Senstar Technologies Ltd (SNT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems third quarter 2007 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, November 5, 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 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 GK Investor Relations. Mr. Helft, would you like to begin?

Thank you, Operator. I would like to welcome all of you to Magal's third quarter results conference call and thank Magal's management for hosting this call.

With us on the line today are Mr. Izhar Dekel, the CEO, Mrs. Raya Asher, 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 third quarter. We will then open the call to the question and answer session.

Please also note that the results presented today include results that are both on a GAAP basis and a non-GAAP basis, given that there are a number of one-time charges this quarter. A full reconciliation table of the non-GAAP measures to GAAP measures can be found in the Company's press release issued earlier today.

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

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

This has been a very interesting and challenging quarter. We have continued to generate revenue growth in new orders, while continuing to execute on our three core growth drivers. The first one is acquisition activity. I will elaborate later. The second is increasing the marketing activities in new geographic areas and participating in more and more tenders in new regions worldwide. The third is involvement in larger integration projects regarding the acquisitions we've accomplished this quarter.

We have completed major milestones in the Company's expansion strategy and acquired a European integration company. The acquisition was completed in August and has contributed [very much] to our results this quarter. Magal has a strong track record of post-merger integration, and we expect this acquisition to be successful in contributing and driving our business in quarters and years to come.

This acquisition is in line with our strategic focus and vision, meaning it will strengthen our position in full integration projects. This is visible in our day-to-day business, as we participate in more and more tenders for security integration projects in different places, and in new regions in the world where we had limited presence in the past.

This quarter we also executed on our second growth driver, expanding our participation in tenders for projects. We announced about several orders, which include our innovative video solutions DreamBox and FORTIS. Regarding the FORTIS, I am pleased to say that the system now has more than 40 installations among the 20 cities in Israel and 10 installations throughout Europe, with more and more demand to that kind of solution.

We recently announced that an order has been removed from our backlog. While this is unfortunate, I would like to note that no expense has been incurred on account of this transaction. We believe that this customer will do business with us in the future.

Regarding increasing marketing activities in new geographic areas, this quarter we intensified our efforts to target integration projects worldwide with many of the tenders we are currently targeting, including the range of our products. We are looking forward to announce some of them in coming months.

Now, to the quarter. This was a strong quarter in terms of organic growth and continued order generation, ending the quarter with a higher backlog than last quarter. Revenues for the quarter include strong revenue generation from North America customers. This quarter [also had] several one-time events, which pushed down margin, driving us to [present] a net loss.

The first interesting factor was an order of several million dollars for a prestigious site for the Israeli government. We believe that stressing our presence with this particular client will benefit us in the future, and is in line with our long-term vision. The order is at a very low gross margin and as such affected throughout our financial statement, driving down the margin (inaudible).

The second factor was several one-time exceptional charges recorded this quarter, which Raya will elaborate on in a few moments. These charges altogether had a negative impact of roughly $1.5m on our results.

Looking ahead, we continue to execute on our three main growth drivers and levering our recent acquisition, intend to further grow and expand our presence to new geographies and regions with our broad solution offering. As noted, we ended the third quarter with a higher backlog compared to the last quarter and, together with several additional orders in the pipeline, we expect 2007 to be another year of growth over 2006 in terms of revenues, and when excluding the one-time charges also in terms of profit.

Now, I would like to turn over the call to Raya Asher, [therefore], to review the first (sic) 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.

Before I begin, I would like to point out that this quarter our results were affected by a few one-time charges, which are not indicative of our ongoing performance and goals. As [our document] states, we will relate to both GAAP and non-GAAP figures, which exclude these charges.

The non-GAAP financial measures exclude the effect of one-time post-employment benefit charge relating to our retiring Chairman, and the provision for final tax assessments for prior years. We believe that non-GAAP financial measures are the principal indicators of the operating and financial performance of our business. These eliminated charges are not part of the day-to-day business or reflective of core operational activities of the Company. Management uses these non-GAAP financial measures as a basis for strategic decisions, forecasting future results and evaluating our performance. A full reconciliation between our GAAP and non-GAAP results is available in our earnings release published earlier.

In addition to these charges, this quarter we also suffered from the substantial weakening of the U.S. dollar against two of our main currencies, the Israeli shekel and the Canadian dollar.

Let me also remind you that the third quarter results include the consolidation of our recently acquired European company as of September 1.

Revenue for the third quarter was $21.9m, a substantial 35% increase over the third quarter last year and 46% higher than the second quarter of this year. Revenues for nine months totaled $51.9m, which is a 17% increase compared to $44.5m in the same period last year.

Let me now provide you with the breakdown of our revenues on a geographic basis for the nine months. Israel represented 21%, North America 26%, Europe 24% and the rest of the world 30%.

Gross profit for the quarter was $7.9m, up by 15% from $6.9m and up by 20% compared to $6.6m in the second quarter of 2007.

Gross margin for the third quarter was 36.1%, compared with 42.6% in the third quarter of 2006 and 44.1% in the second quarter of 2007. This lower gross margin was the result of the special and prestigious project for the Israeli government which bears a low margin, as Izhar explained earlier.

Operating expenses for the third quarter include a one-time charge under G&A in the amount of $960,000 and relates to contractual post-employment benefits for the Company's Chairman, who will retire at the end of the fourth quarter of 2007.

Operating income, including that charge, was $95,000. Operating income on a non-GAAP basis, which excludes this charge, totaled $1.1m compared to $1.2m operating income in the third quarter of 2006, a 39% sequential increase over the $761,000 operating income in the second quarter of 2007.

Operating margin for the quarter, excluding the one-time benefit charge, totaled 4.8%, compared to 7.6% in the third quarter last year and 5.1% in the second quarter. As noted, the margin was affected by the low-margin order to the Israeli government.

Operating income for the nine months, excluding the charge, was $2.6m or 4.9% operating margin, up 9% compared to $2.4m or 5.3% operating margin in the same period last year. Operating income for the nine months, including the one-time benefit charge this quarter, totaled $1.6m.

Financial expenses for the third quarter totaled $981,000, which includes approximately $700,000 of currency exchange losses due to the weakening of the U.S. dollar by approximately 6% against each of the new Israeli shekel and the Canadian dollar. Compared to the third quarter last year, by comparison, in the third quarter last year financial expenses totaled $260,000.

Taxes on income for the third quarter of 2007 totaled $749,000, and included a tax provision for final tax assessments in the amount of $0.5m relating to the years 2001 to 2004. Net results for the quarter were therefore affected by the one-time compensation benefit as well as the tax provisions, causing us to present a net loss of $1.6m.

Non-GAAP net loss, excluding the one-time benefit charge and tax provision, totaled $367,000. The non-GAAP net loss still includes the impact of the weaker dollar, which increased our financial expenses by approximately $700,000, compared to $623,000 net income in the third quarter of 2006 and a net income of $342,000 in the previous quarter. Diluted loss per share was $0.16 compared to diluted earnings per share of $0.06 in the third quarter last year.

Net loss for the nine months, including the one-time charges in the third quarter, totaled $1m compared to a $1m net income in 2006. Diluted loss per share for the nine months totaled $0.10, compared with diluted earnings per share of $0.10 last year.

Turning to the balance sheet, cash, cash equivalents, marketable securities and bank deposits as of September 30 were $27.2m.

And now I would like to open the call to questions. Operator?

Thank you, ma'am. (OPERATOR INSTRUCTIONS). The first question is from Gary Markoff from Smith and Barney.

Good morning, everybody. Could you break down the annualized number of the acquisition? You said that there was one month that contributed to the third quarter. What would the annualized number be? Or what was the number you contributed?

Hello, Gary. Good morning. How are you?

Good.

You know, regarding the breakdown of the acquisitions, we normally are not providing any details of a breakdown of any certain activity of the acquisition, in general. But I can say that it contributed a few millions to the third quarter revenue and we believe that the main contribution will be 2008/2009.

Does their quarter come in smoothly over the quarter, month to month to month, or is it back-end loaded? I am just trying to calibrate here. You are saying a few million. I am going to define it as three, or you would have said it was a couple. If you say it's a few million, that leads you to the potential that it's in the range of $9m a quarter. That would be an enormous contribution to the Company.

It's very difficult now to judge it as a linear contribution. We will say [out] in advance, but what I can -- what I told you, how much about it's going to be this quarter, and we believe it will make a much more -- will be contributed in 2008/2009. And as I said, and say again, it's very difficult to estimate now how it will be developed (inaudible) quarters.

And the normal profit margin for this company, the acquired company, versus what MAGS has been doing historically, the gross margin?

Yes. The gross margin in this company historically is similar to our normal gross margin with our financial statement, maybe a little bit less because it is more an integration company but it's about the same.

Well, that could be huge then. Okay. You made a comment that the order that was removed from backlog announced last week, that you will do business with -- they will do business with us in the future. Does that mean that particular order, or the entity that was going to do business will do some other business? It was very unclear what the designation of the not duly authorized meant, the specific order. Could you give us some clarification there?

We are talking about other orders, other business with the same client.

Okay. So you are saying that the order for $8m is not likely to come back with additional signatures to become duly authorized?

That order is not now on the agenda.

Could you give us any other additional information about what happened?

In the later stage it was found out not an appropriate -- from the client side -- it was not an appropriate way of authorization. In the company that is the reason why we took it off.

Okay. Could you talk a little bit about what's in the pipeline?

PipeGuard or pipeline?

In the pipeline. You can talk about PipeGuard if you wish.

Regarding PipeGuard, (inaudible) not any new advance, which might be interesting. Regarding the pipeline, I said that the backlog today is better than the backlog last quarter we had, meaning we improved our backlog.

Can you give us some line of sight in terms of what may or may not be on the horizon with regard to PipeGuard projects?

Regarding the PipeGuard, we are still in negotiation with a few big oil companies to test it, to install it. But we think it takes much longer than it should. We are under -- we are in the negotiation process with three different oil companies, big oil companies all over the world but it takes more time than we expected.

Okay. Could you tell us anything about the special project you did for Israel that showed up in this quarter?

A little bit about it. It was a very, very important project for us. To have received -- we --- it was [tender] decided -- the management decided to enter to this project in a very low margin because we see the potential. We see the importance to be in connection with that particular client and that's the reason we decided to take this project even though the margin is so low.

Okay. Do you expect to do any additional ones based on this --- that particular order?

I hope so but not in the same margin, not the same margin. (Multiple speakers) sorry. That margin was a penetrating project which was very important for us from a strategic point of view, and that's the reason why we decided so.

Okay. Could you give us any update on what's happened with Smart?

Smart, (inaudible)[question always] positive. From a profit point of view, we are about breakeven, some very small loss and we continue to continue the sales (inaudible). They are interesting for investors to buy that activity and we will see what it will be.

Okay. And could you go back and review what you said on FORTIS? I wrote down that you said you are now in 20 cities. That doesn't seem logical, to me, that you would be up to that number. What did I miss?

I said it was 40 installations of FORTIS, which amounted 20 cities in Israel now is protected with that system.

20 cities in Israel have FORTIS?

Sorry?

20 cities in Israel have FORTIS?

Yes. 20 cities in Israel is protected with it. [Generally speaking], part of them are big installations, part of them are small towns. It's not really (inaudible) of cities. And we continue to expand our activity with that system. There is a big demand. There is a strong demand to that system of command and control in many -- it's application is very, very wide to that system.

And what's happening on the international front with regard to FORTIS? You had made some comments of a potentially large order in Europe or Eastern Europe.

I said also that in Europe we have about 10 installations in Europe. It's just a system that, for example, in one of the -- in the airport in Bucharest and the other one is in Italy on --- with an oil company, and others in East Europe and West Europe. And the people [of] the clients are very, very pleased with that system.

And last question, then I will jump back into queue. There was some article recently talking about MAGS protecting the U.S. water supply in various areas. Could you update us on that?

We released, six months ago, something like that, one announcement about (inaudible) which is protected by our system. Meanwhile, there are no -- there's a big potential for that, but meanwhile there are not any new installations with that client.

Okay. Thanks a lot.

Thank you very much. Have a nice day.

Thank you, sir. The next question is from Mark Diker from Diker Management. Mark, go ahead.

Hi, good morning. On the acquisition, I want to go back, the line of questioning from the prior caller, trying to get a sense of the magnitude. And I know you talk about '08 and '09 that you will see the real effects of it. Can you give us a little bit more clarity on the annualized run rate, or is it a very lumpy business and that's why you are not able to do that? I mean is it -- of the $7m to $10m? Should we expect $7m to $10m of incremental revenue? Should we expect $1m to $5m, $1m to $4m over the course of the next 12 months?

Good morning. How are you?

Fine, thank you.

You know, [we] are not providing the figures breakdown regarding certain activity. What I can tell and what I told the caller before, we expect that acquisition will contribute meaningfully to our activity in 2008/2009. It is very difficult now to estimate exactly by how much. But when we acquired this company, we made our calculations very carefully and we came to the conclusion it will contribute, as I said before, it will contribute not that much, [so not immaterial] but meaningful to our revenue in the coming years (inaudible).

I would imagine meaningful would mean north of 20%. Is that fair?

You are always pulling me to a percentage.

Well, I am just trying to understand that magnitude, I mean meaningful.

No, less.

Less than 20%. Okay. Thanks. That's helpful. And then, in terms of strategy going forward, we've seen you working with a lot of system integrators and oftentimes, when they are taking multiple bids, customer, defense agency, or what not is taking multiple bids from different system integrators. You are kind of a -- the perimeter fencing or the technology of choice for your category, and you are part of every bit. Now you make an acquisition where you actually essentially owning one of the integrators.

The first question, I guess, does that -- could that potentially create a conflict when you are trying to supply to maybe other competing bids and bidders in a situation? And what is the strategy of the Company going forward, to make more of these types of acquisitions or was this just a one-off?

I will start with the second question. In general, yes, one of our strategies is to acquire more companies in our business. Regarding the first question, the point you raised, the risk of conflict between product producer and integration company, it might exist but not in that case. In that case, the [acquired] company -- integration company which is still in an area which you don't see such a conflict like that can be [exist]. And because of that, I don't see that risk of conflict between the integration and the product activity.

Okay. So you say acquire more companies in our business. I wouldn't say your business is a technology provider, not necessarily a system integrator, you acquired a system. It seems, from my understanding, you acquired a system integrator. That helps you deploy your products. Do you expect to acquire more integrator types like this?

We are looking for companies, also products and also some integration companies, and [prepared] in which area and what exactly type of integration company. With that acquisition, we also can increase our products to be sold to certain integration companies.

Okay. And did you - and maybe I missed it - did you state what you paid for the company and whether it was cash or stock?

We paid $6.8m in cash.

And is there an earnout?

Yes. There is an earnout, yes.

How big is the earnout?

50%.

15% of future revenues?

Yes. 50 -- five zero (inaudible).

Profits, not in revenues?

Yes.

For two years?

Five.

Okay. And then, in terms of we talked about the pipeline, can you talk specifically about the U.S.? And for the past couple of years we've been talking about the low amount of penetration in perimeter security around airports and other types of installations, but specifically airports and we've talked about ports as well. And then we've been waiting for funds to be released from the government to either local governments or national governments to fund those. Are we starting to see more RFPs and more activity in that front or is it still not happening?

Regarding airports, as far as we know, all the airports now, not all, but we don't measure activities regarding perimeter security at airports all over the U.S. The announcement -- what we've released is about $1.5m. We have said in the U.S., not for airport. It is for other facilities, governmental facilities but not for airports. Regarding the airports and other security areas in the U.S., we still don't see big gaps from our side in that market.

So you just don't see the RFPs coming through?

No, I said -- we've basically said we are making a lot of effort, a lot of penetration effort, to get into that market. We'll see. And it's [our] steps in [pilots] and in new clients and so on. But for my first point, we still don't see the big jobs. We believe in 2008 -- 2008 and '09 we can reach to that target increasing our sales in U.S.

Okay, got it. Thank you.

Thank you, sir. The next question is from Ken Liddy from Wachovia Security. Ken, go ahead, please.

Hi, how are you? I wanted to get back to this prestigious project you're working for the Israeli government in the quarter. Is that project ongoing?

Yes, that project is ongoing and we'll accomplish it in the coming two or three quarters.

And could you give us an idea of how large of an order this is in revenue?

Yes. The order is between $6m to $7m.

And is there a sensitive nature of it that is the reason you didn't announce it?

We announced (inaudible) project. We announced the (inaudible) with every order we [receive].

Okay. What was the order, specifically?

Yes. The [order was] we announced about to protect, you will read it from the announcement, a turnkey project to protect several military bases in Israel.

Okay, okay. Now, with regards to your acquisition, could you give us a better idea of what areas that integrator specifically serves as far as region? Does it serve Asia? Does it serve Europe, Africa?

That is a very interesting question. But when we announced about that acquisition, we haven't [delivered] information -- more information than it is a European company, integration European company. And there, for obvious reasons, we cannot elaborate about the areas of activity.

Can you give us any idea of how much revenue that company did in 2006 or 2005?

When we due diligenced that company, we had all information of the past record but we are not providing the details. But you can understand us when we considered to make the acquisition, we checked very, very thoroughly all the details on the past record.

Now, in the quarter your backlog increased, so obviously you have orders of over -- you've booked orders of over $21m, $22m. Could you give us an idea if it was closer to $30m, closer to $25m, as far as booked orders in the quarter?

As far [as backlog], okay, I said backlog is now higher than it was compared to the last quarter. But we are not providing the figures on the sales as of today.

Was it substantially higher or just higher?

Is it higher? Yes. [Yes, large deals].

And as far as your work on the seam-line fence, I understand that work has been halted for the remainder of the year and that will probably pick up in a big way in 2008. Is that what you're hearing or what I'm reading is wrong?

Can you repeat, please? I didn't understand the question.

I understand that there's been a slowdown in the work in the seam-line fence. Is that true?

Regarding the seam line, it's interesting. The seam line slowed down because of the budget issue, and only because of the budget issue. The foundation is ready. It's a very [tall] system to be installed. And meanwhile, [it's because] of the budget. As far as we understand, as far as we know, in a month's time or even less the budget issue will be solved and we believe then we can continue with that project. All together, around 200 -- about 250, almost, kilometers will remain to be installed. And we believe a big portion of that remaining section of the seam line will be ours.

And could you quantify that in dollars? Is that $20m, $25m or $5m to $10m?

For sure. It's something between $30m to $40m. It depends, also depends on many other conditions, but it's something between $30m to $40m.

And you would expect that to be completed between the end of this year and 2008 or 2009?

I believe today, 2000 -- look, the government -- what the government has declared, what the government is wanting to do it as of yesterday, not for tomorrow. But because of the budget issue, I believe, it will be done 2008 and maybe will remain [something to] 2009.

Understood. Now, in the past you've talked about some large projects in the pipeline. You used the phrase, "several hundred million dollars of potential projects." Could you give us any specific updates? Are any of these closer to being at the bid process, or the timing that we could expect to see or not see some of these come to fruition?

Yes. We are in very sensitive negotiation contacts and even new contracts in new regions. We are working, we are working. It takes time and the projects [start again]. We [are amid] bigger and bigger projects. We are not in negotiation but we are in contact. We have submitted the tenders. We are bidding with that kind of project. The big number that you quoted before, that big number is remaining. The big [numbers] remain and even increase by our last acquisition, which now involves us in many other big projects.

To give us a better idea, I guess, of what type of impact you think acquisitions would mean to you, looking beyond 2008, looking at 2009, do you think between organic growth of Magal up until this acquisition along with this acquisition will be enough to get the Company to $100m in revenue or close to $100m of revenue?

I believe so, and even above.

Okay. That's helpful. And are there any new items in the pipeline that you could share with us -- some of what you're seeing out there as far as potential projects for you to be working on?

Before we have a solid order in our hands, we do not elaborate about projects in the pipelines. But there are a few interesting projects and, as I said in my opening, I hope in the coming few months to announce about a few projects that we will have received.

With regards to the order that you put back, the $8m order, you've mentioned that there is other potential projects that you would be working with that customer. Do those potential projects equal, or around the same amount of money, $8m? Or do you think that relationship could be much larger or smaller?

With that particular client, we are talking about smaller projects, not the same size but more than one.

And I might have missed it, what -- did someone jump the gun on the customer? Where did they, I guess, screw up when they booked the order?

No. What I -- I do not elaborate on what I have said before. It was something, only the procedure, the authorization. That client --- that's the reason why we withdrew that order.

Now, looking to the fourth quarter and first quarter of next year, do you expect revenues to increase year over year, profits to increase?

I expect, and I said it before, 2007 will be better than 2008. The quarters -- the last quarter in Magal is traditionally stronger. Also, I believe it will be continued to the coming quarter in 2008.

Do you -- is this $20m revenue mark something that you think you can sustain?

Yes.

Okay. Well, I'll go back into the queue. Thank you.

Thank you, Mr. Liddy. (OPERATOR INSTRUCTIONS). The next question is from Jeff Kessler from Lehman Brothers. Jeff, go ahead.

Thank you. Hello there.

Hello.

A question on your margin, on your gross margin, and the mix as you go forward. As you've got a lot of revenue with a changing margin mix, I'm wondering if that has to do with the mix of the way your business is shifting toward systems integration and away from just specific products. Systems integration can have, not always, but can have, lower gross margins. And should we be used to seeing some larger revenue numbers going forward with a little bit less of a gross margin, as you get into more project management and away from selling just specific products?

Hello, Jeff. I missed you, missed your question. [I have to now adjust to the] -- in general, you are correct. When we are doing more projects, more integration projects, we expect that the gross margin will decrease. Meanwhile, till now we succeeded to keep the same margin, our normal margin, even when we're entering into more and more projects. I believe that we will continue to keep our margin about the same level as we are doing today. 1% less or 1% more, but in general, we'll continue and we will succeed to keep the same margin for the future.

Right. So even though you're getting involved in much more -- the percentage of business moving toward projects, you believe you can keep the gross margin within a couple of percentage points of where it is?

Yes, I believe so. And based on our past experience, I not just believe so, I'm sure we'll succeed to keep about the same margin. Of course, this will sometimes, starting with the last project we executed, with a very low margin sometimes something like that might be happening. But in general, our normal way of working is to keep the same gross -- the same level of gross margin.

Okay. A question on DreamBox. You just received a contract in DreamBox and by itself, when you look at it, it's a very, very interesting product because it does so much in a one-box system. However, the trend in video surveillance and security surveillance has been moving toward open systems, open architectures that can actually be interoperable with other systems, so that software writers and others can add to it. Obviously, that has not been the strategy up till now for DreamBox. You've kept it proprietary. You've kept it so that basically all of the features and functions are unique to Magal.

And I guess my question to you is are you at a point at which you're willing to -- or the Company is willing to start opening up DreamBox a little bit and sharing some of the codes for writers so that it can be a bigger-selling product? Or is there technology in it that is so specific and you think that you can continue to sell it to whoever you're selling it to that you don't ever intend to open up and make it an open architecture video system?

Look, Jeff, it's very interesting to see the different approach in between U.S. and Europe. Most of our -- not just Europe but non-U.S. countries. Most of our DreamBox installation is out of U.S. and in that area it's the idea of DreamBox to include in one box so many features are very attractive. In the U.S. they prefer, as you define it, a more open arch -- so difficult to pronounce it, architecture, open architecture. But we in Magal, we are faced with that fact and we are working now to develop a product which will be much more open and will include, in certain cases, features to [simplify it] that might be with response to the market demand in the U.S.

So if you could just recap here, the proprietary DreamBox product that you have now will be continued to be sold to who? Like to -- the Israeli Army or various airports that just want a specific product? The more open product will be marketed to who?

The DreamBox as of today we are selling to many clients all over, also in the U.S. but in other countries it's much more acceptable, much more popular, that kind of concept. In the U.S. sometimes, if they prefer a different concept of product, that -- also to our clients, potential clients in U.S. which prefer the concept of the DreamBox. It depends what is the application and what's the client, exactly what they're doing, but we will continue to sell both. We'll continue to sell the DreamBox and we'll develop the new generation which will be more open.

Okay. I may have missed this in your opening remarks, one final question. That is your video leasing business in the U.S., what point are -- where are you with that financially?

Financially, I said, the cash flow is positive. Regarding the profit and loss, we're about --- about, not exactly, breakeven but (multiple speakers).

You're at breakeven now?

Almost breakeven. Very small loss, but is almost breakeven. Maybe in a few months it will be at breakeven.

Okay. But it is now cash flow positive?

Yes, positive cash.

Okay. All right. Thank you very much.

Thank you. Have a nice day.

Thanks very much, sir. We now have a follow-up question from Gary Markoff from Smith Barney. Go ahead, sir.

Yes. I just wanted to clarify a comment. I'm sure you misspoke it, or perhaps I misheard it, in answer to Ken Liddy's question regarding 2008 being better than 2007. I thought I heard you say that you expect 2007 to be better than 2008, but I'm not sure you meant it. Could you clarify, please?

Yes, we made a mistake (inaudible) saying that it was a mistake. But we expect 2007 will be better than 2006. If I said 2008, it's my mistake.

And you mean to suggest that 2008 will be better than 2007, correct?

Yes, absolutely correct.

Okay. Thank you.

Thank you. Have a nice day.

There are no further questions at this time. Mr. 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. We look forward to speaking to you again in three months' time. Have a good day to everybody.

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