RADA Electronic Industries Ltd.
Q3 2019 Earnings Call Transcript

Published: 19 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Rada Electronic Industries Third 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:]

Yeah, 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 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. And with that, I would now like to handover the call to Rada’s CEO, Mr. Dov Sella. Dov, go ahead please.

[Dov Sella:]

Thank you Ehud. Good day to our call participants and welcome to our third quarter of 2019 results conference call. I start with the results summary and guidance. I have to mention that we are very pleased with our Q3 results especially with the strong growth in revenues which surpassed the 11 million and is the highest ever in our history. Q3 is up over 60% when compared to Q3 of 2018. Furthermore we did not sacrifice gross margins to achieve this growth. Gross margin is maintained at around 36% per our targets.We are comfortable with the guidance of 2019. Expectations are for revenues to surpass 43 million this year which implies continuous growth into quarter number four with revenues over $13 million that we expect. It is translated to at least 15% sequential quarterly growth, revenue growth quarter-by-quarter and represents year-over-year quarterly growth of over 54%. This type of growth is the fruits of our -- of the seeds that we planted in the few past years as we aggressively invested in new radar technology. And it also shows that our markets have now awakened to our offerings especially the counter drone segment of this market. Bottom line is that we are on track and are very excited over what we are to face in the coming quarters.As discussed the general picture a bit. The market for our radars is here and now. We've been increasing emphasis on counter drone needs and the continued development of Active Protection segment, a moment we've been working towards for many years. The interest and need for the solutions in our -- in which our radars are a key part is global and considering the addressable market size we believe this is just the beginning of a sustained growth period. We are at an inflection point from the initial stage to the growth stage of the market.Market behavior in the U.S. and also other places like Israel is changing from fulfillment of urgent needs to programs of record or long-term programs and it will help us to establish a backlog for a few years ahead. We expect it to happen along 2020. We see significant upside from follow-on orders to the initial orders sold to new customers further validating our radar technology solutions. And our pipeline is continuously growing and broaden with significant prospects. Potential orders are especially strong in the U.S. while other international markets are increasingly growing.In summary these are exciting times for the other team and we have been planning for that for many years now. Rada's future growth will be fueled by global sales of our radar technology through an attractive mix of growing markets. We have mature solutions with performance over price advantage versus the competition. In view of the huge opportunity ahead of us we are positioning Rada for significant growth by investing in production infrastructure both in the USA and Israel and by developing the next-generation for our radar technology to address these demanding needs of this growing markets in the coming years. We expect our operating expenses to stabilize in the near term and along with the anticipated growth to reach profitability during 2020, and overall we are very pleased with our performance in Q3 and the whole of 2019. We are on track and positioning the company for accelerated growth in the future. I'd like to hand over this discussion to Aviv Israel our CFO. Avi please.

[Avi Israel:]

Thank you Dov. Hi, everybody. You can find our results on the press release we issued earlier today and I will provide a short summary of the third quarter results. Third quarter revenues were $11.3 million up 60% year-over-year. Our gross margin was stable at 36% of revenues same as reported in Q3 of last year as well as in the last few quarters. This is the level we're currently expecting and happy with.We continue to make significant investments especially in R&D as well as our infrastructure in the United States so our operating expenses grew. Our aim is to bring operating expenses towards the $20 million annual range which we believe will be sufficient to support our current expected growth. R&D expenses increased to $1.9 million up from $0.8 million in the same quarter of last year. This was slightly higher than the R&D expenses of the previous quarter which stood at $1.7 million.Sales and marketing were 0.9 million compared to 0.7 million in Q3 of last quarter. This was marginally below that number in the last quarter. G&A expenses were $1.8 million compared to $1.1 million of last year and a significant increase related to our newly established U.S. presence. The G&A was at the very similar level to that of the prior quarter. Operating loss was $0.5 million compared to a loss of $0.1 million in Q3 of last year. The operating loss narrowed from $0.8 million in the prior quarter. Net loss attributed to shareholders for the quarter was 0.7 million, this is compared with a net loss of less than 0.1 million in Q3 of last year and 0.6 million last quarter.I would like to summarize and point out a few highlights from our balance sheet as of September 30, 2019. We ended the quarter with $16.7 million in cash and no financial debt at all. Our inventory increased significantly to $17.3 million from $11.2 million at the end of 2018 in order to support expected products delivery in short cycles. Our shareholders equity stands at 14.1 million financed -- financing 72% 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. That ends my summary we shall 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:]

Hi, good morning and thank you. I wanted to start with some big wins in APS. First, BAE was awarded a contract to integrate Iron Fist by the Dutch Army for the CV90. And I assume obviously as a supplier of radars this will benefit you. Can you talk about when this contract is expected to begin contributing to your revenue and maybe the magnitude of what this means to Rada?

[Dov Sella:]

Yes, we are not on contract yet. It was noticed that it was awarded but we expect the contract to be received in the first half of 2020. We don't expect this program to affect our revenues next year.

[Brian Kinstlinger:]

So it is a 2020-2021 event?

[Dov Sella:]

Yes.

[Brian Kinstlinger:]

Great. And then sticking with APS maybe update us on the plans for the U.S. Bradley I saw, the protest by DRS was unsuccessful and they expect a contract I think in January 2020. So is this -- will this be a contributor to 2020 revenue and maybe share maybe the impact of how you see this contract?

[Avi Israel:]

During 2020 it will be mainly testing and validation. And the revenues are expected -- maybe by the very end of 2020 but mainly in 2021.

[Brian Kinstlinger:]

Great. And then lastly with three contracts now you've got Israel and contracts with Dutch army and the U.S. And you talked about your pipeline being pretty strong I think for APS if I understood it. Could you maybe talk -- speak to your pipeline, are there a handful of large contracts like these three, are there dozens that you're bidding on, maybe just some kind of quantification on your pipeline would be helpful?

[Avi Israel:]

Well I cannot quantify the pipeline at this forum but we can say that it's not only APS and there are additional APS programs in the pipeline beyond what you've mentioned and also with some prospects that we assume our relevant to the current ones also. But the pipeline is a few tens of relatively big opportunities.

[Brian Kinstlinger:]

Okay, now clearly the demand for your tactical radars for drone defense and other SHORAD programs is solid with the growth we're seeing. And it sounds like you expect 2020 to have very strong growth as well. But I'm just wondering if this exceptional growth creates tough comparisons so that the growth rate might slow a little bit or do you think that you can sustain these abnormally strong growth rates given you're still at a small revenue base?

[Avi Israel:]

I think the latter part of your question is more relevant. We estimate the market, the total addressable market is at least $5 billion. And I think everybody is just scratching the tip of this mountain. So we do believe that growth of the market will continue.

[Brian Kinstlinger:]

Great, last question I've got and then I'll get back in the queue with some others. Maybe you can speak to the questions I get is on the competitive landscape. Have you seen any other companies or heard of any other companies developing many tactical radars or have anybody -- has anyone entered the market with a competing product?

[Dov Sella:]

I have to remind us all that when we started developing radars our biggest competitor from Israel [indiscernible] were already established in this market. So we're trying to shake the market towards our end and there are since day one and we do see some movement of smaller players in the U.S. mainly that are trying to be relevant. But we do believe that our performance over price lead is still maintained and based on that we do anticipate the growth as we depict to continue.

[Brian Kinstlinger:]

Okay, thank you.

[Operator:]

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

[Austin Moeller:]

Hi, Dov and Avi. I just had a quick question about IM-SHORAD and what the timeline of that looks like in terms of becoming a program of record both on the army side and the marine corps side?

[Dov Sella:]

IM-SHORAD is the Army program, the Marine Corps is named GBAD. The Army program is not a typical program of record, it evolved as an urgent need to a very rapid program and probably all of us -- some of us have seen that in the U.S. AUSA Conference being depicted as from slides to prototype within less than a year. So I think everybody involved including the U.S. Army are very proud of this momentum. The program itself is a sizable program for us, it's close to 150 vehicles. And if it goes as plan then it is now -- it was already published by the Program Executive Officer that it has started testing. We do see revenue start towards the end of 2020 or mainly again 2021. And again the testing and validation typically takes quite a few months until everybody's settled. This is the Marine -- the IM-SHORAD one. The Marine Corps we have delivered close to 200 radars for them for the urgent needs of the GBAD program and they are now trying to make it a program of record. We do anticipate that it will become a program of record with I don't know, maybe a couple of hundred of vehicles was of program again during 2020 and also here the revenues will be materializing in 2021.

[Austin Moeller:]

Okay, so just to clarify IM-SHORAD would be army, so all of the radars for the 144 vehicles there are going to be purchased with urgent need emergency funding and not necessarily with a program of record?

[Dov Sella:]

I'm not in the very details of the right nomenclature but this transaction is in other transaction agreement or arrangement in order to accelerate the program. So I don't know if it is classical urgent need or naturally not a classic program of record but it's very important program that the U.S. Army is running now.

[Austin Moeller:]

Okay, got it and then I just had a question on the R&D as we're sort of going into 2020 here. Is that expected to stay around 16% to 17% of sales as we go into 2020 or as aCHR and xMHR sort of get through the testing regime is that expected to sort of come back to around 12% to 14%?

[Dov Sella:]

Well, we are not looking at that from the percentage of the top-line point-of-view. We are investing in R&D so our understanding of what the market needs in 18 to 24 months from now and we have identified it about a year ago already. So we do believe that the R&D expenses will kind of stabilize relatively soon because we have equipped ourselves with the other -- manpower and capabilities to execute our plans.

[Austin Moeller:]

Okay, so the run rate there is looking more like the I guess if we're stabilizing sooner in that 1.9 million to 2 million per quarter range?

[Dov Sella:]

Something like that, yeah.

[Austin Moeller:]

Okay, great. And then I was just wondering if you could expand any on the offering being developed by Syracuse Research and would that primarily be a competitor to your offering on the Almantis [ph] for example?

[Dov Sella:]

Judging from their publications and statements I believe they are trying to bring a competitive product to the IM-SHORAD, to the Mantis [ph], to the SHORAD and the counter drone segment.

[Austin Moeller:]

Okay, great, thank you.

[Dov Sella:]

Thank you.

[Operator:]

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

[Michael Brcic:]

Hi guys, just a quick question on the cash usage and where do you see the cash balance over the next few quarters and how comfortable are you with your total cash level to achieve profitability?

[Avi Israel:]

We closed the quarter at around $17 million in cash and no debt at all. Looking into the preliminary numbers coming from the 2020 budget planning it looks like we have enough cash to move forward and to support our growth, CAPEX expenditures, and so on so forth. So we don't foresee any problem with the cash. And we're looking for bank alternatives in case we're going to need them. So it doesn't look like an issue from our point of view.

[Michael Brcic:]

Great, thank you. Congratulations.

[Operator:]

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

[Brian Kinstlinger:]

Yeah great, just a little bit of follow-up on that last question. Inventories building, demand is getting even stronger. Can you talk about your plans for inventory, do you expect that to increase significantly, gradually increase, how are you thinking about inventory?

[Avi Israel:]

We have an annual plan and we translate it to either ahead of order production or based on order and the down payments and so it will be a mixture. Naturally when you have long-term programs you have down payment, you have a more relaxed market evolution. And we are on the verge of changing from urgent needs to more stable market with some forecasts as we said. We did increase our inventories but we do believe that this level of inventories is basically what we need in order to address our upcoming plans.

[Brian Kinstlinger:]

So to be clear you don’t expect as demand is increasing this year you'll have to increase inventory levels significantly through 2020?

[Dov Sella:]

Not significantly. I believe numbers can grow because we want to be on the safe side and the markets behavior is sometimes a little hectic as far as the short cycle between PO and the opportunity that we don't want to miss. And as a result we are producing to stock. Our shelves are pretty empty. So we are building our -- mainly components inventory in order to support these short cycles. So it is not a reason for dramatic or extreme increase as you mentioned.

[Brian Kinstlinger:]

Great, and then in terms of CAPEX you talked about expanding infrastructure I think and capabilities in different regions. Is that going to be reflected in CAPEX or is that going to be more reflected in operating expenses and maybe if you can expand on what that is from a budgetary standpoint?

[Dov Sella:]

As always it's a combination of things. Our CAPEX investments in the U.S. is there but with the growth of the market if we realized ahead of time that we need to increase production capability we will increase CAPEX. We are -- I think we are at a steady level of CAPEX investment in the last two years. Last year we actually increased it in the U.S. but looking at the Israeli CAPEX level we are at the steady-state and the U.S. is -- the huge investment is behind us. So we do believe that we are more relaxed on that side as well.

[Brian Kinstlinger:]

Great, finally for Avi maybe you can share just some numbers with us for the third quarter. Can you just talk about what CAPEX was and then depreciation and amortization and stock comp so we can calculate adjusted EBITDA for the quarter?

[Avi Israel:]

We usually do not repost these numbers and definitely I don't want to create a situation under which there is a differentiation between shareholders that are participating on this conference or not. So obviously these numbers are I believe based on the -- even 2018 financial statements you can guess and not be very far from the numbers.

[Brian Kinstlinger:]

Okay, thank you.

[Operator:]

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

[Unidentified Analyst:]

Yeah, thank you for taking my call and congratulations for the great quarter and the excellent results. I wanted to know is the U.S. production facility ready or is that kind of really like only in a couple of months or when?

[Dov Sella:]

We are doing the ribbon cutting ceremony on the 2nd of December with the governance of Maryland. Infrastructure is almost all there and we do plans to release our first assembles radar -- assembled and tested radar from that facility by the end of December. So that's the resolution.

[Unidentified Analyst:]

That's great. And if I understood right in the past you've said that right now you have capability of giving 100 million. Is it like annual rate and now you want to double it 200 million annual rate is it right?

[Dov Sella:]

Yes, worth [ph] of radar sales, yes.

[Unidentified Analyst:]

And if I may ask you Mr. Sella, when do you think you're going to fill this 200 annual rates and when do you think --?

[Dov Sella:]

I think around the production size. We are experiencing significant growth. If the growth continues and -- you can do the math yourself. We do believe that the $200 million production potential is adequate at this stage for any particular reason.

[Unidentified Analyst:]

And what do you think you're going to need to make another plant or another facility like in a year and two years where…?

[Dov Sella:]

When we need to we will do it.

[Unidentified Analyst:]

Okay, thank you.

[Dov Sella:]

Thank you and thank you very much.

[Operator:]

[Operator Instructions]. There are no further questions at this time. Mr. Sella would you like to make your concluding statements.

[Dov Sella:]

Yes, thank you operator. On behalf of the management of Rada I would like to thank you all for your interest in our business and we look forward to speaking with you and updating you in the next quarter. Have a good day everybody. Thank you.

[Operator:]

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