RADA Electronics Industries (RADA) Q4 2020 Earnings Call Transcript

RADA Electronics Industries (RADA)
Q4 2020 Earnings Call
Feb 10, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronics Industries' fourth-quarter and full-year 2020 result 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 RADA's investor relations team at GK Investor and 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 -- Investor Relations

Thank you, Operator. I would like to welcome all of you to this conference call to discuss RADA's fourth-quarter and full-year 2020 results. I would like to thank RADA 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 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

Thanks, Ehud, and welcome everybody to our full-year and the fourth-quarter earnings call. Let's start with the results summary. As you can imagine, we are very pleased with our record financial results, both in the quarter and for the full year. We are happy with both the top line, the revenues; and the bottom line, the profitability.

Our revenues grew 72% year over year for the full year of 2020 compared to '19, and 62% quarterly when you compare it to the fourth quarter of '19. Our gross margins in Q4 reach 39%, after growing to 38% in Q3, from a very stable 36% we sustained for about 10 consecutive quarters before that. Our U.S. production is operating at high -- high capacity now and better efficiency.

And as we grow sales further, we expect to continue to improve our manufacturing efficiencies. Operating expenses are stabilizing, taking into account the significant growth in the top line. The growth in the -- the -- growth in the opex is at a much lower rate. And when looking through 2021, we expect opex to be stabili -- stable, and it means that there is a strong operating leverage in our business.

And going forward, we can bring much of the revenue growth down to the bottom line. Our EBITDA of $3.9 million in this quarter, or 17% of our revenues, shows that we are enjoying the fruits of our investments. We expect profitability to further increase in the coming quarters. We gave a revenue guidance of over $120 million for the year of 2021.

Our guidance represent approximately 60% and more year-over-year growth compared to 2020. If our backlog growth grows and the new orders come in at a faster rate than originally expected, our visibility is the best that we ever had been and we are increasingly confident about this guidance. We have a strong balance sheet of over $36 million in net cash at the end of the quarter. The current cash level supports our current inve -- inventory plans and enables efficient manufacturing, especially under the COVID environment.

It enables us to continue to invest in our growth. It allows us to focus on maintaining our R&D edge and to capitalize on some opportunities as we identify them. Let's talk about one of the opportunities that we have identified and actually implemented in the recent days. We are starting to inorganically broaden our business.

One of such opportunities that we are taking advantage of is an investment in RADSee Technologies Ltd., an early stage Israeli start-up company introducing a very interesting and relevant radar technology, with whom we have signed an investment terms. RADSee makes radars for the automated driver-assistance system, or ADAS, market. Those solutions are relevant for both the future autonomous vehicles, as well as the current nonautonomous vehicles. There are many technological similarities between the way RADSee works and the way we at RADA do.

Yet, they focus on the commercial current and future mobility markets, as opposed to us focusing on the defense. Hence, we see strong potential synergies down the road. We are currently investing $3 million and purchase 12% of their equity while our investment carries an option to further increase our stake. For now, our involvement will be we are board membership.

We will remain focused on the execution of our current business under the significant growth opportunities we are experiencing. As may be known to all, Israel has a vibrant and innovative technology ecosystem, also nicknamed as the start-up nation, with quite a few interesting and relevant RADA technologies, companies, addressing attractive and growing markets. Our vision around that is to create a synergistic radar technology hub, broadening to commercial and lucrative markets, and later widen it to other geographies where we have advantage at. RADSee is the first step toward this goal.

Again, our business focus right now is to cater for our massive -- massively emerging defense end markets. We made only an initial investment to have access to RADSee's technologies. But very importantly, we do not want to take our eyes off the goal and we continue to work toward our current goals. Let's summarize.

We are outperforming our already high expectations. 2020 revenues grew 70% year over year to a record of over $76 million in revenues in a year which the business environment was a bit difficult for everybody. Our gross margins are increasing, our opex is stabilizing, and we are increasingly benefiting from deleveraging the business. We have become solidly profitable with EBITDA of 17% in the last quarter and potential to improve this even further.

Based on our visibility for 2021, we reiterate our -- and are optimistic about our revenue guidance of over $120 million this year. And our current leading and mature radar technology addresses the demanding needs of our growing markets for the near term, and we expect our growth to continue for the foreseeable future. We have taken the first step in broadening our vision to become a leader in the wide radar arena with our initial investment in RADSee, a very promising early stage joined our technology company. And finally, while we are putting our best ever quar -- quarterly results, we believe that our upcoming quarters will be even better.

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

Avi Israel -- Chief Financial Officer

Thank you, Dubi. Welcome, everybody. You can find our results from the press release we issued earlier today, and I will provide a short summary of the fourth-quarter and the full-year results. Fourth-quarter revenues were $23.3 million, up 62% year over year.

For the year, revenues were $76.2 million, up 72% year over year. Our gross margin in the fourth quarter was 39%, 300 basis points over the last -- over that of last year, and the full year was 37%, versus 36% of last year. We're happy with this improvement in gross margins and even expect a further improvement in the future as quantities will grow and production efficiency will improve. Q4 operating expenses were $6.2 million, compared to $5.3 million in Q4 of last year.

And the full-year operating expenses were $22.9 million, compared to $18 million in 2019. I would like to point out that the opex was 30% of our revenues in 2020, while it was 41% of revenues in 2019. So as we already mentioned, our opex is pretty stabilizing. Operating income was $2.8 million in Q4, versus a loss of $270,000 in Q4 of last year.

For 2020, we had an operating income of $5.5 million, versus operating loss of $2.1 million of last year. Q4 net income attributable to RADA shareholders was $2.6 million versus $295,000 of loss in Q4 of last year. And for the year, we had $5.6 million of net income versus a $2 million loss of last year. We reported a record EBITDA for the fourth quarter of $3.9 million which we -- which is 17% of revenues versus EBITDA of $587,000, or 4% of revenues in Q4 of last year.

For the full year, EBITDA was also a record of $9.7 million, or 13% of revenues versus four $407,000, or 1% of revenue last year. I would like to summarize and point out some highlights on our balance sheet. As of December 31, 2020, we had $35.8 million in net cash and no material financial debt. At the end of the year, our shareholders' equity stood at $72 million, financing 67% of our balance sheet.

In summary, as Dov mentioned, and as the financial results demonstrate, we are very pleased with our progress in what has been a complete -- a complicated year for everyone. That ends my summary, we should not open the call for questions. Operator, please.

Questions & Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator instructions] The first question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Great. Thanks so much for taking my questions. You mentioned -- I am sure that Avi has sees the program driving growth. Are you able to share with us how many programs that are large like this that make up maybe a majority of demand -- demand, for example, do five or six large programs account for 50% or 60% of the orders or is demand broad-based over say, hundreds of customers.

Dov Sella

Well, we don't have hundreds of customers potentially, I think. We have a -- I can say -- let's say potentially, so yeah, it is spread for us it's -- it's widespread, you know. And I am sure this is a significant one for us. It can -- it can be providing something like $20 million of revenues maybe a bit more this year or we start already a backlog of freight and then we expect another order of a significant order of about 74 additional -- 72 additional vehicles that some of them will be delivering toward their second half of the year.

So, I am sure the significant program -- the GBAD of the marines is a program of record. It is less in size compared to that, I'm sure, that it is significant. There are quite a few additional customers both in the U.S. and -- and in the rest of the world that we cannot disclose at this stage but a bit less of volume but significant.

So, you know, we -- it is spread around let's say, 10 primary customers and the additional 10 less -- less in size.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Great. That's really helpful. And then, on the APS side, you still expect to deliver a thousand radars for the Eitan and 60 for the Bradley in 2021, or is there anything change in terms of delays or, you know, push forward by hand -- and or are there other APS delivery you expect this year, you know on the early stages?

Dov Sella

We said already that APS will affect our top line only in the second half of 2022 and onward, mainly, in 2023.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

But is it -- is it the Eitan and Bradley are the only two that will have small deliveries this year? Is that right?

Dov Sella

This year, we are going to have very minimal deliveries of prototypes, it is insignificant. Serial deliveries for the Eiton, we start next year. On a lower -- lower scale, Bradley is expected 2023, [Inaudible] is expected 2023 also. So, APS will start affecting not only in 2023.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Got it. OK. And then, you mentioned gross margins and in the U.S., you're at high-capacity expect -- efficiencies. I guess I'm curious, the long-term target 40% or you double or triple in size, and in terms of revenue and build scale, what is a reasonable long-term gross margin target for the company?

Dov Sella

I think that if you examine the companies like us, product companies in -- especially in the defense, you'll know if we do really well we cross the 40. But -- but you know, it is not there. We keep saying we are not a software company. There is a limit to -- to the top line to the -- to the gross margin.

So, if we do over 40, we'll be very happy with that.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Yes, yes. I agree. And then lastly, if you can comment on RAD -- the RADSee technology and give us more details. How are these radars being used in autonomous driving in the vehicle market in general, maybe a supplier to some big solutions and -- and, you know, what kind of functionality they bring to that -- to the automotive market?

Dov Sella

It's so early, it's too early to describe. You know, we are taking a minority share at this point but the whole idea is to address this fair highly price-sensitive market with a high-end solution that gives better or excellent performance over price ratio. That's what we did in doing the defense. Today's technology of availability of components and small design of antenna and software algorithms can compensate a lot for what was done not so long ago by hardware that increases the prices and made them unaffordable.

There is a demand and pressure in the auto -- automotive market even today to give better things but they don't let go about prices. So, RADSee is in u -- unique situation of a, you know, performance over a price that meets the -- the expectations of the market. And also, give something with a performance that can -- can meet the high demand that the potential autonomous cars are requiring. Until now, the consensus was that LiDARs, it can give these -- LiDARs are expensive and they come with the ingenuity solution that can introduce high-performance radar at their really affordable prices to this market.

But again, it's an early stage, they're on the verge of start testing within a few months. We still want one or two, and also with OEMs in -- in this market and we will help them as much as we can and follow them closely and we will update every quarter when we have something new to say. But this is the starting point.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Thanks for taking my questions. Thank you.

Dov Sella

Thank you, Brian.

Operator

The next question is from Ken Herbert of Canaccord. Please go ahead.

Ken Herbert -- Canaccord Genuity -- Analyst

Yes, hi, good evening, Dubi and Avi.

Avi Israel -- Chief Financial Officer

Hi, Ken.

Dov Sella

Hi, Ken.

Ken Herbert -- Canaccord Genuity -- Analyst

Maybe Avi first. Your operating expenses were looks like about 26% to 27% of sales in the quarter. Is that -- is that sort of, as a percent of sales, the -- sounds like in your comments and the stability there, the percent of sales we should assume for '21?

Avi Israel -- Chief Financial Officer

I believe as, you know, revenue for '21 will grow from 76% to 120%. That's our guidance and definitely, our opex will grow at a way smaller percent. So, as time goes by, the percent of revenues of the opex will go down.

Ken Herbert -- Canaccord Genuity -- Analyst

OK. Go down. You know, can you -- can you provide any more specifics on -- on how much it goes down or maybe another way to ask the question is -- is -- is it fair to assume that EBITDA margins for next year will hold in those sort of 15% to 16% range?

Avi Israel -- Chief Financial Officer

Look, we already achieved the 70%. So you know, we can go where our target is to bring it above the 20% and we definitely see as quantities grow, the top line. We definitely want to see ourselves in this -- in this area of the 20-plus percent.

Ken Herbert -- Canaccord Genuity -- Analyst

OK. And you're confident that's sustainable then from '21 to '22?

Avi Israel -- Chief Financial Officer

Yep. That's -- that's the idea. We -- we increased our opex dramatically over the last couple of years. We've been very transparent to the market informing them that this is what we're doing.

We've built up our U.S. presence and U.S. subsidiary via "our opex". We've increased dramatically our R&D efforts but we're stabilizing it

Ken Herbert -- Canaccord Genuity -- Analyst

OK. That's excellent. And I just wanted to -- to follow up on the -- on the -- on the EPS-type question. It sounds like then that recent contract with the Netherlands with Elbit that involves your radars that would then likely ship in '22 and beyond.

Dov Sella

Yes.OK. OK. Perfect. And just one final question as well on RADSee.

Should we expect more investments in the -- in the automotive sector? Dubious, this becomes maybe an area where you see synergies and an opportunity for growth, or -- or strategically, how should we view this initial investment in terms of your longer-term goals?

Look, we are looking around for synergistic opportunities around the technology first not the market because there -- there are not too many companies that are involved in the defense market like ours. And they -- they are typically bigger than us. So, we are looking for growth around the technology and synergy -- synergy in the technology -- technological approach and innovation, and so on. So -- so, the -- the automotive -- automotive market is the first one and there are some adjustments in markets as well maybe, you know, the security markets and others.

You can find radar technologies today which are available and -- and do what was not, you know, done new in -- in the past because of prices. You can -- you can see them in other places as well. So, we are -- we are working around the core area of -- of the technology.

Ken Herbert -- Canaccord Genuity -- Analyst

OK. So, is it fair to say there are some -- there are some natural synergies between your radar technology and -- and what RADSee offers that -- that over time, you see -- you see greater opportunity there?

Dov Sella

Yes. We can see even -- I mean, the way they -- they -- they do the radar is very similar to how we did it. You can migrate algorithms from here to there. Naturally, with the adaptations, the -- the frequency ranges are totally different but still, there are -- there are some core algorithms that are relevant around the signal processing.

We can migrate their technology to autonomous military cars as well market-wise because we are in this market and they're very close to the customers. When we install radars on vehicles, it can be, you know, so, we're talking to the engineers that develop the unmanned vehicles in the military market. That's -- that's how we see -- we see things and naturally, with creative ideas, it will evolve in the next couple of years.

Ken Herbert -- Canaccord Genuity -- Analyst

Great. All right. Well, thank you very much. I'll pass it back there.

Dov Sella

Thank you.

Avi Israel -- Chief Financial Officer

Thank you, Ken.

Operator

The next question is from Alex Silverman of AWM Investments. Please go ahead.

Alex Silverman -- AWM Investments -- Analyst

Most of my questions have been asked and answered. Can you help us with how efficient the review process is these days? Have -- have they gotten back to any semblance of normalcy?

Dov Sella

I'm sorry, Alex, can you repeat because we did not get your question.

Alex Silverman -- AWM Investments -- Analyst

So -- so, for -- for, you know, the past year, the -- the military review people, then working from home, they haven't been very efficient. Has any of that returned to any level of normalcy? Is there -- are they back to any level of reviewing on that sort of the normal basis?

Dov Sella

I see. I think we can say that there is a COVID fatigue all over and things still don't return to the original pace. But we took it into account and a lot of what we believe will happen will happen in the U.S. this year.

So, we do see where it's coming from. We are beyond -- beyond the point of -- of, you know, holding up processes and so on because we are past testing. Programs are continuing installation, production, all those, and such. And we also took it into account when we assumed what can happen in the rest of the world.

But generally speaking, things are not yet normal. Sometimes we have to do, you know, demonstrations wirelessly and we are overcoming that challenge and we are in real-time exhibiting our performances to potential customers all over the world for that. And so, creativity is happening. But -- but on the average, things are slower, unfortunately.

Alex Silverman -- AWM Investments -- Analyst

OK. That's helpful. Thank you very much. The rest of my questions were -- were asked and answered.

Dov Sella

Thank you.

Operator

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

Jeff Bernstein -- Cowen and Company -- Analyst

Hi guys. Congratulations on a -- a terrific year. A couple of questions for you on the balance sheet. The inventory days are -- are pretty stable despite the big growth you guys have had.

Just wondering how you're feeling about your inventory of semiconductors where there's -- there's been a lot of shortages reported, etc. And whether that's kind of sustainable going forward. And then the receivable days have come way, way down and just -- and just drill in -- in how the collections are going so much better.

Dov Sella

You know, inventory-wise, we took a decision a year ago to have basically a one full year of -- of supplies of component -- components in our warehouses and that's what we keep. We are attentive to the hiccups in the market that come forward, surge in the automotive market probably. But it does not affect us. We are closely monitoring, we are putting all of -- well ahead of time, a long term -- long-term-ish approach.

So, we are not -- not affected. And if you take a look at our inventory level, you can realize that. And about collections, Avi?

Avi Israel -- Chief Financial Officer

Yeah. About collections, the good news is as you could have seen in the fourth quarter, our -- the cash from collection was -- was very, very high. If you look at accounts receivable, compare accounts receivable as of the end of 2020 compared to the accounts receivable at the end of 2019, it's almost the same figure despite the growth. So, it means that collection is -- is doing very, very well.

I mentioned it twice, I'll mention it again, we experience different pace of collection in the U.S. compared to Israel and the rest of the world. U.S. is -- money is becoming -- is -- is coming to us "quicker".

And as the U.S. revenues of ours are growing, we experience short cycles of collection which is very good news for us.

Jeff Bernstein -- Cowen and Company -- Analyst

Got you. Thank you.

Operator

The next question is from [Inaudible]. Please go ahead.

Unknown speaker

Good afternoon. Are you -- regarding RADSee, are you going to be a passive investor for the time being or Yossi Ben Shalom with his ties to the automotive industry is going to be involved heavily in the new acquisition?

Dov Sella

No. We are going to be passive minority investor to FFN. Yossi Ben Shalom is not involved with the investment of RADA. I mean, he is involved as the chairman of RADA.

But that's -- I mean, it's RADA that he's investing in RADSee.

Unknown speaker

OK. My second question is I noticed that ARC ETFs that led by the famous Kathy Wood is involved in RADA. Are you in touch with the management of ARC and the other big investors in your company like Wellington Fund?

Dov Sella

So? What's the question, please?

Unknown speaker

Are you in touch as far as letting them know what's going on in the company beside -- I mean, new release of news? Are you in touch? Do, you know, the people involved behind the ARC ETF and Wellington Fund?

Dov Sella

We are in touch with all the relevant investors in RADA whenever the need is on a general basis. I don't understand why this is unique.

Unknown speaker

OK. Thank you.

Dov Sella

Thank you.

Operator

Thank you. [Operator instructions] The next question is from Ken Herbert of Canaccord. Please go ahead.

Ken Herbert -- Canaccord Genuity -- Analyst

Hi, Dubi. You recently started trading the shares in -- in Tel Aviv on the stock exchange there. Can you just provide investors and provide us an update on -- on the logic for that? And then -- I mean, I think it makes a lot of sense. And then how that's gone so far and -- and how that helps to achieve your goals?

Dov Sella

OK. First, we opened up the -- the trading today in the opening ceremony. So, it's a milestone, let's say, this morning. We -- we -- we started being traded only last Tuesday.

So, you know, it's too early but -- but the rationale is -- is very -- very understood. We have quite a significant investors basically hearing this lots of institutional -- primary institutional investors and hedge funds. And they're, you know, hear and there are kinds of requests of making the -- the trading for them easier regarding the hours and the -- and locations. So, we are attentive and -- and we do hope that it will be for the benefit of the company and them as well.

You know, we in Israel, we are immediately included in the Tel Aviv 90 which is the second -- second-highest index. And there is going to be or already is a demand for -- for our shares because we are going to be included not only in vetting but -- but also in technology and some others probably five, six, seven different indexes. It will increase trading, it will include RADA in -- in -- in a lot of portfolios of institutional investors. So, you know, all in all, it's another -- another vehicle that should -- should support the company and also the investors.

Ken Herbert -- Canaccord Genuity -- Analyst

Great. Thank you very much. Really nice quarter.

Dov Sella

Thank you.

Avi Israel -- Chief Financial Officer

Thanks, Ken

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 -- of our management, I would like to thank you all for continuing the interest in our business. Tomorrow, we'll be presenting at the Cowen Conference and also have some one-on-one meetings.

I'm not sure that you can still join but please try if you'd like. Otherwise, we look forward to speaking with you again soon probably in the next-quarter results. Stay well and healthy and good day to all. Thank you.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Ehud Helft -- Investor Relations

Dov Sella

Avi Israel -- Chief Financial Officer

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Ken Herbert -- Canaccord Genuity -- Analyst

Alex Silverman -- AWM Investments -- Analyst

Jeff Bernstein -- Cowen and Company -- Analyst

Unknown speaker

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