RADA Electronic Industries Ltd.
Q2 2019 Earnings Call Transcript

Published: 21 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Rada Electronic Industries second quarter 2019 results conference call. All participants are presently 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 view it in the News section of the company’s website, 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?

[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 line 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 contents of this conference call.With that, I would now like to introduce Rada’s CEO, Mr. Dov Sella. Go ahead, please.

[Dov Sella:]

Thank you Ehud, and good day to our participants, and welcome to our second quarter of ’19 conference call.I want to start with the results summary of the guidance. First, we are extremely pleased with our second quarter results. It’s the best ever quarter in Rada’s history, a two-digit quarter with top line revenues surpassing $10 million in revenues, and it is over 50% of year-over-year growth. Furthermore, we did not sacrifice gross margins to achieve this growth and we maintained the gross margin at around 36%. It is the level of what we targeted from the beginning.We increased our guidance a few weeks ago. We expect that our revenues this year will surpass $43 million compared to the $40 million guidance that we gave earlier, and again this is going to be the best ever year in Rada’s history. It shows 54% of growth year-over-year, so as can be seen, our early growth is still accelerating and we do believe that this level of growth can be maintained along the next year as well.This type of growth currently is the fruit of the seeds that we have planted in the past two years. We were at the right moment with the right product mature and available, that we started developing back in 2012. Along with the wakening of our market for tactical radars, especially the counter drone segment, we see now the results in the form of top line growth. Bottom line is that everything in on track and the results of this growth are validating for us.Let’s talk a bit about the general picture. We believe that the market for our tactical radars is moving from the initial stage that we have experienced in ’17 and ’18 to the growth stage, and hopefully towards an inflection point even. Our strong revenue growth demonstrates part of that, but more than that, the need is becoming more visible and clear primarily in the U.S. market and also in our other relevant markets, like Israel, Europe and others.We also, as an example, on the news a few weeks ago, a first and very public demonstration of the United States using our technology as part of their solution to destroy Iranian drones in the Gulf of Hormuz. Yesterday, there as an announcement by the Israeli Ministry of Defense that [indiscernible] Elbit with their Iron Fist active protection system were awarded with the program for equipping the Eitan fighting vehicle and the D-9 Bulldozers here in Israel, and as most of you may know, our radars, our CHR radar is in the heart of this system for 11 years now, so we expect negotiations and receipt of orders in a few weeks or a few months.All these indications point in our opinion that we are in a definite move from the initial stage to the growth stage of the market. Since recently we have seen a nice influx of new investors, let me reiterate a bit about the market potential.We estimate just in the U.S., the total addressable market for our tactical radars is about $2.5 billion over the next 10 years, $1.5 billion we allocate to the active protection segment of the market and the other $1 billion to the short range air defense, while counter [indiscernible] and counter drone solutions are included in this segment, and after while evaluating the rest of the world, the addressable market, we come to similar numbers, so we estimate our total addressable market at about $5 billion.We believe that we have solidified ourselves as market leaders at this stage in this emerging [indiscernible] market, and by the end of 2019 we won’t have even touched the 1% of the potential of this market, of course, so the opportunity ahead of us is huge and we do believe that the market behavior, especially in the U.S. will soon change from fulfillment of urgent needs to what is [indiscernible] a problem, so [indiscernible] meaning programs that are executed over a few years term, and it will help us build a backlog for a few years ahead. Until now, we’ve been working in an environment of very short turnover of deliveries built into stock and delivering in a very short notice to fulfill urgent needs.In terms of our pipeline, it continues to broaden with significant revenue potential. The potential orders are global but especially strong in the U.S. given the market maturation and our strong presence there. Still, there is significant upside from follow-on orders and the initial orders that received by other customers the world over.In summary, I would like to emphasize that Rada today is a company primarily in the exciting technology of software defined tactical radars. We still have our legacy avionics as a stable at a level of $10 million to $12 million, but the focus is on tactical radars. The development and debut for our products to the market has been perfectly timed, as I mentioned earlier, and hopefully we are approaching an inflection point as the market takes up this progress significantly.As we approach 2020, our solutions are mature and have a significant competitive edge. We are meeting very immediate and urgent defense needs, as I just mentioned, in active protection, counter drone, short range air defense, and counter mortars, what is named CRAM, counter rocket artillery and mortars. To date, we already have seen initial sales of these products which are being used by armed forces in the U.S., several armed forces or armed branches in the U.S. and Europe, and also in Israel, and we believe that soon these orders are going to expand significantly.Because of the huge opportunity ahead of us, we have been gearing Rada to significant growth, and Rada today has significant competitive lead. Currently this situation, which we intend to maintain and we invest heavily in research and development and developing next generation products to maintain this lead. Our U.S. based production will be ready by year-end to gear up for significant sales in 2020 and the goal is to deliver all the U.S. market requirements from our U.S. facility and deliver to the rest of the world from our Israeli production facility. We believe that profitability will follow in the coming few quarters as we capture significant portion of the current emerging market and maintaining our gross margin levels, as demonstrated this quarter and previous quarters.We have a strong cash position at about $15 million. It is enough to keep us producing to stock, building our U.S. facility and completing it, and continuing with our R&D major efforts to keep the lead. It also shows a strong and stable supplier in front of our customers, which are typically much bigger than us.In conclusion, again we are very pleased with what we have achieved this quarter and in the first half of this year. It tells us that everything is on track and more than that, with growth of 50% and more, we believe that the inflection point is coming near and it should reflect the performance in the few years to come.At this moment, I would like to hand over to Avi Israel, our CFO. Avi, go ahead, please.

[Avi Israel:]

Thank you Dov. Good morning to our U.S. participants and good afternoon to our Israeli ones. You can find our results on the press release we issued earlier today and I’ll provide a short summary of the second quarter results.Second quarter revenues were at about $10 million, up 52% year-over-year. Our gross margin was at 36% of revenues, same as reported in Q2 of last year. This is the level we currently expect and are happy with, with potential upside in future as our revenues continue to grow.As Dov explained earlier, we continue to make significant investments especially in R&D as well as in our infrastructure in the United States, so operating expenses grew. Our aim is to bring operating expenses toward a $20 million annual range, which we believe will be sufficient to support our current expected growth. R&D expenses increased to $1.7 million, up from $0.7 million in the same quarter of last year.Sales and marketing were $1 million compared to $0.7 million in Q2 of last year. G&A expenses were $1.8 million compared to $0.9 million of last year with a significant increase related to a newly established U.S. presence. Operating loss was $0.8 million compared to $0.1 million in operating income in Q2 of last year.Net loss attributed to Rada shareholders for the quarter was $0.6 million. This compares with $0.1 million in net income in Q2 of last year.I’d also like to summarize and point out some highlights of our balance sheet as of June 30, 2019. We ended the quarter with $15 million in cash and no financial debt at all. Our inventory increased by $5 million in the last six months in order to support product delivery in very short turnover. Our shareholders equity stands at $42 million, financing $75 of our balance sheet.In summary, as Dov mentioned and as the financial results demonstrate, we are very 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 Brian Kinstlinger of Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

Great, thanks for taking my questions. Wanted to start with the active protection news you talked about in the press release. Elbit is supplying Iron Fist for the AFV and D-9. Like you said, the deal’s valued, it looks like in the press release, at $250 million over a decade, so that’s $25 million per year. Can you talk about how investors should think about your share of this program, and will this program be able to sustain 36% margins or better?

[Dov Sella:]

At this stage, it’s just an announcement of selection. We need to negotiate--Elbit needs to negotiate it with the IMOD. We need to negotiate it with them, and I cannot talk about it further.

[Brian Kinstlinger:]

So the $250 million number that’s been announced, that’s not accurate yet? That’s not actually been finalized, is that correct?

[Dov Sella:]

I don’t know. I don’t know who notified that, and I cannot comment on that.

[Brian Kinstlinger:]

Okay, all right. Well then maybe differently, we can talk about active protection in the U.S. I know that you’ve been in various stages of testing and delays. Talk about where you are with that process and when you expect deliveries on initial prototypes.

[Dov Sella:]

Yes, we are gearing up towards a resumption of tests after some improvements in the configuration of the complete system. I’m talking about the complete Iron Fist system, including our radar. We are gearing up towards resuming the tests towards the end of this year, and if all goes well we do expect that deliveries will be towards--will start towards the end of 2020.

[Brian Kinstlinger:]

Okay, and can you remind us at this point which vehicles or infantries you plan to be working with?

[Dov Sella:]

Yes, currently we are on the Bradley armored fighting vehicle and the discussion is on First Brigade.

[Brian Kinstlinger:]

Okay, [indiscernible]. Great. Then in your radar business, I take it that’s driving pretty much all of the growth, given active protection isn’t generating a lot of revenue yet. Can you talk about the main drivers? Is it mainly short range air defense so far or have there been other growth drivers?

[Dov Sella:]

It’s mainly short range air defense, specifically the counter drone segment [indiscernible].

[Brian Kinstlinger:]

Great. Then you’ve talked about some other countries, Israel and Europe, but is today’s results, the Q2 results, is that mostly reflecting the U.S. and Israel and Europe are more of an opportunity, or are you already seeing the benefits or the demand from Israel and Europe?

[Dov Sella:]

We already see the demand, we already see it in revenues. It’s kind of breakeven, the U.S. and the rest of the world.

[Brian Kinstlinger:]

Meaning half your revenue is U.S., half the rest of the world for these--for short range defense?

[Dov Sella:]

Yes, roughly.

[Brian Kinstlinger:]

Great. Then I guess I want to get a sense for the difficult comparisons as we look at next year. Oftentimes if there is one or two or three very large orders, it creates some lumpiness. Has that been the case this year or is the growth fairly broad based?

[Dov Sella:]

I’m sorry, I didn’t entirely--the growth in this quarter? The growth in this quarter is spread evenly over a few contracts.

[Brian Kinstlinger:]

Okay. Then you talked about building up your U.S. entity and the goal of production readiness. Is this both advanced protection systems and short range defense for the U.S., or is it just one or the other?

[Dov Sella:]

All our radars will be built in the U.S., never mind what the application is.

[Brian Kinstlinger:]

Great. Last question I have and I’ll get back in the queue is as your business continues to grow, it looks like the second half of the year is going to be stronger, and I’m guessing given this is just the beginning, 2020 should be stronger as well. What are the plans for increasing R&D and sales and marketing investments, and how should we think about that as it flows through the income statement?

[Dov Sella:]

We are not waiting for the growth with increasing our R&D. We are increasing our R&D since mid last year already, anticipating this growth, so this will not change the R&D plans. The R&D plans are there and they’re being executed, and sales and marketing is evidenced through the fact that we are growing because we--and our go-to-market is through the integrators, and we are already there with most of them, with the important ones in that areas that we are active at, while in emerging areas we are in development phases with others. We don’t think that the S&M expenses will be something overwhelming to ensure this growth. We already have planted the seeds two years ago, one year ago, and now we are starting to harvest the fruits.

[Brian Kinstlinger:]

Great. Actually I have one last question on inventories. You highlighted obviously we’ve gone from $11 million to $16 million in six months and a short turnover of converting that. Should we expect to see still with the increased demand significant increases in inventory over the next six months, or do you think that will tail off a little bit?

[Dov Sella:]

It depends. I mean, when the market is new and emerging and has urgent needs, the only way to address the market needs and to be there and to take the opportunity to your side is by building to stock, anticipating what’s going to happen and delivering in a short cycle. In this case, we need to invest in working capital and by inventories, but once we start executing the bigger programs, the programs [indiscernible] along two, three, maybe even four years, the whole process is changed. You can plan ahead, you don’t need to buy material upfront, you probably also will receive advance payment for long lead items and so on, so it will be a combination because the market is not stable all over.

[Brian Kinstlinger:]

Great, thanks. I have some other questions, but I’ll get back in the queue.

[Dov Sella:]

Thank you.

[Operator:]

The next question is from Isaac Videmlansky [ph[, a private investor. Please go ahead.

[Isaac Videmlansky:]

Yes. First of all, regarding the 250 million shekels, the analyst that asked before the question, he gathered numbers from the Globe newspaper.Now to my question--

[Dov Sella:]

He said million dollars, by the way.

[Isaac Videmlansky:]

How much?

[Dov Sella:]

Same number but in dollars.

[Isaac Videmlansky:]

Same? Oh, wow. It’s even better. At the beginning of the month, the Israeli Army introduced a new sophisticated tank by the name of Carmel, equipped with special radars. Are you involved with this Carmel project and what size of orders do you expect?

[Dov Sella:]

Carmel is not a tank. Carmel is a fighting vehicle--

[Isaac Videmlansky:]

[Indiscernible], tank, whatever.

[Dov Sella:]

It’s a concept. There are no orders yet and the three big industries here in Israel are showing what they have in mind. There is no order yet and I cannot anticipate anything. I can tell that we are involved.

[Isaac Videmlansky:]

Okay, and then my next question is regarding R&D that you mentioned. In one of the past conferences, you mentioned that you are working on four new radars. Can you give at this time some more color, more details about those radars that you are developing?

[Dov Sella:]

No.

[Isaac Videmlansky:]

No, again no? Okay. Thank you.

[Operator:]

We have a follow-up question from Brian Kintslinger of Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

Yes, great. One more question on Iron Fist. The solution that you provide to the Israel defense ministry, is that very much the same as the U.S. or are there major differences, and what I’m trying to get at is as the U.S. watches you install Iron Fist into these two vehicles, how does that, do you think, impact or accelerate the U.S.’ plans, given someone else is able to use it and it’s in production?

[Dov Sella:]

It is similar, first. The U.S. has selected the Iron Fist for the Bradley before this announcement was made in Israel, and the U.S. long term plan, this is NDI - non-development item kind of urgent need. The long term plan of the U.S. was named MASS until now, now it is named Vehicle Protection System, an open configuration and modular and so on and so forth, and it is ongoing. The schedule for it is a few years to come.

[Brian Kinstlinger:]

Okay, thank you.

[Operator:]

The next question is from Michael Brcic of National Securities. Please go ahead.

[Michael Brcic:]

Hi, thank you. Just real quick, did you break down what are the revenues based on the legacy system and the new radars?

[Dov Sella:]

We are not breaking it typically, but you can assume that the proportion of--the yearly proportion is kept over this quarter as well, and we say that the legacy is stable at about $10 million to $12 million while we already gave guidance of $43 million in total, so you know, you can assume from that.

[Michael Brcic:]

Just something somebody asked before and I didn’t quite get it, but in the past you have talked a lot about the lumpiness of the business. As it is growing, has that lumpiness--I mean, do you have a little bit more visibility now than you did before?

[Dov Sella:]

Yes, we believe that the lumpiness will be towards the growth and not towards the decline.

[Michael Brcic:]

Great. Thank you very much, and congratulations for the big turnaround.

[Dov Sella:]

Thank you very much.

[Operator:]

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

[Jeff Bernstein:]

Hi, good morning. Just wondering, you mentioned CRAM specifically. Could you just talk about that market with regard to the differentiation from the SHORAD market? It sounds like you already have some systems being used, but can you just flesh that out a little bit?

[Dov Sella:]

Yes. CRAM is counter rocket artillery and mortars. We have such systems as a [indiscernible] solution around Gaza and in some other places in the world. It is typically more fixed solution compared to the short range air defense that is more mobile in most cases. Also, the big difference in the--the hardware is typically the same but the algorithms and software enable in CRAM to detect the shot immediately and to track down back to where it was shot from, while air defense you do more volume surveillance of the air, you can find threats like rockets and missiles, but you don’t necessarily focus on where they came from but more where they are now, and you want to shoot them down.

[Jeff Bernstein:]

That’s great, so that’s really a differentiated market. Have you talked at all about what you think the TAM is there?

[Dov Sella:]

The TAM? We take it as part of the short range air defense solution because our radars are multi-mission and sometimes you need also CRAM on the move, even though the main application is mobile SHORAD. This segment is within this market.

[Jeff Bernstein:]

That’s great, thank you.

[Dov Sella:]

Sure.

[Operator:]

The next question is from Scott Huntington of Bodell, Overcash, Anderson & Co. Please go ahead.

[Scott Huntington:]

Good morning, folks. Appreciate the straightforward call here and the fruit of your labors. Just a quick question on Germantown. I guess we’re online for a year-end start-up. Are we safe to say that that assumes that you’re finding the necessary technical people to staff the facility?

[Dov Sella:]

Yes, we do, and we are growing in numbers. We have currently over 20 people. The goal is to have 40 people by the end of the year.

[Scott Huntington:]

Thank you. Keep moving. Thanks.

[Operator:]

The next question is from Nahum Moschitz [ph]. Please go ahead.

[Nahum Moschitz:]

Thank you very much for taking my call. Congratulations for the great quarter. I just wanted to make sure I understood what you said. You said that you expect about the same growth in 2020, like you said over 50% growth in 2020. Did I get you right?

[Dov Sella:]

We expect growth, I don’t know to what extent exactly. We do believe that what’s happening between last year and this year is an indicator. We will probably issue guidance towards the end of the year about 2020.

[Nahum Moschitz:]

Okay, thank you. Another question, please. I’ve read in an article that actually you are building another factory here in Israel in June in Samaria. Is it right?

[Dov Sella:]

No, it’s not us.

[Nahum Moschitz:]

Okay, okay. Are you building another factory here in Israel?

[Dov Sella:]

No.

[Nahum Moschitz:]

Okay, got you. Thank you very much. Keep up the good work, thank you.

[Dov Sella:]

Thank you.

[Operator:]

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

[Austin Moeller:]

Hi Dov. I was just wondering if you could compare and contrast the capabilities of the Iron Fist radar system versus the system with Trophy built by Rafael and Alta?

[Dov Sella:]

I cannot. It touches very sensitive information and data.

[Austin Moeller:]

Okay, thanks.

[Dov Sella:]

Sure.

[Operator:]

We have a follow-up question from Brian Kintslinger of Alliance Global Partners. Please go ahead.

[Brian Kintslinger:]

Great, just one question. As this short range air defense business becomes a little bit more visible to you, and although I see that it’s early and you should be growing, is there any timing we should think about, such as sometimes purchasing in the first quarter is lighter as companies put together their budgets as we think about next year, or do you think there shouldn’t be any seasonality at all that we have to think about?

[Dov Sella:]

We believe that the SHORAD contracts both coming from the Army and the Marine Corps will be, if we are lucky, in the first half of 2020; if not, in the second half.

[Brian Kintslinger:]

Okay. All right, thank you.

[Operator:]

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

[Dov Sella:]

Yes, thank you very much for joining us today on this call, and we look forward to talk to you in the next quarter results conference. We thank you again on behalf of Rada’s board of directors and management. Thank you.

[Operator:]

Thank you. This concludes the Rada Electronic Industries second quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.