RADA Electronic Industries Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the Radha Electronics Industry's fourth quarter and full year 2020 result conference call. All participants are 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 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?

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 Sela, 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 questions 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 content of this conference call. And with that, I would now like to introduce Radha's CEO, Mr. Dorf Sellas. Dorf, go ahead, please.

Thanks, Eod, and welcome everybody to our full year and fourth quarter earning 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 2019, and 62% quarterly when you compare it to the fourth quarter of 2019. Our gross margins in Q4 reached 39% after growing to 38% in Q3. from a very stable 36%, which sustained for about 10 consecutive quarters before that. Our US production is operating at high capacity now and better efficiency. And as we grow sales further, we expect to continue to improve our manufacturing efficiencies. Our operating expenses are stabilizing, taking into account the significant growth in the top line, The growth in the OPEX is at a much lower rate. And when looking through 2021, we expect OPEX to be 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 revenue guidance of over $120 million for the year of 2021. Our guidance represents approximately 60% and more year-over-year growth compared to 2020. As our backlog grows and 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 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 Rad-C Technologies Limited, an early stage Israeli startup company introducing a very interesting and relevant radar technology with whom we have signed an investment term sheet. Radzi makes radars for the automated driver assistance system or ADAS market. The solutions are relevant for both the future autonomous vehicles as well as the current non-autonomous vehicles. There are many technological similarities between the way Radzi works and the way we at Radda 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 purchased 12% of their equity, while our investment carries an option to further increase our stake. For now, our involvement will be via 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 Startup Nation, with quite a few interesting and relevant radar technologies companies addressing attractive and growing markets. Our vision around that is to create a synergetic radar technology hub broadening to commercial and lucrative markets, and later widen it to other geographies where we have advantage at. RADC is the first step towards this goal. Again, our business focus right now is to cater for our massively emerging defense and markets. We made only an initial investment to have access to RADC's technologies, But importantly, we do not want to take our eyes off the ball and we continue to work towards 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 the leverage in 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 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 leaders in the wider radar arena with our initial investment in RADC, a very promising early stage radar technology company. And finally, While reporting our best-ever 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.

Thank you, Duby. Welcome, everybody. You can find our results on 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 basic points over that of last year, and the full year was 37% versus 36% of last year. We are 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 $207,000 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's 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 of loss of last year. We reported a record EBITDA for the fourth quarter of $3.9 million. 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 $407,000 or 1% of revenues last year. I would like to summarize and point out some highlights from 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 complicated year for everyone. That ends my summary. We shall now open the call for questions. Operator, please.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the headset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Brian Kinslinger of Alliance Global Partners. Please go ahead.

Great. Thanks so much for taking my question. You mentioned, I am sure, that advocacy is a 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? 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?

Well, we don't have hundreds of customers, potentially, I think. We have tens, let's say, potentially. So, yeah, it is spread. For us, it's widespread, you know. I am sure it is a significant one for us. It can be... providing something like $20 million of revenues, maybe a bit more this year. We start with already a backlog of it, and we expect another significant order of about 72 additional vehicles that some of them will be delivered towards the second half of the year. So I am sure the significant program, the G-BUD of the Marines is a program of record. It is less in size compared to the I am sure, but it is significant. There are quite a few additional customers, both in the US and in the rest of the world that we cannot disclose at this stage, but a bit less of volumes, but significant. So, you know, it is spread around, let's say 10, primary customers and the additional 10 less in size.

Great. That's really helpful. And then on the APS side, do you still expect to deliver 1,000 radars for the ATON and 60 for the Bradley in 2021? Or has anything changed in terms of delays or push forward? And or are there other APS deliveries you expect this year in the early stages?

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

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

This year, we are going to have very minimal deliveries of prototypes. It is insignificant. Serial deliveries for the ATAN will start next year on a lower scale. Bradley is expected 2023. CV90 in either is expected 2023 also. So APS will start affecting us only in 2023. Okay.

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

I think that if you examine companies like us, product companies, especially in the defense, you know, If we do really well, we cross the 40, but you know, we keep saying we are not a software company. There is a limit to the top line, to the gross margin. So if we do over 40, we'll be very happy with that.

Yes, I agree. And then lastly, if you can comment on the RADC technology and give us more details about How are these radars being used in autonomous driving and the vehicle market in general? Will they be a supplier to some big solutions? And what kind of functionality do they bring to the automotive market?

It's too early to describe. We are taking a minority share at this point, but the whole idea is to address this highly price-sensitive market with high-end solutions that give a better or excellent performance over price ratio. That's what we did and do in the defense. Today's technology of availability of components and smart design of antenna and software algorithms can compensate a lot for what was done not so long ago by hardware that increased the prices and made them unaffordable. There is a demand and pressure in the automotive market even today to give better things, but they don't let go about prices. So, RADC is a unique situation of, you know, performance over price that meets the expectations of the market. And also, it gives something with performance that can meet the high demands that potential autonomous cars are requiring. Until now, the consensus was that LIDARs can give it. LIDARs are expensive. They come with an ingenuity solution that can introduce high-performance radar at really affordable prices to this market. But again, it's early stage. They are on the verge of start testing within a few months with T01s. one or two, and also with OEMs 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. Great.

Thanks for taking my questions. Thank you. Thank you, Brian.

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

Yes, hi, good evening, Yubi and Avi. Hi, Ken. Maybe Avi first. Your operating expenses were, looks like about 26% to 27% of sales in the quarter. Is that sort of, as a percent of sales, sounds like in your comments and the stability there, the percent of sales we should assume for 21?

I believe, as you know, revenues 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, percent of revenues of the OPEX will go down.

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

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

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

Yes. That's the idea. 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, quote-unquote, our OPEX. We've increased dramatically our R&D efforts. but we're stabilizing it.

Okay. That's excellent. And I just wanted to follow up on the APS 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.

Yes.

Okay. Okay. Perfect. And just one final question as well on RADC. Should we expect more investments in the automotive sector, Duby, as this becomes maybe an area where you see synergies and an opportunity for growth? Or strategically, how should we view this initial investment in terms of your longer-term goals?

Look, we are looking around for synergetic opportunities around the technology first. not the market because there are not too many companies that are involved in the defense market like us. And they are typically bigger than us. So we are looking for growth around the technology and synergy in the technological approach and innovation and so on. So the automotive market is the first one. And there are some adjacent markets as well. Maybe you know the security markets and others. You can find radar technologies today which are available and do what was not, you know, done in the past because of prices. You can see them in other places as well. So we are working around the core of the technology.

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

Yes, we can see even, I mean, the way they do the radars is very similar to how we did it. You can migrate algorithms from here to there. Naturally, with the adaptations, the frequency ranges are totally different, but still, 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 very close to the customers. When we install radars on vehicles, it can be also... talking to the engineers that develop the unmanned vehicles in the military market. That's how we see things. And actually, with creative ideas, it will evolve in the next couple of years. Great.

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

Thank you. Thank you, Ken.

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

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

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

So for, you know, the past year, the military review people have been working from home. They haven't been very efficient. Has any of that returned to any level of normalcy? Are they back to any level of reviewing on a sort of normal basis?

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 the point of, you know, holding up processes and so on because we are past testing. Programs are continuing, installation, production orders 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 the challenge. And we are in real time exhibiting our performances to potential customers all over the world through that. So creativity is happening, but on the average, things are slower, unfortunately.

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

Thank you.

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

Hi, guys. Congratulations on a terrific year. A couple of questions for you on the balance sheet. The inventory days are pretty stable despite the big growth you guys have had. Just wondering how you're feeling about your inventory of semiconductors, whether there's been a lot of shortages reported, et cetera, and whether that's kind of sustainable going forward. And then the receivable days have come way, way down, and just interested in how the collections are going so much better. Yes.

Inventory-wise, we took a decision a year ago to have basically one full year of supplies of components in our warehouses, and that's what we keep. We are attentive to the hiccups in the market that come from a surge in the automotive market, probably. but it does not affect us. We are closely monitoring. We are putting orders well ahead of time, a long-termish approach. So we are not affected. And if you take a look at our inventory level, you can realize that. And about collections, Avi.

Yeah, about collections, the good news is, as you could have seen in the fourth quarter, our cash from collection was... was very, very high. If you look at accounts receivable, compare accounts receivable at 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 doing very, very well. I mentioned it twice, I'll mention it again. We experience different pace of collection in the US compared to Israel and rest of the world. U.S. money is coming to us quicker, quote-unquote. And as the U.S. revenues of ours are growing, we experience short cycles of collection, which is very good news for us.

Gotcha. Thank you.

The next question is from Isaac Widomlensky. Please go ahead.

Good afternoon. Regarding Radzi, 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?

No, we are going to be a passive minority investor, 12%. Yossi Ben Shalom is not involved. It's the investment of Radzi. I mean, he's involved as the chairman of RADA, but that's, I mean, it's RADA that is investing in RADC.

Okay. My second question is, I noticed that ARK ETF that led by the famous Katie Wood is involved in RADA. Are you in touch with the management of ARK? and the other big investors in your company, like Wellington Fund.

So, what's the question, please?

Are you in touch as far as letting them know what's going on in the company? Besides, I mean, your release of news, are you in touch? Do you know the people involved behind the ARK, ETS, and Wellington Fund?

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.

Okay. Thank you. Thank you.

Thank you. If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we pull for more questions. The next question is from Ken Herbert of Kencourt. Please go ahead.

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

Okay. First, we opened up the trading today in the opening ceremony. So it's a milestone, let's say, this morning. We started being traded only last Tuesday. So, you know, it's too early. But I think the rationale is very understood. We have quite a significant investor base here in Israel. lots of institutional, primary institutional investors and hedge funds. And, you know, here and there came the request of making the trading for them easier regarding the hours and locations. So we are attentive. And we do hope that it will be for the benefit of the company and them as well. You know, in Israel, we are immediately included in the Tel Aviv 90, which is the second highest index. And there is going to be or already is a demand for our shares because we are going to be included not only in that index, but also in technology and some others, probably five, six... seven different indexes, it will increase trading. It will include RADA in a lot of portfolios of institutional investors. So, you know, all in all, it's another vehicle that should support the company and also the investors.

Great. Thank you very much. Really nice quarter. Thank you, Ken.

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

Yes, thank you, operator. On behalf of our management, I would like to thank you all for continuing the interest in our business. Tomorrow we'll be presenting at the current 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 a good day to all. Thank you.

Thank you. This concludes the RADA Electronic Industries fourth quarter and full year 2020 result conference call. Thank you for your participation. You may go ahead and disconnect.