RADA Electronic Industries Ltd.
Q3 2021 Earnings Call Transcript

Published: 3 Nov 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Third Quarter 2021 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. As a reminder, this conference is being recorded. You should have all received by now the Company's press release. If you have not received it, please contact RADA's Investor Relations team at GK Investor & Public Relations at 1-(212)-378-8040, or view it in the News section of the Company's website, www.rada.com. I would now hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

[Kenny Green:]

Thank you, operator. I'd like to welcome all of you to this conference call to discuss RADA's third quarter 2021 results. I'd like to thank the management for hosting this call. With us on the call today are Mr. Dov Sella, Chief Executive Officer; and Mr. Avi Israel, Chief Financial Officer. Dov will summarize the key highlights of the quarter, followed by Avi, who will provide a summary of the financials. We will then open the call for the question-and-answer session. Before we start, I'd like to point out that the Safe Harbor published in today's press release also pertains to the content of this conference call. And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella. Dov, please begin.

[Dov Sella:]

Thank you, Kenny and good day to all. Let's start with the results summary. We're very pleased with our record results for the quarter, which show not only strong growth across the vote , but also the benefits from the significant operating leverage that is inherent to our business. Again, our Q3 numbers speak for themselves. Revenues are up 57% year-over-year. Our gross margins are 41% up 330 basis points versus Q3 of last year. Operating margins are 20% versus 10% a year ago and adjusted EBITDA is up 162% year over year to a level of $8.2 million or 26% of our revenue versus 15% in Q3 of last year. As you can tell, we are very pleased with the results and especially with the progress made on the margin profile of the business, which we're all ahead of our previous expectations. In terms of our balance sheet, we ended the quarter with over $86 million. We leveraged the strong cash level to increase our working capital, mostly our inventory of semiconductors to avoid any supply chain issues. So let's talk a bit about inventory and short-term delivery of our business. As I'm sure we all know and aware and probably have heard from many other companies, there is a global shortage of components. Earlier this year, we took a strategic decision to increase our inventory levels, which has grown to $38 million to secure our supply chain and ensure we have the parts needed to meet our current and future customer demands. It also enables us manufacturing efficiency in which we build products and deliver to customers in a very short turnover. This is really a key, significant competitive advantage of ours that is maintained for a few years now beyond our technical capabilities and product advantages. We often receive short time -- very short timelines and urgent need book and ship delivery requirements with the whole process taking only a few weeks. This means we are often operating without the luxury of a significant backlog on which to deliver, but at the same in time, our offering are in demand across the board and our customers of this new and growing market appreciate the top level service that they receive from us, which they cannot get from somewhere else. This allows us to gain and keep customers for the long term and meet our revenue goals in the short term. As we move through the end of 2021 and into 2022, this ability of ours is even more important. Let's take a view of our markets. In the US as has been widely reported, the new federal government has not been able to pass the budget and is operating other continuing resolution. This means that last year's budget continues without the 5% increase that is expected with many new programs being delayed. Furthermore, the new government has different priorities and all this is leading to a shift in the working point of the DOD and some lack of short-term certainties in defense spending, causing near term delay across the board. While this phase of fewer budget adjustment is making it more challenging, not just for us, but for the entire defense industrial base, we know our market will and the somewhat partial visibility along with older lumpiness has long been a characteristic of this market of which we are very experienced with. We do believe -- we do not believe that there is a risk to the overall US market demand for the defensive capabilities that our products provide since they are in the heart of modernization drives and are included in the proposed budget lines. The issue as has been the case for a few years is the timing of orders, which may be delayed this time. On the other hand and in line with the expected behavior of a new markets, some pipeline opportunities jump ahead of previous anticipations, especially following it's organic event such as drone attacks in various places in the world, like the Gulf, Iraq, Syria, India, recently to name a few where we receive orders in a short notice with rapid delivery requests and our revenues are becoming increasingly globalized. In addition, we are seeing the various geographies in which we operate, become more accustom to operating under the COVID regime and areas that were very slow or even totally blocked for almost two years now are opening up and momentum of demonstration and sales is regaining. We believe that this should speed up the process of gaining new customers, making business development easier than it has been during the last two years or demos and meetings on how to perform. We therefore expect to enjoy increasingly global diversity of revenues in the coming years. Hence it is important for us to maintain our agility on the pulse of the market, positioned to move quickly and critically, focus our customer expectations and continue growing our top line. So let's talk about our guidance; with regard to our guidance, despite the challenges I've just discussed, we reiterate our expectation to surplus the $120 million revenue goal for 2021. For 2022, we expect our organic growth to continue and we aim to provide you with guidance towards the end of this year or early next year once we complete the analysis of our continuously growing pipeline and improve its clarity. In addition, the APS segment of our market is throwing up through initial orders from Israel and the Netherlands and successful tests and allocations of funds in the US budget, all will lead to generate revenues that will significantly affect our top line in 2023 and ensure continued growth. Beyond that, we expect the strong operating leverage, which we have achieved to date to continue supporting our ability to further grow our profitability beyond the current level. So in summary, as our results show, we are currently experiencing significant growth and our strong margins allow us to grow our profit at a much higher rate. While budgets and additional matters cause short term delays in the US market, we are very experienced at, at navigating these markets and our structure to quickly take advantage of arising opportunities and serve the orders when they come. At the same time, we are also seeing markets globally adjusting to the current working climate, providing us with additional opportunities for growth. From a financial perspective, we are re reiterating our revenue guidance for over $120 million for this year with organic growth continuing into 2022 and with the leverage allowing our profit to increase further. At this point, I'd like to hand over the discussion to Avi Israel, our CFO. Please, Avi.

[Avi Israel:]

Thank you, Dovi. Good day to everybody. You can find our results on the press release we issue earlier today. As Dovi mentioned, we are very proud of our financial performance and I will provide a short summary of the third quarter results. Third quarter revenues were at $32.0 million up 57% year over year. Our gross margin in the quarter was 41% compared to 38% in Q3 of last quarter. Operating expenses were $7.0 million compared to $5.8 million in Q3 of last year. I remind you that our current level of operating expenses supports are current and expected operation in the short to mid-term. So OpEx is expected to grow at a much lower pace than revenues. Hence the business style contains additional operation leverage with the potential to further improve the operating margins. Operating income was $6.3 million in Q3 versus $2 million in Q3 of last year. Adjusted EBITDA for Q3 was $8.2 million, which is 26% of revenues up 162% versus an EBITDA of $3.1 million or 15% of revenues in Q3 of last quarter. I would like to summarize and point out some highlights from our balance sheets. As of September 30, 2021, we had $86.6 million in cash and zero financial debt. Our shareholders equity stood at $150.4 million financing 77% of our balance sheet and up from $72 million at the year end of 2020. Given the current global shortage of components and the ongoing need to mitigate against any COVID-19 pandemic impact on our supply chains, we took a decision to strategically increase inventory levels to ensure availability of components for our ongoing production plan. As at the end of the third quarter, our inventory levels was increased to $38.1 million from $28.8 million as at the end of 2020. In summary, as Dov mentioned, and as the financial results demonstrate, we continue to be very pleased with our progress. That ends my summary. We should now open the call for question. Operator, please.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from Greg Konrad of Jefferies. Please go ahead.

[Greg Konrad:]

Good morning and good quarter.

[Dov Sella:]

Thank you.

[Greg Konrad:]

Maybe just to start, thinking about the growth in the quarter, maybe what were the top program drivers, and then, you mentioned a little bit around 2022, do you see it different set of programs kind of driving the growth into next year? Just thinking about the revenue cadence?

[Avi Israel:]

Yes. The drivers for this quarter are mainly the M-SHORAD of the US Army. The M-SHORAD revenues this year will be about 25% of our total revenues of the company. So this is a very significant program that matured into production. In addition the drone profile, the re-drone of the trial the usual stuff continues. So that's -- this quarter and also it is kind of spread all over the year and also in the current quarter it'll be similar. However some in addition, not however, in addition, some activities that were categorized as urgent need until not so long ago, like the Air Force Base Defense, ABAD and SOCOM requirements are maturing into line items in the budget as we identify it. So it should affect the next year as well.

[Greg Konrad:]

And then just on the margin, I think you talked about kind of getting to 20% and you kind of, well above this quarter, you were above it last quarter. If we look at the drop through sequentially as close to 50% EBITDA margins, have you reset the margin kind of above the numbers you've talked before? Just how are you thinking about puts and takes on kind of the 25% plus margin in the quarter?

[Avi Israel:]

Yeah as I mentioned, it is a bit early compared to our initial plans because we are efficient in also restructuring our production lines, investing in the test equipment, getting the proper people and in parallel to recruit the needed people to implement our design and development plans. And we are stabilizing our CapEx. So altogether it actually kind of surfaces up the inherent margins that we have in our business and we are very happy with that. There is a limit to that. We are not a software company, as we said in the past. It's a software defined hardware but we are happy and we do believe that there is still room to grow above the current operating and EBITDA margins that we have. The operating -- the gross margin is fine. Also room to grow by 1% or 2%, but we are reaching the point.

[Greg Konrad:]

Thank you. I'll leave it at that.

[Operator:]

The next question is from Peter Arment of Baird. Please go ahead.

[Peter Arment:]

I guess maybe question on APS, can you talk a little bit about the active protection kind of the adoption that you expect, I guess that's supposed to start in 2023. Are you seeing anything on the competitive landscape that may change that path?

[Dov Sella:]

Okay. Well APS is as I said, for many years, it was tormenting . It is waking up. We started with APS back in 2006, even and we were -- we've been waiting 15 years for these moments to come. So we are under contract in Israel through . We are cooperating with LB since 2008. We are under contract in Israel, as I mentioned, and also in Netherlands. These are firm contracts and delivery dates are starting towards end of next year, but mainly in 2023 majority of it, and we have been selected together with IMI through GVOTS a while ago, two, three years ago for the Bradley in the United States. There were delay, but we are in a good shape. To our opinion, the results are good of the testing and there are always signs just a month ago the USA timeframe or the military, the US army mentioned that they are going to make it happen, hopefully along 2022 in testing and 2023 in orders, production orders for 2023. It's not formal yet, but there are good signs. So that's the general trend of the market. There are some additional potentials in other places in the world. And we do believe that also in the US the quantities will be more than one Bradley brigade once we perform. On the competitive landscape, there are mainly two primes now which are both Israelis. It's with the trophy and the LB IMI with the Iron Fist. We are in the Iron Fist. We are the incumbent trader in the Iron Fist. So for the new term, we are there and on the other end, you do see long term initiative like in the US the name until a while ago was MAP, Modular Active Protection. They changed it probably to VPS. Here we're working also directly with the army to prove our viability. We are doing adaptation work directly because the modularity of the solution opens up the room to every sensor and the sector to come into the picture. I do believe that we are also here in a good shape, but this is a long term-ish effort and something similar is happening in the UK. They call it MIPS, but it's in essence the same approach. There were very good demonstrations as were published by Leonardo, UK in September around the DSCI conference exhibition. And we were part of these demonstrations as well. So, we are active in any place that is relevant for us. And currently we are happy with the near term future, which is 2022, 2023 and probably also beyond,

[Peter Arment:]

And just regarding your comment, you’ve been strategically kind of building up a little bit the inventory to make sure you have the correct components. Do you anticipate doing that through the end of the year and do you actually respect the inventory results? Thanks.

[Dov Sella:]

Okay. This situation of the market that -- of our market, we categorized it as new and emerging actually showed us very -- from the very beginning that we need to work with high inventory levels. And instead of just in case, just in time to work just in case and this just in case actually is keeping us alive. The market is demanding things very fast and we are able to deliver. So when COVID happened, we were kind of prepared for that because when the semiconductors became scars, we had them for almost a year ahead. And recently we decided to increase our inventories, especially around semiconductors to more than a year away. So I think here we are in a good shape. We don't have touch wood as of now any hiccups with our supply chain. And sometimes we see our customers asking our products to be delivered earlier than then the actual need in order to be sure that from us, nothing will come as a surprise. So we give them this confidence level gladly.

[Operator:]

The next question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

Hi guys. Thanks for taking my questions. You gave us US revenue well sorry, you gave us revenue from SHORAD for the year about 25%. So can you remind us the percentage of your total revenue in the US versus the rest of the world, and then based on the uncertainty in the near term and US lumpiness potentially that you talked about, does that suggest this trend that you've had for so many quarters of sequential revenue growth might not play out here? Maybe we'll see the seasonality of US defense spending.

[Dov Sella:]

The US is our most important and biggest market. As of now last year, it was 60% of our revenues. This year, it'll be around 70% with the IM SHORAD being the biggest chunk. So yeah, the US is our current most important market. But as I mentioned, we see the rest of the world opening up and we estimate the US market to be potential half of our addressable market. So, when there are lumpiness in the US, we compensate from other places and that's what happened to us. And when other places they actually closed down because of COVID, the us was blooming. So, it's between the US and the rest of the world in the long term medium term, let's say not long term, we do believe that our estimations are met and as we proved them in the last five years we are showing something like I don't know, maybe 20 sequential quarters of growth which is unique. I cannot give a guarantee that each and every quarter will be better than the previous one, but we do believe that our annual annual you know, focus as we have proven, as I said, are met and I don't think that at, at this level of numbers, it is not very important that each and every quarter will be higher than the previous one, as long as you'll keep the, a decent level and, and meet the annual growth. So, there is some unclarity around the US opening up around the budget mainly, not opening up I am sorry, but I think it'll be soon enough cleared.

[Brian Kinstlinger:]

And then with your comments on, obviously we all know changing priorities of a new administration in the us, not so much the us budget. How did this change the timeline of your APS program in the us? Is it going to it be maybe delayed even further? Just maybe any update on how that's been impacted?

[Dov Sella:]

I don't think it affects our APS segment at all. It may you know, change the pace of the, of the shore, the serum and change the pace with short term delay, as I mentioned, but we are addressing urgent needs and the, and the modernization priorities. So I don't, think that even in the midterm, we will suffer but you know, everybody with form of Afghanistan in a hasty matter. And, the military takes time also to analyze how we did it, what are we going to do next? And when what they know, but when and so on. But ATS, you know, since it is 2023 and the need is very clear, I don't what happened the around the, the, the us, the OD market does not affect the APS at all. It will it continues, it, it is actually showing better promises and our expectations to start deliveries in 2023 is very valid to my opinion.

[Brian Kinstlinger:]

Great. Lastly, I think you made a -- that you have the components and inventory to meet 2022 demand. Should we still expect, given I take it lead times or much greater that you'll continue to increase inventory over the course of the next few quarters, and that is plan to you can,

[Dov Sella:]

Yes, we will do it as needed. You know we are looking 12 to 15 months ahead. We, we have a very wide pipeline. We analyze what can happen in this timeframe. We do our production plans based on that you know, if you build it, they will come and we adjust our inventories accordingly. Yeah, it may happen.

[Brian Kinstlinger:]

Great. Thank

[Operator:]

The next question is from Austin Moeller of Canaccord. Please go ahead.

[Austin Moeller:]

Congratulations on the quarter. So just to clarify, on, this quarter, it sounded like international sales were more heavily weighted relative to the delayed us sales in Q3. And I heard you call out the drone bill program for our, but I was just wondering if there were any other notable international programs, and if there's been material ramping in Q3 for India, or if India's going to take significantly longer just given the environment there.

[Dov Sella:]

Okay. first of all, maybe I was not clear that I am sure this the biggest program that we have in the quarter that we are reporting and the, the complimentary programs are the drone are the redrawn, some other customers that we have in in east Asia and, and so on. So it's not that the us was not, I think you a bit confused it with the new business, but the revenue wise, the US is the dominant part that we sell to about India, India has a potential thank you a for reminding me, India is a potential, we, we have an MOU with the partner about to set the JV. We see the Indian market showing signs of opening up mainly around the counter UAV, but it is too early, too early to discuss once it's formal, we will make the notice.

[Austin Moeller:]

Okay, great. And, and just on the energy sure. Add variance. When, when might you expect that the, the government will reach a decision around that? Do you expect that that might be in 22 or 23, but we'll hear more details about a down select there.

[Dov Sella:]

I think it'll be 2023 as on the earliest.

[Austin Moeller:]

Okay, great. Thank you.

[Dov Sella:]

Thanks.

[Operator:]

The next question is from Jeff Bernstein of Cowan. Please go ahead.

[Jeff Bernstein:]

Hi guys. Congratulations on the, on the quarter just a couple of quick questions. I, I guess, Leonardo put out a release about the $200 million addition to the contract with, with GD in September. Does that have any bearing on what your backlog looks like? Et cetera?

[Dov Sella:]

No, it's we are inside it's we are part of this.

[Jeff Bernstein:]

So that just gives you a little bit more visibility on, on what's to come there, I

[Dov Sella:]

Guess. No, we are delivering already.

[Jeff Bernstein:]

So after the fact, all right. And then I'm just wondering, what is your role on this Rafael, spider? Are you involved there? And, and I guess there's a, a check procurement going on.

[Dov Sella:]

Yeah. The check procurement is something that that is incubating for a few years and we are not there, but spider is an opportunity for us. We are working closely with RFA on various avenues, and again, it's a bit too early to discuss.

[Jeff Bernstein:]

That's great. And then I see there's a huge air defense contract in Poland. That's going to have local content, et cetera. Is there some role for sure, a type systems there

[Dov Sella:]

To our opinion? Yes. But after working with them six years, we saw the note like you, that they decided to do it indigenous indigenously. Probably they have enough time to do that. They are just starting and we are active for a few years now. We'll see, you know, we are not offended by any decision we continue working there. I do believe that if not sure at the counter solution of ours is relevant. But yeah, we accommodate.

[Jeff Bernstein:]

And then lastly back on the energy weapon system, are, are you actually working with that curious Leonard United system with, with GB and, and are there things you need to do for targeting that's different than your current systems?

[Dov Sella:]

The pure effort is a high power microwave to be installed on, on a striker. It's not a program yet. We are the incumbent radar in the sensor suit of the IM of the URA. We don't see. And we, we hear from the army similar lines. We don't see a need to replace the sensor suit because it can work with, I microwave it can work with I energy laser. It works with the kinetic solution that they currently are employed. I do believe that we will we have good chance to stay the incumbent trade-off for the all the variants that the future will introduce.

[Jeff Bernstein:]

That's great. Thanks so much, guys. Thank you.

[Dov Sella:]

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 pull for more questions. There are no further questions at this time, Mr. Ella, would you like to make your concluding statement? Yes, I'd like on behalf of the management to thank you all for the continued interest in our business we will be presenting at the number of conferences in the coming months, like the bird industrial next week, next Thursday, Latin broke tech expo in mid-November and the Needham growth conference in mid. So, you know if you, if you'd like to speak to us through these events please do we hope to speak with many of you as many of you as we can, and you can also be in direct contact with us through our IR team. We look forward to speaking with you next quarter. Thank you all.

[Operator:]

Thank you. This concludes the RADA third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.