Senstar Technologies Ltd (SNT) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems Second Quarter 2007 results conference call. (OPERATOR INSTRUCTIONS)

I would like to remind everyone that 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 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 now like to hand over the call to Mr. Ehud Helft of G.K. Investor Relations. Mr. Helft, would you like to begin?

Thank you, Operator. Good morning, good afternoon to everybody. I would like to welcome all of you to the conference call and thank Magal's management for hosting this call today.

With us on the call are Mr. Izhar Dekel, the CEO; Mrs. Raya Asher, our V.P. Finance and CFO. Izhar will summarize the key highlights of the quarter, followed by Raya, who will review Magal's financial performance in the second quarter. We will then open the call for question-and-answer session.

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

Thank you, Ehud. Good day, everybody, and welcome to our second quarter and first six months 2007 results conference call. I would like to thank you for your continued interest in Magal and for joining us on this call.

Before we begin, I understand that the sound quality in the recent earnings calls has been very poor, and I apologize for that. We have now changed our conferencing equipment and hope that the quality of sound is improved.

And now to the quarter -- this quarter, we presented strong increase in profitability. Operating income for the quarter increased 18%, and net income increased 27%. Both compare to the second quarter of last year. We also presented increased profit margin with gross margin for the quarter reaching 44.1% and operating margin reaching 5.1%. Revenues this quarter remain flat compared to the last year, totaling $14.9 million. This mainly follows the delay of several orders expected in the second quarter, including a delay in a [single] order from Israel minister of defense for the remaining section. Even though this order has been slightly delayed, we still expect to receive the order in the second half of 2007.

Altogether, we are pleased with our financial performance, and especially the increase in profitability this quarter.

We've ended the second quarter with a healthy backlog, and together with several additional orders in the pipelines, we expect the next six months to be stronger than the first six months of the year, which is traditionally [the results.]

When we look ahead, we continue to focus Magal growth strategy on three core elements. During the quarter, we made substantial progress in all three areas, laying the foundation for future goals and opportunities.

The first is participation in projects, both directly and through strategic team agreement. The second is increasing marketing activities in new geographic area. The third one is acquisition complementary activities. I will now elaborate briefly on each element.

Regarding the terms of projects -- during the quarter, we signed an agreement with an international large-scale infrastructure company to be their security solution partner. We believe this kind of partnership will serve as a major growth driver in years to come, increasing our access to new markets. We hope to receive an order by the end of the year. In addition, we are currently in the crunch stages of discussion on several major projects, which, we hope, will materialize in the near future.

In terms of expanding marketing efforts into new geographical areas -- during the quarter, we established a marketing office in Brazil. This partnership will enable us to further expand our operation to one of our key strategic markets, South America. This partnership will provide us with a local base within South America.

Finally, in terms of our M&A. We continue to hold discussion to acquire a profitable international company active in security area mentioned last quarter. We expect to complete this acquisition in the second half of 2007. The company is expected to immediately contribute to our financial performance. We will provide more details when we can.

All in all, many interesting things are happening at Magal. It is our view that the steps taken in recent quarters, including forming new partnerships, expanding to new regions and identifying potential acquisition targets will serve as major growth drivers for the quarter to come. We believe these steps will begin to bear fruit in the second half of 2007 and even more in 2008.

Now, I would like to turn over the call to Raya Asher, V.P. Finance and CFO, to review the first quarter financial results.

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 second quarter were $14.9 million, similar to the second quarter of last year, and slightly below the $16.1 million in the first quarter 2007. Revenues for the six months totaled $30 million, a 6% increase, compared to $28.3 million in the same period last year.

Let me now provide you with the breakdown of our revenues on a geographic basis for the six months. Israel represented 26%, North America, 25%, Europe 33% and the rest of the world 16%. Gross profit from the quarter was $6.6 million, up by 6% from $6.2 million, and as compared to $6.5 million in the first quarter of 2007. Gross margin for the second quarter was improved to 44.1%, a substantial increase compared to 41.8% in the second quarter of 2006, and higher than the 43.2% in the first quarter of 2007. The increase in gross margin was as a result of the change in the revenue mix this quarter.

Operating income from the second quarter reached $761,000 or 5.1% of revenue, up 18% from $645,000 or 4.3% of revenue in the second quarter of 2006. Operating income for the first quarter of 2007 totaled $745,000 or 5% of revenue. Operating income for the six months was $1.5 million or 5% operating margin, which is up 34% compared to $1.1 million, or 4% operating margin in the same quarter last year. Net income for the second quarter of 2007 was $342,000, up 27% compared to $269,000 in the second quarter last year, and up by 15% compared to almost $300,000 in the first quarter of 2007.

Earnings per diluted share were $0.03 in both the second quarter of 2006 and 2007 and in the first quarter of 2007. Diluted earnings per share from the six months period was $0.06 compared to $0.04 in the same period of last year.

Turning to the balance sheet -- cash, cash equivalents, marketable securities and bank deposits as of June 30th were almost $30 million. During the six-month period, we generated approximately $2 million cash from operating activities positive.

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

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS)

The first question is from Jeff Kessler of Lehman Brothers. Please go ahead.

Thank you. The pre-tax numbers are actually very, very good. And the question is why -- first question, why did the tax rate rise into the 40s, 45%, compared to the year-ago tax rate was 28%? Is one of the tax rates too high? Is one too low? And what do you consider to be, going forward, your normalized tax rate to be?

I will answer.

Okay, Raya, please.

Two main factors influencing the effective tax rate. The first one is permanent differences between the accounting income before tax and the taxable income.

The second one is the mixture of the income before tax of our entities and the different tax rate at each country. In addition, in some regions, we record evaluation allowance for the deferred tax, which increases the effective tax rate. The effective tax is fluctuating between the quarters, although in the first six months of 2006, the effective tax rate was about 36%. But let me remind you that we ended 2006, the full year, in 50% effective.

So we believe that between 35% and 40% for 2007 effective tax rate is reasonable to estimate.

Okay, thank you. Could you elaborate a little bit? You've talked a bit about in general about some of the projects that you believe have either been pushed into or maybe awarded to you in the second half of 2007. I'm wondering if you could get just a little more detailed about the nature of those projects.

Hello, Jeff. How are you?

I'm doing fine. How are you?

Thank you. As you probably know, for the last few years, we are entering more and more toward projects, parallel to the products. But our focus now is more in the project -- on comprehensive projects and even sophisticated projects. We are working mainly on projects with refineries, borders, ports, and others like this. For the coming six months, we believe we'll have projects, a comprehensive project like that in a certain country, sometimes in the countries that we haven't worked before. That's the reason that, for the time being, (inaudible) I can provide when we'll have more details to provide on that.

Okay. Just a follow-up to that -- a couple of companies that I've spoken to -- integrators in the United States and in Europe -- have talked about high demand for command and control systems related to both commercial campuses as well as larger areas. And I'm wondering if you've began to see any real revenue growth that has began to either -- that we're going to be able to move the meter, so to speak, or begin to really affect numbers in 2008 with FORTIS or any related command and control system that you're selling.

The command and control business become more and more important security market. For that purpose, we developed FORTIS, which we presented one and a half, two years ago. FORTIS become very strong, very important player now, with the ability to provide projects. We see now more and more interest in that kind of command and control. And we are involved in tenders and negotiations with a few projects with FORTIS because of the abilities, or the features, unique features become more and more important.

We believe that, in the near future, we earn substantial revenues from that product and not from that product as standalone. That product is connected to the whole project. And we installed until now between 50 to 60 units of that system all over the world. Just in Israel, we installed around 25 of that kind of systems.

Okay. So what you're saying is that -- is it fair to assume that there is going to be an uptick or an increase in project revenue with FORTIS as a component of that over the next six months or over the next 12 months? What is the sale cycle, what is the waiting period that we can expect to start seeing some of this coming through?

I believe also in the coming six months -- and I said before about 2008 -- we believe that the higher increase in project revenues we'll see in 2008. But FORTIS is only one component of that project and the heart, the core of that business. The FORTIS, and not just the FORTIS, command and control at all, including the MagNet or even the DreamBox, our other products, command and control products.

Okay. Thank you very much.

Thank you, Jeff.

The next call is from Robert Gordon of Robert Gordon & Associates. Please go ahead.

Hello. Congratulations on a good quarter. You mentioned this briefly this new partnership that you have in Brazil. The announcement that came out June 13 states that Magal expands operations in Brazil through a new strategic partnership. Now, is that partnership with an integrator, did you say? Or is that with the government?

Regarding Brazil, we established in Brazil a marketing office. The marketing office with a technical ability to expand our presence in that market. That's what we did in Brazil. We started now with a small office. We're going to increase it. We have more and more leads to that market. We believe Brazil is a crucial market, big market, in South America. There is a lot of projects there, and a big project, sophisticated project, which is very fit to our activity, which is very fit to Magal products. That we are doing in Brazil. We increase our presence in South America market. We have one office, marketing office in Mexico. Now, we added -- following the success in Mexico, we added another one in Brazil. And we believe it will increase between -- we'll stretch our position there in that market.

Do you have any contracts there yet?

Not yet. There are negotiations. And I believe, in the very near future, we'll have a contract there. And as I said before, and that I'm saying always, when something will happen, we will announce about it.

All right. Can you tell us what the reason was that you opened this office? I know that it's to do more business in Brazil, obviously. Is there something that was a draw to the company? Was there some sort of promises made by the government or an integrator down there that you would be the security people for the projects? There had to be something that drew the company into Brazil, other than general feeling that there was a big market down there? Because you could have opened an office there five years ago. So there's got to be something that happened that caused you to open up this office to make this (technical difficulty). You've got a new strategic partnership. It's got to be a partnership with somebody.

Can you tell us a little bit about that? I know that you may not want to reveal too much. But there's got to be somebody on the other end of this field that's your partner that's making some promises to you to get you to open this office.

That was a very good question. This decision where and when and how to open an office in a certain territory, it is a question that we consider a lot before we are doing that. The reason to open an office in a certain area, in certain territory, is if there is a market, there is a need to our products or to our activity. And when we come to conclusion that there is a market, there is a demand to our products, and we have the right foundation, the right chances to achieve results in that area, then we open an office.

We have a connection. We have a good connection and a potential client in Brazil territory. And we believe that when we open the office in Brazil, it will not serve only Brazil, also other countries around. And we are working [about] South America in general. We have a very successful office in Mexico. And now we hope to build something similar in Brazil.

You've mentioned Mexico a couple of times. I know they've been having a lot of problems with their pipelines. Has Magal been called in at all as a consultant on any project to safeguard Mexican pipelines from the type of terrorism that they've recently experienced?

Mexico, we have a very successful office. We are working there. For many years, we are active. And we achieve very nice results. Regarding the pipeline in Mexico, they have a problem with their pipes, many oil pipes. And we are in market and we have an offer. And we are in contact with relevant client to our product.

So it's possible that Magal will be hired directly or indirectly to help safeguard the pipelines of Mexico?

Yes. It is possible.

Okay, very good. That's great news, because that would be a huge project.

You mentioned last time about doing a lot more business in the U.S. Maybe it was the U.S. I could be wrong about that. But you were going to do business with a large integrator, that you had a new partnership with a large integrator. I think you alluded to that in the conference call today. Has that partnership yielded any fruit at this point? I mean, do you have any good deals or big deals you can tell us about?

Regarding the partnership with a big integrator in the U.S., we said [at the part] that we submitted an offer to the Mexican border with Raytheon. After that, we're doing a partnership with - we did a partnership with corporate - with Lockheed Martin, and any potential project which, at the end of the day, we didn't meet. We are (inaudible) with negotiations or with talking model negotiation with the big, giant integrator companies in the U.S. regarding working together not just in the U.S., but also other parts of the world. Until now, not any significant results. But we believe that, in the future, we'll cooperate and the results will come.

Okay. You also mentioned the Seam Line. Is that a financial holdup? Or is that a political holdup? Why have you not been able to announce an agreement on that?

We don't know exactly the reason. To my opinion, the reason are mainly bureaucracy issues. We 100% believe it will be solved in the near future regarding the [information].

What are we talking about here? Is it about $20 million?

All remaining sections of the Seam Line, it's about 250 kilometers, 250 kilometers. We are talking on the electronic part, something between $25 million to $30 million. We are doing about 80% of that job. We believe that in 2007, our part will be between $5 million to $7 million.

And the rest would be in 2008.

And the rest will be in 2008, yes.

Okay. Now, was there not supposed to be other big contracts in Israel, with fencing and security along the Egyptian border? I know that there was some comment made by an Israeli military person not too long ago that they were going to put in some extravagant, expensive fence -- hundreds of millions of dollars. Is there any truth to that? Can you tell us anything about that?

In Israel, there are two relevant borders on the agenda today. One is the Syrian border, and the other one which is more relevant is the Egyptian border. Both borders -- along the Syrian border, there is an electronic fence, but very old one. And I believe it will be replaced in one year or two years or three years or four. It will be replaced. The Egyptian border is open without an electronic fence. We are involved. We know that they are talking about that border. But in that stage, I cannot add more about it.

Okay. One last question, a general question -- it's no secret that there's a lot of political turmoil in Israel concerning the present government and that, in all likelihood, this government is going to fall and that there will be new elections in not too distant future. How do you feel about that? Are you getting a lot more business from Mr. Olmert's government?

Look, I don't see any direct connection or any interaction between if there is a government from that side, political side or the other side. In general, the needs in our products is exist not matter which government are served.

Okay. Thank you.

Thank you very much.

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

Good evening. As far as your forecast of improvement upon the second half of fiscal year 2007, in your statement, you mentioned it's based off of the strong backlog. Do you mean to say that even if some of these projects don't come to fruition, you still feel that revenue and earnings will be better than 2007 for the second half of the year?

When I am saying that the second year will be better, I took into consideration what is our backlog, what orders expected to be received. And I calculated it when I said it.

I did not hear your opening statement. I was away. I just want to clarify, is there any update on the acquisition that you were pursuing that you mentioned in the last conference call?

I don't understand. You didn't hear me, or you couldn't understand me -- my voice? What was your --

Oh, no, no. I couldn't get onto the call. Really, nothing to do with you.

No, just to know, just what I said (inaudible - highly accented language).

We continue to hold discussions to acquire the profitable international company active in the security area mentioned last quarter. We expect to complete this acquisition in the second half 2007. The company is expected to immediately contribute to our financial performance. We'll provide more details when we can.

As far as from some of this business that you were expecting to see this past quarter, if not sooner, do you feel there's a strong likelihood that we'll see a substantial amount of this business in the next three to four months?

I already said a few words about the delayed orders. And we expected the gap will be breached in the coming six months.

I'm just curious that you're very confident that you're going to be getting -- what type of numbers in general were you thinking about -- a few million, or $10 million, $20 million?

A few million will delay. And it is important to mention that traditionally, and I said it before, the second quarter -- the second half of the year is better than the first one.

I'm sorry. I missed that last point.

The second six months is traditionally better than the first six months.

Oh, yes. And is there specific products? Are you still - are you very confident on some of these FORTIS orders coming to fruition? Or are you more so leaning towards some of the - something with the Israeli government and the Seam Line fence?

We are mainly focusing on orders, which all our orders are important.

So you think there's a likelihood that we'll see from a wide array of products and customers.

Yes. I believe so. We increase our, also, range of products to be sold. Yes.

As far as gaining a better footing with Wall Street, do you feel that you have made any type of inroads as far as getting some institutional interest in the company again?

We are an ongoing business. We have a meeting with investors. And we expose our activity to the investors. And we are doing it all for the time.

Do you have any interest in getting a major brokerage firm to establish coverage?

When we are meeting one of our meetings with analysts, out of them I'll say we are too small to be covered. The [objective] today, there's not going to be any coverage (inaudible) into our company.

Okay. Well, we look forward to a strong second half.

Thank you.

(OPERATOR INSTRUCTIONS)

The next question is from Beverly Machtinger of Grace & White. Please go ahead.

Hi. Yes. I was wondering if you could update us a little but on Smart, because I know it's really been a drain more than a help on earnings. And I was wondering if you could just give us some idea of where the profitability is and what the future of that segment is.

Smart -- as you know, we -- the company suffered a loss for Smart until the last year. Now Smart are break even. We are improved in decisions. And we improved the activity. Now Smart can even generate positive cash from the operating -- from ongoing business.

Thank you.

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

Ladies and gentlemen, on behalf of the management of Magal, I would like to thank you for your continued interest in our business. Thank you very much.

Thank you. This concludes Magal Security Systems Second Quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.