Senstar Technologies Ltd (SNT) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems second quarter 2008 results conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded July 30, 2008.

I'd 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'll now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you. Good morning and good afternoon. I would like to welcome all of you to the conference call and thank Magal's management for hosting this call. With us on the call today are Mr. Izhar Dekel, the CEO, and Ms. Lian Goldstein, the V.P. Finance and CFO.

Izhar will summarize the key highlights of the quarter, followed by Lian who will review Magal's financial performance in the second quarter. We'll then open the call for the question-and-answer session. I would now hand over the call to Mr. Dekel. Izhar?

Good afternoon, everyone, and welcome to the call.

We're encouraged by our second quarter results generating revenue increasing of 78.0% year-over-year reaching $25 million. So far, this year is shaping up in an especially -- exceptionally strong year in terms of revenue growth. While this is higher than our normal expected rate, our results for the sales staff increases our confidence in realizing our long-term target of doubling revenues within the next four or five years.

Our strategy has evolved over the past year to target larger-scale comprehensive projects. This had the effect of flowering our gross margins, while improving our revenue and net profit in absolute terms as we build up scale and leverage our existing infrastructure.

Innovation, it makes a sequential quarter-over-quarter comparison of our designs less meaningful as many of these projects are long term and revenues are recognized as we progress and this does not reflect our ongoing success in generating sales.

Our success should be measured on a yearly or even more so on a multi-year basis. Our goal is to present continued year-over-year revenue growth and leverage of sustained 20%, which will allow us to double our revenues within four to five years. And we also aim to build profitability growth going forward.

I would like to note that from this quarter onward, we'll be issuing our results on both a GAAP and non-GAAP basis. We are starting this quarter as we are now more confident that our non-GAAP figures are useful to understand and assess our ongoing corporation and the charging eliminate are not part of the day-to-day business. On this call, unless otherwise stated, I will discuss the non-GAAP results. The GAAP results are in our press release that we issued earlier today.

In the second quarter, we are also encouraged by our profitability. In particular, our operating margin improvement, which increased to 7.7% of revenues compared with 6.1% last year, as well as our net income which more than doubled to $907,000.

We achieved all this despite the continued weakening of the U.S. dollars, which tempered our success and cost us roughly $1.1 million compared with last year.

However, our overall improvement represent the initial fruits of our effort in focusing on increasing profitability and larger scale projects.

I'd like to discuss some of the success we had in the quarter.

We have won a number of orders for the installation of municipal security system based on our Fortis system, which is becoming a growth engine and strong revenue generator for Magal. During the quarter, in Israel, we announced order for system to protect Netanya and Bat Yam, two major coastal cities, as well as water reservoir in Ramat Gan, just outside Tel Aviv. In Israel in total, we have completed 15 of this type of project and are in the process of executing five more and all of this projects to follow follow-on potential.

Two weeks ago, we also announced an order to install a municipal command and control system in an Asian capital, a project worth $650,000 initially with a potential to reach potentially $3 million. This order was received following a string of success in Israel. This particular customer reviewed many of the system we have installed locally and ordered the system after an extensive review.

All this orders reinforce our position as a leading provider of municipal security system.

In Israel, there is still strong potential particularly in the largest cities are now considering installing system and we are in discussion with them. All the systems that we have so far installed in Israel offer us impressive references.

Our international wins demonstrate the success of our strategy in expanding our sales effort out of Israel, where the potential is huge and each project tend to be much greater in scope with larger revenues potential. We have also had other international success particularly in India with project based on our DreamBox and taut wire products. We are also in advanced negotiation for protecting an additional international airport in Central Asia and also South America. And we look forward and are hopeful in winning this project and announcing them when we can.

Looking ahead, we intend to continue to drive our top and bottom line with continuous year-over-year growth with focus on higher profitability. We remain committed to our long-term goal of bringing our operating margin to about 10% and doubling our revenue within four to five years.

I would now like to turn the call over to our CFO Lian to review the financial performance of the second quarter 2008. Lian, please?

Thank you, Izhar.

Revenue for the second quarter increased 77.6%, reaching $25 million, compared to $14.1 million last year. Israel represent 8.8% of revenue. North America, 16.4%. Europe, 11.8%. And the rest of the world, 63%.

Gross profit for the second quarter increased by 48%, totaling $9.5 million, compared to $6.4 million last year.

Gross margin for the quarter was 38% compared to 45.7% last year. The gross margin for the quarter was lower due to --- first, the change in revenue mix, which we've been increasing larger scale integration projects with lower gross margin. Second, the impact of the ongoing weakening of the U.S. dollar against two of our main operating currencies, the Israeli Shekel and the Canadian dollar.

Before moving on, I would like to further elaborate on the impact of the weakening of the dollar on our results this quarter. A portion of our revenue are in dollar, while a large portion of our expense, mainly labor expense, are in coin in Israeli Shekel and Canadian dollar. This records -- this are recorded at all levels of our financial results. Because of that, our results were adversely affected by the ongoing weakening of the dollar. This drew a $700,000 on decline in our overall operating income over the last year. In addition, the currency fluctuation also adds a negative impact of $430,000 on our finance expense, bringing the total impact of the weakening dollar throughout the quarter to $1.1 million on our net income before tax.

Before moving on to the operating figures, I would like to remind you, and as Izhar mentioned, that the following numbers are on a non-GAAP basis and our GAAP numbers can be found in today's press release.

Our non-GAAP figures mainly exclude the amortization of customer relationship intangible assets which are acquired when we purchased the European integration company at August last year. And we still have $4.4 millions of intangible to amortize. We also exclude the effect of stock-based compensation charge, which have a significant financial effect, as well as the loss associate with the discontinuing operation, mainly related to Smart business, which we sold at the end of last year.

Operating income for the quarter increase 125%, reaching $1.9 million, compared to $858,000 last year.

Financial expense for the quarter totaled $450,000, compared to $140,000 last year. As I just mentioned, during the quarter, we recorded approximately $430,000 in exchange rate losses, resulting mainly from the weakening of the U.S. dollar against the Israeli Shekel and Canadian dollar.

Net income for the quarter was more than doubled and totaled $907,000, compared to a net income of $400,038 in the second quarter of 2008. This represent basic and diluted earnings-per-share of $0.09, compare with basic and diluted earnings-per-share of $0.04 last year.

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

(OPERATOR INSTRUCTIONS) The first question is from [Ken Liddy] of Wachovia Security. Please go ahead.

Hi. Congratulations on the progress. You talked about some orders in Central Asia and South America for airports. Could you give a little bit more information?

Regarding the -- hello, good morning, first. Regarding the South America, I didn't mention the airport in Central Asia. We have one project. We announce it about a few months ago. Is a comprehensive project, which combine our core products like fences and other electronic sensor, class cameras and the commandant control. But where it exactly, we are not disclose at that point.

And what I was getting at is the projects that you're working on trying to attain -- the pipeline of your orders -- potential orders. You've mentioned airports that -- two airports that your contracts that you're trying to get.

What I said that we are now in the process of tenders for two airports that we haven't received them yet. We hope to have received them.

And what type of timeframe would you expect to hear something?

I believe that in one month or in two months, we know if we won that project or not.

And in your annual report, you posted that you had $65 million in backlog of which $45 million roughly you expected to bill the remainder of 2008. That was as of May 31st. As of June 30th, has that number changed much?

That number is remain about the same from one site. We have executed in the field part of that backlog and from the other site we've received another order. So, it remain about the same.

So, you expect to bill out a backlog roughly around $45 million in the last two quarters of the year?

Look, we are working very hard to generate more orders --

At least that is what I'm saying.

Sorry?

You're expecting to bill at least $45 million from your backlog in the last two quarters of the year?

What in -- I said that regarding the backlog -- regarding the advance in income, we are now working on a project. And when we are working on a project, sometimes it's quite difficult to predict exactly how much will be recognized for the coming six months. I believe that the big -- I believe that the big part of that backlog we will execute and we will implement.

Okay. And you mentioned that the profits in the quarter were hurt by the Israeli dollar, I mean the Israeli Shekel versus the dollar -- weakness in the dollar, by $1.1 million. So, profits would be roughly around $2 million in the quarter. Is that correct?

Yes. If the profit -- that number and the result -- the damage from the weakness of the dollar, then our profit might be much higher.

And how much cash did you generate in the quarter from operations?

From operation, we generated about $2 million cash.

Okay. And you mentioned that you have five more Fortis orders that you're currently working on. Is that in Israel or is that globally?

What I said about the installation of Fortis, that installation are in Israel. In addition, we've three other installation outside of Israel and the last one we also announced about the capital in Asia. It's also another one for the Fortis.

In your press release, you mentioned that the opportunities for new orders have never been higher or something to that effect. In the past, you talked about several hundred millions of potential orders out there. Were those orders coming from Fortis? What type of projects?

Regarding the -- our potential orders and the figures remains about the same. Now, when we are dealing with more comprehensive projects than in the sensors -- than in the product, we are dealing with the project -- airports, harbor and cities, which in this area, the projects are really big.

In your annual report, you -- I noticed that you had a huge increase in your businesses dealing in Africa. Is that an area which you expect continue to grow?

In Africa, we see a big potential to our activity in the future. We invest a lot of effort -- marketing effort there and we believe the fruit will come.

I guess that's all the questions I have for now, but I will have more. Thank you.

Thank you. The next question is from Gary Markoff of Smith Barney. Please go ahead.

Hi, Izhar. Could you sort of --

Good morning.

How are you? This is a very nice looking quarter. I -- just looking for -- cause you poked at this a little bit, so I just want you to back up and give us some context here. With regard to the Fortis system in an Asian capital, what triggers it going from a $500,000 order to a $3 million? And in your experience within Israel up to 15 different cities, wouldn't it also be likely that you'd start to see a radiation out from that Asian capital and we could start to do multiples of $3 million orders from the Fortis system? What is happening that the city in Asia has adopted this? And what is -- in your experience within Israel, how does then become the ripple effect to surrounding towns?

Hello, Gary. First, thank you for the question, because it let me -- it clarified - not clarified, explain a little bit about the Fortis system -- the mode of sale in that system a little bit different from our regular or normal project that we are selling. In Israel, the 15 and very close 20 cities are protecting with that system. And it started in very relatively small volume. Usually starting with a small volume and in that case it increased later on, double, or triple, or even more the size of the original project.

In Asia, the project we announced from the beginning, for sure, it will reach that number that we indicated and now they're even talking to increase that figure also. We believe that, like in Israel, when we succeed, and I'm sure we will, when we succeed with that installation, many cities will come after that. We have another city in other place of the world which we're working to demonstrate our system, and today -- to the coming demonstration a lot -- a lot -- many, many mayors from other cities are coming to see the demonstration. And we believe that after we will install it, we will implement it and we will explain and the customer will be impressed by the -- by using that system, many other will come.

All right. So, that's all -- that sounds terrific. Can you give us a sense about how long it took to get this order? Was it three months? Was it three years? And how long will it take to put into place so that the visiting mayors can actually see something functioning?

The current one, we already are in the process to implement it -- the first stage. We believe that in 12 months, we will accomplish the remaining of the project and parallel to that from other cities, the request will come.

And is this activity happening around the world? You had mentioned in the past that there had been some attention on this product area from Europe.

It is an effort around the world and the minute -- at that stage, we are working on our marketing efforts, but I believe and I hope that in the near time, we'll have a news about it.

Can you say that last sentence again?

I believe that in the near future, let's say in a few months, other -- we can announce about other places and other cities, which join to our reference list.

Okay. And can you give us the typical installation value range? Is it -- if you have a small town to a big city, what's the differential in terms of the business potential to you?

Now, the city in Asia, we wrote and we mentioned the current project we are talking about is a $3 million, $3.5 million. In Israel, it's a small cities -- smaller cities. Of course, the volume is much lower. But it is very difficult to define and to compare it according to a size of the cities, because it depend how much security on the -- how much devices and sensors and the other things the client would like to use. But in the $3.5 million is an example for only a one part of the city. Cause not the whole city. Is only one part of the city. And I believe as I represent a figure to what size what is the potential size.

So in that particular city, how big could that business end up getting if you were to blanket the entire city?

A few millions. A few millions, but now it's detained. It's very, very difficult to answer, because every client, every cities, every other demand, different request and because of that, it is very, very difficult to define in advance what is the size of each city.

Okay. And what was -- what was the moment of truth that the order happened? What was the deciding factor from a customer's perspective?

The customer in Asia visited our installation -- our cities here in Israel. He was aware, the more than one, very impressed by the performance, by the capability, by the satisfaction of the clients and in a very short time, they've decided to purchase such a system like that from us.

All right. So that goes into the times. So the time that it took from when they began to examine this till they give you an order would be defined as how long?

Look, the example I gave, it's not a typical example. It was two months. Two months is a very, very fast. That was --

Okay. Great.

The last example, but it is not a typical example. Usually it takes and you know that much longer.

But in this case, it can take place in 60 days? Someone sees it --

Yes.

Turns around. Gets a business and place and gives you an order.

Yes.

Okay. That's fantastic. Thank you very much.

Bye.

Thank you. The next question is from [Norman Rabinovitch]. Please go ahead.

Yes, I'd like to ask, do you see any potential for orders for your pipeline protection system in the near future?

Understand you mean to the PipeGuard products and the PipeGuard, we see the potential. We still working on that. In the past, we say that we are very close to get an order and unfortunately, it was delayed. Since then, we are not publish information about that product. When something real will happen and we really hope something will happen soon, of course, we'll announce about it.

What do you -- what is it that is causing the delays? Is it resistance to your Company doing that kind of work?

No, it's not -- it isn't to our Company. To my opinion, it takes a much longer time than expected to adopt the system to protect the pipe with such a product like that. It's not only -- there are three or four companies in the world which have a solution to protect the pipes. None of them have received any meaningful order to -- not to educate us to -- but for the oil companies to adopt such a system, which also then they need to build a force to act, it takes much longer than expected. They still want it. They are talking with us. Unfortunately, meanwhile, they are not expended money.

I understand. Thank you.

Thank you. Our next question is from Ken Liddy of Wachovia Security. Please go ahead.

Hi. I just wanted to see, are you seeing more business potential with the oil and gas industry?

In the oil-gas industry, we're very active. Oil and gas industry for the coming years are a plus to airports and the seaports are the biggest potential clients all over the world. And every place, South America or every other place which the oil and gas industry are active, we are there. We are there. We talk to them. We negotiate with them. And for us is a big part of our revenue will be with the oil and gas industry.

In your annual report, you talk about two different key areas -- perimeter projects -- products and turnkey projects. Are you -- what percentage of your revenues in 2008 do you expect from turnkey projects?

In general, every our share or part from a project -- our income from a project are becoming bigger and bigger. In the past, we talk about 70-30 for products. I believe that the 2008, it will be something around 60-40 for -- still for products. And the future to come, more and more will be under the project.

Has there been in any type of update with regards to the MOD and the anything with the -- any of the offensives? I know that -- I just saw that they're going to tear down a portion of the separation fence and rebuild. Does that represent an opportunity for you?

Regarding the [simline] or the separation fence, everything will be done in that area. We will be out of it. Unfortunately, for 2008, even 2007, the advance was very, very small. Only a small part from the simline. The MOD officially continue. We believe at the end of the day, maybe in 6 months, in 12 months, that the work will be accomplished. We base our forecast and we based our performance in the future, more and more about international activity and less about the Israeli MOD.

Do you expect to grow revenues from 2007 to 2008 in Israel?

In Israel, I doubt if we grow our income in Israel.

What about looking out to 2009?

2009, when you are talking about MOD and the decision maker, it takes very -- let's say, very hard to predict.

Has there been any type of a dollar-on activities from some of the orders you had last year in -- I guess it was Latin America? Have you seen activities? I mean, you got a lot of new clients last year. Are you seeing follow-on opportunities or follow-on orders?

Yes. Also, the last one we've announced is a new client that joined to our -- I said before -- to our reference list. Many other new clients are coming. Yes, absolutely.

What I'm saying is are you seeing follow-on activity from clients that you've -- have new clients that you got in 2007, are you seeing potential for orders from those clients in 2008 and 2009?

With our -- I don't have any right now in mind what exactly our new customers have ordered, but in general, we continue the contact with them and they -- even in the few places haven't accomplished the work. So, I believe, a continuation to that orders will come.

And I'm sure you've purchased the European integrator, are you seeing those revenues -- are those revenues coming in higher than expected, that are being generated from the integrator?

What we have acquired last year is according to our expectation and our expectation was very high. And it is working according to that.

And one last question, have you -- in the past -- in years past, you had a stock dividend. Have you considered -- has the Board considered reinstituting a stock dividend of any sort?

Regarding the dividend, today, we prefer the Company to fill, to invest the money in M&A and in other marketing activity in order to increase the volume of our activity.

Have you looked at increasing through a stock dividend? Have you looked at your increasing share -- your share float by a stock dividend, not a cash dividend?

I see. Not right now. It is not on the agenda right now.

Okay. Well, thanks for taking my questions. Congratulations over an excellent start to 2008.

Thank you.

The next question is from [Art Patton] of [Dimitri Capital]. Please go ahead.

Good morning. I was wondering if --

Good morning, sir.

How are you?

Fine, thank you.

I was wondering if you're finding that project costs vary much by region?

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

Are you seeing a variation in project costs depending on where the project is taking place? Like what country or what region.

In general, the cost of our products -- fixed cost. Of course, it depend now from territory to territory. For example, in Israel, the weakening of the dollars, the cost is today higher, because we pay salaries in Shekel or in Canada also with the dollar becoming weaker against the Canadian dollar. But in general, our core sale, the cost is about the same all over. And now is depend to free up -- execute a comprehensive project is depend how much the cost in a certain territory. In one territory, the cost is lower and one territory, the cost is higher. We are taking that into consideration when we calculate the selling price in each territory.

Okay. Understood. That's all I have. Thank you.

Have a nice day.

Thank you very much. [OPERATOR INSTRUCTIONS]

There are no further questions at this time. Before I ask Mr. Dekel to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on Veidan's website, www.veidan.co.il. Mr. Dekel, would you 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. Some of you, you'll see in the coming weeks 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 second quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.