RADA Electronic Industries Ltd.
Q4 2018 Earnings Call Transcript

Published: 20 Mar 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Fourth Quarter and Full Year 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. I would like now to hand over the call to Mr. Ehud Helft and GK Investor Relations. Mr. Helft, do 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. Earlier today, RADA released its results for the fourth quarter of 2018 and full year. By now, you should have received the copy of the press release, which is also available on Rada's Web site 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 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 morning to our U.S. audience and good evening to our Israeli audience. And welcome to our fourth quarter and full year 2018 results conference call. I'd like to start with the results summary and guidance. While 2017 was a very high bar to cross for us, because it more than doubled the 2016 revenues and reached $26 million, we managed to do even better than that in 2018 with $28 million in revenues. Furthermore, while in '17 we achieved our strong revenue level on the back of one large order, in 2018 our orders were more diversified with strengths on both sides of the business, avionics and radars. The results represented our end markets are beginning to mature and sales of our tactical radars are beginning to broaden in length. While our revenues of '18 are the highest achieved by our company in about 25 years now, the RADA today is not the same as RADA in the past. We are almost like a startup technology company with very new and exciting technology around software defined radars with the added advantage of a legacy business that provides us with additional cash flow to support the investment. And while we developed our tactical radars with foresight over the past few years for what in our eyes was then the predictive future need. Today, we have a solution that is very immediate and satisfies current and urgent defense needs of providing protection against the traditional threats like rockets, missiles and such and also newer threats like small and potentially armed drones. Our early sales of product have already been used by armed forces in several countries to address these threats operationally. And such is protecting vehicles from short range missiles and also airport from drones. And because of the huge opportunity ahead of us, we are gearing RADA for significant growth in 2019 and mainly in 2020 and beyond. Therefore, 2018 was and 2019 should be years in which we have and are making very significant investments in R&D, and also in sales and marketing expenses, which we believe will enable us to deliver significant revenue growth and ultimately high-level of profitability in 2020 and beyond. Therefore, our efforts are focused on top line growth while maintaining a solid level of gross margin. This is where we should be measured in 2018 and also in 2019. And we are confident that when we grow a market share, while maintaining these gross margins that we have shown in 2018 and also we plan to do it in '19, these will show significant profitability of the company. In terms of our expectations, we expect above 40% -- actually 43% of revenue growth in 2019 compared to '18, and we estimate it to be at about $40 million. And as the programs of record start to become online at the end of '19 and during 2020, we are even more optimistic for the period beyond that, where we really begin to realize the fruits of our investments over the past years and also this year. Compared with what we felt the same time last year, I am much more confident about the years ahead. Let's talk a bit about the pipeline and orders. Our focus is mainly on active protection and the mobile short range air defense when we are talking about the tactical radars. Active protection is active in the U.S. Army, in Israel and the other geographies are emerging today. If you counter drone is actually all over, while the U.S. market is leading. Mobile short range air defense, the U.S. Army and the Marine Corps and also NATO forces are joining gradually. The market behavior of this segment is changing in the U.S. mainly from fulfillment of urgent needs to programs to [indiscernible]. And we hope to build a backlog for a few years ahead along 2019 and during 2020 around all these programs. We have strong pipeline, it broadened nicely in the past year with significant revenue potential. Potential orders are global but especially currently strong in the United States. Given that in the rapid market maturization is showing its face, and our relatively strong presence through our subsidiary there and the activity. I want to stress that the orders to new customers that we have previously supplied, as well as the orders we are now beginning to supply has potential to lead to very significant follow-on orders compared to the initial stages that we have delivered to quite a few customers this year. As we started 2019, it seems that this is the year we've been waiting for quite a few years now. We are now in the inflection point of market acceptance and the growth and hence, our strong investment in capitalizing on all of the opportunities ahead. Regarding our cash position in the investment in the future, we have strong cash position at over $20 million, and Avi will further elaborate on that later. Given it gives us the adequate capital to invest in our U.S. production lines and operation, it provides us the ample capital to further invest in R&D to maintain our lead and also the market dollar to pursue market opportunities and initiative. It give us the required working capital to build inventory and to deliver in a very short turnover and also overcome erratic behavior of the components market as we have seen in last few months. And it also positions us in strong and stable eyes in front of our potential customers and the end users. In summary, we are very pleased with our 2018 performance and the forecast that 2019, which will be a record year for us with over 40% of revenue growth compared to 2018. Our balance sheet is strong. It gives us the ability to make the right investments in order to capitalize on the opportunities. We see initial orders from new customers always very high growth potential. We see the programs of record starting to crystallize in the United States mainly. The pipeline is very strong and we believe that the real sharp goals will be at the end of 2019, and this program of records that will start then and also keep us along 2020, '21 and onwards. In summary, we are very optimistic more than ever before. I'd like to hand the discussion over to Avi Israel, our CFO. Avi, 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 will provide a short summary of both our fourth quarter, as well as the full year results. Fourth quarter revenues were $8.4 million. For the full year, we reported $28 million. I noted in the fourth quarter, there were some delays in the U.S., which were external to RADA. So about $2.5 million of revenues expected in Q4 shifted into 2019. Our gross margin was 36% in Q4 and was at the same level throughout 2018. In 2017, the gross margin was more volatile and for the year was 32%, while in Q4 it was 24%. As Dov explained earlier, we're making significant investments, especially into our infrastructure in the United States. So our operating expenses grew in 2018, and will continue to grow in 2019 and support our future growth expectations. R&D increased $1 million in the quarter and was $3.1 million in 2018 overall. This is up from $0.7 million and $1.6 million respectively in the same periods of last year. Sales and marketing were $0.8 million in Q4 and $2.9 million for the year compared to $0.7 million and $2.1 million respectively last year. G&A, which were $1.2 million in the quarter and $4 million for the year compared to $0.7 million and $2.6 million respectively last year with significant increase related to our newly established U.S. presence. Operating income was $100,000 in Q1 and $165,000 in 2018 as a whole compared to $104,000 and $2 million in the respective periods of last year. This continued operational losses for the quarter were $0.2 million and for the year $0.4 million. These losses also represent results of the agreement to sale our Chinese subsidiary that was signed in December 2018. Net loss attributed to RADA's shareholders for the quarter were $0.3 million and for the year $0.2 million. This is compared to $0.7 million and $2.3 million of profit in the respective periods of last year. Non-GAAP EBITDA was $0.5 million in the fourth quarter and $1.9 million for 2018. This is compared to $0.5 million and $3.5 million in the respective periods of last year. I would also like to summarize and point out some highlights from our balance sheet as of December 31, 2018. $21 million in net cash, no financial debt at all short or long term. During 2018, we raised approximately $12 million from institutional shareholders in Israel. DBSI, our largest shareholder also invested $1.5 million in the January of 2019. Our shareholders' equity strongly increased to $42 million compared to $29 million of last year. We used $3.8 million in operating cash flow during 2018, primarily to build our inventories for large level of orders. We need to fulfill and in the coming months, as well as investment in additional $0.9 million in CapEx, mainly in our production line. That ends my summary. We should now open the call for questions. Operator, please?

[Operator:]

Thank you. Ladies and gentlemen, at this time, we'll begin the question-and-answer session [Operator Instructions]. First question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

In the past discussions, you've been cautious about top-line growth in '19. But obviously, the $40 million revenue guidance suggests substantial growth. And maybe you can breakdown where the increased demand is coming from, maybe aviation versus or is it all radars. And then within radars, can you breakdown this year the growth in short range defense versus ATP?

[Dov Sella:]

Yes, it's mainly the radars. The avionics, as we said in previous discussions and continuously is relatively stable and a fluctuation of $1 million to $2 million dollars is not significant. It's mainly radars and it is all around the short range defense and counter drone solutions, because the APS market is not yet showing significant revenues it's in the testing phase and preparation space.

[Brian Kinstlinger:]

And then of the orders for short range air defense and drone, how much of the 40 million is coming from backlog versus orders you still need to obtain?

[Dov Sella:]

We are disclosing these numbers as of now, not in the past and not now.

[Brian Kinstlinger:]

And then can you talk about, I think you said the U.S. is the most exciting market right now in terms of orders for this business. Can you talk about other regions where you've started to see success?

[Dov Sella:]

Yes, actually in '19 we'll see other regions growing. The traditional allies of the U.S. like the NATO countries and some others in the Far East, and we see through them also and through the Israeli integrators additional end user countries that need these solutions, mainly around the drone protection.

[Brian Kinstlinger:]

And then can you give us an update on the ATP testing, where are we right now and in terms of timing, how long it might take? And then I think you're delivering some radars for APT. Can you maybe quantify that for this year?

[Dov Sella:]

Yes, we are going to deliver. It's not significant in dollar values. It's a few dozens of radars, but it is not moving the needle compared to all the rest. The testing will start towards the fall of this year, and it will carry to 2020 also. But we do expect based on what we hear from our customers here, which is Elbit IMI. We do expect these orders for the initial quantity for testing units, but mainly for long lead items for the bigger acquisition phase.

[Brian Kinstlinger:]

And on this call and last call, you talked about programs of record being set up by the U.S. government. Have those been set up or are you waiting for the next Federal budget, which might not be for a bit of time?

[Dov Sella:]

The programs of record, the main three programs of record that we are expecting to get, one is the active protection, even though it's NDI, it becomes a program of record in our terminology and both the Marine Corps and the US Army with ground based air defense. Until now, we have delivered initial quantities for their testing and their internal operational requirements definition and architecture definition and testing, and they're preparing these acquisitions for 2020 budget and 2021 budget.

[Brian Kinstlinger:]

So we're hoping then the 2020 budget one or more than one of these three will be in that budget. Is that right?

[Dov Sella:]

We hope that all three will be there.

[Brian Kinstlinger:]

And then you talked about investing in U.S. and in new radar production line. Is there a CapEx cost to this in addition to the increase in some of your operating costs?

[Dov Sella:]

Of course.

[Brian Kinstlinger:]

And so can you maybe give us an estimate for CapEx costs for 2019?

[Dov Sella:]

It's about few million dollars.

[Brian Kinstlinger:]

Like 5?

[Dov Sella:]

Probably not so much, but a few million dollars…

[Brian Kinstlinger:]

And then how long do you expect it's going to take to build out the U.S. in the production line and can you talk about where it will be located?

[Dov Sella:]

Yes, the location is in Germantown, Maryland. The company is now located in Silver Spring, Maryland and we have identified a space in Germantown to the north. And the goal is to produce radars in the fourth quarter of this year.

[Brian Kinstlinger:]

And then lastly with the equity ratio. Can you just today talk about what your diluted share count or common share count is?

[Dov Sella:]

You mean number of shares?

[Brian Kinstlinger:]

Yes.

[Dov Sella:]

Number of shares as of December 2018 were…

[Brian Kinstlinger:]

…not at December, as of today. I know you -- because it looks like you did the raise and then you did something else small it looks like in your press release.

[Dov Sella:]

Yes, I'll give you the details. As of December 31, 2018, the rough cut numbers were $37.5 million. We should have another around about $0.5 million to DBSI as a result of this $1.5 million capital raise in January. And besides that, we have outstanding number of employee stock option plan no more than that.

[Operator:]

The next question is from Ashok Kumar of ThinkEquity. Please go ahead.

[Ashok Kumar:]

Just a follow-on question to the comments earlier. On the build out of infrastructure, your guidance of $40 million on the top-line and target margins of mid-30s. So that just supports operating expenses of $14 million or better. So will that give you full year profitability on the operating income line?

[Dov Sella:]

You have to take into account that we are also increasing our investments as we made it clear over the previous discussion in R&D and also sales marketing building the U.S. infrastructure. So, I don't think we should be judged at this stage on profitability. It's around being breakeven or better.

[Ashok Kumar:]

So Dov, in terms of programs of record. Do you rate these opportunities by deal stage in qualification proposal and procurement, right? I assume that you have very tightly integrated with some of the federal government opportunities as you have high visibility for remainder of this year and going into 2020 procurement cycle?

[Dov Sella:]

Sorry, what is the question?

[Ashok Kumar:]

The question is on do you look at what deal stage you're in with these programs of record with the federal government, whether it's in qualification stage or proposal stage or different stage drives? So I mean do you have visibility into that?

[Dov Sella:]

We actually are relying here on our customers you have to understand that we are actually selling our systems through integrators. And they are taking care of this. So we are not monitoring it very, very closely as the one may suggest, but we through them in general terms, we know what are the phases and the expectations that we gave are based on that.

[Ashok Kumar:]

And one last question Dove. On the again continued customer diversification drive, given your pipeline today, where you anticipate your geographic and commercial performance mix to be by the year-end and looking into the next fiscal year?

[Dov Sella:]

What we are currently doing is we're working very hard on concluding our complete full financial statement, including the 20-F report. I believe that it will be released in the next two weeks, no more than that. And within that, these reports you will be able to see geographical spread of our revenues and customers and so on.

[Operator:]

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

[Scott Huntington:]

One of my questions have been answered regarding your build out here in the U.S., thank you for the coverage on that. And I caught it on your presentation under the new products you have nearly five under development. It was little unclear sometime between now and the New Year. And if you can you give me timeline on your new product development. And also if the marketplace is tempering -- potentially tempering on your current offerings in anticipation of your upgraded systems that are untapped?

[Dov Sella:]

Well, the revenue growth of '18 and also '19 is based on the current programs products. And our new developments are to keep us in the lead in the next years to come, and they will mature along this year.

[Scott Huntington:]

And the timing on them is just so that some of the timing of it being coming to market?

[Dov Sella:]

End of this year early next year…

[Operator:]

[Operator Instructions] The next question is from [Isaac Vidomlanski]. Please go ahead.

[Isaac Vidomlanski:]

Yes, back to the subject of $3 billion D&A sales. I think that was exactly last year that you announced and I will quote what you said, RADA technology is aiming to achieve a special security agreement, SSA, in the United States defense security service by the end of 2018 year. And SSA will the company for engagement with the primary military programs of the United States involving tactical radars for the maneuver forces. Cyber certification of the RADA tactical radars is in progress, and is expected to be achieved by the year-end 2018. So my question is where are we standing exactly with this agreement? And can you shed more light about the U.S. subsidiary?

[Dov Sella:]

SSA is under process, it takes time until you get endorsement from the right authorities and so on. The SSA process has started and we are now shifting our prognosis towards end of this year. And also cyber certification is undergoing as we speak here and probably will happen within a few months.

[Isaac Vidomlanski:]

Another question is last week in the Virtual Conference you said RADA is developing four new radars. Can you tell us more about these new radars?

[Dov Sella:]

Not at this stage.

[Operator:]

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

[Dov Sella:]

Yes, thank you for joining us on behalf of the management. I would like to thank you again for the interest in our business. If you'd like to speak to us, please call our investor relations it’s GK, Ehud and his people. And we look forward to speaking with you and update you again in the next quarter. Have a good day, everybody.

[Operator:]

Thank you. This concludes the RADA Electronic Industry's fourth quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.