RADA Electronic Industries Ltd.
Q1 2018 Earnings Call Transcript

Published: 23 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries First Quarter 2018 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 & Public Relations at 1-646-688-3559 or view it in the News section of the Company’s Web site 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?

[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 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 hand over the call to RADA’s CEO, Mr. Dov Sella. Dov, go ahead please.

[Dov Sella:]

Thank you, Ehud. Good morning, to our U.S.A. participants and good evening, to Israeli ones and good day to everybody else. And welcome to our first quarter results conference call of 2018. A summary of the quarter, we are very pleased with the overall results, especially given the fact that the first quarter is seasonably the weakest of the year typically. In brief, our revenues our just over $6 million for the quarter, which shows 29% growth compared to the first quarter of '17. Revenues are made of an assortment of projects no one large contributor to the sales a good mixture. And our gross margin is best to the typical rate of the mid-30s actually it's just over 36%. We feel that in 2018, the Company is geared to growth with significant opportunities ahead of us. Our pipeline is significant. The pipeline for tactical radars focus on active protection and the mobile short range aero defense, which are both new and emerging markets endorsed in world. And the anticipating growth, not only in the coming term but also in the next years to come, we are investing heavily in our growth. We are investing more and more in R&D. We have demonstrated an increase of 6%, and we have invested 10% of our revenues in the last quarter compared to 4% in Q1 of last year. And we plan to further increase our R&D. We have our targets developing new products. We are recruiting more people. And all of that really are reflecting our R&D investment. Marketing and sales are increasing our investments as well. And mainly, we have opened our U.S. subsidiary a few months ago, actually in Q1. This subsidiary should bring us close to the market, and the end users of our tactical radars mainly achieve the U.S. market. And this company is alive kicking, and already has received the initial orders and cash from U.S. customers. The bottom line is $0.2 million, which is above breakeven actually and we have generated $0.4 million in cash, positive cash flow, which is also a healthy sign and Avi, our CFO, will go into more details later on. We have almost $40 million in cash, which is adequate capital at this stage to pursue all our growth initiative and investments. It provides increased working capital for building inventory, and deliver with structure over to our customers, which is typical situation to an emerging market. And this is what we are experiencing during the last year or so. So we are building radars to stock, but their shelf life is very short, and we are delivering continuously. And also, this cash level shows to our customers that we are strong and stable supplier, which is very important in this defense market. Our guidance for the second quarter is at about $6.5 million. It shows a growth of over 20% compared to the second quarter of '17. And I want to remind you all that 2017 was probably our best year. So we are showing so far better performance in this year, which is a good omen for the whole year. Our pipeline is strong with significant revenue potential. We are chasing quite a few big programs, mainly around active protection and the mobile short range aero defense, mainly in the U.S. but not only. We have activities in the western world, in general, in NATO in Far East areas and others. And also the counter-UAV and counter-drone market is very alive and kicking for us for the military market. We want you to note that our sale -- and actually the sales in our industry, tend to be lumpy and radar’s order especially tend to be a shorter turnover for this new and emerging market. We saw it in 2017 and especially in the second half where we had a big order from the United States Marines, and it affected the performance of the whole year. It can happen in the near term as well. At this stage, we cannot predict anything. We are optimistic and bullish. Some opportunities are a bit delayed like active protection in the United States, but opportunities are not lost. It takes a bit more time, but the pipeline is continuously widening. And in summary, we feel bullish about the coming years. And while the trends in the market, we have mentioned it in the last conference call that we make, but we reemphasize that the U.S. Army’s General chief of staff, General Emily, has issued guidance on the modernization of the U.S. Army, and two main avenues are active protection for armored vehicles and tactical vehicles, and mobile short range air defense, or in short for the maneuver force. And we are focused mainly on these two big opportunities, in general, and in specifics. Our tactical radars are actually addressing these capabilities, and can operate on the move, which is a very significant requirement for these markets. And we have already demonstrated successful delivery for our initial sales to the U.S. and Israeli military. We believe that we are sitting on the verge of the market acceptance that grow situation, and we start to see early adapters of the technology among some of the most modern military forces, and the most important integrators of this market. And we estimate our total addressable market at above $5 billion over the next decade. And we believe that currently we have an edge over other players through the full range of our tactical radar capabilities, which are software-defined multi-mission radars for the maneuver force operating on the move and exceptional and unmet yet performance to price positioning. In summary, we are very pleased with the results for the first quarter of 2018. It represents very good start to the year. And we hope it’s a good sign for the quarters to follow. We’re already increasing the guidance for the second quarter to be better than last year. Our pipeline is strong. We are pursuing many opportunities in the United States and other parts. We feel good about our chances, and expect first things to come through later this year or next year. In general, we are very excited with regard to the potentially hit. At this stage, I would like to hand over the discussion to Avi, our CFO. Avi, please go ahead.

[Avi Israel:]

Thank you, Dov. Good morning, good afternoon, ladies and gentlemen. I will present the financial results in short. You can find our results on the press release we issued earlier today, and I will provide a short summary of our first quarter results. First quarter revenues grew 29% to $6 million compared to $4.7 million in the first quarter of 2017. Our gross margin was 36.2% versus 35.7% in the first quarter of last year. As Dov explained earlier, we had increased operating expenses, primarily in R&D, which increased to $0.6 million from $0.2 million in the first quarter of last year. Sales and marketing was $0.6 million versus $0.4 million last year, and G&A was $0.7 million compared to $0.7 million of last year. Our operating income for the quarter was $0.2 million versus an operating income of $0.3 million in the first quarter of 2017. Net income for the quarter was $0.2 million or $0.01 per share versus the net income of $0.4 million or income of $0.02 per share in the first quarter of 2017. I would like to also emphasize and point out some highlights from our balance sheet. As of March 31, 2018, $13.4 million in net cash, no debt at all; over 80% of our balance sheet is financed by our shareholders equity, the total is over $30 million; we generated $0.4 million in operating cash flow during the quarter. That ends my summary. We should now open the call for questions. Operator, please?

[Operator:]

Ladies and gentlemen, at this time, we will begin the question-and-answer session [Operator Instructions]. The first question is from Michael Brcic of National Securities.. Please go ahead.

[Michael Brcic:]

Just a quick question on -- the revenues were up but the earnings are down. Is that -- did you addressed that when you talked about putting more into R&D?

[Dov Sella:]

Exactly.

[Michael Brcic:]

The global anti-drone market, you were talking about that's looking pretty good. What's the size of the addressable market on just that?

[Dov Sella:]

You have to understand that we are mainly addressing the counter-UAV market for the military forces. We don’t see a real movement in the commercial market for that, and this is part of our total estimation. It is, let's say, a part of the mobile short range air defense market segment.

[Operator:]

[Operator Instructions] The next question is from William Gibson of ROTH. Please go ahead.

[William Gibson:]

You mentioned the increased spend in R&D. So is that on a percent basis even greater in future quarters than the first quarter, or is that just absolute dollars?

[Avi Israel:]

We have increased our R&D expenses to somewhere in the vicinity of the $600,000 per quarter. We see and we focus increase in level of R&D expenses in dollar sum. Assuming revenues will grow, it will remain at the percentage out of revenue sum. But in dollar sum, we expect not only that we grew this R&D level of expenses in the first quarter, we expect it to grow further throughout the year as we see more and more new products, mainly in the radar business that we need to develop in order to maintain competitive edge on the market.

[Operator:]

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

[Dov Sella:]

Yes. Thank you all. On behalf of RADA's management, I would like to thank you for the interest in our Company and business. And if you would like to meet or speak with us, please feel free to contact our IR team. We look forward to speak to you, and updating you in the next quarter. And have a good day. Thank you.

[Operator:]

Thank you. This concludes the RADA Electronics Industries first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.