RADA Electronic Industries Ltd.
Q1 2017 Earnings Call Transcript

Published: 24 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries First Quarter 2017 Results Conference Call. [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 Public Relations at 646-688-3559 or viewed in the news section of the company’s website, www.rada.com. I would now like to hand over the call to Mr. Gavriel Frohwein of GK Investor Relations. Mr. Frohwein, would you like to begin please?

[Gavriel Frohwein:]

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 released its first quarter 2017 results. By now, you should have received a copy of the press release, which is also available on RADA’s website at www.rada.com. With us on the call today is Mr. Dov Sella, Chief Executive Officer and Ms. Shiri Lazarovich, Chief Financial Officer. Dov will summarize the highlights of the quarter followed by Shiri 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 like to now introduce RADA’s CEO, Mr. Dov Sella. Dov, please go ahead.

[Dov Sella:]

Thank you, Gavriel. Good morning, everybody on the U.S. side and good evening in Israel and thank you for joining us today. Welcome to our first conference call and thank you for the interest in RADA. We decided recently to increase our efforts in communications with our investors and this conference call is actually the first call that we do after releasing our quarterly results. I would like first to provide you with the introduction of RADA to those who are not entirely familiar with the company, discuss some of the recent developments and address the significant long-term potential that we believe we are facing. And after that, Shiri will summarize the financial results that you can also find in the press release. At the end naturally, we are open to your questions. RADA, RADA is a defense electronics company, listed in the NASDAQ with a current market cap of about $30 million. We specialized in the development, production and sales of advanced electronics for both airborne and land applications, manned and unmanned. Specifically, we are focusing on avionics systems and inertial navigation systems for the aircraft manned and unmanned and the radars which is the growth engine of the company, which are intended to be installed on ground vehicles and provide force protection solutions in general terms. Our customer base is world class integrators and platform manufacturers like the Israeli Defense Force, the U.S. Navy and other Armed Forces in other parts of the world, prime integrators like Lockheed Martin, Boeing, IMI here in Israel, Rafael Advanced Defense Systems in Israel, Embraer in Brazil and many others. In Israel, we had about 50% of the sales of 2016, but typically we sell our sales are spread evenly in Israel, U.S., Asia and Latin America. Let’s look at what we sell in a bit more detail. Our airborne systems include the broad range of systems like solid state digital video recorders, Head-Up Display Cameras for fighter aircraft and debriefing systems on the ground for their recording of what was recorded in the air and a wide variety of core avionic systems that are typically installed on unmanned aircraft and also on fighter aircrafts. Tactical radars are intended for the manual force. And it is a fairly new technology and very advanced offering with an exceptional performance to price ratio that we evidenced as of now. Particularly, we are targeting the radars for solutions of force protection like active protection for practical and military vehicles and mobile short range air defense, with focus on drone protection detection and protection as part of wider weapon systems. What is unique is that these radars are also able to work while on the move and can detect accurately, all threats like fire whether there are RPGs, rockets, motors, anti-tank missiles and flying objects like drones, UAVs and others and provide the alerts and targeting information for the weapon system to address the threats and neutralize them before they hit the force. The radars, as the technology of the radar is very advanced, it’s tough to define radars with active electronic scanned area antenna, cutting-edge technology that provides high flexibility multi-mission usage and we start to see the early adopters especially in the U.S. and here in Israel adopting this technology in growing numbers. For example, we are in quite a few high energy laser programs in the United States under development, where our radar was the radar of choice to accompany the development and take part in the field tests and hopefully it will become part of the operational configuration in the end. We estimate the market size of the few billion dollars maybe three, maybe more for the next decade based on the number of vehicles that can – that are the addressable market and we see this movement of equipping vehicles with active protection starting to take momentum, again both here in the United States as leaders, while we are already part of the NATO program in Europe. Though it’s only one, this market is emerging and waking up. And we are experiencing a very wide pipeline of large number of multimillion dollar opportunities globally especially in the United States which is our focused market at this stage. In more depth, we have long history, but over the past years we have undergone the successful turnaround from focusing on avionics mainly through addressing the radars, the tactical radars. A year ago, VBSI, an Israeli private equity fund took control of the company and it is lead by [indiscernible] with our Chairman and help us allotting the restructuring and strengthening of our balance sheet during the past year. I think you can see some of that in current quarter results. And we also made the number of changes internally including some management changes in restructuring reorganization. We are developing and building our growth engine around radars to better position ourselves in the long-term. And we are addressing this big market which for us is huge and almost infinite as I mentioned earlier. About the first quarter, it seems that the turnaround efforts are paying off. It is very clear I think from the results and we reported more than 91% growth compared to the quarter of previous year, while we also reported net profit of $390,000. I think it’s our first profitable quarter in the last consecutive 10 quarters. It’s important to bear in mind that while we are filling products with appropriate margins, our sales are lumpy and can be varying depending on the programs that we are part of, because we are always typically part of a larger weapon system. So lumpiness in the quarterly results can be expected here and there. And it is important in this context to view the business through the levels of the full year or versus monitoring each quarter by itself. Looking ahead, we are increasing our yearly forecast from – for 2017 from $18 million to close to $20 million based on our current backlog and our expectations and it represents a 50% growth compared to last year. And we believe that the next quarter which we see clearly will be as good as this one and maybe even slightly better. In summary, we are pleased with these recent results that we have achieved in this quarter. It’s a good start for 2017. Our pipeline is strong. We are pursuing many attractive opportunities. And with this summary I would like to hand over the call to Shiri, our CFO for our financial summary.

[Shiri Lazarovich:]

Thank you. In respect of the financial results, I will give you some highlights of the first quarter. As we indicated earlier first quarter revenues grew 91% to $4.7 million compared to $2.5 million in the first quarter of 2016. Our gross margin was 35%, almost 36% versus almost nil in the first quarter of last year. Operating income was $349,000 versus a loss of $1 million last year – in the first quarter of last year. So as a result we are reporting a net income for the quarter $390,000 or $0.02 per share versus a net loss of $1.8 million last year and $0.11 of loss last year in 2016 first quarter. With respect to cash flow and cash equivalents, we have at the end of March 2017 a balance of $1.3 million in the company. Gavriel?

[Gavriel Frohwein:]

That as the summary we should now open the call for question-and-answer session.

[Operator:]

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Isaac Vidomlanski. Please go ahead.

[Isaac Vidomlanski:]

Thank you very much for initiating for the first time the conference call. It seems that your management is conscious about their stockholders and not that a good record that management have in other companies will be respected in RADA. And now to my question. My question is in the past you came with a statement that an American company is testing your equipment, any feedback to tell us? Second question, President Trump just signed a huge defense contract with Saudi is rather going to benefit out of this contract and also Israel signed a defense contract with India, are you going to benefit from this contract. And the last one is RADA participating in the Iron Dome project? Thank you.

[Dov Sella:]

Okay, let’s first hit one by one. Regarding feedback from the test in the U.S., we have general sentiments, the tests are very good. But we cannot go into details, results are classified and typically they are not shared with us, they are kept in the United States by the United States military forces. Saudi Arabia, we cannot comment on specific customers. We don’t know exactly the details there, so we cannot comment. Regarding India, this is a market we are active at especially with our current avionics. We are already started sales there with radars and we hope that this will become a growth engine in addition to the U.S. in the years to come. And regarding Iron Dome, we are not part directly of the Iron Dome, our radars are shorter range and tactical, but we are part of the global red alert system in the Israeli Southern border and hopefully it will expand to other borders. So that’s the context.

[Isaac Vidomlanski:]

Got it. Thank you and good luck and continue the good work. Bye.

[Dov Sella:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] The next question is from [indiscernible] Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hello guys. Congrats for a good quarter. I would like to know if you are expecting the same gross margin level in the next quarter? Did you hear my question?

[Shiri Lazarovich:]

Yes. This is Shiri. The gross margin will be determined and it will be depending on the composition of the orders that will be delivered during the second quarter and the level of the revenues would still – not final.

[Unidentified Analyst:]

Okay. But around 35%, is it something which is going to be the average of the company or even more or you think that we are going to see bigger fluctuations between the quarters?

[Shiri Lazarovich:]

Hi. The profit of the product itself, it’s relatively what you have indicated and even more. But the profile or the average of the gross profit per quarter or per period, whatever it will be determined by the level of the revenues. And it will be higher than a certain level which is the minimum level in our company today.

[Unidentified Analyst:]

Okay. And can you talk a little bit about the backlog of the tactical radars, you can’t talk about the segments?

[Dov Sella:]

We cannot talk at this stage on the segments and backlog.

[Unidentified Analyst:]

Okay, thank you.

[Dov Sella:]

Sure.

[Operator:]

The next question is from Michael [indiscernible] of National Securities. Please go ahead.

[Unidentified Analyst:]

Hi, good quarter. Thank you. Can you just – and I know you mentioned the addressable market, can you maybe talk a little bit about the growth rate of the tactical radars – radar market. Two, is what – are you guys starting to take market share from somebody else or is it just the market is growing, maybe just talk about the ongoing market if you don’t mind?

[Dov Sella:]

Okay. In general this is a new market, awakening market that is addressed by very few competitors at this stage. So we don’t feel that we are taking part of others. We invested quite a few years in sort of educating the market and showing what can be done. And now the results are starting to show up like potential market is wakening up in the U.S. mainly. And also the mobile short range air defense, particularly until recently all systems in air defense were too big and too remote and now the forces, the Western World forces are talking about mobile capabilities. So in essence it’s a huge market. It is starting to show up.

[Unidentified Analyst:]

Great. Thank you very much.

[Operator:]

The next question is from Yochai Radin of Sphera Funds. Please go ahead.

[Yochai Radin:]

Hello, Dov. Hello, Shiri. Congratulations for an excellent quarter and ongoing improvement in the results. I just wanted to get your view on the – you have raised the guidance to $18 million to around $20 million revenues for the year. Could you elaborate a little bit if this is coming from the USA or any other demographic distribution of this incremental revenue?

[Dov Sella:]

The USA market is in conversion stage at this moment and it will affect probably 2018. So, the sales are spread let’s say evenly globally.

[Yochai Radin:]

Okay, that helps. Thank you very much.

[Operator:]

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

[Jeff Bernstein:]

Hi, good morning. Thanks for taking my questions. Just could you talk about your capacity and do you have enough capacity to meet what you see as the coming ramps in the programs that you are engaged in right now?

[Dov Sella:]

Our capacity aversion will meet the revenue level that we expect in this and the coming year. We have invested in that quite a lot in the last 6 months and we have to remember that we are also planning of transferring production when it comes to the point, to the United States. So, we don’t see really a capacity limitation as of now.

[Jeff Bernstein:]

So that would be our ask, you would do that?

[Dov Sella:]

Yes.

[Jeff Bernstein:]

Great. And then do you have a split on the radar business versus the aviation related business or will there be in the financial statements a breakdown?

[Dov Sella:]

Yes, we have a split. I think you can see the split also in the presentation that we have in our website. Out of the $20 million, around $12 million are avionics.

[Jeff Bernstein:]

Great, thank you.

[Dov Sella:]

Sure.

[Operator:]

The next question is from [indiscernible] of VoiceSense. Please go ahead.

[Unidentified Analyst:]

Yes, hi, guys. Congratulations on a good quarter. This seems to be a turnaround quarter for you guys. Could you be a little more specific in what you attributed that to, what has prompted that turnaround and if you expect that to continue? And my second question will be regarding the pipeline that was mentioned, could you provide a little more color on that, to be a little more specific on maybe a general size of the pipeline, where it’s coming from? Thank you.

[Dov Sella:]

Okay. I think what happened in last year is that some of the orders that we expected were delayed to this year. So, this reflects the first quarter. This is why the first quarter is mainly more than 50% avionics. So, we don’t believe that the first quarter is the signal for turnaround, but if you take a global look on the year, you see the significant increase in radar sales percentage, which is coming close to 50% compared to what was a year, 2 years ago. But you have again to look in broader term and not judge it quarter by quarter. Regarding pipeline, we have large pipeline in the United States in the Far East here in Israel quite a few opportunities and recently Western European countries are showing high level of interest, but beyond that, I cannot configure specific customers.

[Unidentified Analyst:]

Got it. Thanks a lot.

[Dov Sella:]

Thanks.

[Operator:]

Thank you. [Operator Instructions] The next question is from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

How are you doing, guys? Thank you for taking my question. Congratulations for a great quarter. I would like to ask you, you have enough company – do they have enough money to get along with the business or you think you got to have to issue any shares dilute the shareholders? Thank you.

[Dov Sella:]

At this stage, we have enough money to perform 2017 as planned. If we decide to do some broader movements, especially in the U.S. market, maybe we will toward the end of the year or maybe even next year, maybe we will come to the conclusion that we need more funds. But this year, we are front.

[Unidentified Analyst:]

Thank you very much and again congratulations and good luck.

[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, thank you all for joining us. And I would like to thank you on behalf of the management and our Board of Directors. We are hoping to meet you and discuss further our business and the opportunities. And if you want to speak to us, please feel free to contact our Investor Relations. I look forward to speaking to you next quarter and even before that. Thank you very much.

[Operator:]

Thank you. This concludes the RADA Electronic Industries’ first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.