Senstar Technologies Ltd (SNT) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Magal Security Systems, Ltd. Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference being recorded.

It is now my pleasure to introduce your host, Kim Rogers with Hayden IR.

Thank you, operator. Welcome to Magal's Third Quarter 2020 Earnings Conference Call. I would like to welcome all of you to the conference call, and thank Magal's management for hosting this call.

With us on the call today, Mr. Dror Sharon, CEO of Magal; and Mr. Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review Magal's financial results for the third quarter. We'll then open the call for questions-and-answer session.

Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions, and Magal cannot guarantee that they will, in fact, occur.

Magal does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends; reduced demand and the competitive nature of the security systems industry; the unanticipated and unknown effect of the coronavirus, including on our operation and our clients; as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

In addition, during the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.magalsecurity.com for the most directly comparable financial measures and related reconciliations.

And with that, I would now hand the call over to Dror. Dror, please go ahead.

Thank you, Kim. I'd like to thank everyone for joining us today to review our third quarter results. In my comments on the comparison are year-over-year referring to the third quarter of 2019.

Globally, the Magal team is executing well, despite the impact of COVID restrictions. We continue to develop new business relationships, build the pipeline and close sales. We are closing sales in both of our divisions, Magal Integrated Solutions, our project division; and the Senstar Product division. As a result, backlog in the third quarter rose to a record level. We reduced operating expenses by over 9% and reported EBITDA of $1.3 million.

Year-to-date, we have lowered operating expense by $3.2 million. Magal has maintained profitability without restricting investments in sales and R&D, our primary growth drivers, and in assets crucial to our future growth post-COVID. Ongoing investments in new products and upgrade to our platform enabled the company to maintain competitive advantage and grow our business.

As a percentage of total consolidated revenue, Magal Integrated Solution was 54% and while Senstar was 46%, in line with previous quarterly performance to date in 2020. Both business segments continue to be impacted by COVID-19 further in the third quarter.

On a positive note, we announced 2 key contracts in the quarter. In August, we issued a press release stating that a global organization awarded Senstar a USD 6.5 million contract to provide equipment to secure deployable military assets. This award recognized technological differentiation and the scope of Senstar offering by deployable security solutions.

In early October, we announced a large contract to secure a governmental body principal premises in one of Africa's largest capitals. Magal's estimated share in this project is $10.5 million. And we anticipate increasing the revenue during the course of the project.

The African contract is an excellent example of how both of Magal's divisions cooperate in delivering competitive advantages. The state-of-the-art security system includes comprehensive range of Magal's quality products and platforms.

At the project's core, it is Fortis command and control, which is Magal's proprietary physical security information management system, or the PSIM. This new-generation PSIM supports underground perimeter intrusion detection system, PIDS, and Senstar Symphony Video Management Software, or the VMS. The VMS includes Intelligent Video Analytics, the IVA capabilities. The project also features electronic access control hardware and the software and the secured communication network that supports the systems integration and operation. These are proprietary solutions that run on software and technology, chiefly created in-house by Magal and Senstar.

Senstar's revenue declined by 5% compared to the 2019 third quarter. While we were down year-over-year, Senstar delivered almost 5% sequential growth. The division's largely transactional revenues, along with its geographical and product line diversity has let the division remain relatively stable in 2020.

In the third quarter, Magal Integrated Solutions continued diversifying its revenue stream with an increasing sizable key account role, continuing transactional business from smaller contracts and deals across new territories, such as recent large contracting we won in Africa. Compared to the same period last year, Magal Integrated Solutions was down 26%, in line with how the division has performed since the COVID outbreak.

Shifting to an update on our 4 key verticals: energy, correctional facilities, critical infrastructure and logistics. Energy continued to be impacted by this uneven recovery in global economy that has decreased demand for oil and gas and depressed commodity prices. This is causing delays in both large projects and new investments in the sector that were in the works before COVID. We began to see improvement in the energy vertical in the last few months. Projects are starting to come back to the table. As a result, we anticipate closing new deals in this vertical by year-end for the third quarter of 2021.

Correction in the U.S. continues to be strong vertical for us. We anticipate these strengths to continue into fourth quarter. A new anti-drone solution is being tested to detect, track and neutralize drones that enter the airspace over sensitive area, and we are targeting it also to correctional facilities. We expect it to extend -- we expect to expand our offering in the correctional vertical with this innovation technology.

Critical infrastructure continue to be a major vertical for us with seaports and airports in Latin America, Asia Pacific, Africa and Europe. We have had recent wins in these verticals.

Logistics facilities worldwide have grown to meet increased demand related to the upgrade in online shopping. These large, complex, logistics facilities have greater security and operational needs. To meet these needs, we are launching an updated version of Symphony, our VMS software, and the dedicated analytics around VMS. We have upgraded the software to provide a comprehensive solution for securing logistics facilities and for specific operational capabilities, such as packages tracking and movement management.

This enhanced solution improved the ROI on our logistic customers' security investment. Currently, 2 large logistics providers are using our new solution. The second project in Europe is being finalized in these days for parcel movement using our new VMS software and the IVA.

Another innovative product we recently launched is Safe Spaces. This new video analytics solution, which is camera and VMS platform-agnostic, allows businesses to ensure they are maintaining COVID-related public safety requirements.

Safe Spaces quickly identifies individuals not wearing masks and monitor social distancing, occupancy limits and sanitation stands in public spaces and buildings. We have shipped units to several sites for testing and see encouraging interest from the market potential for this solution.

Customer like Safe Spaces integrates with any VMS on the market and can be rapidly installed and deployed. The Safe Spaces hardware and software were all developed internally by Senstar in a very short time.

Shifting to an overview of our performance by region. North America, mainly the U.S., continues to be stable and is tracking to our internal plan. EMEA is starting to -- recover, but APAC is mixed, depending on the country. Latin America as a region continues to struggle.

Magal maintained a strong balance sheet with net cash and related cash position of $53.4 million, and we have remained profitable to date despite the decline in our revenue. We have focused our use of capital on: one, retaining our experienced team critical in supporting our growth; two, continue our R&D investment; and three, keep looking for M&A.

We prioritize investing in technology because it is essential differentiator of Magal in the global security industry. Magal Integrated Solutions is more than a system integrator. We develop our software in-house and are now launching a new version of Fortis, our PSIM command and control, which is the backbone of our integrated solution platform.

Magal developed technology for its customers, like optical sensor for the Israeli Ministry of Defense, which we have incorporated into our anti-drone system that I referenced earlier. Our anti-drone system is an entirely in-house development solution that has numerous application across our key verticals. Similarly, at Senstar, we continue to invest in enhancements to Senstar Symphony VMS software, adding new features and new capabilities, and also upgrading our PIDS line of products.

Another use of capital and priority is M&A. Current M&A opportunities in our pipeline are targeting technologies that leverages our existing capabilities and brings innovation and new strategy. We are currently in discussion with a few competitive bidding processes and hope to close one before shortly.

At our AGM today, we received shareholders' approval for a framework to offer a cash dividend up to $25 million. Our ability to pay a dividend to shareholders is subject to the approval of the Israeli District Court. The final amount of any dividend payment would be decided by the Magal Board of Directors.

I want to thank the global Magal team for their contribution. I recognize the challenges we are all facing in our various roles at Magal and appreciate everyone's dedication and performances.

With a strong balance sheet and industry-leading technological expertise and record backlog, Magal is positioned for recovery and growth post COVID. I remain confident in our ability to execute our long-term strategy to grow revenue, improve profitability and close M&A opportunities.

And now I would like to hand the call over to Kobi to summarize the financial results. Kobi, please go ahead.

Thank you, Dror. Revenue for the third quarter of 2020 was $18.3 million, a decline of 18% compared with $22.2 million in the third quarter of 2019. The geographical breakdown as a percentage of revenue for the third quarter was as follows: Israel, 24% versus 23%; North America, 25% versus 33%; Latin America, 7% versus 3%; Europe, 21% versus 24%; Africa 15% versus 17%; Asia and the rest of the world, 8% versus 10%.

The breakout between Magal Integrated Solutions and Senstar Products revenue was 44% product and 56% projects. Magal Integration Solutions division revenue declined by 26% year-over-year, and Senstar Products division revenue declined by 5% year-over-year.

Third quarter blended gross margin was 41.8% of revenue versus 45.1% last year. The gross margin decrease was primarily due to the increase in project revenue that carried a lower gross margin, partially offset by higher gross profit contribution from Senstar sales and cost savings in the quarter.

Our operating expenses were $6.8 million, a 9% reduction from the prior year third quarter operating expenses of $7.5 million. The reduction in operating expenses is attributable primarily to payroll-related actions, such as delays in hiring, reduction in vacation liability as well as the reduction in other expenses, such as travel and marketing, and subsidies received from the Canadian government.

Again, I want to emphasize that we delivered these reductions while maintaining our continuous investments in R&D and sales personnel, our most important assets. Our employee headcount remained mostly unchanged.

Operating income was $0.9 million in the third quarter of 2020 compared to $2.5 million in the third quarter of 2019. Financial income was $6,000 compared to financial expense of $0.6 million in the third quarter of the last year. This quarter, due to relative stability in ForEx markets, we did not record a noncash expense as a result of the end-of-period valuation of monetary assets and liabilities.

EBITDA for the third quarter was $1.3 million versus EBITDA of $3.1 million in the third quarter of the last year. Net income attributable to Magal shareholders in the quarter was $0.6 million or $0.01 per share versus a net income of $1.3 million or $0.06 per share in the third quarter of the prior year.

Cash and cash equivalents, short-term deposits and restricted cash and deposits as of September 30, 2020, increased to $53.4 million or $2.31 per share compared with cash and short-term deposits of $51.6 million or $2.23 per share as of the end of 2019. Our working capital decreased by $0.4 million as of September 30, 2020, in comparison to the end of the last year. A majority of the decrease is driven by the trade receivables collection.

We're happy to take your questions now. Operator, to you, please.

(Operator Instructions) Our first question comes from the line of [Mike Dissler] with [MNX Holdings].

Gentlemen, thank you for providing the information regarding the continued R&D investment. I think that's critical for the future of the company. As you know, I'm a very long-term shareholder.

Just a quick item. You said that, I guess, resolution #3 was approved this morning at your Board meeting. And in light of the investment expense, R&D over time and any potential acquisitions down the road, for the last several years, the cash funds have been sitting on the books while gathering some dust. Has always been there for basically R&D and acquisition.

And my question is -- and I suspect the Board did this, but I just thought I'd ask both of you, is in light of the fact that we've had that cash hoard sitting there for R&D and for potential acquisitions, wouldn't it be a more prudent use instead of just returning it in the form of a dividend, whereby the funds will have been taxed twice. Meaning at the corporate level by Magal as paying the tax on earnings as well as the shareholders, who would then receive those distributions, at least in the United States, would have to pay a tax.

Would it be slightly more prudent to use some of the -- a small portion of those funds -- and I've mentioned this before, to repurchase shares which does 2 things: One, you're able to buy them at a substantial discount to probably fair market value, certainly book value. Two, thereby reducing the outstanding share count, which would drive earnings. And three, not subject the shareholders receiving a dividend to any sort of taxation by whatever government would tax them?

I'm just pointing that out. And I know that we've been -- you guys have been careful stewards of the -- of that cash. And in fact, during the last 2 quarters, it's remarkable that you didn't really have to dip into it at all and remain profitable throughout this 2020 period. So my hats off to you there. I just wanted you to consider the alternative use of that cash in light of what I just laid out.

[Mike], I will take the question. So basically, at this point of time, the Board of Directors is still discussing the different ways of different potential ways or designation of using the capital in light of, as we mentioned before, the M&A opportunities that are on the table as well as investment in -- continuous investment in the company and keeping the strategic goals of the company.

The -- from the corporate law perspective, both repurchase of shares or dividend distribution are regarded essentially as the same. It's a reduction of shareholders' equity. And therefore, based on the Israeli corporate law, we are required to obtain an approval of the Israeli court since the company doesn't have significant retained earnings to distribute.

So currently, we are in this, I would say, preliminary stage of removing this limitation. And once we get the approval from the Israeli court, the Board of Directors will have to reconvene and consider all the different components, different options, both what should stay or -- and what should be -- should get back to the shareholders and in which manner.

Okay. That's cool. That was very thorough. Finally, I just wanted to say, keep up the good work. I do understand that by purchasing shares back you are actually also reducing some of the liquidity out in the marketplace, which is not necessarily a good thing with only, say, 23 million, plus or minus 1 million shares, available, not including the FIMI holdings, the total outstanding.

And therefore, that would probably limit the number of shares available in the marketplace, which is not necessarily a good thing in terms of the size of institutions that can then seek to purchase shares. They need a certain amount of liquidity, as you are aware. So I truly understand the tightrope, the balancing act that you are doing, and I appreciate your full explanation. I look forward to hearing from you next quarter.

(Operator Instructions) Our next question comes from the line of Sam Rebotsky with SER Asset Management.

Yes. The backlog, you say, is the highest ever. What percentage did it increase from the prior quarter?

Sam, it's Dror. It grew around 20% or so, even close to 30%.

Pardon? So how much did it increase?

Close to 30%.

30%, that's wonderful. That's wonderful. And you expect to close on an acquisition, presumably it will be a cash acquisition shortly. Is that in the $10 million range?

Actually, we are looking on a few in the range of, again, between $10 million to $30 million in revenue.

That's wonderful. All right. Hopefully, that this COVID will end soon as they keep discovering vaccines and you could get on with business. Good luck, guys.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Okay. Thank you, operator. On behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business. I look forward to updating you next quarter. Have a good day, and keep safe. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.