Senstar Technologies Ltd (SNT) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems first-quarter 2011 results conference call. All participants at present are in 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 turn over the call to Mr. Kenny Green of CCG Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. Welcome to Magal's first-quarter 2011 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 the financial performance of 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 other risks identified in documents filed by the Company with the Securities and Exchange Commission.

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

I would like to welcome you and thank you for joining us today.

Magal continued to make progress from both financial front, but very much the strategic front. We have seen year-over-year improvement revenue, margins and all parameters, combined with our now exceptionally strong backlog, including the new order we announced today. We feel the first quarter's progress is a very solid base for 2011.

I would like to start with summarizing our financials, before I talk about recent order win.

Revenue for the first quarter grew 18% over the first quarter of last year, reaching $11.5m. And we reduced our operating loss to $1.2m, from around $1.6m in the first quarter of last year. Our bottom line improved from the net loss of $2.4m in the first quarter of last year to a net loss of $1.6m.

It is important to note that the first quarter is always seasonally the weakest for Magal, primarily due to the difficulty to execute its perimeter protection projects also in winter months in many of our major geographies in which we operate. This was especially true of the US this year, which as many of you are well aware of, faced particularly bad weather this winter. However, we believe that a large portion of the revenues that were specifically delayed in Q1 due to the bad weather will come in Q2.

Additionally, we already started executing on our large project in Mombasa and our Western African port project quite recently, and minimal revenue was recognized from this project in the first quarter. I will discuss Mombasa and our other projects later on.

Our gross margin in the quarter grew to almost 40%, with continued improvement throughout the past year. The gross margin has been growing because our strategy is focused on competing for higher margin and strategically important projects in regions where we have already demonstrated our strong capabilities. In addition, we are focusing on being more efficient in executing our projects, and our success is evidenced by the margin increase.

Additionally, we are spending more money on sales and marketing compared with that of a year ago. We see significant opportunities right now, and we want to ensure that we are well positioned to capture as much business as possible. And as you will agree, we have recently been able to capture some significant opportunities.

We ended the quarter with cash, restricted and long-term deposits amounting to $22.2m, providing us with a sufficient level of working capital for our current needs.

We expect to complete the rights offering to shareholders in the coming weeks, which will significantly strengthen our balance sheet. We have made initial filing with the US and Tel Aviv security authorities, and we hope to complete the process with money in the bank at some point in late July or August.

Moving on to our projects and a market summary, our business has a lot of positive momentum through the recent project wins we have gained in the emerging markets of Latin America, but especially Africa. Our backlog is very strong. Including the win we announced today in Africa, backlog is (inaudible) at any time in Magal's history. We still see potential for more, and we are chasing a lot of opportunities in our pipeline of potential business.

In the Africa region, we have been very successful at winning projects. As African markets emerge, the countries in the region are increasingly placing importance on the security of the access they are building. Today, we announced the win of the largest project in our history. We signed a $35.5m contract in West Central Africa for a turnkey project to provide a fully integrated security system, ready for the 2012 African Cup of National Football [Championship], which will be held in January 2012.

Given the very short timeframe and size of this project, we have already made all the initial preparation and plans, and we have set up internally a team specially tasked for this project. Execution and installation of this project will begin almost immediately, in the coming days.

The security solution will cover multiple sites and will include a number of smart sensors, gates with access control, x-ray screening devices, a full CCTV solution with multiple surveillance cameras and sophisticated intelligent video analytics capabilities, as well as intercom and public announcement systems. The full system will be networked and integrated into several command control centers by Fortis.

This project represents a highly significant business achievement. It is also a very important additional reference for us, both in the African region, but also providing us with a new potential market opportunity for our depth of securing major sporting events.

With regard to our big project in Kenya, as I explained earlier, our $21m deal to secure the Port of Mombasa has only recently started processing. We recently completed all the critical design reviews and preparations, informing customer [forward]. We will begin the execution. We expect this project to take the rest of the year and next. And we believe that our close cooperation with the Kenya Port Authorities and our experience in procuring sea ports will lead to further similar orders in the region.

At the beginning of the year, we also announced the achievement of a contract to protect another sea port in West Africa. While this (inaudible) the project was much smaller than Mombasa, amounting to $2.6m, it is an additional demonstration of our momentum in the region. This project also only started after the end of the first quarter, but we are now in the middle of the delivery phase and we expect the project to be completed this year.

Latin America remains an important target for us. The region performed strongly in the first quarter. We are working on a number of projects, including the protection of two major hub airports, as well as a significant $3m project for protection of a federal crisis management bank. We are also progressing with the completion of projects from last year, and we believe we are in a good position for additional business from customers later this year.

In Asia, we continue to perform strongly. In February, we won order for the perimeter protection for two sites, nuclear power plants. We also won an order expanding a current project at a major international airport, adding a taut wire fence and buried cables, as well as extending the airport communication surveillance equipment. We have a number of other important projects in the pipeline there. We are particularly focused on airport perimeter protection projects, in which we can already point to a large, broad installed base in the region.

Within our local market, Israel, business remained robust. Recent major wins include a two-year contract for the support and maintenance of a major homeland security system, a video motion protection project of a future cell site, an upgrade order of the perimeter fence of a high profile prison, an additional order for improving the system of the seam-line fence.

Overall, the past few months have been very strong from a business development point of view, leading to our highest backlog level of all time, and we believe that we will see the fruits of our efforts over the coming quarters. We are now at a plain inflexion point, where our business is lean, efficient and focused, while looking forward to strong growth from our recent wins, as well as those to come.

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

Thank you, Eitan.

Revenues for the first quarter of 2011 totaled $11.5m, 18% higher than the first quarter of 2010 revenues of $9.8m. Sales by geography in the quarter were as follows -- North America 19.6%, England 18.4%, Europe 15%, South and Latin America 31%, and the rest of the world amounted to 16%.

Gross profit for the quarter was $4.6m, or 39.9% of the revenues, compared with $3.7m or gross margin of 37.4% in the first quarter last year.

Operating expenses in the quarter amounted to $5.8m. This is higher when compared with $5.3m reported in the first quarter of last year, and was primarily driven by additional marketing and sales expenses. It is important to note that at the same time we strongly reduced our G&A expenses by over $300,000 in the quarter, compared to last year, a demonstration of the effectiveness of the cost control plan.

The operating loss for the first quarter of 2010 improved to $1.2m, compared with an operating loss of $1.6m in the first quarter of last year.

Financial expense was $155,000 for the first quarter, compared with financial expenses of $769,000 in the first quarter of last year.

The net loss for the quarter was $1.6m, or $0.15 per share. In the first quarter of last year, we reported a net loss of $2.4m or $0.23 per share.

Cash, restricted and long-term deposits at the end of the quarter amounted to $22.2m.

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

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

Congratulations on the incredible order today.

Thank you.

So you mentioned in your press release that you expect [significant] orders for early 2012. Do you expect to recognize the revenues -- most of the revenues in 2011?

Yes, we do. The special project that we have announced today is supposed to come to an end, as we understand, and major part of it will be recognized this year.

You also indicated that you expect the gross margins to remain strong. That would seem to indicate that the gross margins on this project are quite high. Could you talk about what your expectations for gross margins for 2011 are?

Well, we expect that the gross margin for 2011 will be at the same range that we are in and, as we said last time as well, that we are aiming to the high [30s]. And we think that we will keep that, as you see in the first quarter. I hope this will remain with us in the coming quarters, and year-end as well.

How do you expect the revenue to be recognized for this latest project? Will it be largely in the second and -- third and fourth quarters?

Practically, it will be divided between these two, as I said, major part of it. The exact portion in each one is not yet defined. We don't know yet, actually.

And the Mombasa order, you indicated that you've started that order. Do you expect significant revenues from that order in the second quarter or later this year?

Not in second quarter, but later this year we do.

Could you talk about some of the -- you indicated the pipeline remains quite strong. Could you talk about some of the regions that you're particularly excited about?

As I said earlier, we are still focusing in Latin America, as you understand also in Africa, and the Orient, the Far East. In all of those, we believe that there are opportunities. We are participating in different tenders and RFPs. And we hope that in the next quarter we will be able to report on additional new orders coming from those regions.

Getting back to today's order, how long was the tender time for that order?

I am not sure I understand the question. Can you repeat it?

When did you begin the bidding for that order that you announced today?

Well, usually the processes are long. An open tender can take sometimes a year, even, before any purchase order will be issued. Some of them are shorter, but the cycle, by definition, is long, takes months. And it's not something that happens short in projects, when we sell projects. When we sell products or sensors in the world, the cycle or the orders are coming quite soon after the quotation was placed, in most cases. And still, some of them are much longer. At the end of the day, they are all connected to a site, and the question is whether the site is ready or it's a preliminary quotation or it's a preliminary request. And therefore, it takes quite long.

Understood. You also indicated that your backlog right now is at a record level. Could you quantify that? What is the backlog, currently?

Since the end of 2010, we refer to $54m, around $54m. And you see our report on the first quarter. And plus the $35.5m, we are in the neighborhood of $80m to $85m.

At that level, it would seem to indicate that profitability for the year and for at least the second half of the year would be likely. Are you comfortable with that?

Yes, I'm comfortable. I think that, as I said earlier this year, that we expect 2011 to be profitable.

And do you expect revenues to be at a record level? How much of the $80m to $85m would you expect to be in calendar year 2011?

I cannot tell you exact number, and I don't know if it will be a record. I must say that the record is nice to achieve, but the profit is more important.

Understood. That's all my questions for now. Again, congratulations. Thank you.

Thank you very much.

Your next question is from Gary Markoff of Morgan Stanley Smith Barney. Please go ahead.

Hey, guys. Hey, Ken. Could you just give a little bit more color? Ken asked a whole bunch of questions in a different line of sight than I was specifically looking for, so you'll maybe retouch on this a little bit. How many people were in the bidding for this big order you just got? How did that shake out? How did it start? When were the RFPs put out? How were you included? What was the process of all that?

Well, the general processes start with the customer that presented the need. And in this case, there is an overall request for security plan. And we will participate in the RFP for the physical protection part of it. I think that a few companies -- whether it was five, six or seven, I am not sure right now, but at the end of the process we're the one that was selected. And then, after all the process of defining the details and the contract, and as usual, in this case it was happened in a short process, compared with what I have just mentioned. But definitely it is a challenge.

Okay. There has been a credibility issue with the prior management, with big announcements that haven't happened. And one of the things that you have said that you wanted to rectify was to make sure that there was a cash payment paid upfront before announcements were made, or something that was locking these contracts in. Could you describe that process this time around?

Well, I can just tell you that I stand behind my plan. And the announcement will follow after a positive input coming that assures that this project is a valid project.

I see a line on the balance sheet that talks about customer advanced going to $4.49m from $2.42m. Is that represented for this particular project we're talking about in the stadium, or is that other stuff?

The balance sheet does not represent this project. This project announced today is not part of our Q1 report.

Okay. Great. And so we'll see that in the Q2 report?

Yes.

Let me ask the question this way. What is the agreement upon which the payment comes in?

Well, I'm not going to present in details the terms of payment in this contract, but you will see that in the second-quarter report.

Let me ask you the question this way. Has the ability to pay been evidenced?

Yes. I said that this was the reason why we announced it.

Okay. Very good. So I guess that's the bottom line of that particular question. With regard to the stepping up in selling and marketing expenses, which went up smartly, revenues went up, gross margin went up faster. Selling and marketing went up even faster than that. All well and good if these guys are bringing in $35m projects, or even $5m or $10m or $15m projects. Is that line going to flatten, or is that going to be moving with business booked?

Will it be flattening, I don't know. But it not necessarily will grow with the revenues.

So you should have greater operating effect from the additional sales and marketing guys -- general sales and marketing effort?

Yes, we hope so. We are doing our effort in order to get more and increase our revenue, not necessarily this year but we are working on some projects, as you understand, on a long cycle. But the investments or the expenses happen now, in order to get some orders even next year.

Okay. You did mention, I believe -- I thought I heard you say that there were two airports in the United States that are in play.

No. We have mentioned two airports in Latin America.

Latin America, okay. Not the United States.

No, this time not.

Okay. Well, that's fine because the United States market never unfolded. It was always a huge potential, still a huge potential, but I was surprised to hear it was starting to go. So the two airports in Latin America, are they in the same country or different countries?

No. This one is in the same country, two airports which we have reported. And this will -- started and will end this year.

Okay. And the revenues per airport, can you disclose that?

No.

Okay. Well, congratulations. It's nice to see some big wins being put up, and I look forward to a progress going forward.

Thank you very much, Gary.

(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 a concluding statement?

Thank you very much. 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 my Investor Relations team, whose contact details are on the press release. I do look forward to speaking with you and updating you again next quarter. Wish you all a very good day. Thank you very much.

Thank you. This concludes the Magal Security Systems first-quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.