Senstar Technologies Ltd (SNT) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Magal's Fourth Quarter 2017 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 have not received it, please contact Magal'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, www.magal-s3.com.

I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations.

Mr. Green, would you like to begin?

Thank you, operator.

I'd like to welcome all of you to Magal's Fourth Quarter and Full Year 2017 Conference Call.

I'd like to welcome all of you to this call, and thank Magal's management for hosting this call.

I first want to apologize for the late release than we normally do, as well as the late start of the conference call.

This was due to the Board of Directors meeting later than they normally do in the day, due to the availability of some of the board members.

With us on the call today are Mr. Saar Koursh, CEO; and Mr. Kobi Vinokur, CFO.

Saar will summarize the key highlights, followed by Kobi, who will review Magal's financial performance of the quarter.

We'll then open the call for the question-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 as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

In addition, during the course of this 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 in our press, we have reconciled the non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Regulation G requirements.

You can also refer to our website at, www.magalsecurity.com, for the most directly comparable financial measures and related reconciliations.

And you can also find it on our recent press release on the website.

And with that, I would now like to hand over the call to Saar.

Saar, please go ahead.

Thank you, Kenny.

I would like to welcome all of you to our conference call, and thank you for joining us today.

We are very pleased with the result of the quarter, which represent a vast improvement over the previous few quarters, and it's also a solid year-over-year improvement.

The most important improvement, however, is our exceptionally strong backlog and what it represents for the future.

At the year-end, our backlog was one of the highest quarter-end levels that we ever had.

And today, given the orders we have already announced in the first quarter, our backlog is grown even further and is the highest ever for Magal.

This solid backlog provide us with a strong revenue visibility for the coming few quarters and gives me confidence that 2018 will be an improved year for Magal.

Looking at the fourth quarter.

We reported revenue of $23 million, up 14% year-over-year and EBITDA of $2.3 million, up 20% year-over-year.

Furthermore, we had a solid cash flow in the fourth quarter, generating $4.6 million of operating cash flow in the quarter.

We ended the year with $52.4 million in cash and 0 debt.

This strong level of cash provide us with a working capital to continue to grow our business organically, and at the same time, it enable us to take advantage of the many potential opportunities we see in our end markets to complement our organic growth.

We are indeed actively looking and we aim to complete another acquisition in 2018.

We are also very pleased with the progress that our video solution have made throughout 2017.

Our fourth quarter revenue from the Video and Cyber segment were up 32%, Q4-over-Q4 last year and 20% in 2017 as a whole.

And we are pleased to say that this segment is now finally passed into operating profitability.

We are seeing a strong and growing interest from existing as well as new potential customer for our new -- for our video and analytics product as well as our ability to provide broad, end-to-end, suite of security solution.

Last week, we inaugurated a new 8,500 square-foot facility for our state-of-the-art Video Management Software division.

While remaining in Waterloo, Ontario, the heart of Canada's technology triangle, the new facility will support future growth, as we continue to expand our footprint in a global VMS market.

Looking ahead, over the coming year, I expect our Video and Cyber segment to become one of our main growth engine, driving our business to new heights, and we intend to continue to invest in this segment.

Video, however, is not the only one of our growth engine, which is beginning to ramp as we hoped.

Since the beginning of 2018, we have received a record number of orders for our fiber optic-based sensor product, FiberPatrol.

In fact, we have received more orders in the first quarter than for the whole 2017 for this product line.

Recent order for this product are being used to protect critical infrastructure in Western Europe and North America, including chemical facility, public utility site, transportation depots and a military based in Southeast Asia.

In parallel, we are pursuing similar opportunities for border protection with our fiber solution, including the US-Mexico border.

Part of the attractiveness of our system is the new technologies we have added to the product line.

We have used the latest artificial intelligence technique, allowing the buried sensor to classify and differentiate between human and animal targets, vehicle, excavation and even tunneling, whether manually or by machine.

Its ability to accurate classify the type of intrusion event significantly lower cost -- costly nuisance alarms, which require manpower in a more border regions.

This sensor can stretch for up to 80 kilometer between substation, making it simple and quick to install.

It provide highly sensitive covert protection over the long distances, and it's particularly suited for border security.

Despite its ability to monitor very long distances, it also has very high pinpoint event location accuracy with a few feet.

As we can see, we are very proud of our recent technical accomplishment.

FiberPatrol capabilities are clearly in demand giving the sharp increase in orders received since release.

Only a few weeks ago, I was honored to be part of a panel discussing U.S. and international border security at the Homeland and Defense Security Summit in the United States.

On the panel, I was joined by top representative from the U.S. Army, the U.S. Department of Homeland Security and Airbus Defense.

As you might imagine, there was significant interest in our discussion on the most effective ways to provide border security and to prevent infiltration.

Behind the panel and throughout the conference, I met with many senior official, and there was clearly a very strong interest in Magal's solution to today's border and perimeter security challenges.

I do believe the market is moving in our direction toward more intelligent and creative ways of thinking about border security, using the most advanced array of sensors, such as those which Magal is already providing throughout the world.

I would like to spend few minutes discussing our recent order wins.

This a sign of the increased market interest in our product.

Since the start of the fourth quarter, we've publicly announced more than $50 million worth of orders.

I invite you to check out our new website, at www.magalsecurity.com, to find our recent press release as well as further information about our company.

I would briefly highlight those recent wins.

In September, we announced $5 million in orders for North American correctional facility.

A few weeks later, in November, we announced $3.5 million for our integrated security solution and maintenance for several major international airports, including Barcelona Airport and Indira Gandhi International Airport in New Delhi.

And later that month, we signed $8 million contract to provide integrated security solution for several critical energy infrastructure sites.

In December, we were awarded a $13 million contract to provide integrated security solution as a subcontractor for Toyota Corporation.

Magal will provide Toyota and its end customer a major international seaport in East Africa, a fully integrated turnkey security solution.

We are obviously proud and honored to team up with the global leaders such as Toyota, for such a major security project.

In January, we announced $20 million in contract for integrated security solution, including $15.5 million order for the protection of critical energy infrastructure in the Americas.

While we delivered on part of this order, this order, as well as others we have won, have all contributed to our record backlog.

I would like to spend a minute talking about our acquisition strategy.

As you know, we recently signed an agreement to acquire control of the company called ESC BAZ in Israel.

The acquisition, in particular, broadened our video product portfolio with a military-grade and high security thermal camera.

The BAZ product portfolio include a wide range of modular and customized, medium- and long-range surveillance system for distance from 500 meters to up to 25 kilometers.

BAZ system have been used successfully for over 20 years, and are field-proven with customers, including the Israeli Defense Forces, police and security services as well as other government and civilian customer worldwide.

Our road map is to combine our strong video analytic and GIS command and control with BAZ surveillance system, to offer the market a unique geospatial surveillance command and control system, designed to detect threat scenarios by analyzing video inputs from cameras and managed coordinated response.

We expect the BAZ, the ESC BAZ acquisition to close in the coming weeks.

In summary, I'm very encouraged by our strong fourth quarter result and strong backlog that we have.

We are in a strong position for 2018 and beyond.

And now over to you, Kobi.

Please, go ahead.

Thanks.

Revenues for the fourth quarter of 2017 were $23 million, up 14% year-over-year.

The geographic revenue breakdown for the quarter was as follows: North America, 25%; Latin America, 31%; Africa, 13%; Europe, 19%; Israel, 9%; and Asia and the rest of the world, 3%.

Fourth quarter gross margin was 46.6% of revenues versus 49.6% last year.

The variance was due to the sales mix in the quarter and is within our expected range.

Operating income in the quarter was $1.8 million compared with $1.5 million last year.

I know that our operating expenses were affected and increased in USD terms due to the strengths of the local currencies in the areas we operate, primarily the Canadian dollar and the Israeli shekel versus the U.S. dollar.

This offsets the real efficiency steps we took during the second and third quarters of the year.

During the fourth quarter, we recorded a financial expense of $0.5 million versus financial income of $0.5 million in the fourth quarter last year.

The financial income and expenses mostly relate to the noncash financial charges generated through foreign exposure, primarily by our Israel-based U.S. dollar-denominated deposits.

In terms of taxes, we saw a tax expense of $1 million versus a tax rebate of $0.9 million in the fourth quarter of the last year.

The higher level of tax in the fourth quarter was primarily due to a recent change in the U.S. tax regulations, whereby there was a onetime reduction in our deferred tax assets.

I know that this is also a noncash expense.

Net income in the quarter was $291,000 or $0.01 per share.

Net income in the fourth quarter of the last year was $2.9 million or $0.13 per share.

The EBITDA, which is more representative of the performance of our business, in the quarter was $2.3 million, an increase of 20%.

This is compared with EBITDA of $1.9 million in the fourth quarter of the last year.

To summarize our full year 2017 results.

We reported revenue of $64.3 million, which decreased by 5% year-over-year.

Sales by geography 2017 were as follows: North America, 24%; Israel, 15%; Latin America, 20%; Europe, 17%; Africa, 15%; Asia and the rest of the world amounted to 9%.

In our annual report, which will be filed later today, we will publish our segment breakdown.

Sales of products, including cyber and video, were 47% of 2017 revenues and project sales were 53% of revenues.

Last year, the breakdown was 54% products, including video and cyber, and 46% projects.

Gross margin was 48.7% versus 49% last year.

Operating loss in 2017 was $1.2 million compared with operating income of $1.5 million in 2016.

During 2017, our financial expenses were $4 million.

This was primarily due to the noncash financial charges due to the weakening of the U.S. dollar versus the Israeli shekel, generating -- generated by the foreign currency exposure to our U.S. dollar-denominated deposits.

In terms of taxes.

In 2017, we had a tax expense of $1.7 million, while in 2016, we had net tax income of $0.1 million.

As I mentioned before, a large portion of the tax expense was noncash, due to a onetime reduction in our deferred tax assets in the U.S. as a result of the recent U.S. tax reform.

Our full year 2017 net loss was $6.9 million versus a net income of $1 million last year.

EBITDA for 2017 was $0.6 million versus EBITDA of $3.2 million last year.

Cash, short-term deposits and restricted deposits as of December 31, 2017 were $52.7 million, or $0.0227 (sic) [$2.27] per share at almost the same level as December 31, 2016.

We have no bank debt in Magal.

Overall, that concludes my remarks.

We would be happy to take your questions now.

Operator?

(Operator Instructions) The first question is from Sam Rebotsky of SER Asset Management.

Tell me, the March 22 press release with the 20 sites, is that included in backlog?

Is there a quantification of that number?

The announcement that we made last week related to the 20 new sites, it's included in our backlog.

Yes, it is.

As of today...

Yes.

So the $50 million that you sort of -- the $20 million was January, 2018.

So, of the $30 million, say, how much of that went into the December, 31 or any of it?

And what is for 2018?

Okay.

As we -- as you know, we usually don't publish specific numbers for backlog.

But as you can sum up, all the recent announcement that we made over the last few months, and as I mentioned already, we finalized the backlog with a very strong backlog by the end of the year.

And right now, it's actually at the highest point ever.

So without putting a number, you can understand where we are.

Okay.

Now the acquisition you're looking to make, what kind of cost for the 55%?

And what kind of sales would that produce going forward?

We haven't published the amount of money of the acquisition, because it's insignificantly in the amount.

The main motivation of buying ESC BAZ is for the technology and for the product portfolio.

And, therefore, the amount that we are spending is nonsignificant.

And therefore, we are not publishing it.

Okay.

And as far as the acquisitions that you're looking at other than this particular one, is there a range of size of the acquisitions you're looking at?

As I mentioned in the past, we are looking in 2 direction.

One direction is for technology acquisitions, very similar to the ESC BAZ to broaden our portfolio, both on the hardware and the software.

And in parallel channel, we are looking also to acquire a much bigger organization, leveraging the cash position that we have.

We are looking on both direction at this point.

Okay.

Now with all this backlog, I assume we would be profitable.

Which quarter we expect to be profitable?

We are not -- again, we are not going into quarters, because we are talking -- all of this backlog is related, or most of it, it's related to our project business.

And there is still lumpiness in the project business.

But definitely, we are looking to be profitable throughout 2018 and beyond.

Okay.

And this -- all these projects will be completed by the end of 2018?

No.

Not all of them would be completed in 2018.

Most of it or a vast majority of it will be accomplished in 2018.

But still, some of the projects are big projects that will take us also for 2019 as well.

The next question is Dan Weston of Westcap Management.

I had a first question relating to the acquisition of the ESC BAZ.

Saar, is there any indication or color you can give us relating to what kind of accretion of revenues this will bring in?

And any difference in the margin profile on that business to what you're tracking at right now?

It's a tough question because we haven't given this information.

But what I can say, it's less than 10% in revenues, but not much less than that.

Okay.

And gross margin profile?

Very similar to our solution business.

Got it.

And just a follow-up on your previous caller's question relating to backlog.

I know you don't give the actual number.

But could you just refresh us like maybe you can give us what the delta was between your backlog at the end of the year to where it stands today?

I think you can actually do the math yourself, because as we mentioned already, the announcement -- just the announcement on the project business was above $50 million in the fourth quarter and on.

And you know that we -- this quarter was $23 million.

So I think, you can do the math.

It's relatively easy.

Okay, very good.

I appreciate that.

And let me see.

I think last quarter, you had mentioned, I think, maybe one of your previous callers asked a question relating to the critical sites for the regulation of the medical marijuana industry.

Is there any updates you can give us there?

It sounded like you were pretty excited on that opportunity.

Yes, I am.

Actually, it looks even better and better every day.

The opportunity is huge.

I can tell you that -- I think I mentioned it, that just in Canada, we are looking, or the Canadians are looking to have more than 1,000 sites over the next 3, 4 years.

We are looking to take some portion of the pie, of course, not everything.

But we have very good positive request.

And we are part of a group that was awarded a nice portion of sites, and we are planning to go to the execution phase in the next few months.

So -- and the 1,000 sites that you're speaking of, how many different owners does that represent?

To tell you the truth, I don't know the answer for that.

But this is less important.

The more important, maybe, perimeter is the ability to duplicate solution from site over site.

Nobody wants to start designing every site from scratch.

And everyone wants to take advantage of the sites that already done and just duplicate it.

And since we have a proven solution, I mentioned already, that were awarded on several sites already.

And then now for us, it's just a matter of duplication, saving a lot of cost for the design phase.

That's great.

And then, I know it's early because it was just signed.

But is there any indications relating to the omnibus bill that was signed last week on maybe benefit to your North American business?

I'm not sure one -- which one are you referring to.

Are you referring to the fiber that we reported last week?

No, the omnibus bill that was signed out of Washington last week, just relating to your North American border security critical infrastructure.

Any color that you can give us there?

As I mentioned, I think, in previous calls, CBP is running several processes that we take part of them.

We are expecting some news in the upcoming weeks.

And once we'll have some news, we will be happy to share it with you.

The next question is from Ken Liddy of Oppenheimer.

I just have one question regarding your recurring revenue.

You've talked about in the past that you're looking to try to grow that.

What was the recurring revenue in the quarter and for the year?

Yes.

So indeed, we continue improving our recurring revenue portion.

We do publish this information in the 20-F that is going to be filed later today.

And you will see continuous improvements in this ratio for us.

And what type of avenues are you trying to boost that number through -- with service contracts?

Yes.

So actually, we operate -- all of our 3 segments of operations, Turnkey Projects, products and Video and Cyber.

All of them are a good basis for improvement of recurring revenue.

So when we're talking about the video segment then the maintenance and support contract that we are selling is basically our major recurring revenue in this segment.

For products, we are -- basically we are selling also product maintenance, sensor care program, which provides with the recurring revenue on that.

And projects, off course, this is the post-project maintenance contracts.

So overall, currently we're talking about around 26% of our revenue being recurring.

And our goal is to continuing to gradually increase this percentage.

Great to hear.

And related to some of your efforts with security at airports.

I saw that recently you installed at an North American airport.

Is this something that you look for other similar type of contracts in the United States?

Yes, we do.

Actually, we -- our subsidiary, Senstar, just announced -- I think yesterday it was that we successfully completed the Memphis International Airport security solution.

And we are looking on many other airport as well.

Later this year in May, there's going to be a conference here in Israel, by the way, of many major U.S. security officers from the major airports, they are coming to Israel to learn more about airport security.

As you may know that Israel airports are secured with very high standards and many security officers from around the globes are coming here to see new technology and we are going to take part of this conference as well.

And just one more question.

With regards to some of this security at the border in Israel, do you expect to have any project wins in the coming year?

Yes, we do.

Yes, we do.

Israel is planning to continue investing in the border security -- in our border security.

As we understand from the Ministry of Defense, there is budget allocated for this year for 2018 and we are definitely working to take a nice portion of that.

(Operator Instructions) There are no further questions at this time.

Before I ask Mr. Koursh to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Magal's website, www.magal-s3.com.

Mr. Koursh, would you like to make your concluding statement?

Yes, thank you.

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 an active 2018, and to updating you next quarter.

Have a good day, and happy holidays for Easter and Passover.

Thank you.

Thank you.

This concludes the Magal Security Systems' Fourth Quarter 2017 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.