Senstar Technologies Ltd (SNT) 2010 Q3 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the Magal Security Systems third quarter 2010 results conference call. (Operator Instructions).

I would now like to turn the call over to Mr. Kenny Green of CCG Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. Welcome to Magal's third quarter 2010 conference call. 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. Eitan Livneh, President and CEO, and Mr. Ilan Ovadia, CFO. Eitan will summarize the key highlights, followed by Ilan who will review Magal's financial performance of the quarter. We will then open the call for the question and answer session.

Before we start, I would 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 or 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 other risks identified in the documents filed by the company with the Securities and Exchange Commission.

With that, I would like to hand the call over to Eitan. Eitan, go ahead please.

I would like to welcome all of you and thank you for joining us today. I am very pleased with the results of the quarter. Reporting a continued sequential growth in revenue, but most importantly we more than halved our operating loss and we are well on track achieving our goal of returning to profitability.

Revenue grew 17% over prior quarter, reaching $13.4m and we reported an operating loss of $812,000 compared with the $1.7m last quarter. As you can see, the measures we have taken that I have discussed in the past few quarters to reduce our expenses and increase our profitability are working and we have lowered our revenue breakeven levels such that we should achieve breakeven in the near future.

We ended the quarter with a strong level of cash, at $14.8m providing us with more than sufficient level of working capital. This amount includes a bridge loan by our major shareholder, Mr. Nathan Kirsh, until we complete our rights offering. This was approved at the extraordinary general shareholder meeting and it is in the final stage before our filing a prospectus with the US Security and Exchange Commission.

After a difficult period that resulted from a global economic slowdown, some of our target markets have begun to improve. We see good traction in Israel in the emerging market region. And we hope to achieve some wins that we can announce in this region in the near future.

In Israel, we saw robust business and we recently won a follow-on order of $2.3m from one of our many loyal customers for a two-year contract for the support and maintenance of the major homeland security system in Israel.

In Latin America, we recently won a $1.7m tender to protect two major hub airports in South American countries, providing us with a strong reference to use when competing for business in the region. We are also involved in a two-year project in Latin America region to modernize the cell lock system in three federal prisons. As you can see, our team is seeing strong success and we see the region as an increasingly important and strategic geography for Magal.

Africa, we see also a very important and strategic region. As the continent emerge, security is becoming more affordable and even more vital, and we see significant potential for sales in that region.

We are also competing in a number of tenders globally, and our pipeline of potential deals has grown strongly over the last year. In addition, the size and strategic importance of deals in our pipeline has also grown in the past year. We very much believe we will have a good chance of winning a number of these tenders, and I will keep you updated with our progress.

A project which has not yet even entered to a tender phase, which may represent significant potential for Magal, is the Egyptian border fence project. If you remember we planned -- we played a significant part in the Seam Line fence between Israel and the West Bank a few years ago. A budget of ILS1.4b, approximately $400m, has been allocated to this new two-year project, building approximately 200 kilometers of fence. We believe that out of that amount, about 10% or $40m will be spent on the electronic defense system and we hope to win a good portion of that business over the next few years.

In terms of timetable, the ground has started to be prepared for the fence, and we believe that there will be a tender in the coming months. However, given that this highly politicized project, the timetable is anyone's guess, and this project can continue to progress very quickly or very slowly. I hope to update you on this in the coming quarters.

In summary, I believe that Magal is on the right track. We are seeing improvements in our end markets and we are in a much better position to capitalize on this than we were only a few months ago. We are a leaner, more efficient and more focused company, and the continued sequential improvements that we have seen over the past three quarters, is a testament to that.

I will now hand the call over to Ilan for financial review. Ilan.

Thanks, Eitan. Revenue for the first quarter 2010 totaled $13.4m. While this was 24.4% below third quarter 2009 revenues of $17.7m, we saw strong sequential improvement amounting to 16.9% increase over the $11.4m reported in the second quarter.

Sales by geography in the quarter were as follows. North America 41%, Israel 15%, Europe 15%, Latin America 20% and the rest of the world amounted to 8%. The sequential improvement was primarily due to increased businesses in the majority of Magal's geographies of operation.

Gross profit for the quarter was $4.5m or 34% of the revenues. This is below the $6.4m or gross margin of 36.3% in the third quarter of last year and an improvement of the $3.6m or gross margin of 31.7% in previous quarter. The sequential improvement in the gross margin was due to the increased level of revenues in the quarter, as well as the increased portion of FORTIS in revenue mix for the quarter.

Operating expenses in the quarter amounted to $5.4m. This is approximately $0.5m less than the $5.9m of expenses reported in the third quarter of last year. This demonstrates our strong commitment and success in reducing our operating expense levels, through merging our North American operations into our Canadian subsidiary, reducing headcount and payroll expenses, as well as other discretionary expenses.

Towards the end of the quarter, we sold our building in Fremont, California, for $2m, at approximately its book value. This cash from the sale should come in the fourth quarter. Maintaining this building was costing Magal approximately $200,000 a year, which will now be an additional saving to those already made to date.

It is important to note that our expenses in the third quarter are only $34,000 higher than expenses reported in the previous quarter. And this is while revenues increased by $1.9m over the past quarter. This demonstrates the operating leverage now built into our business. Thus, we are able to increase our revenues without corresponding increase in operating expenses.

The operating loss for the third quarter 2010 was $812,000 compared to an operating income of $473,000 in the third quarter of last year, and a reporting loss of $1.7m in the previous quarter.

Financial income was $97,000 for the third quarter. It compared with financial expenses of $839,000 in the third quarter of last year, and a financial income of $110,000 in the prior quarter.

The net loss for the third quarter was $799,000 or $0.08 per share. This is at about the same level as the net loss in the third quarter of last year, at $721,000 or $0.07 per share, and is less than the half of the loss last quarter at $1.5m or $0.15 per share.

Cash deposits and restricted cash as at the end of the quarter amounted to $17.8m. We reported negative operating cash outflow of $0.1m in the quarter.

The improvement in our cash level was due to a bridge loan of $10m from the company's principal shareholder. The bridge loan is for the period until the rights offering of shares to shareholders is completed.

That concludes my remarks. We will be happy to take your questions now. Operator.

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

Good afternoon. I just want to see if there's a dollar amount you could give us as far as how much your pipeline of opportunities has grown?

Well, we will, as you know from previous discussion, we will not describe the details and the numbers regarding pipeline. But I can tell the pipeline is in a better shape compared with what it was in the last quarter. We are approaching new projects in those regions that we have mentioned in the report, in this comments we have done in the last 15 minutes.

And we see more coming, so we feel comfortable with our general statement the coming future is promising or is looking better.

Do you expect awards of some of these significant opportunities before the end of 2010?

Well, how to say 2010 is nearby but some of the projects that we are awaiting results or decisions from customers are in the final stage. If that can come before year end we will be very happy and there is a chance for that.

Could you talk a little bit about how the current quarter is going so far?

Current quarter as we discussed even in the previous one, we can say that with all the reservations, that the fourth quarter is usually better in Magal as you all know, and this year it will be the same.

It still remains to be seen because in the project business, it's the question of recognition on the income and in the product, we see some improvement. So the fourth quarter looks better.

Looking out to 2011, are you expecting to be profitable for the year?

First of all, we hope to be profitable. Second, the numbers for the year or the budget for the year is not ready yet. Based on what we have and what we expect we expect to be better and we expect to be at the level of breaking even a little bit better or it depends, of course, on the real result because they are very much dependent also on exchange rates and things which are beyond our hands, and mix of products and mix between projects and products, but we see the coming year as I discussed in the last conference as well, that we show better in both revenue and in bottom line.

Is there any specific products that are of interest to your customers right now? Has anything changed since last quarter?

I am not sure I got your question. Can you repeat please?

Is there any other areas that have developed of interest by customers for some of the things happening globally? Are customers more interested in different areas than they had been three months ago?

Three months ago and today it's almost the same. I mentioned in my remarks during this call, I pointed out that Latin America and Africa are regions that we see more opportunities in general. And also in Europe, central and west Europe, I can say that we see some good signs that the economic situation is getting better. And that helps us to create more business.

And as far as margins, are you expecting margins to hold at the gross margins and operating margins to hold at this percentage or improve?

We are looking to improve and that goes back to the point of mix of project versus product. If the business will grow and hopefully the part of products will grow as part of the overall picture, the growth margin will be better.

This is Ilan. We also believe that after the cost reduction that we made this year, we came into a level of OpEx that we believe that will stay at this level in the coming future. That's regarding your question about the OpEx.

Okay great. Good to see the progress and thanks for taking my questions.

Thank you.

(Operator Instructions). 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 Magal's website, www.magal-s3.com. Mr. Livneh, would you like to make your concluding statement?

Thank you. On behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business. I would like also to thank my staff for their hard work over the past few quarters.

If you have any questions, please feel free to call me or any of our Investment Relation Team, whose contact details are on the Press Release. I do look forward to speaking with you and updating you again next quarter.

Have a good day. Thank you all.

Thank you, gentlemen. This concludes the Magal Security Systems third quarter 2010 results conference call. Thank you for your participation, you may go ahead and disconnect.