RADA Electronic Industries Ltd.
Q4 2019 Earnings Call Transcript

Published: 10 Mar 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Rada Electronic Industries Fourth Quarter and Full Year 2019 Results Conference Call. All participants are presently in a listen-only mode. [Operator Instructions] 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, 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. Earlier today, Rada release its results for the full quarter and full year 2019. By now you should have all received the copy of the press release which is also available on Rada website at www.rada.com. 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. 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 day to all call participants and welcome to our fourth quarter and full year 2019 results conference call. Let's start with result summary and guidance. Obviously, we are pleased with our Q4 results, especially with the strong growth in the revenue which focused $14 million, the highest ever in Rada's history and up over 71% when compared to the fourth quarter of 2018.For the year, our revenues were over $44 million, $44.3 million to be exact, up 68% over last year. The highest ever in our history and ahead of our full year target which started at $40 million and then updated to $43 million. Furthermore, even while we significantly increased our OpEx in 2019 due to the high investment in our US presence and the development of our next-generation radars, the very strong revenue growth and stable gross margin throughout the year enabled our EBITDA to be comparative in the second half of the year.In early January, we issued our guidance for 2020. We expect our revenues to exceed $65 million representing over 47% growth in 2020. Furthermore, we expect Rada will continue to grow on a sequential basis through a quarterly sequential basis throughout 2020 from the top line, which implies we will surpass the breakeven point and grow profitability during the year. This type of growth is the fruit of the seed we planted in the past few years as we aggressively invested in radar technology. It also shows that our market both in the US and globally have now awoken and are aware of the offering, especially counter drone and point defense, while active protection is still in the waking up stage.Bottom line, we are on track in what we've been looking forward for many years are finally arrived. Let's talk a bit about the general picture. The interest and need for the solutions in which our radars are key part is global. And considering the addressable market size, we believe this is a just beginning with sustained growth period. Second half of 2019 have indeed been the spot of the transition from the initial stage to the growth stage.Market behavior in the US but not only in the US other places including Israel elsewhere in the world is beginning to see these new capabilities which our Rada are enabling its critical for defense need. We, therefore see programs moving from the fulfillment of urgent needs to multi-year acquisition programs, which should enable us to start building a backlog along the 2020.About our sales progress. As many of you know in the United States, we are currently targeting a number of programs. Let's start talking about the Bradley Active Protection Program. We are at the heart of IMI, Elbit/IMI Iron Fist Active Protection System which is in process of being installed on the US Army's Bradley infantry fighting vehicle. And I would like to touch briefly on this program which has been in the news lately. There are three phases to this program. The first one characterization was completed in 2018. The second phase qualification is ongoing, planned to be completed within a year. And the third phase is production for the first Brigade.The original plan was to start equipping the first brigade by the end of 2020 in parallel to qualification. The project has been pushed back by two years and is now planned to be performed in sequence. We do hope that successful qualification has the potential to bring the schedule forward, but currently we cannot -- we don't see formally something around that. I want to highlight that even while this project has been delayed, it was planned to first impact our revenues in 2021. At this stage, we see some other programs that are being brought forward in the US and elsewhere that will compensate for any of these delayed revenues.We estimate the market freight as for APS systems at about a $3billion in the coming decade split evenly between US and the rest of the world and we feel a very well positioned right now. Despite the Bradley delay, we stand by and feel even more confident with regard to our 2020 expectations than we were a few months ago.Another program is the short-range solutions, short-range air defense solutions for the Marine Corps and the US Army. We estimate that short-range air defense market will be a $2billion market over the coming decade, also split evenly between the US and the rest of the world. We are currently serving the US Army IM-SHORAD program, providing the protection for four battalions, air defense battalions. We are also providing systems to the Marine Corps, a ground-based air defense program. In addition to the APS insured to the maneuver force base in point defense has been becoming the recently a clear need mainly since the hostile attacks in the Near East by Iran and its allies. Beyond what has been delivered to date, we see significant upside from follow-on orders to the initial orders that we have delivered in the last two years.Our pipeline continues to broaden with significant prospects. Potential orders are especially strong in the US while other international markets are increasingly growing. Let's -- before concluding let's talk a bit about the coronavirus and its effect on our business. As of now, it has the no impact on our sales and deliveries since we do not use Chinese parts or material on one hand and maintain inventory levels to support immediate needs on the other hand. However, if current travel restrictions continue for an extended period, it will likely have an impact on our business development therefore. That may have effect maybe later this year and into 2020 -2021.We also assume that the situation in China may affect the availability and price of a global supply chain as demand for non-Chinese parts and materials may rise and cause allocation of supply that we consume. All-in-all, we do wish well to all those impacted by virus and hope as all of are that global situation will stabilize soon.In summary, these are exciting times for us and finally reaching the stage we have been planning for quite a while now. We have matured solutions with the strong performance of our price advantage versus competition. In view of the opportunities ahead Rada is positioned for significant growth after investing in our production infrastructure both in USA and Israel, leading radar technology which keeps evolving, addresses the demanding needs of this growing market for the coming years. And overall we are very pleased results of performance in 2019 and look forward to continue growth in 2020 and the years to come.I'd like to now to hand over the discussion to Avi Israel. Avi, please go ahead.

[Avi Israel:]

Thank you, Dov. Good morning to our US friends. Good afternoon to Israeli ones. You can find our results on the press release we issued earlier today. And I will provide a short summary of the fourth quarter and the full-year results. Fourth quarter revenues were $14.4 million, up 71% year-over-year. For the year, revenues were $44.3 million, up 58% year-over-year.Our gross margin in the quarter and the full year was at a stable 36% of revenues, the same as reported in the Q4 of last year, as well as in 2018. This is the level we currently expect and are happy with. As you know, we continue to make significant investment in 2019 especially in R&D and marketing, as well as our infrastructure in the US. So our operating expenses grew. We expect operating expenses to stabilize around it's around current fourth quarter levels throughout 2020.Operating loss was $209,000 compared to $102, 000 in the Q4 of last year. Operating loss narrows from $494,000 in the prior quarter. For the year, we reported an operating loss of $2.1 million versus an operating income of $62,000 in 2018. Net loss is attributable to shareholders for the quarter was $295,000. This is compared with a net loss of $86,000 in Q4 last year and $686,000 last quarter.For the full year, net loss attributable to Rada shareholders was $2 billion versus $163,000 last year. We reported a positive EBITDA for the quarter, $587,000 versus $401,000 in Q4 of last year and $105,000 last quarter.Full year EBITDA was $407,000 versus $1.8 million last year. I would also like to summarize and point out some highlights from our balance sheet. As of December 31st, 2019, we had $13.8 million in cash and no financial debt at all. On January 10th, 2020, we significantly strengthened our balance sheets by raising approximately $23.5 million from investors in the US. This is after expenses in the secondary offering in the United States as of date.At year-end, our shareholders equity stood at $41.4 million financing 64% of our balance sheet. In summary, As Dov mentioned and as the financial results demonstrates, we are very pleased with our progress and on track. That ends my summary. We should now open the call for questions. Operator, please.

[Operator:]

[Operator Instructions]The first question is from Ken Herbert from Canaccord. Please go ahead.

[Ken Herbert:]

Hello, Dov and Avi. Avi, I just wanted to ask you first for the 2020 outlook, you've indicated that you expect quarter-to-quarter some sequential improvements both in revenues and in profitability. As we think about the revenue line, can you make maybe provide a little more granularity on maybe sort of specific first quarter or first half or maybe a little more parameters around how exactly that acceleration will take place over the year?

[Avi Israel:]

As you can see our fourth quarter, Ken is, we reported $14.4 million in revenues and based on the current pipeline and maturity and backlog and so on, we can point out where the revenues will come from especially in the first half. Nevertheless, we are working in this kind of environment for the last two to three years. So we developed our internal mechanism to identify the right potential and matureness of the pipeline. So, yes, we considering the fact that we are mid March already we know what the revenues numbers will be in Q1. We have enough pipeline and backlog for to support continuous growth in Q2 and we have the necessary pipeline to support a continuous growth in Q3 and four. So we believe that the $65 million that was reported is the quarter-by-quarter will show growth and will achieve the $65 million that we reported.

[Ken Herbert:]

Okay. That's helpful, Avi. I guess maybe one other way to think about it is last, in 2019; first half revenues were roughly 42%, 43% of the full year. Is that sort of mix or that the cadence there may be the right way to think about it?

[Avi Israel:]

I believe so. I believe that you are correct. You are not highly mistaken.

[Ken Herbert:]

Okay. Great. And if I could you are obviously a little bit of sounds like push to the right on Bradley and active protection. Can you just maybe go through a little more detail, Dov, on sort of the next milestones on that program? And where you maybe see risk over the next year to as you move in from the qualification phase ideally to production in the future, but so what are the next key milestones on the Bradley APS system we should be thinking about?

[Dov Sella:]

Ken, the qualification is a process that starts very soon. I mean we are working on this together with IMI continuously, but there are gateways in front of the customer tests and demonstrations. It starts here in Israel soon in a few weeks. Then it goes to the United States. This is why this process takes let's say a year and they at the end they or even entering conclusions. I don't think we will see any specific milestones until it is declared as a success hopefully. And that's what we are here for and the biggest milestone is to get the enough funding by the US Army to upgrade the Bradley to version 4 that will enable the installation of Iron Fist on the Bradley. So probably within a year you will see favorite notifications coming from IMI mainly.

[Ken Herbert:]

Okay. That's helpful. And just finally, as we look at the new facility here in Maryland in the United States that's ramping up. Can you just provide any more detail on how that's going? It sounds like obviously everything is going well and you just sort of produced and tested the first articles there, but certainly you've got a lot of investment you put in and ramped up there. What kind of cadence should we expect out of that facility this year? And just any more commentary on how that's ramping up.

[Dov Sella:]

Currently, we plan to deliver over 200 radars to the US market from our Germantown facility. And if we are lucky even more the ceremony of the first radar launching was done two weeks ago with the presence of the Maryland, the Maryland Congressman, Mr. Trone. Everything is on track. I mean we thought at the beginning that we will be able to complete everything by end of last year, but we took into account that it maybe may slip to the first quarter. And we are here and very soon hopefully these three, not hopefully but the plan is that by the end of this month, we will start delivering radars to customers from our Germantown facility.

[Operator:]

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

[Brian Kinstlinger:]

Hi. Great. Thanks. Can you hear me? Great. I think the problem with the Bradley from what I read was not enough power to support the iron fist. Do you have other programs where you see this as a potential issue? I guess you've had a couple of wins and I'm wondering if that power of those vehicles has been evaluated given the lessons learned.

[Dov Sella:]

To our best knowledge, yes, mainly since these are new vehicles that are upgraded before the decision to select the active protection and they took the requirements of active protection and modern requirements into account. If you have to remember that the Bradley is a veteran vehicle that they sooner -- the later the US Army wants to replace it and they call it the OMF-free. So I think the situation of the Bradley is unique.

[Brian Kinstlinger:]

Okay. And you mentioned funding for the Bradley as maybe the one risk and I haven't really read up on that. Is their contention on whether that would be funded for this fiscal year or not? Or is it all likelihood expected to happen?

[Dov Sella:]

Formally it will not happen this year.

[Brian Kinstlinger:]

I see. That's quite two years now not one.

[Dov Sella:]

Yes.

[Brian Kinstlinger:]

Got it. Okay. In the original guidance I'm curious although it's unchanged was there some benefit in the second half of the year for this? And can you quantify that?

[Avi Israel:]

No. No.

[Brian Kinstlinger:]

Okay. On the other hand, we have, we do have a few other APS contracts as you announced for Iron Fist. So I'm wondering whether it be a contribution that you can quantify at all that's expected in your 2020 guidance from APS programs? And then should we expect a significant ramp in 2021?

[Avi Israel:]

I don't expect it to be significant in 2020. It is still in the low quantities of five-year tender for prototypes mainly in testing. And since we are -- we have been selected and potentially going to be the further more selected to production of new vehicles or upgrade them, these programs are for long than the spread over a few years. So significant revenues. We start only in 2022 really.

[Brian Kinstlinger:]

Got it. Okay. And then I'm wondering for maybe the fourth quarter we talked about different geographies. Can you break down roughly; I don't know maybe exact percentages of where revenue is due by geography compared to maybe a year ago?

[Avi Israel:]

It is very similar in geography compared to the year ago. US is about around 50% maybe it will increase this a bit. Israel is a big chunk mainly to export through integrators but still and the rest of the world is gradually increasing, it's about 30%.

[Brian Kinstlinger:]

30% is not so small.

[Avi Israel:]

Yes.

[Brian Kinstlinger:]

And then to the first question that was asked and this is my final question based on what you know is the quarter is almost done? Is the first quarter expected to be stronger than the fourth quarter in terms revenue? Is it more even or is your seasonality that makes the first quarter step back from the fourth quarter?

[Avi Israel:]

What we can say is that the fourth quarter of 2019 which we just announced is a baseline to the sequential growth that we expect quarterly along 2020.

[Operator:]

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

[Scott Huntington:]

Good morning. I have a couple questions here for you this morning. First congrats on Germantown and I just wondering regarding Germantown as you ramp up are your breakevens going to be similar to volume in Israel? And when do you anticipate the volumes being sufficient to allow you to be breakeven?

[Dov Sella:]

Breakeven company wise or --

[Scott Huntington:]

No. The US installation.

[Dov Sella:]

Oh, the US installation should become profitable this year.

[Scott Huntington:]

Beautiful. Thank you. And in past releases and I'm probably guilty for not trying to frame the window a little better but you had mentioned four new products that anticipated being released. The first of the year after the first of the year and of course I sit in my chair, I like I think it's January 1st, but that was never stated by you folks. I'm just wondering how the new products are moving along and when we can anticipate a release of such.

[Dov Sella:]

One was already released was the radar for APS along 2019. Three more will be released end of 2020 and not later by mid 2021.

[Operator:]

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

[Michael Brcic:]

Hi. Guys. Two real quick questions. One is with what's been going on China et cetera? I assume it doesn't affect your supply chain at all.

[Dov Sella:]

Your assumption is correct.

[Michael Brcic:]

Okay. It's good to have it on paper. Secondly, now that Germantown facility is going to be up and running, is that going to take away from capacity in Israel right now? And how will that affect overall margins?

[Dov Sella:]

First of all, the growth is not only in the United States. It's about 50%, so we do believe that the load in Israel will not be reduced because of the US foreign part. And it will stabilize it even qualities. What was the second question?

[Michael Brcic:]

Now that was it just the overall margins. So you in.

[Dov Sella:]

The corporate level and we do expect this to change.

[Operator:]

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

[Dov Sella:]

Thank you, operator.

[Operator:]

There is an additional question. Would you like to take another question?

[Dov Sella:]

Okay. Sure.

[Operator:]

Okay. There's a further question by Scott Huntington of Bodell Overcash Anderson & Co. Please go ahead.

[Sarah James:]

Yes. I'm sorry for jumping back on. I just got thinking a little bit about the three releases scheduled for later in 2020. And I wonder if that has been scheduled all along or if there's been a snap forward or delay or is everything rolling along according to game plan?

[Dov Sella:]

Everything as planned.End of Q&A

[Operator:]

Mr. Sella, would you like to make your concluding statement?

[Dov Sella:]

Yes. On behalf of the management I would like to thank you for your interest in our business. We look forward to speaking to you and updating you next quarter. And have a good day. Thank you. Bye-bye.

[Operator:]

Thank you. This concludes the RADA Electronic Industries Fourth Quarter and Full Year 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.