Senstar Technologies Ltd (SNT) 2020 Q2 法說會逐字稿

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

It is now my pleasure to introduce your host Brett Maas with Hayden IR. Thank you.

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

With us on the call today is Dror Sharon, CEO of Magal; and Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review Magal's financial results for the second 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 and 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 operations 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 magalsecurity.com for the most directly comparable financial measures and related reconciliations.

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

Thank you, Brett. I'd like to welcome all of you to our call, and thank you for joining us today. I hope that everyone's families and friends are safe and healthy.

In my comments, all compares are year-over-year, referring to the second quarter of 2019. I'm pleased that during this time of economic uncertainty, we continue to achieve our strategic goals while managing costs and maintaining profitability. For the second quarter of 2020, we delivered positive net income and grew EBITDA by 78% on a revenue decrease of 17%. Gross margin rose to 47% of reported revenue due to the increase in same-store sales and cost reduction in the quarter.

With the onset of COVID, we shifted our focus to managing our costs with the goal of maintaining annual profitability while positioning the company for recovery in growth longer term. This action provides us flexibility to manage operational expenses for the remaining of the year without jeopardizing our sales and R&D capabilities and efforts.

In the second quarter, we reduced operating expenses by 22% through cost management, delaying new hires and incurring lower sales and marketing expenses.

As a result, operating income increased to $796,000 to $195,000 in the second quarter of last year.

We improved net -- year-over-year, we improved net income to $154,000 from a net loss of $302,000 and delivered an EBITDA margin of 7.8% on a 78% increase in EBITDA. We also had another quarter of positive cash flow, generating $1.1 million in cash from operations.

Our 2 business segments, Magal Integrated Solution and the Senstar product division have been impacted quite differently in the quarter by the COVID.

Project delays, along with the travel limitations, the restrictions on face-to-face meeting with prospects and the clients crucial to closing new business affected our division differently.

Magal Integrated Solutions division was more affected than the Senstar product division this quarter. Closing large project deals is dependent on face-to-face meeting and repeated in-person interaction with various teams. Although government and large entities, particularly in some of our target verticals are delaying new projects to conserve cash in the period of economic uncertainty. As a result, Magal Integrated Solutions -- excuse me -- as a result, Magal Integration Solutions second quarter revenue reduced by 26% year-over-year.

The COVID-19 impact our Senstar product division to a lesser degree, due to the high geographical and product line diversity.

As a result, Senstar revenue declined only 40% year-over-year. We continue diversifying our revenue streams across verticals and territories during the global COVID outbreak.

As a result, Magal project revenue was more transactional coming from smaller contracts and deals rather than large contracts as in prior years.

In the second quarter, we landed several turnkey projects, including the VIP residents in Mexico and then African seaport and then an extension to our turnkey project with the Port of Tarragona in Spain.

Shifting to an update on our 4 key verticals in the Oil and Gas, Correctional facilities, Critical Infrastructures and Logistics. In the second quarter, the oil and gas sector continued to be affected by oil prices fluctuation related to the uneven global economic recovery and large projects remaining on hold. We expect this vertical to begin to improve next year and remain engaged with those customers very closely.

The correction of vertical, particularly in Canada, experienced delays in project execution due to the COVID-19-related limitation on facilities with access. We do expect correction to recover in Canada in

(technical difficulty)

Hello, Kobi?

Yes?

You want to continue reading for him?

Yes, for now. Apologies for the technical issue. We do expect corrections to recover in Canada in 2020, where this vertical has grown nicely over the last few years. A new solution developed for corrections is our recently launched anti-drone system. This system can be used for the detection, tracking and neutralizing of drones that bring listed or prohibited materials into facilities.

We also intend to target homeland security and public safety with the anti-drone system. This system operates in a unique distributed solution based on our proprietary Magal Fortis command and control capabilities and electro-optic solution.

The critical infrastructure vertical has been active for our teams this quarter, but outcomes vary depending on the region.

As mentioned earlier, we closed several infrastructure contracts in Europe and Africa during the quarter.

We continue to invest in the logistics vertical. Logistics requirements are growing worldwide due to COVID-19.

(technical difficulty)

Excuse me. I'm reconnecting Dror Sharon.

Yes. Okay.

Okay. So sorry about it. I just -- I was disconnected. Kobi, where did you stop?

So we just started discussing the logistics vertical.

Logistics vertical. Okay. We continue to invest in the logistics vertical. Logistical requirements are growing worldwide due to the COVID-19. This has generated an upsurge in online shopping and increased focus on improving the -- expanding distribution capabilities. This larger, more complex logistics facilities have greater security and operation needs.

To expand our scope of services in the vertical, we are leveraging our PIDS, the PIDS, the VMS software and the dedicated analytics to provide specialized solutions for securing the facility as well as tracking and managing passive movement.

Another new innovative product we just launched with the Safe Spaces in response to the COVID requirements. This new video analytics solution is camera and VMS platform-agnostic to enable businesses to reopen while maintaining COVID-related public safety requirements. Safe Spaces video analytics identified individuals who are not wearing mask and monitors social distancing occupancy limited, enhanced sanitation stands in public facilities and buildings.

Currently, we have distribution channel partners and the potential clients testing the system.

We are also closing new business with prior customers, notably the new contracts announced yesterday to secure military assets for an intergovernmental alliance. The $6.5 million contract will provide physical security, perimeter detection, video surveillance, access control, public address and associated command and control equipment and structure for assets globally. This key contract award recognized technology differentiation and the scope of Senstar product offering for deployable security solutions.

The RFP was very competitive, requiring robust, modular equipment, the technologies sophistications, capable of being mounted, connected and dismounted rapidly and easily integrated with existing assets. This win is an endorsement for Senstar technology, experience and customer support.

Shifting to an overview of our performance by region. North America saw growth in our product operation during the second quarter. Deliveries have mostly continued in this region in security for critical sites and -- it's considered as an essential services. The Canadian territory was primarily affected by the slowdown in the correction sector. We have a backlog of orders, which we are able to fulfill as restrictions in the country are lifted.

In the EMEA region, where seaport are considered special services, Spain has been active territory for our experienced team. In Israel, the impact of the crisis are mixed, with the Israel (inaudible) district active while other sectors have slowed down. Africa is also mixed, but we are winning new business there as well. We landed the support security system design and the installation in Djibouti, a new territory where we see future opportunities. The APAC region has been impacted the longest by the COVID. With lockdown and the restrictions that began in early '19 -- excuse me, early 2020 and still continue in many regions that we sell into.

We began to see some activity in the APAC region in July, but large areas, including the Philippines and Indonesia are still under lockdown. And other region still managing COVID outbreak that are severely impacted the economic activity in Latin America. Several large countries in Central America are fighting to control the rate of the outbreak. This dynamic has impacted our businesses in this region, though we have had some small contract wins recently.

Magal's sound financial standing with net cash and related cash balance gives us -- give me confidence in our ability to respond to the challenges and opportunities ahead. We will prioritize our use of capital in these areas, investing in R&D to increase our competitive advantages, maintaining our pool of talented, experienced people critical to our future growth and M&A, specific opportunities to add synergies products in growth markets and leverage existing platform.

I've already discussed one example of investment in our R&D road map and the innovation it has delivered. Another element essential for the company post-price recovery is employee retention. We believe that keeping our teams on board will provide support to our customers, close new business and continue to improve our product solutions and software is the competitive advantage that enable us to preserve the strategic direction of Magal.

The M&A targets in our pipeline would add technology to leverage our listing capabilities and bring innovation and expertise. We hope to close at least 1 to 2 deals in 2020. We have resumed dialogue with the targets put on hold at the end of the first quarter. And just a week ago, we submitted the nonbinding LOI to one of the interesting targets that we are working on.

I want to thank the global Magal team for their dedication and spirit in dealing with all the diverse challenges we are facing, both at work and of course, their personal lives. I'm confident that with our strong balance sheet, our backlog of business and our skilled team, we will emerge from the crisis stronger and positioned for growth.

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 second quarter of 2020 was $16.4 million, a decline of 17% compared with revenue of $19.7 million in the second quarter of 2019. The geographic breakdown as a percentage of revenue for the second quarter was as follows: Israel, 24% versus 23%; North America, 26% versus 23%; Latin America, 3% versus 9%; Europe, 17% versus 19%; Africa, 15% versus 16%; Asia and the Rest of the World, 15% versus 10%.

The breakout between Magal's Integrated Solutions and Senstar's product revenue were 47% products and 53% projects.

Magal Integration Solutions division revenue declined by 26% year-over-year and Senstar product division revenue declined by 4% year-over-year. Second quarter blended gross margin was 44.2% of revenue versus 42.6% last year. The gross margin increase was primarily due to the higher gross profit contribution related to the increase of Senstar sensor product sales as well as cost savings in the quarter.

Our operating expenses were $6.4 million, a 22% reduction from the prior year second quarter operating expenses of $8.2 million. The reduction in operating expenses is attributable primarily to payroll-related actions, such as delays in hiring and reduction in vacation liability as well as the reduction in other expenses such as travel and marketing. We delivered these reductions while maintaining our continuous investment in R&D and sales personnel.

Operating income was $796,000 in the second quarter of 2020 compared to $195,000 in the second quarter of 2019. Financial expense was $457,000 compared to financial expense of $363,000 in the second quarter to last year. This is a noncash expense as a result of the end-of-period valuation of monetary assets and liabilities.

At the end of each period, the change in currency valuation of monetary assets and liabilities is recorded as a noncash financial expense or income. Therefore, we use EBITDA, a non-GAAP metric leaving out the variable impact of foreign exchange fluctuations and other noncash factors and believe that EBITDA is a better good of the company's performance.

EBITDA the second quarter was $1.3 million versus EBITDA of $716,000 in the second quarter of the last year. Net income attributable to Magal shareholders in the quarter was $153,000, or $0.01 per share versus a net loss of $236,000, or $0.01 per share in the second quarter of the prior year.

Cash and cash equivalents, short-term deposits and restricted cash and deposits, net of short-term debt credit as of June 30, 2020, were $56.4 million, or $2.44 per share compared with cash and short-term deposits of $51.6 million, or $2.23 per share as of December 31, 2019 and $54.4 million or $2.35 per share as of March 31, 2020.

Our working capital decreased by almost $5 million at June 30, 2020, in comparison to the end of the last year. A majority of the decrease is driven by the trade receivables collections related to high billing level in Q4 2019. We delivered positive cash flow from operations of $1.1 million in the quarter. We are pleased with the company's ability to generate cash in such a tough environment.

That concludes my remarks. We are happy to take your questions now. Operator, please?

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

The $6.5 million contract. In the -- the language is the contract has a value of $6.5 million with final acceptance expected in second half of 2021. Does that mean you started working on the contract and they will complete it? When do you start working on it? And when do you get the money?

The idea, again, we signed it just last week. So we booked it last week in our backlog, starting to work on it immediately. I assume that -- let's say, up to 20% will be done during 2020, and the rest should be finished by the end of 2021.

Well, that sounds very good. Your profit or the -- even though the sales went down for the quarter, you managed to show a small profit. I assume with all the additional contracts, if you increase sales, your profit will increase proportionately going forward?

In this -- Sam, this is Kobi. In this respect, we should remember that currently, in this quarter, we are not at our quarterly OpEx run rate. So the reduction in operational expenses is a reaction -- it's a reaction basically to the specific situation related to COVID-19 impact. Obviously, elements like travel and other expenses will get back at least partially as the overall situation and the economy is getting back to normal. So it's not -- I wouldn't say it will be a pure increase or improvement. EBITDA, it's a bit more complex than that. But definitely, this contract is accretive to our profitability.

Okay. I'm going to say something, which if you recall, Thurman Willis, who was on the call and had always asked for activity in Investor Relations. Unfortunately, he passed, and I would appreciate in his name that you would do as much as you can in Investor Relations, in memory of Thurman Willis. And hopefully, you have -- your story improves and your earnings improve and he would appreciate knowing that Magal has improved.

Thank you, Sam.

Thank you, Sam. Well, Thurman, indeed, believed very much in the company, and we do join your wishes.

(Operator Instructions) Our next question comes from the line of Ken Liddy with Oppenheimer.

I just had 2 questions. First, have you had any additional feedback on your Safe Spaces video analytics at this point yet?

So the -- Safe Spaces, we are now introducing it to several customers and distributors. Now evaluating the solution. I assume that in the next few weeks or a month, we start to secure orders. But again, something we have to see. But we see a lot of traction enthusiasm about this solution.

And given COVID-19, do you see any new verticals that will provide growth? Or as things change at this point that you can discuss?

As I mentioned in my script, the logistics looks very promising. The amount of logistics warehouses and centers is growing. People are buying more and more in the online. And the logistics provider suppliers are looking for solutions in 2 levels. One is to secure the logistics centers themselves. And we started to provide them also with parcels management. We did already the first project in Europe, and the customer were pretty pleased. And by using our VMS software, we are managing the movement of the parcels by unique analytics solution developed for this system. So logistics looks very promising. For some reason, also the control facilities, especially in North America, is a growing market.

Good to hear. And just one last question. What was your cash flow for the quarter?

So we had positive cash flow from operations of just above $1 million.

(Operator Instructions) Our next question comes from the line of [Bruce Tuchman], a private investor.

Bruce?

Both aware, at least Kobi, I know was where. It's been a disappointing run. And I know that in the past, people have said to emphasize investor relations and get the word out. But it's really a matter of increasing sales. If you guys can get either a better sales force or a kick in the butt to the current sales force in this environment in the past 10 years with terrorism, with everything else going on in the world, you folks should be doing a much better job of getting your product out there. And I keep hearing good news on this contract and that contract, but the stock at $3.35 this morning, is not reflecting a growing company, and I had hoped that you folks would be growing a lot better and increasing sales. So it's really not a question. It's a comment and I've been a dedicated shareholder and hope to be longer because I believe in the product, I believe in the company and I believe in the need for the product, so if you could comment, that would be great. But otherwise, I wish you all a great day.

One -- maybe one comment, Bruce. The company for the last 2 years, '18, '19, grew very nice. We grew the sales in -- between 30% to 50% year-over-year. And the plan for 2020 was pretty much to keep this trend. In parallel, we -- probably, we have to speak more with investors, but revenue wise and also profit wise, the company grew very nice in those 2 years. 2020 started very promising. Unfortunately, we got hit like the rest of the world in beginning of the year with the COVID situation. It slowed us down. Hopefully, in the next -- within 6 months or so once the COVID will be controlled in a better manner, worldwide, we'll be able to go back on track and grow the company because we see lots of traction. I assume that security will grow even more than what it should grow in the last years. So I still believe that the security is a good place to be. There is some kind of slowdown during 2020 because of the COVID. But other than that, the company grew very nice in the previous 2 years.

Our next question is a follow-up question from the line of Sam Rebotsky with SER Asset Management.

Yes, Dror. You spoke of acquisitions previously. What's -- what is the status of the acquisitions we're looking at and as prices come down on a potential acquisition?

We are looking in few directions. We have a few posters in front of us. With one also -- actually 2 in line with LOIs outside. I cannot say that prices went down, but at least, there are some good opportunities in front of us. Anyhow, we'll proceed exploring those companies. And hopefully, once we'll be able to move out of this and meet face to face, we'll be able to try and close at least 1 if not 2 during the next few months.

Okay. And could you sort of comment relative to the tend to offer for stock, which was unsuccessful by the office -- by the major stockholder that owns about 40%. And what is the company's position on that? They're a member of the Board of Directors. And what has been the recommendation of this type of procedure? And what did that accomplish? And this was not successful, but the stock managed to move up after that. And based on this contract, sort of would you comment that -- something on that?

This tender offer is basically between the shareholders. So from their perspective, with -- the company's management, we're kind of outside of this transaction, of course, which eventually did not happen. The Board of Directors did convince twice as required by the law to discuss and provide a recommendation, eventually decided to be neutral in terms of the recommendation. And I think this is how we see it from the management team perspective.

From my point of view, the stock is undervalued, and you've hired a new IR firm and they will do whatever they think can recommend to you to get exposure as best they can with the COVID, but there is all the security needs. And hopefully, the contracts that you just signed, it is decently profitable and that we could get the stock to trade on a regular basis at a higher price. Good luck.

Thank you, Sam.

Thank you, Sam. Just to add that we are going to attend -- from the IR perspective, we work very closely with Hayden IR, and Brett and Kim, we are very pleased with their service. We are going to attend LD Micro beginning of September, hoping to market successfully the stock.

We also have scheduled calls, August every week with the new potential investors. We also expanded some -- very nicely our IR work in Israel, in our home country. And we also conduct here almost weekly meetings with potential investors base. So we hope that eventually, our story gets out there and get understood, and we will see some traction in the stock price.

(Operator Instructions) Our next question comes from the line of [Greg Roth], private investor.

I just had a question about cash just to confirm that cash per share is USD 2.44. And regarding the changes in expenses, to follow-on the proportional comment earlier, as business increases again and your expenses rise, do you anticipate using cash? The reason I have the question is that even with this, you increased your cash on hand. So how should I understand that going forward, please?

So -- yes, so in terms of the calculation, it's indeed the number that you mentioned, we have $66 million -- around $66 million in cash, around $23 million of shares out there so...

$23 million.

$23 million. So this is the situation. We do generate -- we show positive EBITDA, we generate cash, we generate cash from operations. And this is the result of cash increase. We had -- we finished basically 2018 and 2019 with positive EBITDA and basically the cash increased during 2020. Obviously, also related to the collection of income that was earned in Q4 2019.

From our perspective, where the cash -- the use of the cash is for the M&A activity. And as we mentioned, our target list gets longer during the last few months, and we are in a quite intense stages with these 2 targets. And on top of that, there is working capital, operational use of cash. I hope that I addressed your question.

Yes, I think so. And congratulations.

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 to our business. I look forward to updating you next quarter. Have a good day, all of you. Thank you.

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.