Senstar Technologies Ltd (SNT) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems third-quarter 2009 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. (Operator Instructions). I would now like to hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. I'd like to welcome all of you to the conference call and thank Magal's management for hosting this call to discuss the results of the first three quarters of 2009.

With us today on the call are Mr. Eitan Livneh, President and CEO, and Mr. Zev Morgenstern, CFO. Eitan will summarize the key highlights of the quarter followed by Zev, who will review Magal's financial performance of the nine month period and the quarter. We will then open the call for the question and answer session.

Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the Company. These statements are only predictions and Magal cannot guarantee that they will in fact occur. Magal does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and the competitive nature of the security systems industry, as well as the other risks identified in the documents filed by the Company with the Securities and Exchange Commission.

With that I would now like to hand the call over to Mr. Eitan Livneh. Eitan.

Good afternoon, everyone, and welcome to Magal results conference call, my first as Magal President and CEO. This is the first set of results we have published for the year 2009. The new management team has taken every effort to research and to investigate every aspect of the Company from an operational, financial and strategic standpoint.

We decided to release results upon completion of this process at a point when we can be sure that our financial results correctly reflect the financial performance and the health of the Company. From this point onwards we do intend to release results again on a quarterly basis.

The [year] with Magal has been a lot of changes, as you know, as well as a complete change in management team, including a new President and CEO, myself. This change of leadership enabled us to make many changes and improvements in operation and work on a new strategy for the Company going forward. While all this was going on the global economy moved into recession and the market became difficult to navigate.

While making the necessary changes internally, we also look to position to rationalize the reduced cost across the board. We reduced about 10% of the workforce and reduced also the cost of salaries of the rest of the workforce by close to -- an additional 10% actually. We also consolidated our North American business into one, making further cost savings.

All these cost reductions have saved a significant amount on an annual basis. As part of the process, we decided to discontinue the operation of our European subsidiary, which we purchased in September 2007. Our subsidiary required us to invest extensive management time and effort, which management felt was not justified in light of the overall performance of that Company.

As you can see by our results in the third quarter, our efforts were successful and we have, in fact, returned to operating profitability. While this is all now in the past I'd like to talk to you today about the future. I intend to talk about how Magal is refocusing its energy and efforts on our core competencies and I'd like to discuss with you some of the interesting projects we have recently won that we are working on.

For the year 2010 my overall goal is to bring the Company back to our growth trend and build our profitability. In terms of re-establishing our growth, we are leveraging our experience -- expertise, sorry, and core competencies in the Security Sensors, Command and Control and Intelligent Video Analytics.

We have increased focus on the development of some highly advanced products, which we hope will [cement] our technological leadership, drive long-term growth and increase our market share. We also see additional potential for our Command and Control Fortis solution and we are planning on releasing a major upgrade with many additional capabilities in the near future.

We also consolidated and increased our global sales effort as well as improving our coordination between marketing and R&D and within our various subsidiaries. We are building up our marketing channels by establishing cooperation and partnership agreement to leverage our lead base internationally and expand our customer offerings. Our current agreement with DVTel and ICx are prime examples of that.

In terms of business we are doing around the world, I'd like to highlight a few areas starting with North America. As I mentioned earlier we have found ways of increasing the efficiency of our US operation, we merged our North American subsidiaries. Our US subsidiary operation and manufacture were merged into the Canadian operation based in Ottawa.

On the revenue side we won some recent orders in North America, one was for the perimeter protection of a US air base and the second for protection of a major airport from waterside intrusions. Both are customers which were important sales reference for us. We also won an order for the sale of equipment and support service for the protection of a large nuclear facility. 83 main wins in the United States combined are worth more than $1m.

In Latin America, we won a $1m project for our Fortis system, which will integrate 50 separate sites. We do see significant other Fortis sales opportunities in the region. We also opened a sales office in Bogota, Columbia, in the past month, which has already started generating some sales.

In Israel, our business focused mainly on project work and we have a number of ongoing projects. If you remember, last year we were executing on two particularly low-margin strategic projects, which are now mostly complete, so we expect our margins in this region to return to normal levels which we expect from project work.

In terms of new projects, we recently signed an additional two contracts for our Fortis solution in two cities in Israel and signed a contract in Australia for protection of a major military base. Again this win is key for us as it really validates our solution as high-end and military capable.

In summary, we've gone through many changes that have provided a foundation for a better result in the future. The improvement is a result of our core business in the past nine months and especially our operating profitability in the third quarter is testimony for that. Our current result represents only the beginning of improvement in performance which I expect will continue in the future. Our achievement in 2009 and goals for 2010 make me and our management increasingly enthusiastic about Magal's future.

One last thing I would like to mention, on the Investor Relations front we have been fairly quiet over the past year as the management team has changed and our focus was on internal improvements and development. Over the coming quarters we intend to change this and become more proactive, become more transparent and issue more information about our ongoing activity and I hope that will improve the investor visibility.

And now I would like to hand over to our CFO, Mr. Zev Morgenstern, for the summary of the financial results for the third quarter.

Thank you, Eitan. Good afternoon or good morning to everybody. The slowdown in the economy experienced during 2008 continued into 2009 and consequently we experienced a reduction in spending in our North American and European markets. Over the last nine months, Magal went through an intensive process aimed at integrating business activity, redefining methodologies, improving work procedures and adjusting the level of expenses to the current volume of business.

In September 2009 our Board of Directors resolved to discontinue the operation of the European integration subsidiary acquired in September 2007. The results discussed in this conference call, and disclosed in our press release, reflect the reclassification of the results of that subsidiary as discontinued operations. The net assets of the subsidiary for the nine months ended September 30, 2009 and the year ended December 31, 2008, were reclassified accordingly. Please note that the results for the first nine months of 2008 are based on the revised quarterly figures disclosed in our Form 20-F for 2008.

In this conference call I would like to discuss the financial results for the third quarter and first nine months of 2009 compared to the respective periods in 2008. You may find a year-to-date quarterly breakdown of our results in the press release issued earlier today, which you can find on our website.

Revenue for the first nine months of 2009 were $39.5m, 2.2% less than in the respective period of 2008. The decrease is primarily attributable to lower revenue levels generated by our Canadian internal distribution subsidiary. The aforementioned decrease in revenue was partly offset by an increase in revenues in Israel and Latin America.

In the first nine months of 2009, revenue generated in Israel represented 25.5% of total revenue, North America 26.5%, Europe 18.5% and the Rest of the World 29.5%. Revenue for the third quarter of 2009 totaled $17.7m, an increase of 14.8% over the third quarter of 2008. The revenue increase is mostly attributable to revenue generated in Israel during that period.

We generally recognize revenue based on the percentage of completion method. The percentage of completion method is appropriate as we have the ability to make reasonably dependable estimates of the extent of progress towards completion of project, contract revenue and contract costs.

Gross profit for the nine months ended September 30, 2009 increased by 10.2% to $15.9m, or 40.1% of revenue, compared with $14.4m, or 35.6% of revenue, in the comparable period last year. The increase of gross profit is attributable to more supportive currency exchange rates in 2009 compared with 2008 and to the low gross margin generated by certain strategic projects in 2008.

Gross profit for the third quarter of 2009 increased to $6.8m or 38.2% of revenues, representing a 54.8% increase over the $4.4m, or 28.3% of revenues, for the third quarter of 2008. Gross margin for the quarter increased due to the higher revenue volume, a more favorable mix of products and projects, as well as more supportive currency exchange rates in 2009 compared with 2008.

In terms of operating expenses during the first nine months of the year, net R&D expenses were $3.2m, or 8.1% of revenues, selling and marketing were $8m, or 20.2% of revenues, and G&A expenses were $6.4m, or 16.1% of revenues. Operating expenses totaled $17.6m, a decrease of 14.5% from the $20.5m reported in the same nine-month period ended September 30, 2008.

In the third quarter, net R&D expenses were $1.2m, or 6.6% of revenues, selling and marketing expenses were $2.9m, or 16.3% of revenues and G&A expenses were $2.2m, or 12.3% of revenues. Total operating expenses amounted to $6.2m in the quarter, 8.1% below the $6.8m reported in the third quarter of last year.

The decrease is attributable to a decrease in operating expenses in North America following the integration of the US operation into the Canadian subsidiary as of May 2009, a reduction in headcount and payroll expenses in North America and Latin America as well as more supportive currency exchange rates in 2009 compared with 2008.

Operating loss in the nine-month period ended September 30, 2009 was $1.7m compared with an operating loss of $6.1m in the same period last year. The operating loss decreased as a result of the improvement in gross margins and the decrease in operating expenses.

For the third quarter of 2009 we recorded an operating income of $0.5m compared with an operating loss of $2.4m for the third quarter of 2008. During the third quarter of 2009 the US dollar decreased by 4.1% against the Israeli shekel compared with an increase of 2.1% during the comparable period last year. Consequently, financing expenses in the three months ended September 30, 2009 increased from $300,000 to $800,000 as a result of the devaluation of US dollar denominated monetary assets.

Net loss for the nine month period ended September 30, 2009 was $2.8m compared with a net loss of $8.6m in the same period last year. Net loss per share for the nine-month period at September 30, 2009 was $0.27, compared with the net loss per share of $0.82 in the respective period last year.

Net loss for the third quarter of 2009 was $700,000 compared with a net loss of $3.4m for the third quarter of 2008. Net loss per share for the third quarter of 2009 was $0.07, compared with a net loss per share of $0.33 in the same period last year.

Cash and cash equivalents, marketable securities and short-term bank deposits as of September 30, 2009 were $17.1m, an increase of $700,000 compared with December 31, 2008. Short-term bank credit and current maturities of long-term loans decreased by $2.1m compared with December 31, 2008. These changes reflect a cash balance increase of approximately $2.8m. The improved cash position was achieved as a result of a reduction in accounts receivable and a reduction in inventory.

As of September 30, 2009 we had 288 employees worldwide compared with 323 employees as of December 31, 2008.

With that we will open the call for our investors' questions. Operator.

(Operator Instructions). The first question is from Ken Liddy of Wells Fargo. Please go ahead.

Hi, in your opening comments you mentioned partnerships with DVTel and ICx. Could you expand on those comments?

Yes, we have signed agreements with both, DVTel is in the cameras, IT cameras business world and ICx in the radar. DVTel is a cooperation type of an agreement in which we will work not only with them and they won't work only with us, it is not an exclusive type of agreement, while we will have a more intimate relationship. DVTel is a US based company. ICx is a radar producer and we signed an OEM agreement in which they are going to design specific radar that we will use and we will have it as a private label of Magal.

Are you looking at other partnerships with other similar companies?

We will look into that as we need, because the solution that we are providing in the world calls for more than what we do ourselves. We understand that we cannot do ourselves all what we need and, therefore, that type of agreement will give us the advantage in the competitive environment that we are in. So, yes, we are looking, it will be on a very one-on-one and each case by itself, but generally speaking, yes.

Have you had any success thus far with either of these partnerships as far as orders?

We do have one already, but this was won before the agreement so actually this was one that was the foundation that helped us to reach that agreement, but we do have a success won with DVTel, with ICx not yet.

You mentioned some recent wins. Could you go over some of the ones you mentioned in Australia and in Mexico?

In Mexico it's one with Fortis worth $1m. As we mentioned earlier we are speaking about the site in Mexico in which 50 different other sites are integrated into and Fortis is actually the central command and control post for all of those 50 sites. That's with regard to the Latin American one. When we speak about the Australian one, in Australia we have a project of protection of a major military base, which we won lately.

Is that a Fortis contract?

No, it is not, it is more of a sensors type of a contract. We supply the sensors that protect the military base, no Fortis involved.

Previously, Magal had seen a lot of potential in Latin America and in Mexico. Are you still seeing the same type of opportunities?

Yes, we do, we do see opportunities in Mexico and, as I mentioned in my short brief, we have opened a new sales office in Bogota, Columbia as a result of that understanding about opportunities.

In the United States -- in North America you have consolidated operations. Are you now at a position where you can start growing that business in the US and North America?

Yes, we have consolidated the operation activities. We still keep, of course, in large our selling force in the United States of America. In Canada we have a very successful activity. We believe that also in Canada itself we can grow the business, but mainly in the United States by replacing some of the people who work for us. We are in a process where we have a new sales force and we believe that in the next year we will see some better results.

And in Israel, could you talk about some of the opportunities in Israel, projects you're working on and projects you may be working on?

On Israel itself I can say very little. We are continue working on the domestic projects; I cannot elaborate on those but we see it as an ongoing business in one hand. In the other hand on the Rest of the World, which we handle from Israel, we are in the process of different projects, different tenders in different regions in the world.

Overall gross margins. You mentioned some of your goals for 2010; where would you like to see gross margins expand to and operating margins?

We expect the gross margin to be in the neighborhood of 40% in 2010. As a normal course of business of Magal, we will keep our cost base as we do in the last quarter, so by doing that we believe that we will have better results overall.

And as far as profitability, how long do you think it'll take for you to -- do you expect in 2010 for the Company to return to profitability?

As you see in the third quarter of this year, we are already operationally profitable. We believe that that trend will continue and we'll keep ourselves at that position in the next quarter as well.

Typically the fourth quarter has been a larger revenue quarter. Do you expect that in 2009?

Yes, based on past experience, as you know I know from past experience that won't be the worst.

I'm sorry, will it be somewhere in this $18m to $20m or $17m to $20m?

I cannot go into the numbers, but generally speaking we expect that the fourth quarter will act normally unless, or taking into consideration, the crisis in the world, the economic crisis, which we suffer from also and in part of our activity in the Western world, so that will apply also on the fourth quarter. So we cannot tell the numbers yet.

You mentioned in the comments that the Company had generated cash. I guess you've generated that from operations?

Yes, if you would analyze our cash flow you'd see that we generated about $3.9m from operating activity.

And do you have any expectations as far as that number building or paying down your debts?

Well, as you know, we do not give guidance so I would not refer to that, but yes, we hope that we'll continue with this trend. It's a continuation to a trend that we started to build up beginning of this year.

Good, that's all my questions for now. Thank you.

Thank you.

There are no further questions at this time. Before I ask Mr. Livneh 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 at www.veidan.co.il. Mr. Livneh, would you like to make your concluding statement?

Yes, I would like to thank you all on behalf of the management of Magal and myself. I would like to thank you for your continued interest in Magal's business. I look forward to speaking to you again next quarter. Have a good day, all of you. Thank you again.

Thank you. This concludes the Magal Security Systems third-quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.