Senstar Technologies Ltd (SNT) 2006 Q4 法說會逐字稿

Welcome to the Magal Security Systems fourth-quarter 2006 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded February 22, 2007.

I would 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 which 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 [dispelled] 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 972-3-6074717.

I would like to turn over the call to Mr. Helft of Gelbart-Kahana Investor Relations. Mr. Helft, you may begin.

Thank you. Good morning and good afternoon (indiscernible). I would like to welcome you all to the conference call and thank Magal's management for hosting this call today. We have got on the line Mr. Jacob Even-Ezra, Chairman of the Board; Mr. Izhar Dekel, the CEO; and Mr. Raya Asher, VP Finance and CFO.

Mr. Dekel will start with the call by giving a brief introduction, followed by Mr. Asher, who will review Magal's financial performance in the fourth quarter and full year 2006. We will then open the call for the question-and-answer session.

I will now hand over the call to Mr. Dekel.

Thank you, and good day, everyone, and welcome to our fourth-quarter and full-year 2006 results conference call. I would like to thank you for your continued interest in Magal and for joining us on this call.

2006 was an interesting year for the Company. Performance-wise, despite the (indiscernible) in the second quarter, we generated revenue growth of over 9%, reaching $67 million compared to $61 million in 2005.

This is mainly because of the strong order generation from both our traditional and new product lines [throughout the 7 million orders] (indiscernible). This year we also generated record income of $3.3 million, compared to a loss last year. Last year's results were reclassified to exclude the [orders cancelled after] 2006, as you probably remember.

One of our main goals is to increase our operating margins to 11% in years to come, compared to 5% this year. We believe this will be possible for increased revenue from our new security platform. This day we continue to launch new products following potential R&D investments. The product, OmniTrax, a superior buried cable detection sensor; the XField, an advanced electrostatic field sensor; and the MSS mobile remote surveillance system which targets a new segment of the security market.

(Indiscernible) to continue with (indiscernible) for offering single product to a total security solution. We are generating potential interest for many clients for our comprehensive security solutions.

Moving into 2007, we see a potential increase in order potential. We are in discussion with several different clients for orders amounting to several hundred million dollars -- double than in the past. We believe this follow our strong marketing investment and presence in the market. We hope to announce several large orders during 2007, some of which were expected to be received in 2006.

Looking ahead, we see several strong growth drivers. Our comprehensive solution offering will bring larger contracts. Our product offering now meets all clients' increased demands for intelligent security. For instance, smart radio is one of the largest high-demand area in our market, and our biggest platform, the FORTIS and the DreamBox meets all these needs.

We also continue to adopt our product to a new geographical market and to a changing client demands. Our solution, which used to be tailored, usually, for military or business clients, is now in demand by civilian customers. This creates large opportunities for the future.

Finally, I would like to thank Coby, the Chairman of the Board, who was Magal's CEO during most of 2006. This will be Coby's last participation in the conference call as outgoing CEO. I would like to thank him for all his contributions to our dreams. He has developed and extended this company, helping to become a world leader in high-end security solutions.

Now, I would like to turn over the call to Raya Asher, our VP finance and CFO, to review the fourth-quarter and full-year financial results. Raya, please.

Thank you, Izhar. I will now provide you with a summary of the results. You can find the results in more detail in the press release we issued earlier today.

First, I would like to explain the issue of the functional currency. In the fourth quarter, Magal Israel changed its functional currency from US dollars to new Israeli shekels. I would like to emphasize a few points.

First, this does not change our reporting currency, which is the US dollar. Secondly, we have always had shekel-based activities with our headquarters in Israel. Here we are mainly changing the base currency to the Israeli shekel. The change in functional currency relates only to Magal Israel. The decision regarding what is the functional currency is done separately by each of the companies in our group. Our subsidiaries in the different countries will continue to operate in the old currency.

Now, to why have we changed. In the past, a large part of Magal Israel's orders were generated in US dollars. However, following the recent unexpected increase in our US-generated orders and the substantial Israeli MOD order, which followed the [stasis] on the northern front, we have seen an increase in non-US dollar production. (Indiscernible) of this, Magal Israel was required to reserve (indiscernible) shekel as its functional currency. Of course, we will have to minimize the impact of this change by taking necessary measures on an ongoing basis, including hedging and other derivatives. This change in the functional currency resulted in the Company incurring approximately $0.6 million in additional non-cash expenses in the fourth quarter of 2006.

Now, to our quarterly and annual results. Revenues for the fourth quarter were $22.4 million, up 20.7% from $18.6 million in the fourth quarter of 2005, and up 38.7% from the previous quarter of 2006. Revenue from the year of $66.9 million, up 9.2% from $61.3 million in 2005.

Let me now provide you with a breakdown of our annualized revenues on a geographic basis. Israel represented 39%, North America 27% and the rest of the world 34%.

Gross margin for the fourth quarter was 37.1%, an increase from 29.9% in the fourth quarter of last year. Gross margin for the year was 40.5%, an increase from 36.1% last year. Operating income for the fourth quarter of 2006 reached $1 million compared to $1.3 million operating loss in the fourth quarter of last year and $263,000 operating loss for the third quarter of 2006.

Quarterly operating margin was 4.5%, compared to a loss in 2005. The net margin in recent years followed the strong R&D expenses invested in order to develop and introduce our new innovative security platforms. Looking ahead, we expect these expenses to increase at a slower rate compared to revenue, and contribute to a steady increase in profit margins in the years to come.

Operating income for the full year reached $3.3 million, compared to $2.3 million operating loss last year. Operating margin for 2006 was 4.9%, compared to a loss in 2005.

The net loss for the fourth quarter of 2006, including the expenses associated with a change in the functional currency, was $0.2 million compared to a net loss for the fourth quarter of 2005 was $1.6 million, or $0.15 per diluted share.

Net income for the full year 2006 was $0.8 million, or $0.08 per diluted share, compared to a net loss of $3.2 million or $0.32 loss per diluted share in 2005.

Turning to the balance sheet, our cash and cash equivalents, including bank deposits, as of the end of 2006 was $27 million.

Now, I would like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). [Ken Liddy], Wachovia Securities.

I was wondering if you could speak a little bit more about the opportunities you're seeing. You mentioned something about very large contracts that you are pursuing.

As I said, it's a very interesting (indiscernible). We see, compared to the past, I said about more than double contract with what we call a big client. As you know, we shifted now -- for the last few years, we shifted our business more from a project to a supply comprehensive turnkey solutions. We see (Indiscernible) tens of millions of dollars regarding (indiscernible) project [to where now we have ahead of us contracts] more than the $300 million, just for example to protect one capital city is a project of tens of millions of dollars. To protect another relevant border is tens of millions of dollars, meaning we are dealing now on a court which the game is much larger than in the past. Because of this, I said about the big potential we had was in 2007, in the past 2008 and after that.

Do you have any type of timeframe we can expect to see some of these contracts flesh out, like this summer, later this year?

Those kinds of contracts, very big contracts -- the process until we receive the order is a long process. We are in a few clients or -- in certain clients, we are in the middle of the process. How long it will take is very difficult to say. We believe that in 2007, we will see the result of this contract.

What products? PipeGuard, DreamBox? What products are gaining the most traction?

These kind of projects, we integrate our product from one side and our command and control ability from the other side, meaning when we are talking about the comprehensive solution, we are supplying not all -- it depends on the client's need -- but many of a variety of our products on one side, the other side is our command and control systems. From the other side, we can connect to the command and control any other product which is needed in a certain project.

For example, there is sophisticated (indiscernible) -- for example, (indiscernible) [the access control], we have the ability to connect to our command and control FORTIS or DreamBox or MagNet or with the other command and control (indiscernible), with the ability to connect many other devices and products in order to supply the comprehensive (indiscernible) solution.

In the last year, I know that you've worked on some what I would guess would be called pilot projects. How are those going at this point?

In the past, we said about the potential pilot for the PipeGuard. Unfortunately, as Coby said in the last conference call, it was delayed -- we believe (indiscernible). It takes time. Meanwhile, same country, another order for the PipeGuard was received. We announced about it, a relatively small order for different use. But we see the penetration of this product into the market.

Are there any particular regions of the world -- Europe, the United States, Israel -- that you're seeing the most business? Or is it pretty much everywhere?

Absolutely. We see a big business, not just in the US and not just in Israel. Not deliberate now about names, but I can say that we are working in the whole continent. We are working in Europe, Eastern Europe, South America, Africa. All those countries have a big potential to our product or solution.

Speaking about the backlog, could you give us an idea how large backlog is, or how much it's grown year over year?

Yes. [Our positioning], we are not providing backlog figure, so [really it remains] the same situation.

As far as this next quarter, the first quarter, typically that's a slower time of year for you, for doing work on the perimeter fence in Israel. Do you see year-over-year growth in revenue and profits?

Traditionally, the first quarter is relatively weaker than the other quarters, and traditionally the fourth one is the strongest. But, regarding your last question, I didn't mention that our backlog in general, without any figures, is larger than in the past. I said at the beginning, I said that not the backlog, but because of the other contracts, a much [lighter] contract is much more clients, our backlog is now much -- is bigger.

Could you speak a little bit about the PipeGuard contract you did receive for the bank? Do you see that there's an avenue that you want to pursue with other banks?

Yes. We are now in a pilot stage, and we believe we are going to be finished -- it will be a continuation to this product in the same -- with the same client.

As far as the security fence sensors in Israel, I've read that there's talk about doing something along the Egyptian border. Do you see that business continuing to be a strong driver of revenue?

Yes. I see that you are very aware of what is going on in Israel. Yes, you are right. They are talking about the Egyptian border. We believe, as far as we know, that the concept will be very similar or the same, like other borders. But it takes time. The decision to order takes time, and allocation of budget. But at the end of the day, it will be. How long it will take -- let me say I don't believe it will be done this year. I believe this year to be decided about it. By the way, a small section already was installed by us along this border.

In previous calls, Coby had mentioned the -- I'm sorry. I just lost my train of thought.

With regards to the fourth quarter, is that product gaining some more traction?

FORTIS is a very, very interesting product. When I talked before, for example, about seeking to protect and be protected by the FORTIS, the FORTIS user at the base, the command and control platform, which enables us to deliver a project, like a (indiscernible) capital city is a project of around tens of millions of dollars. It depends what exactly they want, but at the end of the day, we are talking about a very big project, which FORTIS is the core and the heart of this project. We see the project as a very, very important product in our range of products.

In the past, Coby has mentioned that you may be able to tell us who your partners are, the large integrators. Are you at that point where you can tell us who you're working with in the United States and (technical difficulty)?

Coby is still with us and he came to answer now.

Now I'm very excited, because I have to keep quiet, and it's not easy for me, from those who know me, to keep quiet.

But before answering your question, I would like to take this opportunity and say goodbye to all my friends that are listening, because this would be the last conference call I will be participating. The young generation is taking over, and believe me, they are so much better than we are, the old codgers.

In any case, talking about the big integrators, yes, this is a strategic decision that was done by the Board. As I'm still the Chairman of the Board, I can talk for the Board. This was a strategic decision taken by the Board.

We are now, as a matter of fact, in negotiation with two European big integrators besides the American integrators that are still working with us. I believe next week or the week thereafter, they are coming to visit us over here, a big mission of one of the biggest integrators in the United States, to see the one who did not receive the job on this border, to see how we can really carry out more jobs together.

I believe, and the new CEO put it on his [flag], that relations with the big integrators is one of the most important things for the Company to go forward and develop its market and increase its revenue by far, and much quicker than by selling the products. So what you said and what I said begins as a strategic plan of this Company.

I wish you the very best, Coby, and thank you for putting this company in the position it is right now.

With regards to some of the opportunities in the United States, I know that you have been working trying to get some more business with Homeland Security. How is that, in general, going?

(Indiscernible) Homeland Security is not stopping to allocate the money and to fund the potential project. We are involved in many (indiscernible) big integrators. The name of the game is always security mainly with the big integrator and we are involved with them.

For example, regarding the Mexican border, we didn't succeed. We participated with Raytheon, which was the second-best, and Boeing was in this project. But there is many other opportunities that's real important; we hope to receive more orders in the future.

Once again, thank you, and congratulations on the solid turnaround.

Jeffrey Kessler, Lehman Brothers.

You have changed your going-to-market strategy a little bit, (indiscernible) direct, and to a lesser extent, to large project integrators. Now your focus is on the integrators. Has this affected your operating margin? Certainly, your revenues are fine. They could be better, but they are fine and year over year in the quarter.

The question isn't your operating margin. Has that been affected at all by the shift in the way you're going to market? Is that shift going to obviously hopefully result in higher operating margins, as these integrators take you on?

I have to answer you. Maybe this is the last question I will answer you. I will answer the question instead of the CEO, for you?

I will be tracking you again.

The margin so far on the comprehensive solutions are not too bad. This is not -- it does drop a little bit the margins, when we go out and continue to have the big projects. But of course, the revenues will grow much faster than that.

We became from a product-oriented company to more turnkey project, or I don't want to say integrated, because there are many things that the integrators are doing we don't do -- for example, building up a whole airport, including their runs and everything. We don't do this kind of thing. When we are doing a more comprehensive solution, we are talking about comprehensive solutions in the security business.

We do believe, and it can prove itself, that we're progressing and our revenues are coming up. The margins is correct. And going down, because whenever we had -- we used to have, years ago, about 45% gross margins. Our gross margins right now are about 40%, 41%. This is due to the project.

But the drop in the margins -- let's put it the other way. The increase in the revenue justifies, by far, the drop in the margins. So we are building ourself profit, and we believe that we'll be very successful in it.

Regionally, by regional sector, by geographic sector, are there areas where the margin dropped greater, which potentially you have a greater potential to pop back, because of the -- we'll call it the new mix shift in your business?

I can tell you that the region where our margins dropped maximal was in Israel, and this because of the MOD project that we're doing for them. I don't think that we did -- no place in the world we did in such a low margin that we did for the MOD in Israel. So all together, there's not -- all the others are paying the normal margins that are quite nice for us. The only place that it's -- when you ask what is the region that is the most, that is in FORTIS in Israel and the project that we did in Israel.

You have what we'll call several good reference sites for your command and control system for institutions and for towns in Israel. Have you been able to translate these smaller installations into indications of interest from other entities, other towns, either in Israel or outside of Israel?

We are doing install base for our command and control, not just down in Israel. Also, our DreamBox, for example we tested installation all over the world. In the US, by the way just a little. But in other countries we have many, not just in Israel, also the FORTIS is installed, for example, the airport in Romania and the FORTIS is operated there and in many other places all over the world. So we have very good references to our command and control and to our products and to our ability to provide a turnkey solution which is working very nice in many places all over the world, including Israel, of course.

The reason I'm asking the question is because it would appear to me that sale of FORTIS, with or without the DreamBox but an increase in the volume of FORTIS, particularly internationally, could improve your operating margins as well.

You are absolutely right, and as a matter of fact, that Izhar mentioned before, that we're now negotiating with a city in Europe to control and command the whole city. This is done based on the FORTIS. We are just has been received and sent -- we were requested to send somebody to a nation, which I will not mention the name, to make a survey how to use the FORTIS in so many towns and cities in this nation.

So you're absolutely right that the direction of the future of the FORTIS is tremendously and is very promising. And I do believe we will have to wait so long and we are waiting for the PipeGuard to get [you done] because already, by now, we have over 20 connections that are operating by the FORTIS.

I realize it's very frustrating waiting for governments and entities to make decisions on large ticket items. I guess the question I'm asking is, the timeframe that we might expect for more FORTIS announcements, given that it is a potentially high-profile as well as high-margin project for you -- so I guess I'm asking you, can you give us some idea of timing? I realize that's hazardous, because in the past, it's very hard to predict.

I do believe that in the year 2007, we will announce at least [few] projects that are based on the FORTIS in towns and other type of installations. So you will not have to wait too long. (Multiple speakers) over here to cash the check that will be in the hands of (indiscernible) to cash it. But I'm almost sure there are a few contracts that are underway, and they will be realized and they will be announced during the year 2007.

Just to be specific, the contracts you're talking about involve Europe, not just Israel?

No, no, I'm talking maybe a couple of places in Israel, but I'm talking about outside of Israel, mainly outside of Israel.

[One more while] you have to understand, we focus our efforts now -- not just now, our efforts, marketing efforts, out of Israel. Israel -- a very interesting and very challenging market, but our market effort is focused all over the world, outside of Israel.

Well, hopefully you can get some more business in the United States. (Multiple speakers).

[Robert Gordon].

The visit next week that Coby mentioned by the large American integrator -- is that strictly dealing with day-to-day operations of the products of Magal, or is this the beginning of merger talks?

Depends to which one I'm referring. In two cases, we are talking only about (indiscernible). In one case, we're talking about mergering. Or maybe not mergering, maybe acquiring. Maybe it would be an acquisition.

But it's in the stage of negotiation. As you know, that we're always open. We always say that we're open to any way of cooperation, whether it can be (indiscernible) a project or (indiscernible) on general or getting part of the Company or merge the Company, all that and many opportunities that can be done.

But if you want to know what we're doing right now, in one case, we're talking about an acquisition and in two cases we are talking about (indiscernible). Does this answer your question?

To a degree. Are you ruling out the possibility of merger talks with this company that's going to visit Israel?

You are talking about the American one?

Yes.

No. You know that anything [how we can] (indiscernible). There is the one that's coming over here is a multi-billion-dollar company, one of the five biggest integrators in the United States. I don't think that we would match.

The reason I bring it up, it's (multiple speakers).

He might have an idea to acquire, but I don't think he has any idea of merging us.

Well, they are interested enough to visit you in Israel. When you mention that, Coby, it struck me as a little strange that all of a sudden, after all these years of dealing with this company, they are going to come visit you in Israel. There's got to be some reason that they are going to make a personal visit to you. Is there some reason why they are going to personally visit you?

[Well, (indiscernible) they opened some new restaurant in Tel Aviv with very good food. That's also a good reason. But those people -- it's not the first time that they are visiting us. They have been here before, and we are on a -- I won't say [periodically based], but at least once or twice a year they are coming over here, and about once or twice a year we visit them in the United States, where we talk together and team up on the project and where we can team up and what things -- what the R&D directions and things like that. It's not something that is an extraordinary step for an American huge company to come and visit Magal.

Congratulations on the revenue increase; that was pretty good. I think the stockholders were a little concerned about the fact that the revenues have increased so nicely and the bottom line has seemed to shrink. I know that some of the prior callers mentioned it. I know Ms. Asher mentioned the fact that because of research and development, because of the product lines, that type of thing -- which is certainly very understandable that money has to be spent on R&D. What type of revenues are you going to have to attain in order to start to make a lot of money, bottom-line-wise? What is the revenue target where you can say, when we reach that number, we're going to start to show really good profits?

First of all, I share the feelings with you because I'm a big shareholder, as you know.

Of course.

I do believe that, as you say -- I'll come in a minute. I didn't forget what you asked. But it is the same for revenues, we can make so much more profit.

If you will look at our operation income, it's not so bad. I don't like it; it has to be about twice as much. But we do stand a good chance to increase it, because we're not going to increase by far the R&D. We are not going to increase at all or maybe a little bit the G&A. Of course, selling and marketing expenses will be increased, because this is a function of the sales. But we do believe that, the more we sell, and if we are working on a margin of 40% and if the operation expenses will not be increased in the same rate.

So very quickly, you can take a pencil and a calculator and you can see that if we increase, for the sake of argument -- for the sake of argument, if we increase by 10% the revenues, only by 10% the revenues, we will increase the profit or the income for the year, compared with (indiscernible) by 5 times.

So I do believe that there are some things in our favor. We didn't talk about [Smart]. Smart still contributed about $1 million of losses this year. This came from the first six months of operations till we make the whole [you made as much]. This is the Company that we had in the United States where we lost a lot of money. We cut down the losses, and the second half of the year, we almost lost nothing, which means this is only -- on its own, it's $1 million. $1 million is almost doubling the profit.

Exactly.

So I do believe, at least once not being a CEO anymore but looking more for the shareholders, because I have to look for my own pocket as well, I will say that the profit will be so much bigger, and dividends will be given to the shareholders. I hope it will be in the very near future, maybe in the year 2007 already.

Is there any projections or predictions? You mentioned 10% more revenues. We did a lot better than that this past year. What are your projections, based on backlog, based on expectations, in terms of increased revenues for 2007 over 2006? I know you always say that it's going to be better and better. Can you give us an idea? Is it going to be 15%, 30%?

(Indiscernible) you see I'm right. It's always better.

Correct.

So don't tell me not to say that, because I want to say that, because I want it to be right for the next day as well. But as you know, we don't give any predictions. We don't give any guidelines. I will not tell you whether it will be, but I'm almost sure that the year 2007 will be so much better than the year 2006, also in the growth rate, not only in numbers.

Because of everything you've said thus far, the bottom line is going to be that much better, hopefully, 2007.

As you said, hopefully.

Right, hopefully. The Seam Line -- we haven't heard any new contracts for a long time. Is that something that's going to happen soon?

It's going to happen. I cannot say when, but it's going to be, I think. Yes, you are right.

[Gary Matthau], Smith Barney.

To restart on the Smart issue, you said in the first half, the loss was $1 million, but in the second half it was breakeven. Should we anticipate that that's a trend, or that you have just taken it to a breakeven point, and it's going to stay flat? Is there another million to accrue in the first half or full year of 2007 from that business? (Multiple speakers).

No. As a matter of fact, if you remember, I explained the plans, how do we cut the losses, at the time. I'm not going to repeat the whole story from the beginning, but we don't expect a growth [as large]. We're keeping it on a low fire. We are collecting all of the investments of the equipment that are installed at the customer bases, which means from cash flow, we are much, much better and we have a positive cash flow in Smart.

From (indiscernible), if you ask me, the trend was, okay, so they made a loss. Now it's breakeven. Next year, it will be $1 million. The profit? No, it will not be like that. We will keep it plus/minus on -- shall we say, plus on the breakeven point.

All right. But at least it won't be a drain.

There will be no drain. On the contrary, we will collect all the moneys that are invested and the equipment that are leased with our customers.

Do you have an idea about how many water utilities are based in the United States?

Because I knew the number. I knew the number.

50, 200, 1,000?

15?

50. I would assume that every state has its own water utility.

No (multiple speakers).

-- multiple [lines]. What I'm aiming at is the water utility announcement you made in December in the United States for an East Coast water utility to protect the facility.

Yes, we announced about one -- what was the largest -- our DreamBox was purchased in order to protect -- this was a (indiscernible). I don't know how many, [several waters in a state]. For the next conference call, I'll find out, but --

There are thousands and thousands of reservoirs. You're talking about the utilities; I'm talking about the reservoirs. (Multiple speakers) many thousands of reservoirs. I didn't understand your question at the beginning. We have been asked to protect one of the reservoirs. It was a kind of a test plan (indiscernible). We hope we will get so many more.

Your press release on December 21st said that it was for a major water authority based on the East Coast.

That's correct.

And the order was placed by a nationwide system integrator.

That's correct.

My assumption is a nationwide system integrator should be getting lots of business from the entire United States. If there's one major water authority that wants to protect its facilities in the United States, it would put pressure on all of them, on some level, to be doing the same. Is that unreasonable to think?

First of all, your assumption is absolutely right. But what we did is, together with this integrator, it was a test site. Let's see what will be the results of the test because, for example, we are talking about the borders with Mexico. You know the deal today, the water [center] and they were talking about $2 billion, et cetera, et cetera. But (indiscernible) today. It was more [possibly] was allocated for a [test] (indiscernible).

So in America, things sometimes takes more time, not so much more than in Israel. But they take quite a long time from the day that you make the sale to the day they decided to move all the installations or protect all the installations.

How long did it take from the first inquiry to that announcement on December 21st for that order to come through?

About a year and a half.

Can you also give us some color on the Scotland hospital project?

Which one?

Scotland, in Scotland there is a hospital you're protecting?

Yes. We received an order for that hospital with the product. We announced about it -- Dominion Wireless. It's a company we acquired three years ago, something like that. It is a very nice order we have received from the Scotland hospital, a very good potential in the future for this kind of product. There are many other civilian [compasses], what we call a university or hospital or sites like that.

Because I'm certainly seeing that there are plenty of hospitals in the world.

Thousands of them. It is half over the world. Believe me, hospitals all over the world.

With regard to the announcement you just made on the Israeli military bases, what percentage of the military bases' potential did this particular order cover?

We announced about the Israeli bases that the Air Force bases is funded by an American funds -- [guns], by American guns, money. The potential for that specific kind of places is not a big potential. There is a little potential of many other places with what we call in Israeli money, what we call the shekel currency. There's a big potential, and we are one of three companies which is approved to protect an Army base in Israel.

If I'm hearing right, you said this is Air Force bases?

What we announced is about Air Force, yes. (Multiple speakers).

Because the only description was military; I don't recall reading "Air Force."

It is an Air Force base.

It is an Air Force, yes, it is an Air Force, yes.

Can you tell us what kind of traction you have gotten from the Washington D.C. office that you opened in the middle of November?

I don't know if you had a chance to read that?

I did not, unfortunately.

But I will suggest, whenever you can, when you will be in the neighborhood of Washington D.C., I would suggest to you to just to drop in and to see it. We have an outstanding nice demonstration room over there, and why -- I don't know, I don't know how many -- I know, but I don't know by hand. But every week, at least few dozens of potential clients are visiting it and discussing the things involved with running this operation.

This is one of the things of marketing. It's not selling, its marketing, where we introduce our product and bring them to the knowledge of so many people in the trade.

Now, I think it's a big success, because till now, [if I understand] the last report that I have received, was that over 300 people visited this demonstration unit, which is quite a lot. Let's not forget that most people from the streets are not getting there. It's only by appointment, and only people that really believe that they have a need of those products will come and see it.

That may be the most exciting thing you've said so far. Thank you very much for giving some color. That just tells us what your order pipeline could be, given the amount of traffic you're seeing. That's just in the last 60 days or so?

Yes.

Could you also give us a range of the potential orders that are out there? What is the single largest order potential, if it were to land, what it might mean?

The biggest, shall we say, negotiation or prospect that we have now is about the project of $50 million, single project. This is the biggest one. We are not looking for projects of $0.5 billion, because we don't compete with Raytheon or Motorola or other companies like that. The biggest we are negotiating right now is about about $50 million.

Thank you very much. (Multiple speakers). Keep up the good work. Coby, I have a request. As long as you are shareholder, would you please participate in these conference calls?

(Indiscernible).

I support your demand.

(OPERATOR INSTRUCTIONS). Ken Liddy, Wachovia Securities.

With regards to your backlog, is it that record levels at this point?

Relatively, our backlog -- the high point [possibly] to the past, the answer is yes.

Thanks again, and look forward to a very good year.

There are no further questions at this time. I will now turn over the call to Mr. Izhar Dekel, Magal's CEO, for his closing statements.

Ladies and gentlemen, from the management of Magal, I would like to thank you for your continued interest in our business. I am sure that during 2007, we will see very interesting things at Magal, and we'll continue to expand our revenues and [to grow] our profits. Next week, I will be meeting investors [in Europe], and look forward to meeting you and having the opportunity to both present and answer your questions. Thank you very much.

Thank you. This concludes Magal Security System's fourth-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.