Senstar Technologies Ltd (SNT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems fourth quarter 2007 and full year results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, March 6, 2008.

I would like to remind everyone that forward looking statements for the respected Company's business, financial conditions and results of its operations, are subject to risks and inferences 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've not received a copy of today's release, and would like to do so, please call Gelbert-Kahana in Investor Relations at 1-866-704-6710 or 9723-607-4717. I would now like to hand over the call to Fiona Darmon of GK Investor Relations. Fiona, would you like to begin?

Yes, thank you Operator. I would like to welcome all of you to the conference call and thank Magal's management for hosting the call today. With us on the call are Mr. Izhar Dekel, CEO, Mrs. Lian Goldstein, V.P. Finance & CFO, and Mrs. Raya Asha, Outgoing V.P. Finance & CFO.

Izhar will summarize the key highlights of the quarter and year, followed by Lian for a short introduction. And then Raya will review Magal's financial performance in the full year and fourth quarter. We will then open the call for the question and answer session. I would now like to hand over the call to Mr. Dekel. Izhar?

Good afternoon everyone and welcome to the call. 2007 was very much a year of meeting strategic milestones at Magal.

This year we achieved record annual revenues of over $72m, up to 14% from last year, and ended the year with a healthy cash balance of over $72m.

Our results for the year include the consolidated results from the recently acquired European integrator. They also include the result of Smart, our non-core U.S. Video business, which has now been reclassified as discontinued for 2006 and 2007.

Given the nature of our business, with typically stronger second half of the year compared to the first, I recommend reviewing our performance on an annual basis. In 2007 we met many of our strategic targets.

We acquired a European integrator. This acquisition, completed in August, contributed to our results by being accretive from day one, September 1st.

We also made significant augers in another major goal, the increased involvement in full and larger integration projects.

In 2007, we won several large scale full integration projects, including a complex integration project in the Southern Israeli port of Elat and the Mediterranean port of [Estod]. And we are currently completing another major integration project in Africa.

Further, a few weeks ago we announced a $45m project, the largest in our history, which will be delivered over the next two years. This project validates the success of our approach and we aim to continue in this direction, and hope to win more such projects in the future.

2007 was also a year of geographic expansion with the opening of the marketing office in Brazil through a partnership with a local company. This office will enables us to further expand our operation to one of our key strategic markets, South America, by providing a local base.

Finally, in the fourth quarter, we successfully sold Smart, our non-core U.S. video subsidiary, for $8.5m in the U.S. This follows our strategic focus on our core business of advanced and intelligent perimeter security projects and products.

Overall, 2007 was an important year for the Company on the strategic front. The results are even more impressive when taking into account the fact that this year we received a lower than usual level of business from the Israel Minister of Defense, specially for protecting border fence and the Seam Line fence. However, we do expect the 2008, we will receive sound business expected in 2007. In addition, and as you may have noted in the news, the announcement made by Israel's Defense Minister of his plan to increase protection of the southern border with Egypt in 2007.

Regarding the financial results, which Raya will elaborate on in a moment, I would like you to note that this year we had quite a few one time charges. The most notable is the financial expense mainly resulting from the weakening of the U.S. dollar against the Israeli shekel and the Canadian dollar.

Looking ahead to 2008, we intend to continue to drive top and bottom line growth. As I mentioned to you, $45m order will provide us with a strong start to the year. Given this order and our potential pipeline, I believe we can meet aggressive targets in the near future.

Our strategic goal is to double revenue within four to five years and this represent a 15% to 20% average annual revenue growth rate. We intend to continue to improve our operating margin and our goal is to reach an operating margin of 10% to 11%.

Before transferring the call over to our new CFO Lian Goldstein for a short introduction, I would like to thank Raya Asha, our CFO of the past 10 years, for all your hard work and dedication to the Company throughout the years. I would also like to wish her the best success in the future. We will really miss you.

I would now like to turn the call over to Lian, and welcome her to the Magal family. Lian.

Thank you Izhar and good day everybody. During my first two months at Magal I have used the time to get to know the business, the employees and the management.

During this time, I have also become even more excited to join the Magal management team, and look forward to the opportunity to take Magal to its next level of performance in the coming years.

I look forward to meet you and being available for your questions in quarters and years to come. And now, I will ask Raya, for the last time, to review the financial performance of 2007 and the fourth quarter.

Thank you Lian and I wish you all the success in your job as the new CFO of the Company.

Before I start, I would like to thank cordially Izhar, Jacob Perry and all Magal's management and employees, for the many great years. We have worked together here at Magal as one large family, growing the Company from revenues of $25m 10 years ago to what it is today.

Now to the year's summary. Revenues for the year reached a record of $72.4m, a 14% increase from $63.6m last year. Israel represented 21% of revenues, North America 21%, Europe 23% and the rest of the world 35%.

Gross profit for the year totaled $28.9m, up 10% from $26.4m last year.

Gross margin for the year totaled 39.9% compared to 41.5% last year. Gross margin was negatively affected by a prestigious project which is highly strategic for Magal, for the Israeli Government. This project is now almost completed.

Operating income for the year totaled $2.8m. This includes $900,000 one time post employment benefit recorded in the third quarter, relating to the Company's founder and Chairman who retired at the end of the year. This, as well as higher G&A expenses of roughly $300,000 resulting from the SOX audit performed by our external auditor.

Operating income in 2006 totaled $3.8m.

Operating margin for the year totaled 3.8%, compared to 6% last year.

Financial expenses for the year totaled $2.3m which includes approximately $1.5m of foreign currency exchange losses due to the weakening of the U.S. dollar against the Israeli shekel and Canadian dollar. By comparison, in 2006, financial expenses totaled $864,000.

This is mainly due to the fact that we keep a large portion of our cash reserves in U.S. dollar for potential acquisition, which is an integral part of our strategy. We are currently looking for additional ways to better hedge our business against this currency fluctuation in the coming years.

Net income for the year from continuing operations totaled $196,000, compared to $2m in 2006. Net income for the year totaled $1.9m, compared to $810,000 in 2006.

This represented earnings per share of $0.18 compared to $0.08 last year.

Net income includes the $1.7m income of discontinued operation, which is the Video Monitoring business which we sold in the third quarter.

Now to a few words about the quarter. Revenues for the quarter totaled $23.2m, up by 7% from last year.

Gross profit for the quarter was up 4%, reaching $8.3m or 35.9% of revenues, compared to $8m or 37% of revenues in the third quarter last year.

Operating income for the quarter was $826,000, compared to $877,000 last year. During the quarter we recorded a tax income resulting to the favorable outcome of the change in tax rates in view of our companies and from recording the [additional] income taxes.

Net income for the quarter and from operations totaled $857,000. This is up by 157% from $334,000 in the third quarter last year. Net income for the quarter totaled $2.9m, compared to a net loss of $231,000 in the fourth quarter last year.

Earnings per share for the quarter was $0.28, compared to a loss per share of $0.02 last year.

Turning to the balance sheet, cash, cash equivalents, marketable securities and bank deposits, as of December 31 were $32.3m compared to $27m at the end of 2006.

And now we would like to open the call to -- 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. And I also want to thank Raya for the last 10 years. It has been good working with you.

I guess the first question I have is regarding the SG&A expense for the quarter. Can you explain -- I know you went through it a bit. Does the post retirement -- the post employment benefit have anything -- and the SOX related to this, are they in that 30% increase, or were there other factors in it as well?

Yes, it did. In the (inaudible) base costs there that I mentioned are in the numbers of course. And we had increase in R&D so further development of our products and expanding our capabilities.

The selling and marketing expenses increase is mainly due to the increased result in the revenues which were up by 13% and S&M expenses were by 12% up. The G&A were up at 15%, mainly because of SOX and usual expenses.

Okay. Your SG&A, or your G&A I should say, has generally run at a bit less than 10%. 8%, 9%. Is there a level at which we should expect this number to return to in 2008?

I think the level is more or less flat around the $6m.

Around $6m?

The G&A. You asked --.

Oh, G&A.

Yes.

The yearly G&A.

Alright. Well, that is what the level is going to be around in 2008?

Yes.

Yes, about. As I said before, there are a few bold expenses regarding auctioning services and offshore --. Sorry, you know what I'm talking about. But -- okay. But in 2007 we really invested the main part in the implementation at airports, so we believe in 2008 it will be lower. But in general, our G&A will be about more or less the same level.

Okay. Can I have a question about your backlog and about the projects you're working on, some of the contracts that you've made. This past year you worked on a contract which was prestigious. There is another side of this prestigious and that means you've got a very good name and reputation for doing it, but you also got a lower margin for doing it. The question is, on your gross margin next year, is the backlog -- can we expect a significantly higher gross margin in 2008 as your project mix changes?

Regarding the gross margin, as I said in the past, when we will enter more and more project, the margin might be lower. But we, according to our focus, according to our budget, our margin would be something between 40% to 43%, even though we will be dealing with more and more projects, comprehensive projects.

Well it's no higher than what we saw in the fourth quarter.

Higher. As I said, there is the one strategic project in Israel which pulled down the gross margin to that rate.

Okay. Now, just one other question about that project. Does that project lead to other follow on business, potentially, that may have higher gross margins?

This was a one time project which in --.

Okay.

-- Which in other corners, or other niches of that strategic --- with that strategic client, maybe we'll -- they'll receive more jobs. But the margin will be probably different. It was a one time project and that kind of margin.

Okay. So let me just recap and be clear about this. Even with increased SOX expense, or ongoing SOX expense, and assuming you can hedge your currency a little bit better next year, number one, your SG&A levels as a percentage of revenue should be down. And your gross margin -- your gross profit, at least well into the fourth quarter, even though you're going for projects that inherently have lower profit margins, your gross margins shouldn't be higher. Therefore your operating margin overall should be up in 2008.

In 2008, our plan is to improve the margins. About the gross margin, we talked about. The operating margin, our growth -- our target is to reach, maybe not in one year, but to reach the level of 10% to 11%, and of course it will influence on the whole margin below. So we believe -- we strongly believe 2008 will be much better from that aspects.

Okay, very good. Thank you very much. And again, Raya thank you very much.

Thank you Jeff, thank you.

Thank you.

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

Hi. Could you elaborate a little bit about this large contract received? Have you begun work on the $45m project yet?

Well, this $45m is a very nice achievement. We already started to work on that project. A comprehensive project, very challenging. The margin is good in that project and as we said we will execute it. We have implemented in two years 2008 and 2009. What else you would like to --? I don't know how much we can elaborate, but what else you'd like to know about that project?

Do you expect revenues from that to be progressing in a linear fashion, like $4m to $5m, or $5m to $6m each quarter? Or will it be more lumpy as far as you recognize the revenue?

Let me -- talking about projects like that, it is very difficult to evaluate how the income will be with the scheduled target from the client. We know for sure when it will be ended. And in general supposed to be about, but to give you a very rough estimation, a linear income over the two years.

How much exactly quarter by quarter, it is very difficult to evaluate because of projects in the field, in the construction. There's a lot of very different areas, different disciplines of work to execute.

And the margins on -- the gross margins on this project are better than other larger contracts that you've done with the Israeli Government?

With the projects, there is not any connection to this strategic project, we've talked before. This is a totally different area, totally different environment, totally different client. The margins are much better, and we strongly believe it will contribute very positive to the results in 2008.

Okay. And could you talk about some of the -- are there any other new opportunities that you're looking at bidding on, that you expect to close in 2008?

2007 was a very important year regarding the milestones we have met and I talked a little bit about it. We continue with our strategic attitude with acquisition, with incorporation, tendering agreement and with comprehensive projects.

Will we continue in 2008 to implement that strategic plan? Regarding acquisition for example, we have all the time set in front acquisitions on the table. We check it, we check it very carefully. We will not jump into a potential acquisition. And we believe that with that strategy we will reach our target to double our sales in four to five years.

In 2008, do you expect to be profitable in each of the quarters?

We expect 2008 first of all to be better than 2007. Regarding the quarters, and I said also it's better to judge our performance on an yearly basis. And traditionally, the second half of the year is better than the second half of the year. And regarding the quarter by quarter, I believe the quarters will be profitable, yes.

Assuming the first quarter is a much smaller quarter than the rest of the year, do you expect to have revenues and earnings above the 2007 level?

Still we are working on the projects in an order which is -- has a very close -- it's difficult to evaluate this first quarter compared to the previous quarter.

Okay, with regards to your other goals for 2008 I understand you want to increase your gross margin and operating margin. Are there other goals you can elaborate about?

At 2008, it is about our strategic -- expect some direction, I elaborate before. If we succeed, and I'm sure we will, to meet the targets we assign to ourselves, I think we are on the right track.

Is there anything new on the Seam Line fence that you can discuss with us?

Seam Line fence was almost stopped in 2007. Not because we did not want to continue or because they've decided to stop many. Many considerations, most of them involving budget considerations, were -- they believe to stop. But from the paper and from our information, we know that they are going to continue with that project in 2008. And in addition, to build the border with Egypt that was declared by the Minister Ehud Barak lately.

And I think you said in the past there's about $20m, $25m at least, of business from this Seam Line fence? Mainly in [volume]? Or is that a little bit less than what you'd said?

Yes, it is about the volume, and even low. Yes.

And how big an opportunity is the border fence that is being talked about with Egypt? Is that a larger opportunity or a comparable opportunity?

Border in Egypt is an addition, and we can't take into consideration what we can't see. In the close, near future, they're talking about around 75km, 80km, which is about between $10m to $15m for the Company, which will build an electronic fence.

In 2007, you had some significant contract wins with ports. Do you see repeat business from those customers? And do you see other opportunities opening up, specifically in ports around the world?

The ports, not just the seaports, the airports. Entry ports are a potential activity for us, for many. Lately we have received two ports in Israel and we are also competing with other seaports in other places in Europe. Also we are competing with airports in a few countries, more than one. So ports in general, seaports and airports, are a potential market for us.

Right. Some of these opportunities that you're bidding on, as large as this contract that you've just recently won, that $45m contract?

I believe in 2007 we will receive more projects for airports and for seaports.

Okay. And one last question. How much did the European integrator contribute to revenues in the quarter?

We are not providing this information. Just breakdown how much it will be between this kind of sales.

Okay, well great. I look forward to seeing you next week.

Cheers, bye.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Mr. Dekel, would you like to make your 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. Some of you I will see in coming week in New York and Boston, and the rest of you, I look forward to speaking to you again next quarter. Have a good day.

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