Senstar Technologies Ltd (SNT) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Magal Security Systems' Fourth Quarter 2005 Results Conference Call. [OPERATOR INSTRUCTIONS]

I'd like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, and the effect of the Company's accounting policies, as well as certain other risk factors which are detailed from time to time in the Company's filings with the various securities authorities.

If you have not received a copy of today's release and would like to do so, please call Gelbart Kahana Investor Relations at 1-866-704-6710 or 972-3-607-4717. I would like to turn the call over to Mr. Helft of Gelbart Kahana Investor Relations. Please go ahead, sir.

Thank you. Good morning to everyone. On behalf of Gelbart Kahana Investor Relations, I would like to welcome you all to Magal's fourth-quarter and full-year 2005 results conference call. I'd like to thank Magal's management for hosting this call today.

With me, on the call, are Mrs. Raya Asher, Magal's Chief Financial Officer, and Mr. Cobi Even-Ezra, Magal's Chairman and CEO. Mr. Even-Ezra will begin with an opening remark, and Mrs. Asher will follow with a short description and discussion of the fourth-quarter and the full-year 2005 results. After that, we will open the call for Q&A. Cobi, would you like to begin.

Sure. Good morning, everybody. Good afternoon to those who are in Israel. I am really happy to announce that the last quarter -- the fourth quarter of 2005 -- was the best quarter we ever had. We had revenue of $20 million, which we never had before.

Altogether, I was very glad to find out that as promised a year ago and during the quarter's conference -- telephone conference, the year 2005 is better than the year 2004. So this as a general remark [for the part] of revenues. This year, we were very aggressive and we put quite a lot of money and we had a lot of expenses in marketing and selling of our new products.

You can see that our marketing expenses and sales expenses grow by about 15% or 13% this year over last year. But we do believe that the results shortly will show up. We do believe that the efforts we put in marketing of the new products as the DreamBox and the PipeGuard will show their results in the year 2006, and this will be a [turned] year for those products and, therefore, for the revenues and especially for the income.

We also started to prepare the new generation, the new products for the future, and this is why our R&D didn't drop, but on the contrary it came up, because we have already started to prepare ourselves for the future. We were very successful in getting jobs, projects. Some we failed to get. We were supposed to get a very big project, as I mentioned in the last call we had.

We were supposed to get a very big project in the United States. Unfortunately, we didn't get it. But in a way, we were proud because out of so many companies that were bidding for this job, two remained to the last stage, and it was us and Honeywell. And there was a very tough competition between the two of us. At the end of the day, Honeywell won, but really it was very close that we will beat them.

So next time, I promise you, we'll do better to beat them instead of being beaten by them. Our financial expenses dropped. And we stopped one operation -- one that -- one small department of indoor sensors that we had. That, of course, will not have any really effect on our financials or our operation in the future because it was very small. As a matter of fact, we kept it as a [sideline], and we decided to stop it.

Regarding the profits, we are not happy with the results. The income is not sufficient, and we hope that in the year 2006 we'll do so much better in this direction. But probably you'll have more questions, and I'll answer it [while your questions]. So I will ask Raya to analyze the figures of the year and of the last quarter.

Thank you, Cobi, and hello to everyone. Revenues in the fourth quarter reached 20 million. As Cobi mentioned, I think that's a record quarter in terms of revenues. For the full year of 2005, revenues reached 68.6 million. Gross profit in the fourth quarter was lower than our usual. It reached 40% compared to 44 or 45 in the same period last year on a full year 2005. The reason for the decrease in the gross margin is the mixture of projects that we had in the fourth quarter.

Operating expenses increased only by 3% compared to last year. And the operating income reached about 6% of revenues, which means 1.1 million in the fourth quarter, over 4 million in the full year of 2005. If we go down the line to the net income, our income for the 2005 full-year was $2.1 million, or 3% of revenues. In the fourth quarter, the net income may have reached 750,000, which is almost 4% of revenues.

If we look on the balance sheet, we see a major increase in a few items. The first one is the bank deposits, which increased due to the public offering in April 2005. A major increase was in [trade] receivable and the unbilled account receivables. This increase was due to big projects that we [performed] in the second half of 2005, mainly projects abroad and the seam-line project. We believe that this balance is an unusual one, and we'll collect it all in 2006.

I would like also to remind you that our bad debt is very [manageable]. But it's almost zero. So -- and the customer's a very solid one. They have earlier more major processes, and we have the full confidence that we'll collect it. On the other side also, our payables are little bit increased. This is -- some of it's to offset our receivables. And to conclude, the shareholders' equity is approximately 50% of the balance sheet, and our financials are all very solid.

With this, I would like to conclude. Ehud?

Yes. Operator, we'll open the call for the Q&A.

Thank you. [OPERATOR INSTRUCTIONS] The first question is from [Ken Levy] of Wachovia Securities.

(technical difficulty) solid increase in revenues. I just had a question with regards to the product mix. What percentage was -- for the quarter was with the seam-line sense?

Seam line for the whole year --

For the quarter and the year?

Yes. Are you talking about the year or do you want it for the quarter?

The quarter.

For the quarter, it was about 30% of the quarter.

In 2006, would you expect that to come down a bit as a percentage?

There are two things. First of all, we still have orders. Thus, we will continue to supply at about the same level. So we will continue to do that. The question will be -- of course, in winter, it will be less. And in summer, it will be more. In winter, we can't work because of rain and these kind of things.

Secondly, there is now a tender that was published and we submitted it a couple of days ago for a continuation of the work of the seam line, for the year 2006, shall we say, for the third and fourth quarter of 2006, and we hope we would get it. And if we'll get it, the total per quarter -- the total during the year will remain the same and maybe even more than we did in 2005.

And what percentage of your business in 2005 was [the fence]?

Altogether, it was -- I'll calculate -- it was about 16%.

16. And that's a lower margin business. Is that -- is that correct?

That's correct. The margin of this project is low.

As far as the orders in the period, in this first quarter so far, first of all, what is your current backlog?

We -- really, we don't give figures for the backlog, as usual. But we have a backlog for at least half a year.

And can we expect to see some of those unbilled revenues in the first couple of quarters?

Absolutely.

And as far as orders in the quarter, were they more brisk than the previous year?

The flow of orders in the first quarter that is expected is better than the one we had last year. And we all have to pray to get what we're expecting to get. And when I'm talking about expectations, I'm talking about orders that we do believe, shall we say, somewhere between 80 to 90%, that we will get them. We don't say 100% before we are getting them. So the backlog in the first quarter will increase the total backlog that we have.

How long do you tend to build out your backlog? Is that over a six-month or 12-month period?

Six months is a very good backlog for a company like ourselves.

What is -- of those revenues, what percentage over the next six months would you expect to bill?

Out of the backlog?

Yes.

Well, we expect to bill -- beside getting new orders, of course, out of the backlog that we have, well, we believe will be about 70, 75%.

So we should see a marked improvement upon in the first half of the year as compared to last year?

Compared to last year, I hope, you will see improvement compared half year to half year.

Now, you mentioned you spent an awful lot of money trying to bring to market to your PipeGuard and your DreamBox and help realize their potential. Could you discuss the potential for PipeGuard, with regard to --

The potential of PipeGuard -- are you asking about the expenses?

No. I understand you (multiple speakers)

We -- the expenses of marketing the DreamBox and the PipeGuard is almost $2 million a year.

And what type of revenue can we expect from PipeGuard, do you think, over the next 24 months?

Yes. You caught me, because I was working on three years. But you wanted to have the figure for two years. We believe and we hope to get in two years, as you asked for, at least somewhere between $7 to $10 million.

Has there been any type of increased interest in this product with regards to the latest news events?

Yes. There is a lot of interest lately. And as a matter of fact, we do hope that the first pilot will take place, as I promised already several times, it will take place in the spring this year. And once we will get it, I assure you I will publish it - I will make a press release with big letters.

Now, do you have any competition with this product?

Truly, no. Theoretically, yes. There is a company by the name [SSP] in Australia that although they have a product that is more -- it's based on fiber wire and it can be used better in new installations of pipes, and it's quite difficult or quite expensive to rate with an existing buried pipe. Well, our product -- as far as we know, we are the only one who has a solution for an existing buried pipe. So I don't think these are some of them, but one of them is active, which is SSP in Australia.

And then you mentioned you're working on trying to get a pilot. How large of an order would a pilot be -- 0.5 million, 1 million?

A pilot, we believe, will be somewhere around 0.5 million.

And could you discuss now a little about the DreamBox - the same type of timeframe?

Well, the DreamBox is -- the problem with the DreamBox is that it has to go out through integrators, through the bids, through the specifications in the tender in the bids. Now, for more and more bids are already including the DreamBox in their bids in the United States and we do believe that it will start to take off this year, 2006 -- not in 24 months, but in the coming 12 months, it will start to take off.

And if we (indiscernible) somewhere of about -- what we call -- we measure them by links that we felt until now about 500 links or something like that. We believe that we will more than double sell in the coming year.

And how much will those sales --?

That will be $2 million.

One of the things that was discussed in the last call was you're going to try to make an effort to have more press releases -- not, I guess, bogus press releases -- and some more of what's going on with the Company's orders. Was it a quiet quarter or --?

I believe that in this coming quarter, you will get a lot of press releases, and (indiscernible) not so many because we're getting confused. I do believe that there will be quite a few announcements this quarter.

Okay. Well, I might have a couple of follow-up questions. I'll let someone else ask some questions.

Thank you.

Thank you.

Thank you, Ken.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Jeff Kessler of Lehman Brothers.

Hi, this is actually Manav for Jeff. How are you guys doing?

Very well. Give my regards to Jeff.

I will. And just take a quick question. I mean, obviously, you know, you alluded to PipeGuard and DreamBox. I was just wondering if you could give us a little color on sort of the other product opportunities that you have?

The one thing that comes to my mind, right now, which is CCTV systems and stuff that you announced for the Mexico correctional facilities. What sort of penetration are you seeing? Are you seeing any of that traction in the U.S. in the prisons or -- and other than that any other sort of incremental opportunities you might want to point out for us for the coming year?

Sure. First of all, you know that we do have the control and command system that is working quite well and we are putting in quite a bit and most of our projects are already using our control and command systems. And it's sold within the project and we feel very well.

And it brings us - and sometimes it also brings us a project that we couldn't do before as a turnkey project. Regarding (indiscernible) when you were talking about Mexico -- you were talking about prisons in Mexico or prisons in Canada?

No, I maybe --

I can tell you one thing for example, you mentioned Mexico, in the Mexico, when you asked about CCTV, the Mexico project that we did was including the DreamBox that was part of the visual systems over there in Mexico. Now, the other product -- I mean all the other products that the one bring us $70 million or $68 million revenues. So I don't know exactly what you were asking about the other product.

The other products are [selling] very well and they're used all over. And if you're talking about the Mexican border, that's a different story. I don't know what was exactly the question. But only thing I can tell you about the Mexican border, I can tell you only one thing, we have decided and I think I mentioned it before not to go directly on this project and not to deal with agencies or American agencies directly.

But through the, shall we say, the big integrators in the United States and that's what we are doing regarding the Mexican border. The same we've done with other projects that are now in the United States, that we are doing it through the big integrators in the United States -- except one, the project that we lost.

All right. In terms of 2006, I mean, I know you haven't given any sort of detailed guidance or anything but at least in terms of products, what would be the, I guess, the three or five main things that you guys are really going to look for in 2006? Like how should we track - I mean, these press releases that you say are going to come out in the next quarter or so? What are the focuses that you think we should be looking for?

There are two focuses that we are -- three focuses that we are doing in [throughout] 2006. One is our [detection] project, which is our -- what you call defense sensors -- which were well established in the market and they are still a good part of it. We are negotiating right now quite big projects that we want to add on.

In the meantime, we still have, for the whole year, projects that we have to finish that we have already got before, won before but we weren't ready to start new ones and we believe we are going to do so. So those are big projects. This is the second focus.

And the third focus will be the DreamBox mainly, and the PipeGuard, but the PipeGuard is different because in the PipeGuard the market is very limited. So we really don't think -- we are working on both, while in the DreamBox, we have to work on a wide range. So in the DreamBox, we spent more money in selling and marketing than we do it with PipeGuard.

But once we will get the first order of the PipeGuard we believe that we will get so many more because those people it is small market, only a few hundred of customers that are going to use it and each one knows the other one very well and he looks what the other one is doing. And if we would be successful, which I'm sure we are going to be successful, the others will start to talk and I hope we'll be able to talk with them.

All right. That's good. Thanks a lot guys. Good job again in the year.

Thank you.

Thank you. Our next question is from Robert Gordon.

Yes sir.

Hi Rob.

How are you? Whatever happened to the Gaza fence deal? Is this because what's happened in Israel to the prime minister, and the new party, is it just on the back burner? We were all looking forward to some sort of announcement on this.

Look, unfortunately we are not the one who is deciding what's going to be on the borders of Gaza, et cetera. But our plans, which, of course, we're not going to detail, it's not my plan but the plan of the Israeli MOD and whatever they are doing that whatever they want they are publishing, whatever they don't want they don't publish.

No doubt that we are in the picture, and if -- whenever they will meet any product or project or whether we'll have to develop something very special for their needs, they know us. We do it together. We -- and we'll develop those things for them.

The last election that took place with the Palestinians, when the Hamas had the majority, nowadays it's the Palestinian parliament, no doubt will increase the tension on the borders. And no doubt that the Israelis will be more cautioned about the security along the border. And we will try to help the Israeli MOD whatever we can.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Gary Markoff of Smith and Barney. Please go ahead.

Hi Cobi.

Hi Gary.

Can you just update us on the Smart business?

Sure. We are losing money. There is nothing new about that. But one thing I can assure you, either way, I am going to stop the loss of that during the year 2006, either by stopping operations or by selling off or by putting it in such a position that it will come to a break-even point.

I am sick and tired not less than you are to hear from Cobi all the time, excuse us, that next year it will come breakeven. So this time I'll have to take an action and come -- and be fair with myself, and come to the point that we will not pour anymore money into this job.

Okay. So one way or another, this is going to either turn profitable or you're getting rid of it?

Yes. But according to all our calculations, we are not going to lose even if we get rid of it.

Okay. Could you update us on any of the progress you have with the Navy?

We were very successful, and we're very happy that we were successful. But the Navy, when we have to come to work on the [Black Sea] when he is not on the ship. When he is on land, it takes a long time, because they don't know how to move the ship on the [ropes].

And it takes them -- it takes time, and as a matter of fact there was some development last month -- not last month, I think in January - we're already in February -- yes, last month as to what time late in publishing the financial. And I [issued] myself that we have some problem with one of our accountants who have left the company, and we took some more time to do the job. Usually, you know that we do it a week earlier.

Yes.

So I apologize. It won't happen again. So in any case, coming back to the point, we'll make another presentation to some admirals of the Navy, because this was the technical people that tested the equipment. Now they have to get the budget and the money and things like this. So we take that, and we hope that we will get it at the end of the day.

Okay. Did I hear you say, because I wrote it down -- I believe it was something I wrote down based on what you said. You said you believe a lot of announcements will happen this quarter. Did you say that?

Yes, I said that.

Okay. Well, we're two months out of the way here, which means that there's going to be a lot of announcements in the months --

When I say this quarter, I mean it is three months as of today.

Three months from today?

Yes.

Okay. So over the next three months you're saying, not in the next 30 days?

Not in the next 30 days, but the next 90 days. Thank you for correcting me.

I wasn't correcting you. I was just trying to clarify - because you're setting up an expectation for a lot of news in the next 30 days.

Thank you, Gary.

Okay. Could you also give us some clarity in terms of what advantage Honeywell had over Magal with regard to the -- I would assume this is the New York, New Jersey Port Authority project?

No. It was not.

It was not that project?

No.

So what project (multiple speakers)

-- in New York. It wasn't Honeywell I think, it's Lockheed Martin who got it. But this was a project that wasn't announced, it was a very secret project, if you want to call it this way. It was quite a large project -- dozens of millions of dollars, and they got it on two things.

They offered cheaper than we for lower quality. And we don't have a low -- really low quality products. That's why they were cheaper to us and it was of money. By the way the difference wasn't big. But there was a big fight between the technical people of [the client] and the financial people, and at the end of the day, the financial people won.

Okay. So this was not the New York, New Jersey Port Authority?

No.

So could you give us the status on that project?

Because that's a project we never bid.

No. As a supplier of product --

We never bid on this project, and even today we don't know yet what kind of segments are going to use, and what they're going to buy from us or from other people. As a matter of fact, I'm going to be in New York shortly, and I'm going to talk with the sales people and see what's going on. But we don't know yet -- the (indiscernible) decision yet what [segments] they're going to use. If I'm not wrong, it's wasn't Honeywell who got it I think it was [Raytheon], or am I wrong? (multiple speakers) At my age, I don't remember everything.

My understanding is that you were potentially supplying product to the New York, New Jersey Port Authorities for perimeter fences for those -- for the LaGuardia, Kennedy, and Newark airports.

That's correct. You're absolutely right. But --

Okay.

-- now they have to make a decision what segments are going to use. They've got from us quotation, they got from other people quotations. We were talking with them, other people were talking with them, and there's not a decision as far as I know as of today what -- we don't have any orders from them as yet.

So when would you expect that to come to a conclusion?

We believe that it will take about three, four months -- [until] we will finish the initial design.

And there was also you had mentioned that there were another eight or ten airports that were also looking at the same considerations? Could you update us on that?

They didn't publish yet any tender -- not yet.

Okay. Can you update us at all on anything happening or not happening along the Polish border?

The Polish border -- it's a funny border. It's almost a [funny joke]. The project over there probably will start to come to life. We are already talking with the ones -- two has been left over -- two has been left at the end of the day. And we are also already negotiating with both of them about using our product. And it will take another, probably, quite a few months. This is not the one I had in mind that we will make it first in the coming 90 days.

Okay. And with regard to the pilot this spring, for PipeGuard --

Yes.

What part of the globe would we expect to see an announcement? What region?

In the Americas.

It would be in America?

Well, I didn't say that (multiple speakers).

You said the Americans, which could mean South American, North American.

I said on the Americas.

Latin American, Central American.

Gary, don't push me.

Okay. So that's in one of those areas?

Yes.

Okay. Thank you very much.

You are welcome, Gary.

Thank you. We have a follow-up question from Ken Levy of Wachovia Securities. Please go ahead sir.

Hi. Could you give us a little bit of the details on the order you received from Canada this quarter? Hello?

Yes. I'm trying to gather the information. I think this was for the prisons. We upgraded the prisons over there and then we got the turnkey project for the prisons in Canada. We also got another project that we were not allowed to publish the name of the project. This is why we didn't announce it. Well, we announced the amount, but we didn't announce the type of the project.

Unfortunately, in our field there are sometimes projects that the clients don't want to announce that they are doing those things for two reasons. One, they don't want that -- the bad guys will know what type of products they are using because they -- to give free information to them and it's not a very logic. And secondly, because in some cases they don't want to know that they have any fear or any threats. And this is why they're using the security.

So in both cases, they don't want us to announce it. So on every time that we are announcing we have to get their permission. If we don't get their permission, we never put their name in. This is one of the cases in Canada.

And would you -- can you tell us who your partners are in the United States on some of these products you're trying to bid for?

Yes. We have several partners, of a -- what we call, the big integrators, with one we are much more advanced than with the others. And we might -- this might be one of our releases that we will release shortly.

Will this partner use you exclusively?

In the United States there is not such a thing as exclusivity - it's against the law. But when you're doing things -- you are doing what we call "Teaming Agreement." With the teaming agreement we are going as partners to find solutions together. There is not such a thing that I can block any company, not to use somebody else, nor the company can block me not to offer it to somebody else because usually, if you do an exclusivity [space], you have to do it both ways.

And I don't think it's really good for us and nor to our partners to be locked only with one partner, which basically is losing the deed, we are out of the game. So we are -- what we are doing -- we are doing what is called "Teaming Agreement."

Okay. With regards to this past quarter, you mentioned in the call that you were unsatisfied with the profits for the quarter. What type of earnings per share would you have made you (multiple speakers)

I will be happy if I will make -- I will be happy if I will make profit, less profit around between 6 to 8% of our revenue. This will make me happy.

Okay.

Whatever it comes to.

What was it for the quarter?

I beg your pardon?

What was that percentage for the quarter?

For the quarter, it was 3.7.

3.7. Okay. Thank you. Okay, well congratulations on the quarter.

Thank you very much.

Thank you. And there are no further questions at this time. Mr. Cobi Even-Ezra?

Thank you, everybody, for being patient and hearing my answers. As I said before and I've said many times and I'm going to say it again and I hope that it will come true as it came true until today, this way, that 2006 will be better than 2005. It came true when I said it in 2005 compared with 2004. So I have no doubt that it will be better than the year 2005 -- 2006.

This year, we want also to increase our profitability in several ways. First of all, by selling our new products, which until today, we are only -- it's only an expense, because of the marketing and selling and things like that where we don't have an income. Secondly, as I mentioned before to Gary, about Smart, we're going to [solve] the losses some time this year.

And either way, we're going to check ourselves and see where we can save and spend less money and increase the profitability of the Company. It's time already that we show much better profitability than we have as of today. So this is our target for the year 2006. And I hope we will be able to cope with it.

And there are some good signs that show us that we are on the right track, one of which is the increase in revenue in the third quarter, an increase in revenues of the fourth quarter, which give us indications for the future. And I'm comparing quarter-to-quarter. Now, we can increase our profitability and we will try our best to do so. And this is our target for the year 2006.

I hope this is good news for everybody. Let's not forget that I'm also a big shareholder. And I wish everybody a good day and a Happy New Year, for the year 2006, and a good year for Magal as well. Thank you.

Thank you. This concludes Magal Securities Systems Fourth Quarter 2005 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.