Senstar Technologies Ltd (SNT) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Magal's Second Quarter 2018 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 & Public Relations at 1 (646) 688-3559, or view it in the News section of the company's website at www.magalsecurity.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 please?

Thank you.

Welcome to Magal second quarter 2018 conference call.

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

With us on the call today are Mr. Dror Sharon, CEO of Magal and Mr. Kobi Vinokur, CFO.

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

We will 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 obligations to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demands and the competitive nature of the security systems industry as well as other risks identified in the document filed by the company with the Securities and Exchange Commission.

In addition, during the course of the conference call, we will discuss 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 like to hand over to Dror.

Dror, please go ahead.

Thank you very much, Kenny.

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

I've joined Magal almost 2 months ago and this is my first Investor Conference call with our shareholders.

I intend to continue Magal's tradition of being transparent and open with its shareholders.

And I look forward to continuing our discussions on a regular quarterly basis as well as meeting many of you on the road of investor conferences in the coming quarters and years to come.

In my first month at Magal, it has been very clear to me that I've joined a company with a significant amount of potential part of -- the potential part of it, which is still untapped.

I have been to our main offices and I've been impressed by the quality of the skills, motivated employees and management throughout the company.

I believe that Magal is right now in a place where we can leverage the strong platform that we have to advance to the next level in its development.

Before I start with my summary of the second quarter, I would like to thank Saar Koursh, our former CEO, for his key contribution to Magal's success until now.

I will first provide a short summary of the quarter and our ongoing activities before handling over to Kobi, our CFO, to discuss the financial results.

Our results for the -- speaks for themselves.

We are particularly pleased with our performance and the goals we demonstrated in the quarter.

It is quite clear that the strong backlog we have built over the past few quarters is benefiting us strongly now.

We reported our highest level of revenue at $25.3 million in Magal's recent history, up 91% year-over-year and 47%, sequentially.

While growing revenues by 91% over the last year, operating expense only grew by 8%, demonstrating the operating leverage inherent to our business as well as the growth that Magal has done improving efficiencies in the past few quarters.

All in all, we reported a strong level of operating profit at $2.1 million and EBITDA of $2.6 million, the highest, going back many quarters.

Kobi will discuss the results in greater details in few minutes.

During the second quarter, while we have the strong revenue performance, our backlog still remains strong, higher than at the same time last year.

Furthermore, the pipeline is good and stronger than what we have seen in the recent past.

We are hopeful that we can turn a good portion of our pipeline into additional orders in the coming quarters.

Our success in the recent month is a sign of the increased market interest in our product and service, and we -- as well as the recovery in some of the markets we serve, especially in the U.S.

In terms of products, we are seeing a particularly solid interest in our new products the LM100, a smart sensor integrated with an addressable LED, perimeter lighting solution.

In the terms of regions, North America as I said, which was particularly weak in 2017, has shown somewhat of an improvement in this -- 2018, especially, in this quarter.

North America continues to be our focus market for products, and we are seeing increasing opportunities there.

With regards to the southern U.S. border with Mexico, we are in going -- ongoing contact with CBP, the U.S. Customs Border Protection agency, which are assessing our power solution for this border.

In fact, our power solution is seeing very good markets attraction in the region and worldwide, and continuing to invest resources in developing and invest in advancing this line of product.

In Israel, we are seeing an increasing diversity in projects in the pipeline, worldwide.

In Europe, we have seen increased opportunities and we are in -- currently in the process of reorganizing our sales force in Europe, driven by new leadership in order to better meet requirements and market demands.

Latin America was particularly strong this quarter, as we are executing on some key strategic projects in the region.

In Africa, we are seeing strong opportunities and we hope to win some new business in this coming month in the region.

Our strong backlog provide us with good revenue visibility for the coming quarters.

Combined with our solid pipeline, I have confidence that in -- the 2018 would show a good improvement over 2017 in revenue and also in the EBITDA.

I would like to spend a few minutes talking about the acquisition strategy.

As you know, we acquired the control of ESC BAZ and fully consolidated results at the start of the second quarter.

Acquisition was primarily a technology acquisition, did not have any material impact on our top or bottom lines.

More importantly, we are continually on the lookout of synergistic acquisitions, particularly, technology and products.

We will look to leverage our existing business platform to bring increased sales and open up a new chance for us.

We have over $45 million in cash with no debt, which is more than what we need for ongoing work in capital.

We intend to leverage this strong cash position for acquisitions.

In summary, I'm pleased to report my first quarter with Magal with strong quarterly results and in particular, solid backlog level going into the third quarter.

I believe we are in a good position to achieve solid growth in 2018 over 2017 in terms of revenue and EBITDA.

And now I would like to hand over to Kobi to summarize the financial results.

Kobi?

Please, go ahead.

Thanks Dror.

Revenues for the second quarter of 2018 were $25.3 million, up 91% year-over-year.

This is the record for second quarter.

This is also our third consecutive quarter showing improvement in revenues year-over-year.

Furthermore, the revenue growth this quarter over the same quarter last year, it's been across all the business units in the company, which is a very good sign.

This is also the first quarter in which we consolidated ESC BAZ results into our results.

We are generating around 1/5 of our revenues from the current sources.

This trend continued into the current quarter and we target to grow this portion of the revenue thus, increasing the certainty level in our financial performance.

The geographic revenue breakdown for the quarter was as follows: Latin America, 28%; North America 27%, Africa 7%; Europe, 13%; Israel, 16% Asia and the rest of the world, 9%.

Second quarter gross margin was 43.6% of revenues versus 50.2% last year.

There were number of reasons for the recent divergence in gross margin, which I will go into shortly, but I want to highlight that the gross margin does fluctuate depending on the sales mix.

And a typical range we would expect for our gross margins is around the mid-40s level.

In the second quarter of 2018, like the prior first quarter, the project mix executed favored some lower margin projects, which was strategic for Magal.

In addition, on the product side, we saw a higher mixed of the hardware component in our VMS sales than software, which also affected the gross margin.

This is in line with our commercial strategy for this segment.

In the early part of the last year, the opposite was true, which produced an unusually high-gross margin.

Looking ahead for 2018 as a whole, I -- based on our strategy and projects in our backlog, we expect that the average gross margin will be at around the level that we reported this quarter.

Operating expenses in the quarter amounted to $9 million, 8% higher than the $8.3 million as reported last year.

I note the OpEx was slightly higher due to the inclusion of the operating expenses of ESC BAZ as well as some increased sales and marketing expenses associated with the revenue growth.

This was largely offset by the cost efficiencies measures we took in the second half of the last year, primarily, as you probably remember, in the North American region.

Operating income in the quarter was $2.1 million compared to an operating loss of $1.7 million last year.

During the second quarter, we recorded a financial income of $0.5 million versus a financial expense of $1.4 million in the second quarter last year.

Net income in the quarter was $1.7 million or $0.07 per diluted share.

Net loss in the second quarter of the last year was $3.3 million or $0.14 per share.

The EBITDA, which is more representative of the performance for our business, was $2.6 million or 10% of revenues.

This is comprised with the negative EBITDA of $1.2 million in the second quarter of the last year.

Cash, short-term deposits and restricted deposits as of June 30, 2018, were $45.4 million or $1.97 per share compared with $49.4 million or $2.15 per share as of March 31, 2018.

We have no bank debt in Magal.

In the quarter, we used $2 million in cash for operating activities, primarily for working capital geared towards the scaling up of some projects that we are currently executing or about to commence.

I note that already in the first weeks of this quarter, the third quarter, our collections have been strong and our cash position has increased.

Our overall strong level of cash provides us with working capital to continue to grow our business organically, and at the same time enables us to take advantage of the potential acquisition opportunities we seen in our end markets.

That concludes my remarks.

We will be happy to take your questions now.

Operator?

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

Now the backlog, which has improved from the same quarter last year, has it improved from the prior, the March 31 quarter?

The backlog -- as you mentioned, the backlog of this -- by the end of this quarter is better than the similar quarter last year.

It is better, I would say, across all the segments of our activity, including the integration part and also product and VMS, as I mentioned, basically due to the improvement in all business unit areas.

But is it higher than the March 31 quarter?

No.

It's not as high.

It's still strong.

But it's still, as I mentioned, on the quite strong levels.

Okay.

Now is -- was any of the sales in this quarter deferred from the March quarter?

No.

Okay, okay.

Well, it's good that the profitability is turned around.

And do we see maintaining and improving the profitability going forward?

Definitely.

In Magal, it's -- the revenue growth definitely is the key for improvement of profitability.

We did -- we execute a few significant steps last year in order to extract some cost synergies.

We'll continue doing so, but I would say that the improvement in profitability should come from revenue growth going forward.

Okay.

You're looking at acquisitions, is there any discussions or are you finding things that are exciting and reasonable in price that you might want to pull the trigger on?

We are still looking into few opportunities but nothing that we can report now.

The next question is from [Thurman Willis].

My question is for the strong improvement in revenues and earnings, institutional ownership is rather low in the company.

What do we plan to do to get our message across the wider spectrum of potential investors, going forward?

I believe that now when Dror join the company during the next months, we will -- we'll have some good opportunities to meet with investors across the board.

But in particular, institutional investors.

This is a type of investors that we definitely would like to attract to our stock.

And we believe that Magal is definitely interesting enough for such holders.

A follow-up question relates to the wall, to the Mexican wall.

You are having opportunities in this area, are we excited about our potential with this wall?

And then, lastly, something that we don't seemingly talk a lot about is the grid system and all the potential with the electric grid system.

And does that not provide us with one of the major areas of growth going forward?

I don't really understand the last part of your question about the southern border with Mexico.

Does the attraction to our fiber product for this opportunity.

We're in a constant negotiations and the demonstration with the CBP, The Custom Border -- the custom and -- CBP, the Custom Border Agency.

And what was the second part of your question?

Yes, the grid system, the electric grid system.

We have a lot of opportunities in a lot of areas, but we announced a service contract on electric grid system here just recently of $4 million.

And does the electric grid system across the world provide us with one of our major opportunities?

This is one of the verticals that we keep pushing and our PIDS products are being sold over there.

I don't see a major change over there until what we are doing already, but it looks okay.

And I hope that you can bring on some new investors as your stock appears to be highly undervalued.

The next question is from Bruce Tuchman from Merrill Lynch.

Thank you, very much for meeting with me when I visited Israel last month.

That was very nice to see the company and meet you all, and I do appreciate it.

I want to congratulate you on the excellent revenue growth in the quarter and hope that, that continues and you continue to make more inroads into the U.S. border system, as well as what Thurman had mentioned with the electric grid in the United States.

That's an ongoing problem here in the states and needs various protections.

So I hope we can accomplish some of that going forward.

Also the institutional ownership does need to increase and stock exposure does need to increase, but I just hope that you continue to show good earnings.

And the proof will be in the putting that if you increase the value of the company that people will take a better look at it.

Bruce, it was nice meeting you.

Although, it was a very short on my side but thanks for the warm words.

Thank you, very much, Bruce.

Appreciate your warm words and hope to be in touch going forward.

(Operator Instructions) The next question is from Dan Weston of Westcap Management.

It's Dan Weston.

Most of the questions have been answered at this point.

Dror, welcome to the company.

And I had a couple of questions here.

First, on the previous callers comment about the service contract, the maintenance contract, you just announced for $4 million.

Can you give any color on that?

Is that a new piece of business for you in terms of pricing some of these maintenance contracts?

And how long is the life of that -- of the maintenance contract?

So actually, the press release aggregated a few contracts that we secure during the last couple of weeks.

I would say, the most interesting one is 5-year contract for our -- one of our major customers in North American market.

I was reading the press release and it said that one is to provide maintenance and support for the products you previously installed at various correctional facilities, and then one was to provide support for facilities to the electric power generation company.

That second one, was that a contract that you previously sold product into or is this a services contract for somebody else's work?

So first of all, the first contract that you mentioned is a part of our sensor care program.

And particularly, this program targets the customers that have already purchased our Senstar sensors products.

And basically, this is the extended warranty, maintenance and the support associated with those products that we have sold.

In the both cases, basically, the contracts were signed with existing customers, however -- large long-term customers, and that basically, valuables, our services, products and as well are interested in our maintenance services.

And Kobi, maybe I missed it, what was the total VMS revenue in the quarter, please?

Total VMS?

Yes.

For video.

Overall, the total VMS revenue, it's around $2 million and -- between $2 million and $2.5 million.

Okay.

And then, just in general, Dror, since you've come in officially in June, maybe, you could just give us a little bit of your take on what you've seen inside the company in terms of products, and then outside in terms of your vertical markets?

Where you see the biggest opportunities for growth on your leadership, please?

Well, I just finished the tour on the company facilities worldwide.

Meeting the teams all over the world, almost covered everything.

There are lots of -- first, the brand, the market brand for either Magal and also Senstar is pretty strong.

I see that Senstar is a biggest player in the market with good past performance.

And Magal in the countries where she -- with the companies playing around are pretty strong -- can pretty strong company.

I think it's premature to talk about new strategy or see what direction we are taking at the company, but where we are starting from this point looks very promising, because we have very good product base in Senstar.

And also, the software from the -- what we -- from the acquisition of Aimetis a few years ago, it's also a very strong software.

The combination of what we have there and the strong brand in the market, can bring us to very nice and new horizons.

Also we are now looking into new verticals that came on the table and building some plans out to penetrate them.

And is one of those new verticals you're speaking of have to do with the cannabis market?

Yes, yes, we have a very nice solutions in North America.

Lots of growth we see -- we saw in the last year also, (inaudible) facilities, protecting the growth area and also production area.

And we see it also starting to grow in Europe, mainly, in Germany.

So now we are exploring this vertical in this country as well.

The next question is from (inaudible) of (inaudible) Hazan Capital Markets.

I would like to ask you, usually, the second half of the year in the Magal is much better than the first half.

Do you expect similar -- that it will be similar like other years that the second half will be stronger than the first?

Well, it's still -- we have still a few months ahead of us, so a bit early to talk about expectations.

But overall, talking about the entire year, we do expect a good year, strong year, a year that is better than 2017 from both revenue and EBITDA perspectives.

We had strong Q2.

And as you probably know, in our business, it's very difficult to judge sequentially quarter-over-quarter.

So looking at the entire year, I can definitely share with you this expectation of being stronger year.

The next question is from [Mike Esler] of [Mannix.]

I'm calling as a 2-decade-long holder in Magal as many of the people on this line are.

I'm glad Mr. Tuchman got out to see you.

So one is, I want to congratulate you on a great quarter; two, Mr. Sharon, I want to welcome you on Board.

I think you had excellent timing; and three, I just wanted to advise you, I being somewhat older than many of you.

Just a note of caution regarding the 28% of the business that's coming from Latin America, and of course, Asia and the world at this point.

Just want to make sure that your letters of credit are all bank guaranteed because of the potential for some extreme volatility relative in currency markets.

So just a note of caution from years of experience to a growing company.

I just want to make sure all those cash that's coming in continues to flow in with guaranteed LCs on much of that business.

Thank you for your time, continued success and have a good day.

Thank you, very much, Michael.

Thank you.

The next question is from [Ronan Raffaelo.]

First, congratulations for your nomination as the CEO of the company and I hope your tenure will be boisterous and successful.

And I'd like to focus on other part of the world.

In the recent years, there were many publications in the Indian media about the Indian government plans to [steal] and secure its 6000-kilometer vulnerable borders with Pakistan and Bangladesh.

Using intrusion detection technology like smart fences, cameras and radars.

It was also published that the Indian border security forces, the BSF, are conducting a field test sites using state-of-the-art Israeli border security technology.

Some Russian technology is tested as well.

The pilot has ended or will be end recently.

And the success -- with success and satisfaction of the BSF commander, the tender and bid for the first 3300 Indian-Pakistani border will open in near October.

Can you comment about this?

And is Magal involved in the border?

Or is it another Israeli competitor?

First, nice meeting you [Raffaelo].

It's -- the Indian border is the project that is on the table for the last, I think, almost 10 years.

Going up and down on the time, sometimes starting with new -- with small portions and then stopped it.

Magal has its own facility and the partners in India.

We are in few tenders now related to this project in the border, but India is a very tough market and I think it's fine to penetrate there either from the projects, and also from the product point of view.

So I'm not familiar with exactly what you're referring to and what they did already, but currently, we are in -- trying to pursue this opportunity as well.

Everything I told you is written in the newspapers.

You can Google in Indian-Pakistani fence border fence, and all the results will come there.

Yes, we know.

Thank you.

The next question is from [Thurman Willis.]

Looking forward, do we have a lot of projects that we're bidding on and do we look forward to announcing some nice wins going forward?

I referred to business going forward and not backlog, but the potential for new projects upcoming and are bidding on those.

Could you comment please?

Yes, I would say, as Dror mentioned also, before our pipeline does look diverse, interesting.

I think in comparison to the previous years we cover more territories and we see opportunities that we actively participate in new geographies.

So it's both geographical and vertical diversity.

I hope that answers your question.

So I can take it that the potential going forward for bidding and making new wins, that's not a part of the backlog now, is as exciting as it's been in Magal's history?

What we consider is a backlog is orders which we basically secured.

So whatever's in the backlog is just execution.

On top of that, we have obviously, pipeline that I just described.

Yes.

So in other words, going forward, we see lots of potential for new business?

Yes.

Very strong pipeline as Kobi said, very diversed and hopefully, part of it will be materialize in the next few months.

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

Before I ask Mr. Dror Sharon to go ahead with his concluding statement, I would like to remind participants that a replay of this call will be available on Magal's website at www.magalsecurity.com.

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

Well, all -- on behalf of Magal's management, I would like to thank you, for your continuous interest in -- and long-term support of our business.

And have a nice -- have a good day.

Thank you.

Thank you.

This concludes the Magal Security Systems Second Quarter 2018 results conference call.

Thank you for your participation.

You may go ahead and disconnect.