RADA Electronic Industries' (RADA) CEO Dov Sella on Q4 2017 Results - Earnings Call Transcript

Rada Electronics Industries Limited (RADA) Q4 2017 Earnings Conference Call March 7, 2018 10:00 AM ET

Executives

Ehud Helft - GK Investor Relations

Dov Sella - Chief Executive Officer

Avi Israel - Chief Financial Officer

Analysts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Fourth Quarter 2017 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 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, 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 today on the call 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 and to all participants welcome to our full-year 2017 and fourth quarter results conference. Let’s start with the results summary. We are very pleased with the overall results of this year. It’s actually the best full-year overall results in more than two decades. If we look backwards, revenues were $26.2 million for the whole year, which is more than 100% growth compared to 2016. The fourth quarter significant in revenues, it was over $9 million and it is actually up by 112% year-over-year, and 72% sequentially compared to the third quarter of last year.

The main contributor to the strong level of revenues in 2017 was a major project for strategic U.S. Military Force that contributed $9 million in total and about $4 million in the last quarter. The gross margin for the full-year was 32%, as we anticipated in the beginning of the year, compared to the 11% of 2016.

In Q4, we had a gross margin of 24%, which is below the average of the year and also looking forward, we come back to the 30% over in the first quarter of 2018, and the margin was due to accumulation of a few irregular factors which we believe are one-time issues and we are going back to the normal very soon.

Operating expenses, given the opportunities ahead of us, especially in the United States, we have increased our expenses and the results of which are already visible in quarter number four of last year. The total is a little over $2 million. The primary reason is increasing R&D. We want to keep our advantage over competition and stay ahead.

Recently, we have opened a U.S. subsidiary company in the United States to better capitalize on the opportunities in this market, which is our main market, main growth market in the coming few years, and looking ahead the quarter around the four OpEx level is actually indicative of what we expect to be in 2014 [ph] across the quarters.

Net income was $2.2 million for the whole year, almost 9% of the revenues in one of our strongest years ever, especially in the last two decades as we mentioned. Cash, we have over $12 in net cash, which is in adequate level realized the potential ahead of us. The contributors to this cash level were first of all $1 million in cash flow generated from operating activities during the year.

$10 million of capital we raised in August from top Israeli Institutional Investors and $2 million, actually exercises the warrant mainly by DBSI, our controlling shareholder. This cash level allows us to increase spending on R&D as we have mentioned to keep leadership, to establish and start our U.S. subsidiary to run properly and in the right pace, and to have the working capital to build inventory to address short-term internal deliveries, which did mainly mark the Rada’s market is actually exhibiting. And we need to full-fill urgent needs in our active phase like we did in last quarter of 2017.

About guidance, looking ahead, while quarter 1 of 2018 is clear, the visibility of the rest of the year is not yet clear enough to produce an accurate estimation. The sales in our industry tend to be lumpy and Rada’s orders especially tend to be shorter internal growth because of this new and emerging market behavior. And we have seen that in the second half of 2017 as I have just mentioned.

The few potential significant orders in the pipeline that can convert, like we have in 2017, can covert rapidly to revenues along the year, but at this stage we cannot predict if and when. Some opportunities are delayed due to system integration and testing challenges, by our prime contractors or customers like active protection in the United States, which is delayed by a few months, but the opportunity is not lost, the opportunities are live-and-kicking. The customer is anticipating success of this activity and it is just reflecting a delay because of the complexity and challenges of such high-end and advanced systems still being in testing.

In Q1, we believe that we see that we will have around $6 million of revenues, which is much stronger than what we had in 2017 by 30% and we believe that this is a good sign for 2018 and we are very optimistic that this phase will continue and maybe even better, even though we cannot commit this stage to what will happen, especially in the second half.

Let’s review the market state. I want to spend some time talking about what supports our confidence looking ahead and the investments we are making in this business for practical [indiscernible] Rada’s. In October 2017, during the - or towards the AUSA Conference that’s [indiscernible] U.S. Army Conference that took place in Washington. The U.S. Army’s Chief of Staff General, Mark Milley issued a guidance on the modernization priorities of the U.S. Army.

One area was clearly a priority and it is in the area of short range air defense or [indiscernible] short, including current and [indiscernible] defense and actually the majority of our sales in 2017 were towards this urgent need of counter drawn and counter UAV solutions.

Further priority is the need for active protection systems to add additional protection for vehicle growth and we are in to out of the immediate programs that are currently being run by the U.S. Army through IMI and throughout as both of them are providing active protection solutions under testing through the U.S. Army.

And actually, our Rada addressed these two main avenues that the U.S. Army has adopted as the immediate modernization efforts of its force. And we believe that we are now sitting on the verge of a market acceptance and growth beginning to see early adapters of the technology among some of the most modern military forces like the U.S., but not only.

We estimate our total addressable market for this practical Rada as $5 billion, and not only the United States it’s a combination of United States and the Western World and there are currently actually no other players or competitors that have the full range of technical capabilities, mainly software [indiscernible] practical Rada for the manual force that can operate on the move. This is why we stay optimistic and actually our optimism level is growing.

As of the business update, let’s start with the U.S. Market. The U.S. project has been delivered. The one that I have addressed earlier in my discussion in 2017 has been delivered and completed in our record time because the customer requires a section of a very urgent need. The customer is happy and very satisfied and we anticipated a shielding [ph] of these systems will happen even this month.

Additional significant potential is in the pipe line and the further potential is further older from the same customer, older from other U.S. military customers that are totally exposed to what is happening with this one, and orders from advanced Militaries also in the world where we are also very active and we have a lot of potential need. Our corporation with DRS - Leonardo DRS is progressing well, covering mainly the very short range aero defense market and counter UAV market.

As I mentioned, we have recently opened our U.S. subsidiary in order to capitalize on the opportunities in this market, half of which are in the U.S. market as I mentioned and part of the job is also - parts of the tasks and goals of this JV is to offer Americanization of the technology, localization, and production in the United States.

Radar business grew or 300% versus 2016 driving almost all the growth in the year. And it was over 60% of our revenues in 2017. So, we believe this is a clear indication that the turnaround that we have been working on for a decade now is actually on the verge of let's say completion and materialization.

However, our legacy business, avionics basically recorded for fighter aircraft is stable. Avionics were about 40% in 2017 and we have a solid backlog moving into 2018, which shows similar or even better result compared to 2017 for this market segment of ours. The overall pipeline remains very good and continuously widening. We are pursuing dozens of opportunities mounting to multiple millions of dollars in opportunities, potential all over the world and especially in the United States as mentioned.

In summary, we are very pleased with the results of 2017, the pipeline is strong. We’re pursuing many opportunities and we’re excited with regard to the market potential and the potential of the company to materialize.

At this point, I’d like to hand over to Avi Israel. Avi, please go ahead.

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 our full-year 2017, as well as fourth quarter results now. The full-year highlights were as follows: Full-year revenues grew 104% to $26.2 million, compared to $12.8 million in 2016.

Our gross margin was 32% for the year versus 11% last year. Our operating income for the year was $2 million versus loss of $3.4 million in 2016. Net income for the year was $2.2 million or $0.09 per share versus a net loss of $4.9 million or loss of $0.35 per share in 2016. Operating cash flow was $1 million positive in 2017.

Cash and cash equivalent at the end of 2017 was $12.4 million, compared to $1.2 million at year-end 2016. The growth in cash was due in part to our positive cash flow from operating activities, as well as $10 million offering the company undertook in August 2017, as well as the exercise of warrants by DBSI has bought us some employees, which brought another $2 million into the company. Shareholders’ equity increased to $29.2 million at the end of 2017 versus $11 million at the end of 2016.

As for the fourth quarter, the highlights were as follows. Fourth-quarter revenues grew 112% to $9.1 million, compared to $1.3 million in the fourth quarter of 2016. Gross margin was 24% versus 19% in the fourth quarter of last year. Operating income for the quarter was $100,000 versus loss of $0.5 million in the fourth quarter of 2016.

Net income for the quarter was $0.5 million, compared to $0.5 million of losses at the fourth quarter of 2016. I would like to summarize and point out some highlights on our balance sheet, as well as December 31, 2017. We have more than $12 million in cash. We have no leverage at all short-term, as well as long term. Over 80% of our balance sheet is financed by our shareholders equity. The total is over $29 million. That ends my summary. We shall now open the call for questions. Operator, please.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Isaac Vidomlanski. Please go ahead.

Isaac Vidomlanski

Hi, yes. Congratulations on the very good results and now to my questions. Based on the fact that you are now at a subsidiary in the U.S., are you going to benefit from the new corporate tax in the U.S.? And can you elaborate more on the function of the U.S. subsidiary?

Avi Israel

As for the tax, assuming that, as you know it’s a U.S.-based company. It will benefit from tax benefit in the U.S. and we need to mention as well that rather in Israel, being an Israeli company have quite a lot of carryforward losses for tax purposes in Israel. So, I don't think cash is our problem at the moment, but definitely we will benefit from the ordinary tax rate in the U.S. as it went down we will benefit from it as well.

Dov Sella

As for the targets of the JV, we have corporation agreements with DRS technology, DRS Leonardo. As I mentioned, mainly around [indiscernible] counter UAV, however the market segments are much wider like active protection directly to the U.S. forces, like critical infrastructure protection, boarder protection and so on. So, first and foremost the JV should take care of business development for all the other market segments.

In addition, we understand that we need to localize and Americanize this technology and even produce and transfer it and maintain it. So, these are the tasks of the JV to create a significant company that does business development that is able to do a further development of the product through our partners, which are the engineering branch of this JV named [indiscernible], a company that we are joint venturing with on this effort. And we have already by the way a CEO and COO in place of this JV, and we do believe that the future, immediate future of this technology is in the United States to be materialized by this joint venture.

Isaac Vidomlanski

Okay. And now can I ask another question please?

Dov Sella

Sure.

Isaac Vidomlanski

I know more or less about your connection with Lockheed and DRS, can you explain to me the connection to Boeing, what do you do together with Boeing?

Dov Sella

What we did with Boeing is the same as we did with Lockheed actually and Boeing where a bit ahead of Lockheed when we started. We have delivered to both companies the radar listened that are being used in the development of the high energy laser solutions, which are still under development and continually tested. We have seen a press release of successful testing by Lockheed Martin a few months ago, and we have mentioned that it is done with our radar. Boeing did it a year or two ago. So, this is the nature.

Isaac Vidomlanski

Okay, thank you very much, and continue on your new way.

Dov Sella

Thank you.

Operator

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

Dov Sella

Thank you all for taking part in this conference call. On behalf of the management, I would like to thank our employees as well, and our shareholders for supporting us. If you like to meet us, please speak with our Investor Relations GK, and we look forward to speak with you and updating you again next quarter. Have a good day.

Operator

Thank you. This concludes the Rada Electronics Industries fourth quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect now.