RADA Electronic Industries Ltd.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Rada Electronic Industries first 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 and Public Relations at 1-646-688-3559, or view it in the News section of the company’s website, www.rada.com.

[Ehud Helft:]

Yes, thank you Operator. I would like to welcome all of you to this conference call to discuss Rada’s first quarter 2021 results. I would like to thank Rada management for hosting this call. With us today on the call 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 contents of this conference call. With that, I would now like to introduce Rada’s CEO, Mr. Dov Sella. Dubi, go ahead, please.

[Dov Sella:]

Thank you Ehud. Good day to all our call participants. We believe that our financial results speak for themselves, and Avi will detail them later in his part. The highlights are the following. Our revenues were over $25 million. It’s a growth of 67% year-over-year and up 8% compared to last quarter, and we expect our sequential quarterly revenues to grow along the year. Gross margin improved to 40%, which is in line with our target model. Our adjusted EBITDA in this quarter is $4.8 million or 19% of our revenues, and we feel comfortable with the current level of growth in operating margins and believe there is some room for improvement in the next quarters. We gave revenue guidance of over $120 million for the full year of 2021, which is more than 60% compared to last year, and we believe that this guidance is valid and we continue to stand by this guidance. We have a strong balance sheet with $96 million in net cash at the end of the quarter. This follows a very successful capital raise of $56 million which we did in March, which also added a book of long term, focused and leading institutional investors from the U.S. and Israel to our shareholder portfolio. It also tightened the connection between Rada and some of the Wall Street leading investment banks which are focused on technology and defense companies, and we are now covered by four or five analysts. Our current cash levels support our current inventory plans and our needs to secure the supply chain. It enables us efficient manufacturing. It enables us to continue to invest in our growth. While our U.S. production is operating with good efficiency and satisfying our U.S. market needs, we are doubling our manufacturing capacity both in Israel and the U.S. and increasing our inventories to accommodate the semiconductor global crisis which we all hear about. This cash level of ours also allows us to focus on maintaining our R&D edge, as I will describe a bit later, and to capitalize on some opportunities as we identify them.

[Avi Israel:]

Thank you Dubi. Welcome to all of our participants. You can find our results on the press release we issued earlier today, and I will provide a short summary of the first quarter results. First quarter revenues were $22.5 million, up 67% year-over-year. Our gross margin in the first quarter was 40%, better than 36% in the first quarter of last year. Our operating expenses were $6.4 million compared to $5.3 million in this quarter of last year. Operating income was $3.6 million in the quarter versus $46,000 in the first quarter of last year. Q1 net income was $3.8 million versus $170,000 in the first quarter of last year. We reported an adjusted EBITDA for the first quarter of $4.8 million, which is 19% of our revenues versus adjusted EBITDA of $0.9 million or 6% of our revenues in the first quarter of last year. I would also like to summarize and point out some highlights from our balance sheet. As at the end of the first quarter, we had $96.2 million in net cash and zero financial debt. At the same time, our shareholders equity stood at $132.2 million, financing 67% of our balance sheet. 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 shall now open the call for questions. Operator, please?

[Operator:]

The first question is from Sheila Kahyaoglu of Jefferies. Please go ahead.

[Sheila Kahyaoglu:]

Good morning Dubi and Avi, and thank you for the time. There’s been some commentary from your peers on push-out of defense orders. Obviously you’re doubling manufacturing capacity and stocking up on inventory, so you’re not seeing that perhaps. Can you just talk about are you noticing any programs with delays, go over your top programs once more if that’s possible.

[Dov Sella:]

Yes, we see when we contact our suppliers, component suppliers, we see prolonged delivery dates, and luckily enough we are protected because our strategy handling the inventories long ago when the COVID started, and a bit before that, was to deliver to stock and avoid any mishaps, so our inventories are preventing any hiccups in production, luckily enough, and we are continuing to do that even further.

[Sheila Kahyaoglu:]

Is it possible to go over the top programs for the quarter, what drove the growth, how do you expect that to trend throughout the year?

[Dov Sella:]

Well you know, we reported new business of $60 million in 2020 with significant new business in the fourth quarter, and we actually delivered--you know, our delivery cycle is less than six months typically, sometimes it’s even a few weeks, depends on the urgency in the program. The first quarter represents all that new business that we got in the fourth quarter of 2020, and it’s basically according to our plan. We are not starting the year with a full as opposed to other defense integrators, we are a product company. We are starting the year with not 100% naturally of backlog, so we have quite--about 50% of book and ship, and we had that in this quarter as well. In the first quarter, significant deliveries were also to the IM-SHORAD. We have not completed it, we will complete it by midyear for the 28 systems that I have described in my discussion earlier, and other deliveries through other integrators in the U.S., mainly in the U.S. but not only, also as we mentioned, the Middle East and Europe, through Europe and Israeli companies to the Middle East as well. So altogether, it’s a mix of the U.S. programs, mainly the IM-SHORAD and base defense, and the other parts.

[Sheila Kahyaoglu:]

Okay, thank you. I’ll jump back in the queue.

[Dov Sella:]

Thank you.

[Operator:]

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

[Peter Arment:]

Yes, good afternoon Dubi and Avi. Dubi, in your presentation, it looks like you increased the total addressable market by about a billion dollars from the last time I think you had a presentation out there. It seems like that was tied to the air defense and short range surveillance radar market, so I know this is a TAM over a 10-year period but what are you seeing there to kind of increase, both I guess in the U.S. and the rest of world?

[Dov Sella:]

Yes, I think that the introduction of the new radars, especially the XMHR that widens our offering, it is essentially doubling the range of the most powerful radar that we currently have, which is the ieMHR, and we have deployed already hundreds of them, but we see the needs around base defense, around C-RAM, around force protection, demanding more like, you know, protecting against cruise missiles and low flying UAVs, as we have seen in the Saudi attack in 2019 and in other places, on U.S. bases in Iraq and so on. Actually, we believe that addressing these needs not only in the U.S., also in other places as evidenced, is increasing the addressable market, so we have topped it up by $1 billion based on the offerings that we are going to have very soon.

[Peter Arment:]

Okay, that’s helpful. Then are you still on track for adding additional chambers that you’d talked about previously for your capacity this year?

[Dov Sella:]

Yes, absolutely. In Israel, it’s already alive and kicking, and in the U.S. the renovation of the land is towards end in a few months available as well.

[Peter Arment:]

Okay, very good. Just lastly, your thoughts, Avi, on potentially being cash flow positive this year, just given all the growth that you’re showing, does that still look like it’s tracking? Obviously you had great operating leverage this quarter.

[Avi Israel:]

Yes, as you could have seen, compared to cash balance at the end of the quarter with the one at the end of the year 2020, take out the money that was raised in March, we definitely see a very powerful cash flow positive quarter, so hopefully we’ll continue with this track. Let me remind that what Dubi said, that we planned considering the current situation of the components market, we plan to further increase our inventory to avoid any hiccups in the deliveries, so yes, we definitely expect a positive cash flow year.

[Peter Arment:]

Appreciate all the details. I’ll jump back in queue. Thanks.

[Operator:]

The next question is from Ken Herbert of Canaccord. Please go ahead.

[Ken Herbert:]

Hey, good afternoon Dubi and Avi. Very nice quarter.

[Dov Sella:]

Thank you, hi Ken.

[Ken Herbert:]

Hey Dubi. Just wanted to follow up, did I hear correctly, you’re still expecting the next SHORAD contract in the second quarter, or how does timing look for the subsequent--you know, the 59 units you talked about?

[Dov Sella:]

Yes, we expect them on the verge of the second and third quarter, and we do believe that we will deliver that this year.

[Ken Herbert:]

Okay, that’s great. Can you provide any more detail on the growth you’re seeing in Europe or other parts of Asia? I know you’ve clearly got some work going up in the Netherlands and other areas, but can you provide any more details on any of the contracts or how many? Are these opportunities getting pulled to the left, like you’ve seen in the United States?

[Dov Sella:]

We anticipated that, let’s say, NATO--let’s talk about Europe as a target end user market, and through Europe to other places in a separate sentence. For Europe, we anticipated that Europe itself, NATO countries will adapt the U.S. concept of mobile SHORAD counter-UAS C-RAM and so on in a phase, and we start to see that. As we experienced in the U.S., at the beginning the forces test what they have and the local solutions. We do believe that we have an edge. It’s a process. At the end, cost performance, especially when you are talking about big quantitative for mobile forces mainly are making a difference, so this is the process that we experienced in the U.S. until we started to see orders coming in, and we were demonstrating in the U.S. since 2014 and only in ’17 we got the first significant order for the Marine Corps for the GBAD. In Europe, we started a year ago. We do believe it will be an accelerated process, so probably we start seeing, let’s say, initial orders we have already, but more significant orders along 2022 and mainly in 2023. Through European companies and some other Israeli companies and elsewhere, we do sell to--we don’t sell directly, you know, our go-to-market is Rada inside and we sell to the integrators, so we don’t sell directly. We are part of weapon system solutions, and we sell to the Middle Eastern needs through integrators, most of them European but not only. This is happening. The COVID slowed it down a bit, but it is regaining momentum. As you have seen, about 60, maybe a bit more of our--60% of our revenues last year, this year will be similar or a bit higher in the U.S., and the rest is Europe and the Middle East. Still, we don’t have yet any significant influence on the top line coming from active protection, including . It will reflect our revenues only in 2023 and onwards, while the Israeli program will be already showing revenues in 2022.

[Ken Herbert:]

That’s great. Can the European or Asian markets for--can they be as large as the United States market eventually?

[Dov Sella:]

Yes, we believe that the U.S. market is about 50% of the addressable market, and the rest of the world is another 50%. We do believe that India is a big potential, maybe 15% out of that 50%, and India is waking up very slowly. We all know what’s happening there around COVID, but we are doing some active bidding in India as well. We see it as a potential market, but it is a slow starter market. Yes, we do believe that the rest of the world market is like the U.S. market.

[Ken Herbert:]

Great, well thank you very much. I’ll pass it back there.

[Dov Sella:]

Thank you.

[Operator:]

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

[Brian Kinstlinger:]

Great, thanks for taking my questions. I think this question may have been asked, but I didn’t understand. Are there any issues with the supply chain that you could see impacting the gross margin or lead times, and can you remind us where you do source most of your supply?

[Dov Sella:]

Well, our supply chain is made of mainly producers and providers of components that are from semiconductors, let’s say, that are commercial off-the-shelf components. The sophisticated parts are coming from the U.S., I must say, not always they are produced in the U.S., and I think the U.S. is encountering the challenge of establishing their supply chains internally, but we will entertain that when it happens. But you know, it comes from Europe, from the Far East. We don’t have any components coming from China, so that’s about where we buy components from. Regarding the gross margin, no, we are avoiding that. At this point, we don’t see any effects on the price. We avoid it by the inventory level that we already have, and the fact that we are now ordering more material and we take into account the longer lead times, we can tolerate that in both not affecting our build of material and not affecting our delivery of goods. This is why we are doing these moves now, and we did it in the past and not later. Touch wood, we don’t anticipate as of now any problems around that.

[Brian Kinstlinger:]

Great. Then you made some comments on the APS programs and the pipeline. Has the company won any additional APS programs over the last six months or so? I know there’s a bunch and they don’t start for a while. I’m just curious on the business development side.

[Dov Sella:]

Yes, well we are part of the Elbit so we don’t win the programs on our own, and this is the most mature system that we are part of. We have some incubation programs in other places of the world, but it is too early to talk about. It will take quite a while until they mature, maybe in more than three years until they mature to products and deliveries. We are now part of Elbit’s APS, and we have the Eitan in Israel. I think Netherlands was the program that was announced in the last six months, as you mentioned, the CV-90. These are the two awarded programs, and the pipeline is quite wide. Australia and Europe, there are quite a few initiatives, and once Elbit announces that, we piggyback on that and announce ourselves.

[Brian Kinstlinger:]

Got it. Last question I have, demand for your radars has been robust. Do you see or foresee any challenges with the new U.S. administration, given it’s generally accepted that it will be a less favorable federal budget environment?

[Dov Sella:]

Yes, this question has been asked many times and we are asking ourselves the same, but the answer that we give based on what we read and the evidence is that we are addressing new and emerging needs that are in demand, and actually in a growing demand - base defense, counter-UAS. We also--what happened in the war in that more emphasizes mobile force protection and so on and so forth, so we believe that even if there are pressures, budget pressures, they will be directed towards more legacy programs, mainly in the U.S. I mean, compared to the new needs that we are addressing.

[Brian Kinstlinger:]

Great, thank you.

[Dov Sella:]

Thank you Brian.

[Operator:]

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

[Austin Moeller:]

Hi Dubi, this is Austin. I just had a quick question on can you speak yet as to the quantities that will be manufactured yet under the Royal Netherlands Army CV-90 program for Iron Fist? I would assume that’s probably--is that revenue expected to be material more to 2022 or 2023?

[Dov Sella:]

The CV-90 is 90 vehicles, as Elbit have noticed, and it will be in 2023 and onwards. Twenty vehicles--19 vehicles times four, which is 360 radars with some spare, it can be close to 400.

[Austin Moeller:]

Okay, great. Can you comment yet on any of the opportunities surrounding C-RAM with any of your customers yet, or is that still too early to discuss?

[Dov Sella:]

Yes, I’ve mentioned that I think the Air Force and SOCOM’s needs are a combination of base protection. There is a program in incubation named ABAD - Air Base Aero Defense, and also around SOCOM there is a need to combine C-RAM with air surveillance and counter drones, and we are offering multi-mission radars that can do all these missions simultaneously. We do believe there is good potential around these efforts as well.

[Austin Moeller:]

Okay, awesome. Then you guys hit 40% in gross margin in the quarter. Do you expect that to sort of be the run rate going forward here for the next several quarters, or do you expect directionally to expand further beyond 40%, and what kind of delta should we assume on that?

[Dov Sella:]

Forty percent was actually our target from long ago, and we have surfaced it now maybe a bit earlier than what we thought even. We would like to stay at this level, you know, maybe one or two points more, but not beyond that. We want some margin for competition and maybe if we have inefficiency issues, which we don’t anticipate, but I believe this is a firm margin and we should look at our performance at this level.

[Austin Moeller:]

Okay, got it. Thank you for all the color. I appreciate it.

[Dov Sella:]

Thanks Austin.

[Operator:]

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. The next question is from Isaac Vidomlanski . Please go ahead.

[Isaac Vidomlanski:]

Hi guys. In the last conference call, you announced an investment of $3 million in RADC and retained an option to increase the investment. My question is, based on your experience with RADC so far, do you plan to invest more money in RADC, and can you give us more color about RADC?

[Dov Sella:]

It’s too early to discuss this.

[Isaac Vidomlanski:]

Say it again?

[Dov Sella:]

I’m saying that it is too early to discuss that.

[Isaac Vidomlanski:]

I see, okay. Thank you.

[Dov Sella:]

Thank you.

[Operator:]

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

[Dov Sella:]

Yes. On behalf of Rada’s management, I would like to thank all of our investors and participants to this call for their interest in our business, and we look forward to speaking with you again soon. Stay well and healthy, and good day to all. Thank you.

[Operator:]

Thank you. This concludes the Rada Electronic Industries first quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.