RADA Electronic Industries Ltd.
Q2 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Second 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 website 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, 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 released its results for the second quarter of 2018. By now you should have all received the copy of the press release which also available on RADA's website at www.rada.com. 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 introduce RADA’s CEO, Mr. Dov Sella. Dov, go ahead please.

[Dov Sella:]

Thank you, Ehud. Good morning to our US listeners and good evening to Israeli ones. And welcome to our conference call. A summary of the quarter are the following. We are first of all very pleased with the results. We showed year-over-year growth in our top line in the revenue. We maintained profitability even though we are investing heavily in our infrastructure, in our US presence and in R&D, which is the key to us staying in front of competition and ensuring on growth. We have a strong cash position which is over $15 million. In cash it's right quarter over a decade now. It gives ample capital to invest in our growth and pursue market opportunity initiatives in investment. It provides us the increased working capital for building the inventory to deliver on first turnover orders, which is a lot in these days for us. And gives the confidence to our customers who prefers stronger and stable supplier which can support the product over the long term. A brief summary of the results. We have $6.6 million of revenue in this quarter, which is 24% growth compared to the second quarter of 2017. And one of the key is here that now we see an assortment of project coming from various customers as opposed to one large contributor that we typically had the last year, especially in the second half. And we anticipate that going forward this will continue to be the case. The gross margin is at our typical rate which is in the mid-30s. It was 36.2%. We have increased -- increasing the OpEx expenses from $1.2 million in the second quarter of 2017 to $2.3 million this quarter. We have more than tripled our R&D investment to 11% of our revenues in order to maintain our technological lead. And we want to capture a number of market opportunities in front of us using our new designs. We increased marketing and sales investment up 55% year-over-year. Again to pursue new opportunities and especially establish our US presence. And we increased the G&A also mainly due to our new US company. Operating income and net income remained positive. And we have the balance sheet strength for capturing new opportunities and ensuring growth. In 2018, RADA is geared to growth with significant opportunities ahead of us. We have strong and widening pipeline, continuously widening and we have expected to yield orders in the next quarters to come. We are focusing on APS and mobile short ranger defense, both new and emerging market in the western world. The APS is a bit behind the SHORAD while counter UAV is part of the SHORAD, and we see here strong momentum. While the APS is in a build up stage and we feel very good about the intermediate term meaning the second half of the year. We are giving now based on what we have in hand and looking ahead, we are giving a guidance of $27 million in revenues for the whole year. While the majority will be --more than half will be in Q4. It means that this level of revenues is the stronger year in our recent history even stronger than last year, which was very strong and a significant one for us. Last year strength as we mentioned came from one particularly big order in second half while this year strength is diverse. I want to stress that any of the orders we are supplying now can lead to an order of magnitude tenfold of what we are delivering now and soon. And we do believe that we have in front of us a very significant upside, and it increases our optimism and hopes. We feel good about 2018 in general and we are getting excited about the future to come. Compared with what we felt at the same time last year, we are definitely a more confident and bullish about the coming years. And this is in part due to the strong pipeline potential as I mentioned earlier. Please note that the sales in our industry tend to be lumpy in radar orders especially. At this stage of this new and emerging market of tactical radars that are operational on the move. The market tends to show a short turnover and it can be volatile sometime between quarters. But we are more interested in the long term. As of the pipeline, our pipeline is strong, has broadened significantly in the last past quarter and has significant revenue potential. We have a number of potential orders globally especially in the US. Active protection is mentioned for the US Army and others. Mobile short ranger defense, the one that we have announced for the US Army, announced of us being selected and also the deliveries to the Marine Corps that we did last year and continuously. And also we see in Europe for NATO forces. In Counter UAV and the counter drone is a subset of that and this has received significant press recently. And the interest for these systems is growing globally. Just recently Rafael has been awarded with award for the drone dome in which we are part from the UK Army, as an example. We do believe that we are at the verge of a market acceptance and growth. We start to see early adopters of the technology especially in the US among some of the most modern military forces. As of the market potential and trends, we estimate our total addressable market as we continuously iterate it about $5 billion of over the next decade. Currently, we have an edge over our potential competitors and other players through the full range of our technical capabilities meaning software defined multi mission tactical radars for the maneuver force. It can operate on the move and the icing of the cake is the price to performance advantage that we clearly have at this stage. The market behavior is starting to change from a fulfillment of urgent needs. We start to see programs of records being designed and planned mainly around short-range air defense and counter UAV. And this will help us build the backlog for a few years ahead. The Western market in general is behaving in similar patterns. And we see early adopters and urgent needs coming from other parts of the world. This is why we continuously are producing to stock while our shelves are typically not crowded with the equipment. Let me talk a bit about share prospectus. It was and is an item that was recently we have dealt with two share prospectus recently. One for the registration of a DVSI shares, DVSI is our major shareholder and when they invested in the company about two years ago, we promised them to convert their shares for trading. And that's what we did about two weeks ago. And earlier today, we have filed a prospectus for the company. DBS is our financial interest -- is the financial investor in Rada and hold the over 25% close to 27% of our equity. Yossi Ben Shalom is our Chairman of the Board and a very strong believer in what we are doing, and trying to achieve. And he has no short-term plans to exit his position. When the potential ahead of us is so great, so we do believe that it's a technicality, it's not that we believe. We know that this is a technical step and as we promised we have registered the DVSI stocks for being traded. RADA itself filed a $50 dollar of shares perspectives today. This is to update the remaining of $13 million so far all the shares prospectus that we filed two years ago out of the $20 million shares that we have filed at that time we have remaining $13 million and we believe that what we are doing now is a standard documents which many companies file that will enable us to go to the market and easily respond at a time when we choose, and at the point in the future when we want. For example, we may come across the opportunities which require more capital than what we have now. And we believe that the right thing to do is to be structured in such a way that will enable us to do so. I stress again that when we have sufficient working capital with the $15 million that we have; we want to be prepared for any growth opportunities which will ultimately if happen increase the shareholders value. I'd like to summarize by saying that we are very pleased with the results of the second quarter. And despite some uncertainties at the start of the year, 2018 in fact is turning out to be even stronger than 2017. And strongest year in Rada in the last 25 years. We see initial orders from new customers, as well as recurring orders from existing customers continuously coming our way. We can do much more than what we are doing now. We believe that we have the right product at the right time. And using our current strengths to invest in increasing our capabilities to achieve that step in growth. We believe that our US office and our US presence will significantly yield to what we aim. Our pipeline is very strong. We are pursuing many opportunities mainly in the United States, but not only. We feel good about our chances. And the initial orders are already coming. And we do believe again that the follow on orders can be a 10x bigger than what we are experiencing now. In summary, we are very excited with regard to the potential ahead. And happy with what we are achieving continuously. I'd like to hand over this discussion now to Avi, our CFO. Avi, please go ahead.

[Avi Israel:]

Thank you, Dov. Hello, everybody. You can find our results in the press release issued earlier today. And I'll provide a short summary of our second quarter results. Second quarter revenues grew 24% to $6.6 million compared to $5.3 million dollars in the second quarter of 2017. Our gross margin was 36.2% versus 31.3% in the second quarter of last year. In general, our gross profit increased by 43% compared to the second quarter of last year. As Dov said earlier, we have increased operating expenses as we are investing in our infrastructure overall to support future growth expectations. R&D increased to $692,000 from $208,000 in the second quarter of last year. Sales and marketing were $650,000 versus $419,000 of last year. And G&A was $934,000 compared to $526,000 in last year. Our operating income for the quarter was $104,000 versus an operating income of $511,000 in the second quarter of 2017. Net income attributed to RADA shareholders for the quarter was $50,000 compared to $495,000 in the second quarter of 2017. I would also like to summarize and point out some highlights from our balance sheet as of June 30th, 2018. $15.6 million in cash, no financial debt at all short-term or long-term. Over 80% of our balance sheet is financed by our shareholders equity. The totals over $30 million. As far as cash flow, we generated $2.5 million in operating cash flow during the second quarter mainly due to strong collections from our customers. 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 evening, guys. Can you update us on the expected timing at the delivery of the prototypes for IM-SHORAD and maybe where the discussions are in the negotiation process?

[Dov Sella:]

Yes. The deliveries are expected this year and as DRS has mentioned a while ago. The goal for them to conclude the negotiations with the Army. It's about end of say August. Everybody hopes that it will happen earlier, but that's the goal. And we are already in a process with them and hopefully not long after they conclude with the army will be marching in.

[Brian Kinstlinger:]

Right and then in terms of [Indiscernible] I think that you're --the RADA sensors are in that for the Bradley. Can you talk about the timeline for prototype installation there as well?

[Dov Sella:]

Prototypes are already installed and the system is under testing. A testing is still undergoing and probably will extend until October. And then will be a period of evaluation and the decision how to go forward by the army.

[Brian Kinstlinger:]

And so how many - can you remind us how many Bradley's have the system and what has been the feedback so far that you received about the sensors?

[Dov Sella:]

A few Bradley's are being tested. There are less than 10 and some of them simultaneously doing some tests that all can be done in parallel. But basically one system is undergoing, one vehicle is undergoing live fire to our best knowledge. As of the results, results are classified so I'm --we are not exposed to this.

[Brian Kinstlinger:]

Understood, got it, yes. And then can you update us on the competitive landscape of mini radars? Are there any new manufacturers that you see entering the market? I mean you're clearly a first mover so I'm curious kind of the time that you'll remain in this major advantage.

[Dov Sella:]

In active protection actually and we have our competition coming from Alta. While they were there before we even started doing radars. So this is an existent competition. We do believe that we have advantage here by being the kind of say system agnostic meaning we can fit to any potential APS performance of a price point technology which is more advanced and so on and so forth, but competition is there. In other areas with our bigger radars, and we see Alta competing with us. We see SRC competing with us. Sometimes bigger radars and bigger companies, but in essence we do believe that the image of families is ahead of the competition at this stage. And we continue to invest. We know what we need to do in order to keep ahead of the competition. We hope so and we are very doing that.

[Brian Kinstlinger:]

Great and then in terms of the new US subsidiary. Can you talk about the kind of timeline for plan build-out in US infrastructure?

[Dov Sella:]

Yes. Our plan calls for mid-2019 having production line capable to deliver in the US. And so let's say that the third quarter of 2019 is the goal.

[Brian Kinstlinger:]

Got it, okay. Two more. The first there's lots obviously talk about us APS but can you highlight other countries that are in evaluation phase right now of APS and maybe your technology?

[Dov Sella:]

Yes, well naturally here in Israel we have lots of activities in that type. There is a first NATO move on APS coming from Netherlands and the IMI and we are part of IMI's -- I don't know -- already issued the notifications on that date for the needle and CV90. This is in process of prototyping and testing towards that. And we do hope that the rest of the NATO community will take a look over the shoulder of what's happening and then piggyback on that. In the UK, there was an announcement about there MEET program which is something similar to what in the United States is named a MAPE which stands for Modular APS. The UK is a bit behind probably and we are involved in that as well. And there are other places that maybe it's too early to talk about.

[Brian Kinstlinger:]

Right lastly on the numbers. Can you give us a breakdown roughly of radars versus avionics? That's something or that's something you're not disclosing yet.

[Dov Sella:]

We --until now we have not disclosed it, and let's keep it this way.

[Operator:]

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

[Jeff Bernstein:]

Hi, good morning, Dov and Avi. Congratulations on the good numbers. Just a couple questions, follow-up on the army I am sure add contract that evaluation program is still a couple of multiples the size of the marine program correct?

[Dov Sella:]

The evaluation is very similar to the marines may be asking numbers but the vehicles are a bit bigger. The evaluation is let's say similar in numbers, but the big --the program itself is potential of 144 vehicles.

[Jeff Bernstein:]

Got you, okay. And so that program, we don't know when the actual production program might start shipping?

[Dov Sella:]

The army has mentioned openly that they plan to start equip and being equipped with systems in 2020.

[Jeff Bernstein:]

2020, got you, okay. And then you announced the $4 million order just a few weeks back. and I just was wondering if you could characterize that a little bit more?

[Dov Sella:]

Yes. We have a few orders -- initial orders coming from new customers and typically when there is an initial order, it is in the area of a few hundred thousand dollars or close to a million. We have a few follow-on orders and it's a mixed variety of -- IM-SHORAD counter UAV and also APS orders.

[Operator:]

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

[Michael Brcic:]

Hi, guys. Just couple of little things with the office open in the US et cetera and with the increased R&D. Can we expect OpEx levels to stay at this level or did the opening in the office do more of one quarter thing and maybe it comes down a little bit?

[Dov Sella:]

No it should say or even increase a bit, but this is basically the level that we anticipate for the near term.

[Michael Brcic:]

Okay, great. Now you mentioned on some of these initial orders that you got that there's a potential for a 10x increase in future orders. From your history, do you have a rough time frame of how long it usually would take someone to come to that decision?

[Dov Sella:]

Yes. It is typically 18 to 24 months.

[Operator:]

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

[Scott Huntington:]

Good morning, gentlemen. First of all I'd like to thank you. My question was going to be on the registration with a strategic investor. Also you added the ATM. I think explained that --explain that very well and provided the clarification I was looking for. So again we thank you. And lastly just like to add that we very much appreciate the way you folks have this company positioned to move forward. So thanks for taking the call.

[Operator:]

The next question is from a Hunt Richardson. Please go ahead.

[Unidentified Analyst:]

Good afternoon, gentlemen. Could you please comment on two things? First of all, who is your competition? And secondly, I noted that your expenses have doubled, almost doubled quarter-to-quarter. And could you give us some projections going forward as to how those expenses will be going? Thank you.

[Dov Sella:]

Okay. I think we addressed both questions already, but let me reiterate. The expenses level is what we have now and we anticipate that this will be the level now for the near term, for the next year or so. And the competition is coming mainly from Alta here in Israel, SRC in the United States. And some others but these are the most significant ones.

[Operator:]

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

[Dov Sella:]

Yes. Thank you. We'd like to thank you all for joining us. If you'd like to meet us or speak to us, please feel free to contact our IR team, G K. And we look forward to speak to you again in the next quarter. Thank you all.

[Operator:]

Thank you. This concludes the Rada Electronic Industries second quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.