. Thanks, everyone.

Thank you, Louie. Talk to you soon.

The next question is from Omri Effroni of Oppenheimer. Please go ahead.

Hi, guys, and congrats for the great quarter. I have a few questions about Stellantis Blue as the other analyst. Last quarter, as you said, the guidance was for Stellantis Blue for revenue between $120 million to $150 million and EBITDA positive in the second half of 2025. I only wanted to make sure that the guidance is still intact. That's the first one. For the follow-up, I was wondering if you can give some more color about the defense division and what you are seeing here. What did you see from demand, especially from the Israeli Ministry of Defence and Europe? Thank you.

Okay. Yes, the guidance for Stellantis Blue still stays in place, $120 to $150 million in revenues. We do expect them to significantly reduce the losses and to show positive EBITDA. You saw in the announcement that in my script where I said that we reduced the losses from $3.5 million in the first quarter to $1.5 million this quarter, and we do expect them to progress quarter over quarter and show positive EBITDA in the second half of the year, and even to be able to reach a 10% EBITDA ratio towards the end of the quarter. I'm not sure it will be a full quarter, but towards the end of the quarter, once the cost reduction will be in place and we will be able to start delivering the replacement for the component that is developed by another vendor, we'll see a decent profitability from Stellantis Blue.

As for the defense, we do see a lot of interest from several countries. It's mainly discussions on capabilities and things like that. We're having a lot of proof of concept and demo sessions, not only in Europe, but worldwide. In parallel, we are building our sales force, investing a lot of money in that. We see the increase in our OpEx, also in new products and solutions for the defense. One of them is our next-generation tactical modem, which will be one of the most advanced and resilient modems in the industry. In Israel, we announced several awards, and we still have ongoing interest. Of course, I cannot get into specifics. Sometimes I don't know all the specifics because in some cases, it's a secured project, but we are progressing very well in all fronts.

Also, in the U.S., we announced several large orders on the service side, on the product side, and there is a lot of business going on that we'll see in the next quarter or two.

Got it. Just to be clear, even with the component change from the other vendor that is going to take place in the third and the end of the third quarter, still the guidance of the Stellantis Blue acquisition is intact, even if with the new component.

Yeah.

Okay.

It's still staying in place. Most of the information that I'm giving you today, we knew in advance when we gave the guidance at the beginning of the year. Development and ramp-up of production sometimes take time, but I think that we are progressing on a monthly basis, and we see the progress. You saw the significant reduction in the losses this quarter, and I'm sure that we'll move to a positive EBITDA during the second half of the year.

Okay, thank you very much.

Thank you, Omri.

Speaker 5

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

Thanks, guys. I just wanted to follow up on the Stellantis Blue and the order front. I know that I think last quarter you were certified by Panasonic, which is, I think, one of your big lead customers. Is it fair to expect we should see something this quarter in terms of announcements? Additionally, where should we look for large follow-on orders? Are these done more directly with the airlines, or do you have other partners you're working with?

Speaker 6

Hi, Chris. Yes, we started to work on the certification with Panasonic last quarter. We are about to finish them. We already received from Panasonic prior to closing an order of slightly below 100 aircraft, and we expect to see an additional order. Panasonic, Intelsat, and other customers usually don't order in advance. They usually order on back-to-back, and there is about nine months lead time, and they have a delivery schedule that they are committing to the airline. We do expect to get, in the coming few months, orders from both Intelsat and Panasonic. In parallel, we are working with other players in the market, but it's in early stages, so it's too early to discuss.

Gotcha. I think you also indicated that with the SES-Intelsat acquisition, do you think there was, in advance of the close, any activities, hold-up in orders as they processed that that may have created a little near-term backlog of potential orders going into the back half of the year? Or did you just see normal purchasing activity by both entities?

I think we saw normal purchasing activity. In some cases, we work together with our partners, helping them promote their services and our equipment. In a relatively large number of cases, the order comes back-to-back when they get the orders from their customers. We know the situation, and business is continuing as usual. We do expect to have a strong second half with the merged company.

Great. Follow-up question on the SkyH4 platform and maybe a specific end market in cellular backhaul, which seemed to have slowed down in the last year to year and a half. Are there any specific dynamics that you're seeing there, and how does the new virtualized platform, you know, help, if at all, in that particular market?

In general, I agree that there is a bit of a slowness in the cellular backhaul market, coupled by the promise of the direct-to-device and the LEO players that are also aiming at this market. What we see right now is significantly less new RFPs and customer extensions, customers waiting for the 5G NTN and to see how it's going to be integrated with the 5G network that they have today. Direct-to-device cannot provide the speed that standard cellular backhaul can provide. We do have, with existing customers, we do get follow-on orders, not in the same magnitude that we saw in the past. We believe that it will take another, I would say, several few quarters until the market will return to normal on the cellular backhaul. SkyH4, the virtual platform, is just running the SkyH4 software over cloud commercial off-the-shelf equipment.

It's not going to add, at least not in this phase, additional features, but it will allow operators to have the agility and flexibility that they need and also will allow us to sell in more compelling business models.

Understand, I think.

I think.

Did I hear you say that customers go ahead.

No, go ahead. Go ahead.

Gil, you mentioned that on those SkyH4 sales that, if customers are generally making a CapEx acquisition, are you selling at the same price for the software only as you would have software hosted on a piece of hardware? Or is it something less than that? How do we think about both revenue growth would slow if you're selling software only for less, but margins would change. Are we going to see that impact, putting aside Stellantis Blue in the model in 2025, or is that more out into a 2026, 2027 impact?

With respect to pricing, prices are similar between the CapEx hardware model and the software model. From our perspective, prices are the same. Can you repeat the second question, Chris?

The effect on the margins.

Yeah. The effect on the margins is very positive because once we develop the software, it will be more like software kind of margins rather than hard ones. I want to add that even today with SkyH4, the ratio between software and hardware changed significantly in comparison to SkyH2C. Today, at the first day, we provide almost all the hardware the customer will need, and all the expansions and the upgrades are almost entirely software. We are starting to see the effect in the commercial segment. As you said, Stellantis Blue takes it a bit down. I think we'll see a gradual progress in the next few years to increase commercial business margins. The virtual platform will be ready two years from today. The real effect, I would say, we'll start to see towards, let's say, the end of 2027.

Got it. Final question on the Wavestream amplifier business. I know there's still a large NGSO order out there. Any progress on moving on that?

Yes. There is a lot of progress on this front. We already received more than $30 million in orders. We are delivering every quarter based on the customer needs. We do expect to get additional orders in the next few months. We see also around it also defense business that can be built. We expect also defense orders to this specific constellation. It has its own pace. It's not everything at one day.

Great. I do have one final question for Gil. There were a number of gyrations on the balance sheet between, you know, contract assets, inventories, long-term receivables. Anything we should focus on there in terms of modeling?

I think that, you know, all the changes are mainly in the working capital related to deliveries. We had some reduction in the inventory due to the timing of deliveries between Q1 and Q2. It also affected the AR, of course. The changes over there are relatively large. More than that, I wouldn't say that there is something new to take into account when you model the company.

No material changes in, you know, either the need or cash generation from working capital, you know, as we go through the balance of the year?

No. You know, it always depends on the, I would say, appeals that we get. Some of them, like the Peruvian award that we just reported, is usually associated with advanced payments. I would expect this to positively affect the balance sheet in the next quarter or two. This is something that we're used to see from time to time. I wouldn't describe it as unique, just a reflection of orders and its timing on the balance sheet.

Great quarter, guys. Keep up the good work.

Thank you, Chris.

Speaker 5

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

Yes. Thank you for taking the question. I have a comment rather than a question. First, I'm particularly pleased with your progress in the defense business, which I a long time ago thought was a big piece of growth business. Secondly, it is to congratulate you on excellent performance. That's my comment.

Speaker 6

Thank you, Gunther.

Thank you.

Speaker 5

The next question is from Sergey Gleimyamov. Please go ahead.

Hi, gentlemen. My congratulations with your performance in the second quarter. We saw that operating margin is improved compared to the first quarter of 2025. What is the primary reason, what is the primary effect for that improvement of operating margin if we exclude the effect from Stellantis Blue? Maybe you implemented some initiatives that could reduce the cost or something else?

Speaker 6

Hi, Sergey. First of all, Stellantis Blue has the most, I would say, substantial effect on the changes in the gross margin comparing this year and previous year. We also got some improvement in the gross margin of Stellantis Blue compared to Q1. I would say that this is one major driver of the change. We also had some better gross margin in Peru this quarter that also improved the weighted gross margin. Both together created a better gross margin. Of course, you know, the revenue mix also affects the gross margin, although there are no other unique things to discuss, but it can vary and fluctuate between quarters.

Thank you, Gil. Continuing the topic about your backlog, you obtained probably more than $1.5 million of new orders over the second quarter. I get that it's pretty much more than a year ago and only $27 million for Stellantis Blue antennas. What is the backlog volume in commercial and defense segments now and average subsidy period, excluding Stellantis Blue?

I did discuss Stellantis Blue before about entering into the deal with about 1,000 antennas. The nature of deals there are not, you know, a monthly kind of deals. Usually, it comes in large batches. As Adi mentioned, we're expecting to see some pretty soon. With respect to the backlog of the commercial and the defence, this is a number that we don't share. I can share with you that we usually have visibility for a year that we enter of at least 50% for the upcoming year. Some of the backlog is also relevant for the years after. Without stating any numbers, we have a decent amount of backlog that allows us to see future growth.

Yeah, thank you. That's all from me.

Thank you, Sergey.

Speaker 5

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

Speaker 6

Thank you. I would like 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.

Speaker 5

Thank you. This concludes Gilat Satellite Networks' second quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.