RADA Electronic Industries Ltd.
Q1 2019 Earnings Call Transcript

Published: 21 May 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries First Quarter 2019 Results Conference Call. All participants are at present in a 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 viewed in the News section of the company’s website at www.rada.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin please?

[Ehud Helft:]

Thank you, operator. I would like to welcome all of you to this conference call and thank RADA's 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 would like to point out that the Safe Harbor published in today's press release also pertains to the contents of this conference call. And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella. Dov, go ahead please.

[Dov Sella:]

Thank you, Ehud. Good morning to our US participants and good evening to the Israeli ones and welcome to our first quarter of ’19 conference call. Let’s start with the summary of the results and some guidance. First, I want to mention that we are very pleased with the continued growth that we show. Our revenue growth this quarter is an outcome of our increased investments in R&D and in our US presence. While we grow in revenues, we maintain our solid gross margin level. The bottom line is that everything is on track and the results of this quarter actually validate for us the forecast of the whole year that we gave a while ago. The revenues in this quarter grew by 44% compared to the first quarter of ’18 and when you compare ’18 to ’17, the growth was much more humble because ’18 was pretty much similar to ’17. However, we anticipated early this year that this year will be showing significant growth, we have issued the guidance of $40 million in the top line and we still believe that this is still only the beginning, because we are still at the phase of the market that is not stable enough. However, this growth proves that our markets are beginning to mature, the sales of our tactical radars are beginning to broaden and ramp and our increased investments start to pay the dividends that we expect to get. Regarding our performance goals, I would like to emphasize the following. We would like to picture our business as a technology startup company with a very new and exciting technology of software defined radars. However, we still have our legacy and this is an advantage for us because our legacy is stable and have very good cash flow and profitability. So, in our investments, we rely also on this leg. And while in the past few years, we developed our tactical radars with foresight of what was predicted at that time, today, we have mature solutions to the very immediate and urgent defense needs for effective protection, counter drone, short range air defense, counter rocket artillery and mortars and some other operational needs. Further, as opposed to an early stage company, we already have initial sales of our growth products, already being used by armed forces in several countries, mainly in the United States and Israel. And because of the huge opportunity ahead of us, we are gearing RADA up for significant growth in 2019 and mainly in 2020 and onwards. We already started last year and we are continuing to make very significant investments in R&D. We're developing quite a few new products in order to maintain our leadership and first mover advantage in this market. But we do believe that the growth will be in 2020 and onwards. Therefore, our current efforts are focused on top line growth and this is where we should be measured in the coming few quarters. This along with the gross margins that we demonstrate should bring to significant profitability when the top line will become significant, and as I say, it's 2020 and onwards. In terms of short range expectations, as we said, we are confident that with our over 40% revenue growth in ’19, the goal of $40 million and maybe a bit more will be met. And as the programs of record start to come online in the United States mainly, and our markets, we started our maturity phase. We are even more optimistic for the period beyond the 2020. About the market size and pipeline, as mentioned and reiterated in the last few years, our current main focus areas are on active protection and mobile short range air defense, while counter drone and counter UAV is a subset of the short range air defense. We estimate the market at about $5 billion as total addressable market. Half of it in the United States and the other half in the Western countries, because our offering is a high end offering. About 60% of this estimation of the market is around active protection and the rest is around mobile short, critical infrastructure and so on. We do estimate the relevant market in the United States at about 15,000 potentially tactical vehicles that active protection may be relevant to them. And again, the rest of the world is doubling these numbers. In terms of sales effort, in the active protection market, we are part of the Elbit/IMI, iron fist APS for the US army Bradley vehicle, a program which is moving ahead towards testing and then acquisition of systems for a brigade as a beginning point, as a starting point. We believe that it will begin end of this year or early next year. The mobile short range air defense or M-SHORAD customers are -- address Western European forces such as the US Army and United States Marine Corps and also European NATO forces and some forces in the Asia Pacific. And again, counter drones, counter UAV is a subset of this market in our eyes. We have mentioned that we were selected [indiscernible] for the US Army, i.e. M-SHORAD program, initial maneuverable short range air defense program, having the potential of close to 150 vehicles equipped with the short range air defense package, and each one should include four radars of ours. Meanwhile, we have already fielded close to 200 in the US, mainly operated by the Marine Corps but also by others. And again we believe that this is only the beginning. The market behavior in the US is changing from fulfillment of urgent needs to program suffer code and this will help us build a backlog as opposed to a neurotic and unstable market that we experienced until now. Our pipeline is strong, it broadened nicely in the past year with significant revenue potential. Potential orders are global, but especially strong in the US, given the market maturation and our always strong presence there. And I want to mention that orders to new customers that we have previously supplied and announced earlier this year and last year as well as orders we are now beginning to supply have the potential to lead to very significant follow-on orders compared to the initial stage. As we move through 2019, it is clear that this is the year we have been waiting for since we believe we are now at the inflection point of the market acceptance and growth. About our cash position and investment in the future, we have a strong cash position at about $21.5 million at the end of the first quarter. It is enough capital to continue the investment in our US production line. It provides us ample capital to further invest in R&D and maintain our lead as well as marketing dollars to pursue market opportunities and initiatives. It provides the increased working capital for building inventory to address the short turnover needs of the market that we have experienced until now and still do. And it also shows the stronger stable supplier in front of our traditional customers. In summary, we are very pleased with our first quarter performance, which tells us that everything is on track. 2019 is expected to be a record year for us with over 40% of revenue growth year-over-year, while we believe that ‘19 is only the beginning. Our balance sheet is very strong. It gives us the ability to make the right investments in order to capitalize on significant and immediate needs in our end markets. We see initial orders from new customers continuously coming at us. Always high growth potential and the pipeline is strong and promising. And again, we do believe that even though ‘19 is a very strong year for us, and probably the record year ever for RADA, 2020 and onwards should be even better. At this point, I'd like to hand over the discussion to Avi Israel, our CFO. Avi?

[Avi Israel:]

Thank you, Dov. Good morning. Good afternoon, everybody. 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 $8.7 million, up 44% year-over-year. Our gross margin grew 45% compared to the first quarter of last year, and was 36% of revenues, same as it was in the first quarter of last year. This is the level we currently expect and happy with. As Dov explained earlier, we're making significant investment, especially in our infrastructure in the United States. So operating expenses grew and will continue to remain at high levels to support our growth in the future and as expected. R&D increased to $1.4 million in the first quarter, up from $0.6 million in the same quarter of last year. Sales and marketing were $900,000 compared to $600,000 in the first quarter of last year. G&A expenses were $1.5 million in the first quarter, compared to 0.7 million last year, with a significant increase related to our newly established US presence. Operating loss was at about $0.6 million in the first quarter, compared to a profit of $0.2 million in the same quarter of last year. Net loss attributable to our shareholders for the first quarter was $0.5 million compared to $0.2 million of profit in the first quarter of last year. I would like to summarize and point out some highlights from our balance sheet as of March 31, 2019. We ended the quarter with $21.5 million in net cash and no financial debt at all. I would also like to point out the new FSB 842 regulation that is relevant to operating leasing assets and liabilities. This new regulation was adopted by RADA in the first quarter of 2019. And as a result, we present $1.9 million of the operating lease assets and liabilities, both short and long term. Our shareholders’ equity stands at about $43 million. In summary, as Dov mentioned, and as the financial results demonstrate, we are pleased with our progress and on track with our plans. That ends my summary. We should now open the call for questions. Operator, please.

[Operator:]

[Operator Instructions] The first question is from Michael Brcic of National Securities.

[Michael Brcic:]

Hi guys, congratulations again. Two quick questions, one is on the profit or loss, was there any FX, the foreign exchange changed anything or because most of this was in US dollars, didn't have a big effect.

[Avi Israel:]

Our currency of operation is US dollar and most of our revenues are measured in US dollars. Most of our expenses though, in at least Israel are in the new Israeli shekel. But the influence was insignificant.

[Michael Brcic:]

Got it. I guess more of a question for down the road. But do you see on the protection side, is it possible to get commercial applications, for example, like protecting a big shopping mall or something like that from some sort of aerial problem.

[Dov Sella:]

We are doing radars and radars are part of, let's say, the protection system or in military terms, weapon system. Radars need some alert distance in order to become effective and to give the whole solution to the detection. Shopping malls typically within urban areas are not threatened by long range threats. It's done by a very short range, manually piloted drones, let's say, if you are referring to drones, you don't need radars for that. The ranges are small and there are other means for that. We also believe that the solution to the urban area and to the civil area, the short range nuisance that today this world is experiencing will come to an end very soon through technology, through communications with each and every drone, through licensing and so on. However, there are other civilian or semi-civilian facilities that really need radars in order to address the non-cooperative drones, such as airports, such as critical infrastructure. And then, alright, as we become effective and be part of complete solutions that we believe that it will be provided by the same defense players, because at that moment when you detect something, it is clearly hostile and you need to do something against its continuation of patterns.

[Michael Brcic:]

Got it. Finally, you sort of addressed this a little bit with building the production line here in the US. I’m just trying to think of your capacity to be able to fill, if you get some big orders, how is the planning going for that.

[Dov Sella:]

Okay, our current capacity in Israel is measured -- is sized at about close to $100 million worth of radar deliveries. And once we have the US facility, it doubles that. I don't think we are there at all yet. And if we do come close to that, within six months, we can add another production line in a reasonable investment and triple it. So I don't think that capacity is an issue at all at our stage and also looking into the future.

[Operator:]

The next question is from Kevin Dede of H.C. Wainwright.

[Kevin Dede:]

So Dov, you mentioned, I think two specific plans. One was in conjunction with Elbit on the Bradley and then another was, I think, you said 150 vehicles in conjunction with the army. I was just wondering if you could just go over those again please, maybe a little more color and I apologize I missed the names of the programs.

[Dov Sella:]

Okay. Let's start with 144 vehicles that are planned as part of the IM-SHORAD program of the US Army. This is short range air defense solution and our radars are part of the system. This is one program and other program is the Bradley, the active protection system for the Bradley. Here we are talking about brigade, which is again 150 vehicles as a starting point. But we're also talking about the Marine Corps GBAD, ground based air defense program, which is being crystallized, we've assisted them with quite a few radars. I mean, we have delivered to the Marine Corps over 100 radars in the last year or two, as part of their feasibility studies, field tests and even operational deployments. But, they’re now preparing the GBAD program of record, which we are planning to be part of.

[Kevin Dede:]

Okay. You also mentioned that you could see the total potential going to 15,000 tactical relevant vehicles, is that the sum total of all three of those programs?

[Dov Sella:]

No, there is a bit of confusion here. The short vehicles are different from the active protection vehicles. When you are talking about active protection on a tactical vehicle, you are talking about protecting the vehicle itself. Here, we say that the total addressable market may be as high as 15,000 vehicles. It heavily depends on affordability and the doctrine of the forces, but this is total addressable market. When we are talking about short range air defense and GBAD, ground based air defense, which are synonyms, we're talking about mission vehicles that protects an area that protect a force and the numbers are dramatically less.

[Kevin Dede:]

Okay, okay. Would you say, of the roughly 8 million generated in March quarter, was it say 90% radar or were there some avionics and navigation components of sales?

[Dov Sella:]

It’s a mixture of both avionics and radars.

[Kevin Dede:]

Okay. Is it fair enough to say 50-50, or you can give me a rough ballpark on that mix?

[Avi Israel:]

We don't give that breakdown as you already know from previous conversations, but we estimate the avionics market and that's not a secret as well on a yearly basis to be between, every number between $10 million to $13 million. That's what we expected and we are in line with that.

[Kevin Dede:]

Okay. Thanks, Avi. Dov, could you go over the rollout in Maryland and the timing on your road to production there.

[Dov Sella:]

We have leased a space, we are recruiting people, we have issued orders for the heavy equipment that takes a few months to get delivered. And the plan is to start delivering to customers from our US facility in the fourth quarter of this year.

[Kevin Dede:]

Okay. What do you suspect, Avi, might be the implication to the P&L as the Maryland facility comes online.

[Avi Israel:]

As to the P&L, we're talking about the leasing expenses, obviously, and the maintenance expenses for the space. It's all budgeted and expected. The numbers are, as you can imagine, we're talking about around about 25,000 square foot in total, including offices as well as production space. Prices are well known in the US, no surprise. So, the P&L, we are not talking about, as production will grow, it will be part of cost of goods sold, mainly. As far as this new regulation of 842, this operating lease presentation, the lease agreement is pretty long, it's for like seven years plus option. So, it will have a substantial influence on the balance sheet. But, excuse me, for treating it as a technical presentation. There's no new information that was not exposed in the notes up until today. Now, it's on the face of the balance sheet. It's no more than that.

[Kevin Dede:]

I understood. My thinking might be though, that you could see margins compress a little bit as volumes roll out, is that a fair assumption?

[Avi Israel:]

It's too early to say what will happen, what will be the magnitude of the growth, the split between production in Israel and production in the US. That's way too early to say at this moment.

[Kevin Dede:]

Okay, fair enough, Avi. Thank you. And thank you both gentlemen for visiting me in Israel. I really appreciate that.

[Dov Sella:]

Thank you, Kevin.

[Operator:]

The next question is from [indiscernible].

[Unidentified Analyst:]

Good morning or good afternoon to you guys. I just read that in the last skirmish between Hamas and Israel, they used new weapon, drones that release bombs. In an interview with you Dov, you said that RADA has the ability to discover even flying bees. My question is, what is the procedure? How do you convince the Israeli army to buy your equipment?

[Dov Sella:]

The usual way, we demonstrate, we meet, we show and then hopefully they will buy.

[Unidentified Analyst:]

Do you have a special connection with them? I mean how often do you meet them to show your radars?

[Dov Sella:]

We do whatever is needed in order to promote our business and being successful.

[Operator:]

[Operator Instructions] The next question is from Jeff Bernstein of Cowen.

[Jeff Bernstein:]

Hey, guys. Just a couple of questions, what's the CapEx expected to be in 2019?

[Avi Israel:]

[Technical Difficulty] innovating and enlarging our facilities in order to deal with higher quantities as reflected in our financials and as planned for the rest of the year and they used to follow. [Technical Difficulty] no more than $1 million. So CapEx for 2019 is a combination of these two.

[Jeff Bernstein:]

That's great. And then, so it sounded like we should expect operating expenses to be at these kinds of levels, which don't necessarily imply profitability this year and potentially being breakeven again next year. Is that a kind of general statement? Correct?

[Avi Israel:]

You would excuse me for not commenting on next year profitability, especially at this stage, it's way too early to say. This year, as Dov mentioned already, we focus on our growth while maintaining our gross margins, currently in the last five quarters, being pretty stable at 36%. And this is where our focus is. R&D is growing. And, but will not substantially grow, since we're coming to the area of when we will feel pretty comfortable. G&A will grow as a result of the growth of our US presence. But these are the components that will reflect our OpEx in the coming year or so.

[Jeff Bernstein:]

Got you. Okay, that's great. And then you talked about R&D on some new products. We hear some details about new Products this year, is that next year's business?

[Dov Sella:]

Some of them will be launched earlier or -- later on this year, and some of them in 2020.

[Jeff Bernstein:]

Great. And then lastly, I guess Raytheon and Lockheed Martin are combining their efforts on this US sensor program. What does that mean for the program? And in your mind, what does it mean for you guys’ potential participation there?

[Dov Sella:]

It's a good question. I mean, you can imagine that if Lockheed Martin and Raytheon are joining forces on this program, probably, there is a slight room for anybody else. The program is still in its RFI stages, requirements are not stable and also from the beginning, we did not assume that if it is relevant to us at all, we did not assume that we can approach directly to the customers and end users here. We will explore our options with these big boys and then we'll see how it goes.

[Operator:]

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

[Dov Sella:]

I'd like to thank you all for participating in this call on behalf of the management and myself. I want you to be aware that we are going to present the company this Thursday at the B. Riley Conference in Los Angeles and the week after in New York City on Thursday, at the Ladenburg Conference. I will be in New York City end of next week, so if you want to meet me, you can connect with our IR people and either set a call or a face to face meeting, if you prefer. We look forward to speaking with you and updating you next time. Thank you, all. Bye-bye.

[Operator:]

Thank you. This concludes the RADA Electronic Industry's first quarter 2019 results conference call. Thank you for your participation, you may go ahead and disconnect.