Senstar Technologies Ltd (SNT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magal Security Systems second quarter 2010 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).

As a reminder, this conference is being recorded September 1, 2010.

With us on the call today are Eitan Livneh, CEO; and Ilan Ovadia, CFO.

I would like to remind everyone that forward-looking statements with respect to the 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.

I would now like to hand over the call to Mr.

Eitan Livneh.

Mr.

Livneh, would you like to begin, sir?

Thank you for joining us today.

We are pleased to report increased revenue and declining net loss for the quarter.

Revenue grew almost 17% to $11.4 million, while our net loss declined by 34% to $1.5 million.

Last quarter I discussed the measures we implemented to cut costs and get our operating expenses in line with revenue.

We will begin to see the benefits of these measures in the third quarter.

We are starting to see improvements in our target markets as key markets, such as the UK and Western Europe, are showing increased activity.

As a result, we anticipate that Magal revenue will continue to increase during the balance of 2010.

I would like to turn the call over to Ilan for a few minutes to discuss the results, and then I will return to speak about opportunities for Magal going forward.

Ilan, please go ahead.

Thank you, Eitan.

Revenues for the second quarter of 2010 totaled $11.4 million, a 16.9 percentage increase over the $9.8 million revenues in the first quarter.

Gross profit for the quarter was $3.6 million, or 31.7 percentage of revenues, as compared with $3.7 million or 37.4 for the first quarter.

The decline in gross margin was due primarily to two factors; one, declining sales during the quarter from the UK and Western Europe; and, second, a greater [fortune] of our [affairs] for the quarter were (inaudible) projects other than for our own products.

Project always result in lower margin sales, due primarily to companies which we include from third parties.

The operating loss from the second quarter of 2010 was $1.7 million compared to $1.6 million in the first quarter.

Financing income was $110,000 for the second quarter as compared with financing expenses of $770,000 in the first quarter.

The net loss for the second quarter was $1.5 million or $0.50 per share, a decline of 35% from the first-quarter loss of $2.3 million or $0.23 per share.

Total cash as of the end of the quarter amounted to $4.8 million, a decline of $2.7 million from the first quarter.

If you analyze the results for the first half of 2010, revenues for the six months ended June 30, 2010 were $21.2 million, a 3% decrease compared to the $21.9 million for the first half of 2009.

Sales by geography for the six-month period ending June 30, 2010 broke down as follows -- North America, 35%; EMEA, 48%; and the rest of the world amounted to 17%.

Gross margin for the six months ended June 30, 2010 increased by 15.6% to $7.3 million or 34.4% of revenue.

That compared with $8.6 million or 39.5% of revenue in the comparable period last year.

Operating expenses for the six months ended June 30, 2010 decreased by 3.4% to $10.6 million in 2010 from $10.9 million for the first half of 2009.

The decrease is attributable to a decrease in operating expenses in North America following the integration of our US operations into our Canadian subsidiary and a decrease in the headcount and payroll expenses.

Operating loss for the six-month period ended June 30, 2010 was $3.3 million compared with an operating loss of $2.3 million in the same period last year.

The operating loss increased as a result of decline in sales.

Net loss for the first half of 2010 was $3.9 million or $0.38 per share compared with a net loss of $2.1 million or $0.20 per share for the same period last year.

As I stated last quarter, following the implementation of the organization plan, we expect to see quarterly savings of $120,000 per quarter in our operating expenses line item and $250,000 in our [COGS].

That concludes my remarks.

I would like to hand the call back to Eitan for his view of Magal going forward.

Eitan, please.

Thanks, Ilan I am feeling a bit more optimistic about Magal's growth prospects than I did last quarter, as we are seeing a number of positive signs in our target markets.

As you may have seen, we recently reported that we have received $5.5 million in new orders worldwide, including $3.5 million from Israel.

The Israeli holders do not include the Egyptian border fence project, which is still in the planning stage.

This project will not have an impact on 2010 numbers, but it is a significant long-term opportunity for Magal.

In addition, we announced recently two new wins for Magal in China, where we are providing perimeter security solutions for the Nanchang and Zhengzhou airports.

Both orders are for Magal fence-mounted fiber sensors.

We are now installed in 11 airports across China.

To our knowledge, this is more than the combined installed base of the rest of the competition, giving us a leadership position in this important market.

We see airport security as an important opportunity for Magal worldwide.

We were pleased to reach agreement with two new distributors during the quarter, one of the goals I set during the last quarter's call.

The new distributors will be covering entire nations, one in North America and the other in South Africa.

Both of these geographies represent major opportunities for Magal over the coming years.

And, we were glad to engage the type of distributors which will increase our coverage and exposure within this territory.

We have made significant progress in introducing new next-generation security products designated to meet our customers' needs going forward.

Three of the new products are FLEX PS, which is the sensor's next generation of fence-mounted cable sensor replacing our good but old Intelli-FLEX, and the FPS.

We took the most beneficial features from the current Intelli-FLEX and the FPS system and then optimized the design to offer an installer-friendly package with lower power consumption and the new, improved [standout] (technical difficulty) network interconnection, which enables remote diagnostics and calibration, among other things.

This product will be officially launched in October.

The PinPointer is a locating fence-mounted vibration detection capable of defining the exact location of intrusion to within two to three meters.

It is based on Magal Barricade [sensor] and is currently available for sale.

The Maestro DB is a software/hardware-agnostic version of the existing Dream Box solution.

It is designed to capture standard IT video inputs as well as megapixel high-definition video camera.

It contains mainly new features, including improved redundancy, storage capability and rich display capability.

The product is also available for the market.

In conclusion, I believe that as a result of the recent general shareholder meeting, Magal is now most stable company on several levels.

There will be now management stability, a factor which is critical to Company's future growth plans.

In addition, with the approval of the new cash infusion into the Company, Magal will now be beneficially stable to pursue growth opportunity as well as M&A opportunities, which will enable us to maintain our leadership position in the perimeter security market.

With this stability, management will continue to implement the new strategy plans designed to increase revenue over the next few years by focusing on the new growth opportunities worldwide.

I thank you all for your interest in Magal, and firmly believe that with the renewed support as we build for the future.

I will now open the call for questions.

(Operator instructions) Ken Liddy, Wells Fargo.

Looking out the rest of the year, do you feel that the Company is in a position to reach a quarterly profit in the third or fourth quarter?

Well, referring to the remaining of the year, I cannot say definitely that the third quarter will be profitable.

I hope that the fourth quarter will show profit.

As you know from previous years, the first half-year is usually weak quarter compared with the third and fourth quarters.

So I do see growth coming in the third and the fourth quarter.

Taking into consideration the cost cuts that we did in May-June, which will have an impact on our expenses in the coming quarters, I believe that we will see improvement.

Looking at some of the opportunities going forward, how confident are you that we are going to be seeing growth in 2011?

As I know about the opportunities in our pipeline, which I cannot go into detail for reasons that all of you understand, I can see good opportunities that will help us to grow the business with our strategic plan to focus on specific territories.

I do see the project side of the Company growing while, at the same time, we are pushing forward with new products, as you have heard, to increase our product sales.

Those activities in the short term, with any other strategic acquisition or any other strategic major activity, I might say that those opportunities are promising.

Do you expect gross margin to expand and get back to more traditional levels the second half of this year and in 2011?

Regarding the second half of this year, generally speaking, yes.

Specifically, I cannot comment on the third quarter and the fourth quarter separately, but I think that we will see better margins.

Whether they will go back to what you call traditional, it still remains to be seen.

But the potential growth with the revenue and, at the same time, the cost cuts that we have made gives me the confidence that we will see a better margin.

You mentioned in the press release that you're looking at acquisitions.

Could you go into any details of specific areas that you would like to look at expanding the Company's product mix?

While I wouldn't go into details, I would say just one thing, that we are looking to improve our technology base and presence in specific territories.

We are looking for both directions in our acquisition activities.

And some of the current tenders that you have that you are trying to win -- do you have any type of time frame when you expect to be hearing whether Magal has been awarded contracts?

Is that in the second half -- In September, October, November?

I may say that some of them we expect to be decided by the customers within the next 60 days.

Some of them will take longer, [meaning] in the last quarter.

And one final question with regards to the Egyptian fence -- when do you expect bidding activity, or has there been bidding activity to start on that?

Well, as I mentioned in my previous explanation, the Egyptian border fence is still within the Ministry of Defense in Israel design phase.

Nothing came out to the market, but we know definitely that there is a plan, there is a government budget allocated, and sometime next year it will come out as -- probably as a tender.

So this will have no impact on our results this year.

Hopefully, we will see the beginning next year.

Eitan, I would like also to expand on the question regarding profitability.

I think that, due to timing issues, it is not clear when we would recognize revenues, which would affect when we reach profitability.

This is one issue.

Second one -- we have to bear in mind that the mix of product is very important when we are analyzing our profitability.

And again, this is something that we should see in the future, whether we can sell more products as our strategic plan or, vice versa, we will win new projects in which, by definition, the gross margin is lower.

So regarding profitability, we have to remember that when we are speaking about trends in profitability.

Fred Ehrman, BMI Capital.

You explained the decline in the gross profit margins.

Looking at your current product mix and products you have in the pipeline, where would you hope to see gross margins, let's say, the next two years?

In other words, it's not a -- what would be your goal to see for your gross margins?

We would like to see our product sales growing with the growth of the markets, which is in the neighborhood of 6% to 8% a year, according to the latest researches.

And we think, with the introduction of new products, we might take more than the growth of the markets.

And growing our business on products, focusing on product sales in specific territories will help us to grow the product business.

By definition, as Ilan mentioned earlier, the product business creates better margins than projects.

At the same time, we are looking towards project in specific territory.

But when we speak about products, we have some technology advantage with our current products, and these products will improve our margins.

At the same time, we are working in the engineering and development side in order to improve our products in such a way that the cost structure of some of them will give us better margins.

So you don't have a target gross margin level that you would like to see, or that you expect to see?

I would say that the gross margin that we expect to see is, again, very much linked to the mix of sales that we will achieve.

In some cases, when we have higher recognition of revenue from projects, we will see lower margins.

But in bundled situation or in tradition situation, we might come back to the tradition growth margin, as we have in the last quarter of last year.

I would like also to add on that, Eitan.

I think that in the future we would like to see our sales in the long-term coming back to what we used to be in the past, based upon the mix of products, based upon more products.

And that would be approximately around 39% gross margin, more or less, 38%-39%, in the coming two, three years.

Okay, thank you.

You burned a fair amount of your cash in the first half.

You have approved a financing.

Do you have any more details on the financing?

Because your cash position is, on the rate that you're burning it, puts you into kind of a precarious situation.

However, of course, if you raise the funds that you're looking to, you will be in good shape.

Do you have any details on the financing?

At the current first level and after the manpower reduction in the last quarter, the burn rate is around $1.2 million per quarter.

And I expect that it will be like that in the coming quarters.

Eitan, would you like to speak about the pipeline regarding the future?

Well, when we speak about the burn rate of cash, of course, currently, on the current revenue level, that's the number.

If we will see more business than those opportunities coming soon, we will need to finance them at the very beginning as normal project requirements.

But we still have credit lines available in our banks.

And yes, these new financing coming, and following the last general assembly, will help us to grow the business, hopefully.

And based on the plans, the coming opportunities will generate profit and within a reasonable time, the Company will be profitable.

We hope that in 2011, Magal will be profitable.

And from that point on, burn rate won't be any issue any longer.

What is your current unused bank line?

What is our --?

Current unused bank line.

How much money do you have available from your banks that you have not used?

Ilan, can you refer to that?

We still have available credit lines in the banks.

I don't have the exact number here with me.

We can check it and refer to it later.

Okay.

Again, could you -- you have talked about a rights offering.

When do you anticipate that may happen?

As you all know, the rights offering was approved two weeks ago in the general meeting.

And as of then, we are working on the plan, and it will take a few months, according to the procedure.

So it will -- within the next three to six months, and as you follow the PR that we have presented before this general meeting, there is a bridge loan coming from Kirsh Group.

And when will that --

That will happen very shortly, I believe, within September, this month, actually.

So that will be the bridge towards your financing in three to six months?

Yes.

Okay, and you will use that finance -- and you will repay that bridge loan when you do the public financing?

Yes.

Okay, I don't have any other further questions, thank you very much.

(Operator instructions) [Uzie Ovitz], (inaudible).

My question is whether you are considering or have considered doing some sort of offering in the public markets in addition to the rights offering, or doing some sort of a stopgap to ensure sufficient financing for the Company in case of -- as an alternative to the rights offering?

For the moment and as was approved by Board of Directors and the general assembly last meeting, the current plan is to go for the rights offering, and we do not have on the table any additional plans at the moment.

There are no further questions at this time.

Before I ask Mr.

Livneh to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available in three hours on Magal's website, www.magal-s3.com.

Mr.

Livneh, would you like to make a concluding statement?

Thank you, operator.

I would like to thank you all for joining us today.

I look forward to speaking with you in the future and updating you on Magal's progress.

Please feel free to contact me if you have any question regarding Magal.

I wish you all Shana Tova.

Thank you.

Thank you.

This concludes the Magal Security Systems second quarter 2010 results conference call.

Thank you for your participation.

You may go ahead and disconnect.