RADA Electronic Industries Ltd.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Third Quarter 2018 Results Conference Call. All participants are at present in 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 all have 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 and 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. 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 U.S. participants and good evening to our Israeli audience and welcome to our third quarter of 2018 results conference call. Let's start with the results summary and guidance. We meet and exceed our goals for the third quarter of this year. The most exciting part of our business is actually our succession ahead and this is what I wanted to focus on in this call. While Avi will – Avi, our CFO will soon after I finish will go over the financial results of this quarter and remainder of this year. While 2017's strength of ours was built primarily on one large radar order, in 2018 we see both side of the business being strong and active, both avionics and radars. We expect the quarter number four will be particularly strong. We expect around $11 million in revenues in this coming quarter, actually the one that we are already in. We received a lot of quick turnaround turnover order to fulfill before year end, partially related to our customers using budgets at the end of the fiscal year to fulfill urgent needs. And based on the strong guidance for quarter number four this year, 2018 will be one of our strongest years ever, if not the strongest one and this is coming off another very strong year which was 2017. And even beyond quarter number four, given the needs, we are meeting and the demand we see in the market, we feel very strong and good about 2019. About our pipeline and orders, our focus is on active protection systems for combat vehicles and mobile short-range air defense solution. Active protection systems are mainly being active in the United States by the U.S. Army, in Israel and we see a few other forces in the Far East and also in Europe coming onboard. We are focusing our order radar solutions on counter UAV and counter drone rocket solutions and a mobile short-range air defense which is the counter drone in the wider sense, we see it in the U.S. Army, in the United States Marine Corps and also in NATO forces that are waking up. In the U.S, market, the behavior is changing for us from fulfillment of urgent needs up till now including this year and maybe even going into 2019, we see the establishment of programs or record. We expect such programs to be crystallized and orders received by us during 2019. And once it happens, we will start to build a backlog for the years to follow and this will start in 2020 and onwards. As a reminder, we are still working with a very fast and short turnover of deliveries from a – receiving an order on deliveries and we have set the market to mature in that sense. Our pipeline is strong. It broadened very nicely in the last year with significant revenue potential. Potential orders are global but especially strong in the United States, given our presence there and the establishment for subsidiary there. Orders to new customers that we have previously supplied as well as the orders we are not supplying can lead to a follow-on orders with significant potential in the near future above what we already have been supplying in last year and this year. We see it as a very significant upside to our business and we have started seeing it already happening in this year. We continue to be surprised that we are the verge of market acceptance of growth and hence our investments are to capitalize on it – both in R&D and in our subsidiary in the United States. Regarding our cash position and investment in the future, currently we have a strong position about $30 million. It gives us ample capital to invest in our growth and pursue market opportunities, initiative and investments. It provides increased working capital forbidding inventory to deliver on expected first turnover orders as we are experiencing these days, especially those that come in Q4 and along 2019 and it shows a stronger stable supply to our customer base which can support the products over the long-term. Our strong cash position also allows us to invest in the U.S. business in R&D and sales and marketing as I've just mentioned. And also build our U.S. production capability which we plan to be alive and kicking in the third quarter in the – of 2019. Throughout 2018, we have maintained profitability despite investing heavily in our infrastructure and other activities, and right now the focus is to capture the opportunities for growth. We believe we are pleased with our performance so far in 2018 and 2018 is said to be one of the most strong years in our history in terms of top-line. This strength combined with our balance sheet give us the ability to make the right investment in order to capitalize on this emerging market. We see initial orders from new customers, all which have very significant growth potential with some already converting to follow-on as I said, this year, this quarter even. And our pipeline is very strong. We believe that potential will start to materialize in next year and especially in 2020 onwards. And in summary, we are very excited from the new future more than ever. At this point, I would like to – Avi to describe our financial results. Avi, go ahead please.

[Avi Israel:]

Thank you, Dov. Good morning, good afternoon ladies and gentlemen. You can find our results on the press release we issued earlier today and I would provide a short summary of the third quarter results. Third quarter revenues were at the same level as the third quarter of last year, but a little over $7 million, however, over the first nine months of 2018, we reported $19.6 million in revenues, up 15% of the same period of 2017. Our gross margin was 35.6% versus 38.9% in the third quarter of last year. As Dov explained earlier, we had increased operating expenses, as we are investing in our infrastructure overall to support future growth expectation. R&D increased to $791,000 from $480,000 in the third quarter of last year. Sales and marketing were $728,000 versus $629,000 last year. And a primary drop of OpEx was due to G&A which was$1.1 million compared to $627,000 last year, with most of the increase related to our newly established U.S. presence. Our operating loss for the quarter was $149,000 versus and operating income of $1 million in the third quarter of 2017. Net loss attributed to RADA shareholders for the quarter was $21,000 compared to $801,000 from net income in the third quarter of 2017. We also submitted non-GAAP EBITDA which was $308,000 in the first quarter of 2018 compared to $1.4 million in the third quarter of 2017. I would also like to summarize and point out some highlights from our balance sheet as of September 30, 2018. $13.2 million in net cash, no financial debt at all, 80% of our balance sheet is financed by shareholders equity, they total over $30 million. We generated $0.7 million of operating cash flow in the nine months of 2018. 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 Brian Kinstlinger from Alliance Global Partners. Brian, please go.

[Brian Kinstlinger:]

Hi guys. Thanks for taking my questions. First, can you talk about what the driver to this strong updated fourth quarter is? Is that one or two large orders, is that continued to be more diversification and then in addition, is that more on the software defined radar side, or is it more on the avionic side?

[Dov Sella:]

Okay, it's mainly radars and it is a combination of the – few orders coming from a few customers and nothing that is stand by itself.

[Brian Kinstlinger:]

Great. And then, as you look at 2019, does this strong year end make it difficult for 2019 to continue this growth path? Or do you think early deliveries in APS increase adoption of mini radars and the stabilizing of avionics, does that allow you to grow 10% to 15% given all the positive things you talked about, or is it too difficult to put count now?

[Dov Sella:]

We believe that 2019 will be better than 2018 and it will be based on radar sales mainly. You know we expect repeated order from these installment base that we already have, still not in the form of programs of records, but follow-on orders of the counter-UAV and short ranger air defense solutions.

[Brian Kinstlinger:]

So, you mentioned programs of record, and I understand what that is and how important it is. I was confused on – which business you were talking about is it short-range air defense, was it APS, what were you referring to in terms of program of record?

[Dov Sella:]

We refer to both market segments that will happen along 2019, but will materialize into revenues only in 2020 and onwards.

[Brian Kinstlinger:]

So, there is going to be a program of record for the United States to be buying these software-defined radars, is that what you are talking about?

[Dov Sella:]

Yes, a few of them. We expect.

[Operator:]

Let me go with the next question. The next question is from Isaac Vidomlanski. Isaac, please go ahead.

[Isaac Vidomlanski:]

It was announced that Israel big defense contractor Elbit Systems is buying IMI. Since you work very closer with IMI Fist Iron budget, how this merger is going to affect RADA?

[Dov Sella:]

We do believe the transfer of control will be from our standpoint very smooth. We are in the heart of the Iron First system. We understand that a part of the reasons why Elbit are interested in IMI is that their system, and we do believe that this acquisition will then accelerate the growth of this potential business.

[Isaac Vidomlanski:]

I have two more questions, with your permission. Can you give us a feedback of the last exhibition that took place in Washington? And your reaction, your comment about one of the Israeli commentator [indiscernible] commentator say that Israel instead of what they call it, the system that they are using right now Iron Dome use laser systems. You working on project, I know that you have contract with Lockheed and Boeing. You in fact also were developing something for the Israeli defense in the laser field?

[Dov Sella:]

Okay, let's start with the USA exhibition which is the most important one in our business. It's the annual one in October in Washington D.C. We had very successful exhibition with significant exposure. The secretary of the U.S. Army gave us a visit and quite a few other highline executive from the U.S. Army mainly around the fact that we are part of the IM-SHORAD Program of the U.S. Army. So, it was a very positive experience for us. As of the laser systems, we are involved in quite a few of them and I cannot comment further than that based on the reporter's idea, but we are very active in laser programs wherever we can be part of not only in the United States, but also here.

[Operator:]

The next question is from Steve Nassau from Morgan Stanley. Please go ahead.

[Steve Nassau:]

Congratulations on the last quarter. My question has been answered, but congratulations on the last quarter. Thank you.

[Operator:]

Next question is from Mike Crawford from B.Riley.

[Mike Crawford:]

Thank you. Nice to see the increased guidance for fourth quarter, would you characterize this urgent need order as one that is likely to continue or somewhat of test of the system to put these capabilities on just handful of vehicles and then to consider whether that should be deployed active on whole fleet or how would you characterize these urgent need order that slipped in Q4 guidance?

[Dov Sella:]

Well, it's not one order, it's quite a few orders that we have for – to fulfill urgent needs. Typically urgent needs are in the form of like – you know like their name urgent means, but the quantities are relatively small relatively. It can be large for us like what happened to us last year with the Marine Corp, but typically urgent needs are initial. We deliver on a very first turnover pace and the customers take the systems, test them, deploy them and in parallel prepare their four month program of record there procedure to let the bigger quantities. Does it answer your question?

[Mike Crawford:]

A little bit. So, the program of record is that then something in U.S. but then we would look for the fiscal 2020 budget then for it to become an official program of record?

[Dov Sella:]

Yes.

[Mike Crawford:]

Okay. Alright. Thank you very much.

[Dov Sella:]

Sure.

[Operator:]

We have an additional question from Brian Kinstlinger next.

[Brian Kinstlinger:]

Great. Thanks guys. I don't know what happened, but maybe we can talk about where testing is with the APS system in the U.S.? Are we – from what you are asking, you gave in three months ago, are we on that same path, are we behind, are we ahead and maybe talk still about timing of that testing?

[Dov Sella:]

Yeah. We are part of the Iron Fist testing. The testing is behind schedule as was announced by the U.S. Army officially. However, testing to our best knowledge should continue and decisions probably will be made in mid-2019 and onwards.

[Brian Kinstlinger:]

Great. My other question is, with the $7 million of avionics orders, first I'm curious of the $30 million that you did in revenue this year, that you expect to do this year, what percentage will be avionics and does that $7 million of avionics orders you announced this week, give you confidence that will be flat to growing or will it be slightly down, how do you see that business next year?

[Dov Sella:]

You know the avionics orders are as what we expected part of them are avionics for UAVs that are derived from II being awarded with the program – major program in Europe. It's not a surprise for us. We have anticipated that and we do expect that these avionics business, which is between 10 to 13 let say, will continue like that in the two, three, four years to come.

[Brian Kinstlinger:]

Right. I guess, I'm curious is, like you said, it's pretty flat and cyclical up and down. Is this going to be at the high end of 10 to 13 as you look to next year or will be in the low end of 10 to 13? Or is it hard to tell? Is it too early to tell?

[Dov Sella:]

It's a bit too early, but I don't think it's a big of a difference between 10 to 13 for that – from that uptick.

[Brian Kinstlinger:]

Okay. Thank you.

[Dov Sella:]

Thanks.

[Operator:]

Next question is from Michael Brcic of National Securities. Michael, please go ahead.

[Michael Brcic:]

Hi. Good morning, good evening. Just a quick thing on the radar orders, obviously we're talking about initial orders and then the size of orders in the future can get pretty big. Can you just talk about maybe your capacity and how quickly and easily you could ramp up, if you get those orders, and maybe even put some color on what the possibility is of the size of some of these things?

[Dov Sella:]

Capacity-wise, we can now support revenues of radar up to $100 million with our current capabilities in Israel. An in less than year, we will double that capacity in the United States. So, this group is a show stopper from any aspect you look at it. About the size of potential orders, now we are talking about a few million or quite – the high number of few million dollars and these are the initial orders, while the programs further can be tens of millions of dollars each.

[Michael Brcic:]

Excellent. Thank you very much. Appreciate it.

[Operator:]

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

[Unidentified Analyst:]

Hello. I would like to ask about the OpEx level, what do you plan for the next quarter and next year about OpEx levels? And second question about the urgent need that you talk about your customer, is there any different level of profitability for this urgent need and their gross margin is higher than the normal?

[Dov Sella:]

Avi will answer the OpEx, but regarding the profitability, it's on the other side you know. The higher our numbers will come from the big orders.

[Unidentified Analyst:]

Okay.

[Avi Israel:]

And so the OpEx as you can see we are highly investing into mainly into R&D as well as G&A and it's mainly to do the G&A part is mainly to do with our business in the U.S. Obviously, I cannot dictate a specific number for Q4, but as we said constantly in the last three to four conference call, these numbers will grow because it's mainly what we call investment in infrastructure. Infrastructure there is no capital you know. So, numbers will keep on growing, but hopefully what we plan is that to do it in line with revenue growth that's what I can say at the moment.

[Unidentified Analyst:]

Okay. And what about profitability, about the program of bringing profitability next quarter and next year?

[Dov Sella:]

We currently focus on the top-line and on the gross profit. Our level of expenses on the OpEx side is controllable, highly controllable. So, we monitor it very closely and we define the growth rate of the – of OpEx according to the revenues and the GP, but this time of the – cycle of the company. What we like focus on is revenues while maintaining gross profit maybe even make it better, but this is the main focus.

[Unidentified Analyst:]

Until 2020.

[Operator:]

Next question is by Jeff Bernstein of Cowen. Jeff, please go ahead.

[Jeff Bernstein:]

Hi guys, congratulations on the numbers. Just wondering, the sensor program in the U.S., I know won't get rolled out for a couple of years, but the very big opportunity, how do you guys see yourselves playing in that?

[Dov Sella:]

We are closely monitoring it. The progress we are submitting responses to RFIs and we are discussing with potential integrators, our options around this progress.

[Jeff Bernstein:]

So you would basically be a subcontractor to one of the prime type guys?

[Dov Sella:]

I think so. No, it's a major, major program and we don't assume that we are at the right size to go for the whole jackpot. But our solutions are suitable to quite a lot of requirement that this program calls for.

[Jeff Bernstein:]

Terrific. Thank you.

[Operator:]

Next question is by [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Thank you very much for taking my call. I was just wondering, who are your competitors and what's your claim to fame against them? Thank you.

[Dov Sella:]

As we repeatedly say, our competitors are Elta here in Israel, SRC Inc. in the United States. Our claim to fame is being here and now with available technology and performance of our price is unmet yet.

[Unidentified Analyst:]

Okay, great. Thank you very much. Keep up the good work.

[Dov Sella:]

Thank you.

[Operator:]

Next question is by Tony Radovich. Tony, please go ahead.

[Tony Radovich:]

Thank you very much for taking my questions. RADA team congratulations on an outstanding quarter and an outstanding year. I see that's an increased guidance, that's really terrific. So, just summarizing some of the past few questions, would it be fair to say that we should expect something like a continued revenue top line growth on the order, let's say 15% 16% in 2019? And then really 2020 would you now getting a program of records and being designed into the higher systems build by primes, government primes that 2020 would really be the inflection point for RADA?

[Dov Sella:]

We will give guidance for the year 2019 when we will release the full year results. It will be in three months from now. We do expect growth and I cannot comment about the exact figures. And yet, we do believe that 2020 will be a significant year for us.

[Tony Radovich:]

If I may ask one more question. I think as you have moved earlier, really critical to that growth and inflation 2020 is the setting up of the sustained RADA technology in United States. Could you please provide some comments of how that is progressing where you are resetting up all the agreements staffing et cetera?

[Dov Sella:]

Yes, we are on track. As I said earlier on this call, our goal is to have that production capability in the United States, full production capability with the proper supply chain and all the capital equipment in place and trained provisioned by the end of the first quarter of next year.

[Tony Radovich:]

Outstanding. Thank you very much and keep up the great work. Thank you.

[Dov Sella:]

Thank you, Tony.

[Operator:]

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

[Dov Sella:]

Yes. Thank you, operator. On behalf of our management, I would like to thank you all for the interest in the Company and our business. As always, please feel free to contact our IR team, the GK team. And we look forward to having you with us in the next update and the earning call that we will have. Have a good day. Thank you.

[Operator:]

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