Senstar Technologies Ltd (SNT) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems First Quarter 2007 Results Conference Call. (OPERATOR INSTRUCTIONS) I would like to remind everyone the forward looking statements for the respected 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 the 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 GK Investor Relations at 1.866.704.6710 or 972.3.607.4717. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you, Operator. Good day everyone, I would like to welcome you to the Magal first quarter results conference call and thank Magal's Major for hosting this call. With us on the call today are Mr. Izhar Dekel the CEO, Mrs. Raya Asher our VP Finance and CFO and Mr. Coby Even Ezra Chairman of the Board. Izhar will summarize the key highlights of the quarter followed by Raya who will review Magal's financial performance in the first quarter. We will then open the call for the question and answer session.

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

Thank you. Good day, everyone, welcome to our fourth quarter 2007 results conference call. I would like to thank you for your continued interest in Magal and for joining us on this call. The first quarter of 2007, which is traditionally our weakest quarter, was a good quarter for the company. We improved our financial performance, we signed new orders, we increased our position in certain markets and expanding to new geographical regions.

In further to the financial performance revenue reached $15 million, up 12% from the first quarter last year. Operating margin improved to 5%. As I said on the last conference call, our goal is to reach 11% operating margin. We continue to work hard to meet this target. All in all we showed good growth in the quarter and continue to work to meet our target for topline growth and increased profitability. Raya will elaborate about it later.

In further for the new ordinance, which is believed to be the most interesting point, we received many orders to our traditional new products. These are from current clients and some new clients all over the world. We received $1.3 million in orders [inaudible - highly accented language] from the State of [inaudible - highly accented language], a $6 million order from [inaudible-highly accented language]. These projects will [enable us] to improve both our Taut Wire Intrusion Detection System and FORTIS Integrated Command & Control Systems. $6.2 million of orders from two new international customers, the first is to supply security equipment for all facilities and include a Taut Wire system and the Command & Control, the second one is for [European border] and includes Wireless Central control by [inaudible - highly accented language]Command & Control basically. All the orders will be completed in 2007. We also hope to announce another contract with another top international customer in the near future.

During the second and third quarter of 2007, we expect to receive a single line order for Israel [inaudible - highly accented language] for the remaining same section of the [inaudible - highly accented language]Even though this order has been slightly delayed, we still expect to make the [inaudible - highly accented language]time table and finish the plan section of the [inaudible - highly accented language]by end of 2007. These contracts with new account customers in new markets will [inaudible - highly accented language]our strong position in the [IM] security space and the success of our long-term market leadership.

Regarding a few words about the new products we launched over the past two years. We continue to see increased interest in our new products. Since the installation of the FORTIS system in [inaudible - highly accented language]the crime rate dropped by 55%. This confirms the success of the system. We are now participating in three more [inaudible - highly accented language]for cities in Israel. We are also progress in advanced discussions with three other major international cities on three continents for the installation of the FORTIS system. The revenue potential for Magal we believe, if we win, is huge. We recently integrated the first intervention feature into the FORTIS system. This feature is gaining potential interest. It will enable the sophistication of potential prospect base and intelligence on an analytic [inaudible - highly accented language].

Turning now [inaudible - highly accented language],we presented a new product to the International Security Conference in Las Vegas. This product drew potential interest and drove the focal point in our group. The product is [inaudible - highly accented language]camera system, which enables the monitoring and [inaudible - highly accented language]This camera is integrated to the MSS-1500 system. The MSS-1500 system is an [inaudible - highly accented language]advanced mobile remote surveillance system for [inaudible - highly accented language]deployment. The camera and the system are already generating interest in several countries worldwide and already we have sold to new clients. Several orders are already in the pipeline for 2007. We believe that it will be one of our growth models in the future. [Most of Magal's] descriptions [inaudible - highly accented language]you can see on our website.

Another point I'd like to elaborate is the partnerships. Starting with [inaudible - highly accented language]growth strategy, we have been cooperating with various global [integrators] and third-parties to expand our market reach. We are currently in advanced discussions with an international large scale infrastructure company to be their security solution partner. We believe this partnership could be a growth driver in the years to come when delivering our [inaudible - highly accented language]to relevant markets.

Finally, we have been making some progress in our M&A strategy, which we think is one of our main growth drivers. We are in advanced stages of reviewing the possibility of acquiring a profitable company [XField] in the security area. We expect this international company will increase our presence in new markets in the region. We cannot elaborate further on this transaction, however, this possibility is an important step for the company. We will provide more details when we can. All in all many exciting and interesting things we are doing at Magal. We look forward to continue to grow while laying the necessary foundation for growth in years to come.

This time my review was quite longer than usual, but it is important to review our focus and trends while present and [consulting]as much as possible. Now I would like to turn over the call to Raya Asher, VP Finance and CFO, to review the first quarter 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. Revenues for the first quarter were $15 million, up 12% from $13.5 million in the first quarter of 2006. The breakdown of our Q1 revenues on a geographic basis is that Israel represented 30%, North America 25%, Europe 20% and the rest of the world 25%. The gross profit for the quarter was $6.5 million, up by 14% from $5.7 million in the first quarter last year. The gross margin for the quarter was 43.2% compared to 42.4% in the first quarter of last year. Operating income from the first quarter reached $745,000, a 55 increase from $479,000 in the first quarter of last year. The quarterly operating margin and [inaudible - highly accented language]was 5% compared to 3.6% in the first quarter last year, improving.

Operating expenses for the first quarter of 2007 reached $5.8 million, an increase of 10% compared to $5.2 million in the first quarter of last year. The operating expenses were affected by the substantial weakening of the US dollar, following an increase in the operating expenses that were denominated in other countries than the Europe dollar. The increase in R&D expenses, which reached 10% of revenue, included the heavy impact of the weakened US dollar and a steady investment in order to develop and introduce our new innovating security platform.

Financial expenses for the quarter totaled almost $300,000 compared to $154,000 in the first quarter of 2006. This includes part of the change in the company's function of currencies from the US dollar to the Shekel in the fourth quarter of 2006. As I explained in the previous conference call, the US dollar remains the company's important currency. Net income for the first quarter of 2007 was almost $300,000, or $0.03 per diluted share. This is an increase from $149,000 net income in the first quarter last year, or $0.01 per diluted share. Turning to the balance sheet, cash, securities and bank deposits as of March 31 were $30 million and I am pleased to announce that during the quarter we generated about $5 million from operating activities.

Now we would like to open the call to questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Mr. [Robert Gordon]. Please go ahead.

Good morning, everybody, how are you? I was curious about the statement concerning a potential partnership with the larger company. Can we get a further clarification of the work partnership? Would it be fair to say we're talking about a major acquisition or some other significant business combination? Partnership means that, going back to my old business law days, a partnership means that Mr. A and Mr. B join together as equals in the running of a business, it's a little hard to believe that Honeywell or Raytheon or some company like that would become a partner of Magal, but it's quite possible that somebody would acquire Magal. Can I have a further clarification and definition of exactly what you mean by the word partnership?

Yes certainly that is a good question because partnership is not only one way of working. The other partnership [where Magal] is a big integrator in another partnership with we're talking about what we said about this is a for profit company which the intention is that we will pick the security supplier and all aspects of security. The other kind of partnership is to cooperate for certain projects case by case, or in more ways than one working in partnership. The partnership I talked about in my opening is a comprehensive partnership with a very big infrastructure company where they want Magal to be their supplier of security. Besides that we are in negotiations, discussions talking with bigger companies, mainly integrated companies, which was to cooperate with us regarding supplying security solutions, not just the product.

As far as the bigger company that we're talking about, would Magal secure this relationship with a long-term contract, where this large integrator would not be able to get competitive bids from let's say another science and engineering or another competitor of yours? That they would be beholding and contractually obligated to Magal to always use Magal on all of their projects?

Also the answer is yes and no. There is more than one way to work in this way. In certain cases we are [in agreement] with only supplier for [the health] of partnership and in other cases maybe the client connects to more than one supplier. So it depends case by case, there's not only fixed rules, that's the way to work with the colleagues of the partnership. It is very, very flexible economic, Robert, and we are doing it all this way.

Can you give us some idea of how many projects they could get for you and the types of projects in terms of amounts? Are we talking like a $5 million project? Are we talking a $50 million project? Are we talking a $500 million project? Let's dream a little bit here, give us an idea of what you're projecting here.

Okay we are talking, on the big orders, about $10 million, one of them is the tens of millions of dollars, another one is a $5 million. But we're talking for Magal it's considered a big project. We are not talking about a project of $500 million, no. Nothing like half a million or a billion dollars. We're talking on a big security project which are fitted to our size and [inaudible - highly accented language] we will change our activity through this channel of activity.

Based on the past history of this particular integrator, do you have a ballpark figure as to how many of these projects you would get during the course of the year?

Okay at this stage we cannot provide any more accurate figures. When we have something to announce of course we will include and others know about it.

Can we be assured that end contracts through this integrator will be announced by Magal itself?

In the event of any connection to our activity and we will be part of this contract, of course we will announce about it.

Okay. Thank you.

Thank you very much.

Thank you. The next question is from Ken Liddy of Wachovia Securities. Please go ahead.

Good evening. With regards to this integrator, is it one large project or a partnership that you expect to be with this integrator for a number of years?

The partnership we are talking about we are talking to our bidders [inaudible - highly accented language] opening will build a relationship with such a client for a long term. For example, the company will take, I hope, to have any partnership agreement for long term all over the world. Of course unless both sides will be satisfied with each other, but the idea behind it is to create more work that we will be our security, or their [inaudible - highly accented language] security supplier with them.

Do you expect to have any type of announcement or determination if this partnership is going to be commenced in the next six months?

I believe so.

Okay. With regards to the fee line you mentioned that there is quite a bit more to be done, can you give us an approximate dollar amount of what there is left to be done on the fee line? Thanks.

Yes regarding the fee line, the potential, what would remain the fee line is around 150 kilometers. In money terms it's around $20 million dollars in the fee line. Besides that you have to remember that we have two other models to reach. Until now one of them, the total units Egyptian border along the desert and the other one is the [Goenhart]. The system there must be renewed, but nobody now knows when, but for sure it is not building new. All together the Egyptian border is around 150 kilometers and there is maybe 200 kilometers in the Goenhart about 100 150 kilometers.

Can you see potential for Magal to be used at the US border in any great measure at this point?

Yes we have talked a lot about it before regarding the project along the Mexican border and Canada. This project is included in both borders. Magal we believe, when they will decide what is the equipment, we believe Magal will take a part in it. And even though the [inaudible - highly accented language] are going, we participated in the job with Raytheon and Raytheon was the second best. The first one was Boeing won the project, but we believe that we have the right products. We believe we'll participate in that job in the future.

Great. Has your backlog grown since last conference call? It seems as if you've talked about as much, you announced bookings of close to what you had in revenue, has it actually grown?

We are not [inaudible - highly accented language] much about backlog, but I can say one word, during the quarter we announced about around $15 million order we received. And we announced only on the material orders we received our backlog increased but we not by anything significant.

So it's safe to assume that you're at record levels at this point in backlog?

No we are in a good position but we are not at record levels. We hope to be in the near future.

Do you have any type of time frame you can give us when you would expect some of these larger bids for the FORTIS system to be announced?

Well it will be relevant, we are providing as I mentioned.

For us a guidance, should we be expecting any type of announcement in the next 90 days? Or is that too soon?

90 days we have a new announcement, I don't know if for the cities, but we have a new announcement for the coming 90 days, yes.

Can you talk a little bit about the general environment? Are you seeing a lot more opportunities today than you were 12 months ago?

We see an interesting increase not just in our products but in our activity. We have much more new clients that haven't approached us before, new clients, new territory, new geographic territory, the new missions that in the past haven't worked with us. We are talking on a very big project for example, [inaudible - highly accented language], airports, an electric company in Europe, all aspects of oil field activity. So we see a growth in the interest in security solutions at all. I believe it's not only [inaudible - highly accented language]. What we can see from our side that I can say that we [dubbin], all of dubbin our contacts talking with new clients.

All right that's excellent. What other products besides FORTIS, or solutions, are seeing the most traction?

While FORTIS because FORTIS is a stand alone product. And FORTIS enables us to connect to the turnkey solutions, to the turnkey projects to connect many other features and technologies which we don't produce. For example the [radals], for example access control, for example now I said [inaudible - highly accented language] which is the new feature that we connect to our FORTIS. So in general if you are asking me about a product, I'd say the new product which is very attractive and has a lot of interest in the [telecamera] I explained before. [They only reach] camera around 1.5 kilometer, even above this, which can identify very easily people or something which is trying to penetrate the certain area.

I guess that's all my questions for now, thanks for your answers.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) We have a follow up question from Ken Liddy of Wachovia Securities. Please go ahead.

Hi, I was hoping that someone else could get in there. One last question I had was with regards to the acquisition you're working on. Do you expect that this company would be accretive to earnings right away for Magal?

Yes. The question is definitely yes and we expect it will contribute immediately to our results. Besides much more advantage it will give to us, it will also contribute immediately to our results.

I'm sorry, could you repeat that?

What I said, besides many other advantages this company, if, and I emphasize if, we acquire this company, it will bring us to new territory to new activities. Besides this it will contribute immediately to our results.

Excellent. Any type of time frame that we could expect this to commence if it is going to happen?

In a few months.

In a few months? Okay great. Well congratulations on the quarter and we look forward to another --.

Not during the quarter, maybe quarter after.

Okay great.

The third one, yes.

Okay well that's all of my questions then. Thanks very much.

Thank you. (OPERATOR INSTRUCTIONS) Thank you. There are no further questions at this point. Mr. Izhar Dekel, would you like to make a concluding statement?

Thank you very much, sorry for my scratchy voice, I hope to improve it for the next time. Ladies and gentlemen, on behalf of the management of Magal I would like to thank you for your continued interest in our business. I am sure that during 2007 you will see very interesting things at Magal and we will continue to expand our revenue and improve our profit. Should you have any additional questions please feel free to contact us. Thank you very much and good evening.

Thank you. This concludes Magal Security Systems First Quarter 2007 Results Conference Call. Thank you for your participation, you may go ahead and disconnect.