Rada Electronic Industries Ltd (RADA) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Third Quarter 2020 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 at our 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, www.rada.com.

I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. I would like to welcome all of you to this conference call to discuss RADA's third quarter 2020 results. I would like to 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'd like to point out the safe harbor published in today's press release also pertains to the context of this conference call.

And with that, I'd now like to hand over to RADA's CEO, Mr. Dov Sella. Dov, please go ahead.

Thank you, Kenny. Good day to all our call participants from both sides of the ocean and wherever you are. Let's start with the results summary.

Ladies and gentlemen, the speaker has disconnected from the conference. Please hold while we connect.

Ladies and gentlemen, thank you for standing by. Please go ahead.

Okay. I'm Dov Sella. I will start again my discussion because we have some communication problem here. I guess that our business performance is better than our communication. So I will start the summary from the beginning.

We are very pleased with our financial results. We demonstrate exceptionally strong revenue growth, both year-over-year and quarter-over-quarter. We have a growth rate of 81% year-over-year and 16% quarter-over-quarter compared to the previous one, and we expect the sequential growth to continue in quarter 4 and into 2021.

Our gross margin increased to 38%. We had 36% stable for quite a while now. Our production at both Israel and U.S. production site is operating at higher volume, and we have better efficiency. And as we grow sales, we expect to continue to improve our manufacturing efficiency.

Operating expenses are stabilizing. OpEx is only slightly above the prior quarter on absolute basis, which is $167,000. There is a meaningful operating leverage in our business. And going forward, we will bring this down to our bottom line.

We have EBITDA of $3.1 million in this quarter, which is 15% of our revenue, which shows we are starting to enjoy the fruits of our investments.

We increased our revenue guidance from 2020 from over $70 million to now over $75 million. If you all remember, we last -- in the last quarter, we increased it from $65 million to $70 million. Our guidance is based on our growth on our volume backlog and orders, which are coming in a faster rate than we originally had expected. And our new guidance represents over 70% year-over-year growth, which is higher than the 58% growth of 2019. Looking further out, we expect sequential quarterly revenues to continue to grow in Q4 and into 2021.

We have a strong balance sheet of over $24 million in net cash at the end of the quarter, which is the 30th of September. It is sufficient for our growth and working capital needs. We still have some fluctuations in our cash as we are not yet under serial production programs and typically do not get exact payments as of now. The current cash level supports our inventory plans and enables efficient manufacturing. It enables us to continue to invest in our growth and it allows us to focus on maintaining our R&D edge and capitalize on opportunities when we identify them. We do expect to become cash flow positive along 2021.

Let's discuss our current program. I'd like to update you on some of the major programs in which we are involved. As you may know, the U.S. Army awarded General Dynamics the expected framework of $1.2 billion for the IM-SHORAD program. They are under contract since a few weeks ago, covering 4 brigades -- the framework of $1.2 billion cover in 4 brigades and 144 vehicles or systems will be completed by mid-2023. The initial contract calls for 28 systems, 28 Stryker vehicles. The mission equipment package is developed by Leonardo DRS, integrates our multi-mission Hemispheric Radar as part of it. And we have not yet received the order from DRS, but we do expect to get the first purchase order for serial production program by year-end and hopefully this month.

APS for fighting vehicles. Our radars are in the heart of Elbit's Iron Fist solution. And in the Israeli Eitan AFV, we are in the development phase of this program. Serial production will commence in 2022 and the scope is over 1,000 radars over a few years.

The U.S. Army's Bradley IFV. The testing is ongoing. Serial production is expected to commence in 2022. Scope of the first brigade is over 620 radars for us. There are several additional APS programs in the pipeline requiring potentially thousands of radars, which with deliveries to start in 2023 and onwards. This is a potential program in Europe in the Far East and so on.

USMC GBAD program is enrolled to become a program of record, while momentum is kept by interim deliveries. We have already delivered over 260 radars to the Marine for the GBAD. In general, we evidenced a strong momentum in point defense following the identified threat of rockets, cruise missiles and drone attacks as evidenced by hostile events in the Near East in recent months and years. Beyond what has been delivered to date and as demonstrated throughout this year, we anticipate significant upside from follow-on orders to the initial orders we have already delivered and also still producing to certify.

Our pipeline continues to broaden with promising prospects. And potential orders are especially strong in the U.S., while other international markets are increasingly growing and showing momentum.

Let's summarize. Again, we are outperforming our expectations. Revenues, year-over-year growth of 81% and quarterly growth of 16%, to a level of $20.4 million this quarter. Based on strong orders flow and current backlog, we have again increased our 2020 revenue guidance, which is now $75 million and above, representing a 70% growth year-over-year.

Our gross margin level has increased, and our operating expenses are gradually stabilizing. So we can bring much of the incremental growth in our revenues down to the bottom line. Our EBITDA is $3.1 million or 15% of revenues. And given the operating leverage in our business, we expect EBITDA to grow further. And we do believe that we are still in the early stages of our growth. The market is wide and growing, and we expect to continue the growth in the foreseeable future. Our current leading and mature radar technology addresses the demanding needs of this growing market for the near term, and we are investing heavily in the near-term future and going to launch quite a few new radars in the coming year.

And while reporting our best ever quarterly results, we believe that our next quarters will be even better.

At this point, I would like to hand the discussion over to Avi, our CFO. Avi, please go ahead.

Thank you, Dov. You can find our results on the press release we issued earlier today, and I will provide a short summary of the third quarter results.

Third quarter revenues were at a record $20.4 million, up 81% year-over-year. Our gross margin in the quarter was 38% of revenues when compared with 36% over the past quarters, including Q2 of 2020.

As you know, we made significant investments last year, especially in R&D, in marketing and sales as well as our infrastructure in the United States, so our operating expenses grew. However, looking ahead, we don't expect significant changes in operating expenses going forward.

Operating income was $2 million in the quarter compared to operating loss of $495,000 in the third quarter of 2019. Adjusted EBITDA of $3.1 million, which is 15% of the quarter's revenues compared with $105,000 in Q3 of last year.

Net income attributable to RADA's shareholders in the quarter was $2.1 million or $0.05 per share compared to a net loss of $685,000 or $0.02 loss per share in the third quarter of 2019.

I would like to summarize and point out some highlights from our balance sheet. As of September 30, 2020, we had $23.7 million in net cash net of the small financial debt related to the PPP plan in the U.S.

At quarter end, our shareholders' equity stood at $69 million, financing 70% of our balance sheet. Our inventory level increased to $29.3 million compared to $17.2 million at the year-end of 2019. The inventory level has been strategically increased to support our future expected growth and to ensure full availability of components, given the current environment and the need to mitigate against any negative influence on the supply chain, mainly as a result of the COVID-19.

In summary, as Dov mentioned and as the financial results demonstrate, we are very pleased with our progress and look forward to continued growth. That ends my summary.

We should now open the call for questions. Operator, please.

(Operator Instructions) The first question is from Ken Herbert of Canaccord.

A very nice quarter. I wanted to ask, first, on the gross margins. Very impressive this quarter. Do you think this rate is sustainable as we go into '21? Or is there -- should there even be upside under the gross margin line as the volumes continue to pick up?

We do believe that there is room for improvement of the gross margins, as I've mentioned in my discussion. But we are not a software company. So I think an increase, but not something outrageous is still expected.

And there wasn't anything unusual this quarter that was a tailwind for gross margins. Was there?

No. Nothing special of.

Okay. Perfect. And as we look forward, it sounds like, Dov, I'm sure that is on Page 4, a very nice step-up next year. Can you just comment on confidence around timing of the contract? And I know here, there's been some technical issues with the prime that have led to some delays, at least with the Army, but obviously nothing with you. So can you just comment on confidence around timing there and expectations for that program into 2021?

Yes. Our confidence is as high as it can be, purely administrative in our eyes.

Okay. Perfect. And just finally, are you prepared to talk about the type of growth with the backlog now that we should expect for 2021 on the top line?

It's a bit early. We promise that we will continue growing. But formally, we will issue probably in a month -- maybe a bit more than a month from now, we will issue a guidance for 2021. So let's be patient until then.

The next question is from Brian Kinstlinger of Alliance Global Partners.

With the solid orders throughout the year, I want to dig into the size of your sales force today compared to the beginning of 2020, and then maybe you can talk about your plans to add additional sales resources over the next year.

Yes. I think we have enough people, both on our site here in Israel that addresses naturally the local market and the rest of the market and in the U.S. It's B2B marketing and sales altogether. We have, I think, close to 30 people, which is far order enough. We include our sales support and the customer solutions. And we are finding that we add people as much as we need ahead of time, and I think our results demonstrate that.

And then given your succession -- success in short-range air defense, are customers seeking you out? Or is it mostly outreach or are you responding to RFP-type situations?

I'm sorry, could you repeat the question? I had some communication issues again.

Yes, no worries. So you had a lot of success in demand for your mini radars in short-range air defense. So I'm wondering are customers more and more seeking RADA out. Or are partners seeking RADA out? Or it's still -- is it mostly outreach or you and your teams responding to RFPs?

The shape of the market is not yet RFPs. It's an emerging market, and there are typically needs -- urgent needs that are answered by a quick turnaround of show-me-what-you-have demonstrations and then the relatively quick decisions. So instead of cycles of, I don't know, 2, 3 years, it is something like, I don't know, maybe half of the time. But it is not yet in the stage of answering RFPs.

Got it. Okay. And then inventory, as you highlighted, has been a drag on cash. Obviously, that leads to stronger revenues. It's not necessarily a bad thing. It's a good thing. But as you see stronger demand in '21 and then, obviously, there are some large programs in '22 and '23, will you need to make increased investments in manufacturing capacity?

We are already topping up our manufacturing capabilities in the process to double our capacities, and though we have not reached the limit as of now. We have 2 sites. Each site potentially can produce radars that's worth of about $100 million a year. We are not there naturally. But we do believe that we should do it ahead of time. We have new developments. We want to introduce repair and overall as well. So we are doubling our capabilities. We are adding anechoic chambers, both in Israel and in the United States by mid next year.

Yes. And I guess, to that point, it seems like you're on a pace for more than $100 million next year, even if the growth rate slows significantly. So well, do you think by summer, you'll have increased capacity of more than $100 million?

The capacity in both ends of the ocean, both in Israel and the U.S., can support, as Dov mentioned, $200 million of revenues since we have...

$100 million in each.

Yes. That's the numbers, rough cut.

So $200 million is your capacity in total right now of revenue?

Yes, and we are increasing it. That's not going to be the bottleneck.

The next question is from Will Manuel of Edison Group.

Great quarter, guys. Just wondering in terms of the product mix. If the avionics side of business still tracking the same sort of $10 million to $12 million rate, does that have an impact on gross margins in the quarter?

No, not dramatically. There's no significant difference in gross margin between the avionics business and the radar.

Okay. And you mentioned in your recent updates that most of the new orders coming through from the U.S. Is it an indication that the rest of the world is maybe a little bit slower there? Or the U.S. is coming through quicker? Do you expect any significant change in the geographic breakdown going forward?

They -- we expect that the U.S. will be -- naturally, the U.S. is the biggest local market for us. It's about 50% of the total market. And we are very happy that, as we anticipated, the U.S. is moving faster than any other market. At the end, we do believe that it will be stabilized at 50%. We still show, by the way, 50% of our sales in the U.S. and the other 50% in the rest of the world, while remember that avionics are there. So they are part of the rest of the world. But next year, the U.S. will dominate, let's say, more than 50%, but we do see Europe and other places waking up with similar requirements, as I mentioned in my briefing. And we do believe that in 2022, it will be even again.

The next question is from Jeff Bernstein of Cowen.

It's a great quarter. And just interested, you mentioned developments in the Middle East, I guess, if the observation on our media conflict may have been the first thing ever that's settled by drones. We're not talking about sort of have-to-gather terrorist things anymore. We're talking about major scale technology. How is that changing the TAM for you guys, the requirements that people are now looking at, et cetera?

Well, it started -- I think all these events started more than 2 years ago. So we are in the midst of these changes. It is -- the growth of our business is affected by all these -- by the recognition of the market all over that there is a need for tactical short-range protection and life-saving solutions. And in our eyes, it's continuously evolving, kind of became normal course of business. So we are not surprised as of now.

(Operator Instructions) The next question is from [Nahum Modi].

Mr. Sella, it's [Nahum]. We talked a couple of weeks ago. Actually, I had a question, but you've already answered it. So I just want to tell you congratulations for the great quarter.

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

Yes. On behalf of the management, I would like to thank you all for participating in our conference call this time. We will present in -- at the Wainwright Conference on Thursday -- on the coming Thursday, 2 days from now. So anybody that wants to join is more than welcome. Otherwise, we look forward to speaking with you and update you again in the next quarter in approximately 3 months' time. Stay well, and thank you all.

Thank you. This concludes the RADA Electronic Industries Third Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.