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Edited Transcript of RADA earnings conference call or presentation 21-Aug-19 1:00pm GMT

Q2 2019 Rada Electronic Industries Ltd Earnings Call

NETANYA Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Rada Electronic Industries Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avi Israel

RADA Electronic Industries Ltd. - CFO

* Dov Sella

RADA Electronic Industries Ltd. - CEO

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Conference Call Participants

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* Austin Moeller

Canaccord Genuity Corp., Research Division - Analyst

* Brian David Kinstlinger

Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst

* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Michael Brcic

National Securities Corporation - SVP of Investments

* Scott Huntington;Bodell Overcash Anderson & Co.;Analyst

* Ehud Helft

CCG Investor Relations Inc. - Managing Partner - Israel

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries Second Quarter 2019 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've 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?

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Ehud Helft, CCG Investor Relations Inc. - Managing Partner - Israel [2]

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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 on the line 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 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 content of this conference call.

And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella. Dov, go ahead, please.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [3]

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Thank you, Ehud, and good day to all participants and welcome to our second quarter of '19 conference call.

I want to start with the results summary and guidance. First, we are extremely pleased with our second quarter results. It's the best-ever quarter in RADA's history, a 2-digit quarter with top line revenues surpassing $10 million in revenues. And it is over 50% of year-over-year growth.

Furthermore, we did not sacrifice gross margins to achieve this growth. We maintained the gross margin at around 36%. It is at the level of what we targeted from the beginning.

We increased our guidance a few weeks ago. We expect that our revenues this year will surpass $43 million compared to the $40 million guidance that we gave earlier. And again, this is going to be the best-ever year in RADA's history. It shows 54% of growth year-over-year. So it can be seen, our revenue growth is still accelerating and we do believe that this level of growth can be maintained along the next year as well.

This type of growth currently is the fruit of the seeds that we have planted in the past 2 years. We were at the right moment with the right product, mature and available, that we started developing back in 2012. And along with the awakening of our markets for tactical radars, especially the counter-drone segment, we see now the results of -- in the form of top line growth. Bottom line is that everything is on track and the result of this quarter validate it for us.

Let's talk a bit about the general picture. We believe that the market for tactical radars is moving from the initial stage that we have experienced in '17 and '18 to the growth stage, and hopefully towards an inflection point even. Our strong revenue growth demonstrates part of that, but more than that, the need is becoming more visible and clear primarily in the U.S. market and also in our other relevant markets, like Israel, Europe and others.

We also, as an example, on the news, a few weeks ago, first and very public demonstration of the United States using our technology as part of their solution to destroy Iranian drones in the Gulf of Hormuz. And yesterday, there was announcement by the Israeli Ministry of Defense that IMI/Elbit with the Iron Fist Active Protection System were awarded with the program for equipping the Eitan fighting vehicle and the D-9 Bulldozer here in Israel. And as most of you may know, our radars -- our CHR radar is in the heart of this system for 11 years now. So we expect negotiations and reception of order in a few weeks or a few months.

All these indications point, in our opinion, that we are in a definite move from the initial stage to the growth stage of the market. And since recently, we have seen a nice influx of new investors. Let me a bit -- reiterate a bit about the market potential. We estimated, just in the U.S., the market -- the total addressable market for our tactical radars is at about $2.5 billion over the next 10 years. $1.5 billion we allocate to the active protection segment of the market and the other $1 billion to the short-range air defense, while counter-UAV and counter-drone solutions are included in this segment. And we, after -- while evaluating the rest of the world addressable market, we come to a similar number, so we estimate our total addressable market at about $5 billion.

We believe that we have solidified ourselves as market leaders at this stage in this emerging market. And by the end of 2019, we wouldn't have even touched the 1% of the potential of this market, of course. So the opportunity ahead of us is huge. And we do believe that the market behavior, especially in the U.S., will soon change from fulfillment of urgent need to what is named there [programs of war code], meaning programs that are executed over a few years' term, and it will help us build the backlog for few years ahead. And until now, we've been working in an environment of very short turnover of deliveries, building to stock and delivering in a very short notice to fulfill urgent needs.

In terms of our pipeline, it continues to broaden with significant revenue potential. The potential orders are global, but especially strong in the U.S. given the market maturation and our strong presence there. And still there is a significant upside from follow-on orders and initial orders that's received by other customers the world over.

In summary, I would like to emphasize that RADA today is a company primarily in the exciting technology of software-defined tactical radars. We still have our legacy avionics as a stable at the level of $10 million to $12 million, but the focus is on tactical radars. The developments and debut for our products to the market has been perfectly timed, as I mentioned earlier. And hopefully, we're approaching an inflection point as the market takes up this progress significantly.

As we approach 2020, our solutions are mature and have a significant competitive edge. We are meeting very immediate and urgent defense needs, as I just mentioned, in active protection; counter-drone; short-range air defense; and counter mortars, what is named as C-RAM, rocket, artillery and mortars. Today, we -- to date, we already have seen initial sales of these products, which are being used by armed forces in the U.S., several armed forces or armed branches in the U.S. and Europe and also in Israel, and we believe that soon these orders are going to expand significantly.

Because of the huge opportunity ahead of us, we have been gearing RADA to significant growth, and RADA today has significant competitive lead. Our current lead is situation which we intend to maintain and we invest heavily in research and development and developing next-generation products to maintain this lead.

Our U.S.-based production will be ready by year-end to gear up for significant sales in 2020, and the goal is to deliver all the U.S. market requirements from our U.S. facility and deliver to the rest of the world from our Israeli production facility. We believe that profitability will follow in the coming few quarters as we capture significant portion of the current emerging market and maintaining our gross margin levels as demonstrated this quarter and previous quarters.

We have a strong cash position at about $15 million. It is enough to keep us producing to stock, building our U.S. facility and completing it and continuing with our R&D major efforts to keep the lead. And it also shows the strong and stable supplier in front of our customers, which typically are much bigger than us.

In conclusion, again, we are very pleased with what we have achieved this quarter and in the first half of this year. It tells us that everything is on track. And more than that, with growth of 50% and more, we believe that the inflection point is coming near and it should reflect performance in the few years to come.

At this moment, I would like to hand over to Avi Israel, our CFO. Avi, go ahead, please.

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Avi Israel, RADA Electronic Industries Ltd. - CFO [4]

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Thank you, Dov. Good morning to our U.S. participants, and good afternoon to our Israeli ones. You can find our results on the press release we issued earlier today, and I'll provide a short summary of the second quarter results.

Second quarter revenues were at about $10 million, up 52% year-over-year. Our gross margin was at 36% of revenues, same as reported in Q2 of last year. This is the level we currently expect and are happy with, with potential upside in future as our revenues continue to grow.

As Dov explained earlier, we continue to make significant investments, especially in R&D as well as in our infrastructure in The United States, so operating expenses grew. Our aim is to bring operating expenses toward the $20 million annual range, which we believe will be sufficient to support our current expected growth. R&D expenses increased to $1.7 million, up from $0.7 million in the same quarter of last year.

Sales and marketing were $1 million compared to $0.7 million in Q2 of last year. G&A expenses were $1.8 million compared to $0.9 million of last year with a significant increase related to a newly established U.S. presence.

Operating loss was $0.8 million compared to $0.1 million in operating income in Q2 of last year. Net loss attributed to RADA shareholders for the quarter was $0.6 million. This is compared with $0.1 million in net income in Q2 of last year.

I'd also like to summarize and point out some highlights on our balance sheet as of June 30, 2019. We ended the quarter with $15 million in cash and no financial debt at all. Our inventory increased by $5 million in the last 6 months in order to support products delivery in very short turnover. Our shareholders' equity stand at $42 million, financing 75% of our balance sheet. In summary, as Dov mentioned and as the financial results demonstrate, we're very pleased with our progress and on track with our plans.

That ends my summary. We should now open the call for questions. Operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Brian Kinstlinger of Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [2]

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I want to start with the active protection news you talked about in the press release, Elbit is supplying Iron Fist for the AFV and D-9 like you said. The deal is valued, it looks like on the press release, at $250 million over a decade, so it's $25 million per year. Can you talk about how investors should think about your share of this program? And will this program be able to sustain 36% margins or better?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [3]

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At this stage, it's just an announcement of selection. We need to negotiate -- Elbit needs to negotiate it with IMOD. We need to negotiate it with them. And I cannot talk about it further.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [4]

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So the $250 million number that's been announced, that's not accurate yet, that's not actually been finalized. Is that correct?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [5]

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I don't know. I don't know who notified that, and I cannot comment on that.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [6]

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Okay. All right. Well then, maybe differently we can talk about active protection in U.S. I know that you've been in various stages of testing and delays. Talk about where you are with that process and when you expect deliveries on that -- on initial prototypes.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [7]

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Yes. We are gearing up towards resumption of tests after some improvements in the configuration of the complete system. I'm talking about the complete Iron Fist system, including our radar. We're gearing up towards resumption -- resuming the tests towards the end of this year. And if all goes well, we do expect that deliveries will be towards -- will start towards the end of 2020.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [8]

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Okay. And can you remind us at this point which vehicles or inventories you plan to be working with?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [9]

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Yes. Currently, we're on the Bradley armored fighting vehicle and the discussion is on first brigade.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [10]

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Okay. I mean -- sorry, yes. Great. And then, in your radar business, I think that's driving, I mean, pretty much all the growth given active protection isn't generating a lot of revenue yet, so can you talk about the main drivers? Is it mainly short-range air defense so far or there have been other growth drivers?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [11]

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It's mainly short-range air defense, specifically the counter-drone segment of it.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [12]

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Great. And then you've talked about some other countries, Israel and Europe, but is today's results, the 2Q results, are they -- is that mostly reflecting the U.S. and Israel and Europe are more of an opportunity? Or are you already seeing the benefits from -- or the demand from Israel and Europe?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [13]

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We already see the demand. We already see it in revenues. It's kind of breakeven, the U.S. and the rest of the world.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [14]

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Meaning half your revenue is U.S., half the rest of the world for short-range defense?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [15]

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Yes, roughly.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [16]

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Right. And then, I guess, I want to get a sense for the difficulty comparisons as we look at next year. Oftentimes, there are 1 or 2 or 3 very large orders, that creates some lumpiness. Has that been the case this year? Or is the growth fairly broad-based?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [17]

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I'm sorry, I didn't entirely...

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Avi Israel, RADA Electronic Industries Ltd. - CFO [18]

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(foreign language)

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Dov Sella, RADA Electronic Industries Ltd. - CEO [19]

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The growth in this quarter? The growth in this quarter is spread evenly over a few contracts.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [20]

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Okay. And then you talked about building up your U.S. entity in the Gulf, production readiness. Is this both advance protection systems and short-range defense for the U.S.? Or it's just one or the other?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [21]

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All our radars we've built in the U.S., never mind what application is.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [22]

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Great. Last question I have and I'll get back in the queue is as your business continues to grow, it looks like the second half of the year is going to be stronger. And I'm guessing given this is just the beginning, 2020 should be stronger as well. What are the plans for increasing R&D and sales and marketing investments? And how should we think about that as opposed to the income statement?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [23]

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We're not waiting for the growth with increasing our R&D. We are increasing our R&D since mid-last year already, anticipating this growth. So this will not change the R&D plans. The R&D plans are there and they're being executed.

And sales and marketing is evident through the fact that we're growing because we -- our go-to-market is through the integrators, and we're already there with most of them, with important ones in the area that we're active at. While in emerging areas, we're in development phases with others. So we don't think that the S&M expenses will be something overwhelming to ensure this growth. We already have planted the seeds 2 years ago, 1 year ago, and now we are starting to harvest the fruits.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [24]

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Actually, I have one last question on inventories. You highlighted obviously going from $11 million to $16 million in 6 months and the short turnover of converting that. Should we expect to see, still with increased demand, significant increases in inventory over the next 6 months? Or do you think that will tail off a little bit?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [25]

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It depends. I mean when the market is new and emerging and has urgent needs, the only way to address the market needs and to be there and to take the opportunity to your side is by building to stock, anticipating what's going to happen and delivering in a short cycle. In this case, we need to invest in working capital and buy inventories. But once we start executing the bigger programs, the [programs of war code] along 2, 3, maybe even 4 years, the whole process has changed. You can plan ahead, you don't need to buy material upfront, you probably also receive advanced payments for long-lead items and so on. So it will be a combination because the market is not stable all over.

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Operator [26]

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The next question is from [Isaac Widomlansky], a private investor.

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Unidentified Participant, [27]

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Yes. First of all, regarding the ILS 250 million the analyst that asked before the question, he got the numbers from the Globes newspaper. And now to my question...

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Dov Sella, RADA Electronic Industries Ltd. - CEO [28]

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He said million dollars, by the way.

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Unidentified Participant, [29]

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How much?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [30]

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Same number, but in dollars.

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Unidentified Participant, [31]

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Same. Oh, wow. It's even better. At the beginning of the month, Israeli Army introduced a new sophisticated tank by the name of Carmel equipped with special radars. Are you involved with this Carmel project? And what size of orders do you expect?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [32]

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Carmel is not a tank. Carmel is a fighting vehicle.

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Unidentified Participant, [33]

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Did I say tank? Whatever.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [34]

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It's a concept. There are no orders yet, and the 3 big industries here in Israel are showing what they have in mind. There is no order yet. And I cannot anticipate anything. I can't tell that we're involved.

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Unidentified Participant, [35]

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Okay. And then my next question is regarding R&D that you mentioned. In one of the press conferences, you mentioned that you're working on 4 new radars. Can you give us this time some more colors, more details about those radars that you're developing?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [36]

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No.

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Operator [37]

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We have a follow-up question from Brian Kinstlinger of Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [38]

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Great. One more question on Iron Fist. The solution that you provided to the Israel Defense Ministry, is that very much the same as the U.S. or are there major differences? And what I'm trying to get at is, as the U.S. watches you install Iron Fist into these 2 vehicles, how does that, do you think, impact or accelerate the U.S.' plans given someone else is able to use it and it's in production?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [39]

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It is similar. First, the U.S. has selected the Iron Fist for the Bradley before this announcement was made in Israel. And the U.S. long-term plan, this is NDI, nondevelopment item, a kind of urgent need. The long-term plan of the U.S. is -- was named MAPS until now. Now it is named vehicle protection system and open configuration and modular and so on and so forth, and it is ongoing and the schedule for us is few years to come.

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Operator [40]

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The next question is from Michael Brcic of National Securities.

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Michael Brcic, National Securities Corporation - SVP of Investments [41]

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Just real quick. Did you break down what are the revenue based on the legacy systems and the new radars?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [42]

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We're not breaking it typically, but you can assume that the proportion of -- the yearly proportion is kept over this quarter as well. And we say that the legacy is stable at about $10 million to $12 million, while we already gave guidance of $43 million in total. So you can assume from that.

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Michael Brcic, National Securities Corporation - SVP of Investments [43]

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Just something somebody asked before and I didn't quite get it, but in the past, you've talked a lot about the lumpiness of the business. As it is growing, has that lumpiness -- I mean do you have a little bit more visibility now than you did before?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [44]

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Yes. We believe that the lumpiness will be in the -- towards the growth and not towards the decline.

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Operator [45]

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The next question is from Jeff Bernstein of Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [46]

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Just wondering, you mentioned C-RAM specifically. Could you just talk about that market with regard to the differentiation from the SHORAD market? And it sounds like you already have some systems being used, but can you just flesh that out a little bit?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [47]

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Yes. C-RAM is counter rocket, artillery and mortars. We have such system as sense-and-warn solution around Gaza and in some other places in the world. It is typically more a fixed solution compared to the short-range air defense that is more mobile in most cases. Also, the big difference in the -- the hardware is typically the same, but the algorithms and software enabling the C-RAM to detect the shot immediately and to track down back to where it was shot from while air defense, you do more volume surveillance of the air. You can find the threats like rockets and missiles, but you don't necessarily focus on where they came from, but more where they are now and you want to shoot them down.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [48]

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That's great. So that's really a differentiated market. Have you talked it all about what do you think the TAM is there?

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Avi Israel, RADA Electronic Industries Ltd. - CFO [49]

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TAM.

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Dov Sella, RADA Electronic Industries Ltd. - CEO [50]

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TAM? It's part -- we take it as part of the short-range air defense solution because our radars are multi-mission. And sometimes you need also C-RAM on the move, even though the main application is mobile SHORAD. This segment is within this market.

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Operator [51]

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

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Scott Huntington;Bodell Overcash Anderson & Co.;Analyst, [52]

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Appreciate the straightforward call here and the fruits of your labors. Just a quick question on Germantown. I guess we're online for year-end startup. And can -- are we safe to say that assumes that you're finding the necessary technical people to staff the facility?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [53]

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Yes, we do, and we're growing in numbers. We have currently over 20 people. The goal is to have 40 people by the end of the year.

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Operator [54]

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The next question is from [Nahum Moschitz].

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Unidentified Analyst, [55]

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Congratulations for the great quarter. And I would just -- wanted to make sure I understood what you said. You said that you expect about the same growth in 2020, like you said, over 50% growth in 2020. Did I get you right?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [56]

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We expect growth. I don't know to what extent exactly. We do believe that what's happening between the last year and this year is an indicator. We'll probably issue a guidance towards the end of the year about 2020.

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Unidentified Analyst, [57]

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Okay. And another question, please. I read in an article that actually you're building another factory here in Israel, in Judea and Samaria. Is it right?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [58]

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No. It's not us.

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Unidentified Analyst, [59]

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Okay. Okay. Are you building another factory here in Israel?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [60]

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No.

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Operator [61]

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The next question is from Austin Moeller of Canaccord.

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Austin Moeller, Canaccord Genuity Corp., Research Division - Analyst [62]

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Dov, I was just wondering if you could compare and contrast the capability of the Iron Fist radar system versus the system on -- with Trophy built by Rafael and Elta?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [63]

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I cannot touch. It's a very sensitive information and data.

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Operator [64]

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We have a follow-up question from Brian Kinstlinger of Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [65]

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Just one question. As this short-range air defense business becomes a little bit more visible to you and although I see that it's early and you should be growing, is there any timing we should think about such as sometimes purchasing in the first quarter is lighter as companies put together their budgets as we think about next year? Or do you think there shouldn't be any season at all that we have to think about?

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Dov Sella, RADA Electronic Industries Ltd. - CEO [66]

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We believe that the short contracts both coming from the Army and the Marine Corps will be, if we're lucky, in the first half of 2020, if not in the second half.

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Operator [67]

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

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Dov Sella, RADA Electronic Industries Ltd. - CEO [68]

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Yes. Thank you very much for joining us in this call, and we look forward to talk to you in the next quarter results conference. And we thank you, again, on behalf of RADA, our Board of Directors and management. Thank you.

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Operator [69]

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Thank you. This concludes the RADA Electronic Industries Second Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.