Senstar Technologies Ltd (SNT) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magal Security Systems third-quarter 2013 results conference call.

(Operator Instructions).

As a reminder this conference is being recorded November 27, 2013. I would 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.

I would now like to have the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

And good day to all of you. Welcome to Magal's third-quarter 2013 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 today on the call are Mr. Eitan Livneh, President and CEO, and Mr. Ilan Ovadia, the CFO.

Eitan will summarize the key highlights of the quarter 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.

And with that I would like to turn over the call to Eitan. Eitan, Go ahead, please.

Thank you, Ehud. First I would like to apologize on my voice. I almost lost my voice.

I would like to welcome you all and thank you for joining us today. 2013 has been a tough year for Magal.

While I am not happy with our weaker performance I am encouraged by the recent increase in our backlog and the strong pipeline that we see ahead of us. In addition, we are maintaining a tight control over our expenses despite lower revenue and increased spending money on our cyber activity and our increased presence in some key geographies.

Our net loss has remained kept and our net cash level has remained strong. We reported revenue of $12.8 million, a slight improvement over the last quarter revenue of $12.2 million but below revenue of $23.5 million in the third quarter of last year.

As I explained last quarter, Mexico has been much weaker this year due to the delays in Homeland Security budgets. I do note that the Latin American region overall remains a key target for us and we are investing in it.

At the same time we are treading carefully and we are looking for synergistic acquisition targets which will bolster a local Brazilian presence. I do hope that during 2014 we will be able to further this strategy.

In Colombia we recently announced an order to secure an oil and gas facility there, a first order from the region that we are very pleased with. We see significant potential for growth in the coming years and the Latin American region, as the whole, remains a long-term growth engine for Magal.

Europe also remained weak in the quarter due to the economy situation in the region. With regard to Africa, the continent continues to provide us with a good level of business.

While during 2012 and the beginning of 2013, we completed some major projects in the region, the new projects we got this year have been smaller and more diverse. As you can see from the press release we put out a few weeks ago announcing $6 million in two orders, one a follow-on at the port of Mombasa, Kenya and the second new order in different country. Businesses remain robust and our pipeline in Africa remains strong.

Our North American subsidiaries covering the United States and Canada continue to perform well balancing a portion of the shortfall in revenue from the weaker geographies. In Israel, the pilot phase of the protecting the southern border was completed successfully and we won an order for the second testing phase. We believe this prestigious work has the potential to lead to sustainable revenue over prolonged period.

While the timing is always uncertain, when it comes to government contracts we believe we are in the strong position here. I would like to highlight that while the business that we are doing means lumpiness in revenue, Magal is in a different situation than it was only two years ago. One of the clearest developments in Magal is our financial strength.

Our balance sheet is exceptionally strong for a company of our size with over $35 million in cash slightly up from last quarter and it is over half the value of our current market capitalization and provides us with significant financial flexibility more so than we have ever had in the past. And we are using this strong cash position to invest in Magal's future through R&D and mergers and acquisitions.

On the M&A front, we have been actively examining opportunities and there has been in discussion with potential candidates that have not yet materialized but we expect that some will do in 2014. We have also completed a strategic review with an external consultant to identify M&A opportunities in area adjusted to our core business that will expand our addressable market. And we intend to execute this strategy during 2014.

In terms of research and development, I would like to share with you some of our recent developments. We are very pleased with the progress that CyberSeal has made. We continue to work hard on bringing out complementary offering of monitoring solution for networks combining protection in both the physical and logical world.

We have already made many discussions with customers and we've seen interest in our integrated solution. We just completed a patent-pending filed network switch which we can plug and play into ordinary Ethernet networks providing a high level of cyber security.

We will officially launch this product in the first quarter next year and we are already seeing interest from some of the integrators we work with. Our effort in the cyber security space underlines our strategy to become a leader in the convergence of physical and cyber security.

RoboGuard is the new product we recently developed and we are seeing significant interest from customers. RoboGuard is a robot that runs on the elevated monorail along the perimeter of protected sites or borderlines carrying an assortment of sensor and potential payloads. The robot can respond promptly and rush to the exact zone or location where an intrusion is suspected.

It can automatically patrol and inspect fence integrity, looking for holes or suspicious nearby objects by using sophisticated video analytics algorithms. We have a video on our website on how the system works and I urge you to look at it.

RoboGuard is the perfect choice for sensitive unattended perimeters of critical sites where the customer cannot afford to man enough first response units in order to respond promptly to security events. RoboGuard can be used in order to prioritize the manned patrols and mediate the initial interaction with intruders.

The system is useful to airports, seaports, military and other sensitive sites such as prisons and borders fences. In prisons and borders, for example, the system can be used to perform the routine burden of regular inspection of the perimeter fence.

2013 will soon be behind us and looking ahead to 2014 we have much to be optimistic about. We recently announced a number of orders which has increased our backlog contribute to our 2014 results.

We are also seeing improved prospects in our current pipeline. Furthermore 2014 will be the year we will begin to see fruits of our recent R&D effort particularly our investment in the CyberSeal, our cyber security activity. I remain excited about our future and long-term potential.

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

Thanks, Eitan. Revenues for the third quarter of 2013 were $12.8 million, a decrease of 45% compared with $23.5 million in revenues for the third quarter of 2012. Sales by geography in the quarter were as follows: North America 26%, Israel 22%, Africa 25%, Europe 10%, South and Latin America 2% and the rest of the world amounted to 15%.

Gross profit in the quarter was $6.2 million, or 47.9% of revenues, a decrease of 37% compared to gross profit of $9.7 million or 41.3% of revenues in the third quarter of 2012. The high growth in margin in the quarter was due to the recognition of deferred revenues from a large project which was completed in the quarter as well as functional of changes in the revenue mix.

Our typical gross margin revenue is expected in the high 30&s. Operating expenses in the quarter amounted to $6.3 million. This is a lower than compared with $8 million that we reported in the third quarter of last year, as we continue to keep tight control of our expenses in the quarter in light of the lower level of revenues.

However, as Eitan mentioned, we are investing firmly in our R&D activities and our R&D expenses at $1.3 million were slightly higher than the average of the past few quarters. The operating loss for the quarter was $124,000 compared with an operating income of $1.7 million in the third quarter of last year. Net loss in the quarter was $316,000 compared with a net income of $1.8 million in the third quarter of 2012.

Cash and short-term deposits net of current bank debt as of September 30, 2013, was $35.4 million, or $2.20 per share compared with cash and short-term deposits net of current bank debt of $34.2 million, or $2.12 per share on June 30, 2013. That concludes my remarks. We would be happy to take your questions now, operator.

Thank you. (Operator Instructions). Thurman Willis.

I would just like to congratulate you on your strategy and what you have done at the expenditures you have made this past pain and future gain. So I salute all of management and the Company for what you have done.

So congratulations on the quarter and congratulations on your formula for success. Were you able to hear me okay?

Yes, thank you very much.

One other thing and this may come unusual but I know you are in an acquisition mode. And while I own MAGS and think it is one of the best security companies in this environment, I will just make a very short remark. It will be short and then I will get back in the queue.

I would say that in your consolidation I would encourage you to look at an American company with a 45-year-old history named Mace. I am sure you have heard of the pepper spray mace and all it would say is if you would read the press release yesterday, see the successes that they have had, the low price that their stock is selling for, the fact that they are the only non-lethal gel spray in the market, I think a combination of you acquiring Mace would add tremendously to your potential.

Because it is a household name and it has exclusives With Sports Authority, Sears, Kmart, AutoZone, Ace and Dick's Sporting Goods, and many many good things. They have cleaned up the Company. And I am not trying to sell Mace to you as much as I am trying to say that I think MAGS and Mace would make a tremendous combination.

And so I will just leave you with that and ask you to respectfully thoroughly review this company. It is selling at a cheap price that it has no debt and I think their sales are getting ready to explode because of the consumer request for pepper spray in a gun of 20 feet plus the security equipment. And I don't think any of your products overlap with theirs and I think it would just add to your Company and Mace in a tremendous way.

So I just made that as a comment as a company that I would like for you to look at. Again, I appreciate you taking my question and just congratulations on what I consider is going to be a really good 2014.

Thank you very much for your comments and we will look into that Mace company. I am not familiar with the company but we will review it. Thank you very much for your idea.

Thank you. Thank you.

Fred Ehrman.

Good afternoon, gentlemen. Nice 2014 projection. Hopefully, the execution will meet the expectations.

One quick question. In your press release as well as your opening comments you talked about having a little over $35 million in cash. Looking at the balance sheet at September 30, I see $27.9 million in cash and cash equivalents and $15.8 million of a short-term bank deposit.

That adds up to $43 million. what is the disparity? How do you reconcile those two numbers?

When we mentioned the figure of that you mentioned, it was net of short-term bank credit, which amounted to around $5.5 million.

All right, so -- yes, $5.6 million, I see that on the liabilities side. So that brings it down to about $37 million/$38 million?

That's about $39 million and then we have long-term bank debt of $2 million, so $37 million.

Okay. I would suggest in the future when you report generally those kind of calculations aren't done. If you say this is the amount -- you are saying net cash.

It kind of throws the reader off a little bit. I would say that maybe you should go into detail a little more on how that number is arrived at.

Okay.

Okay. Thank you very much.

[Elise Jacobi, Asset Research].

Hi, thank you. And hi, Eitan and Ilan, so a few short questions from me.

The first question is, you mentioned weakness in Mexico due to Homeland Security spending. What do you see in 2014? Do you see that improving?

Well, we expect -- Mexico has been going through a change of administration at the beginning of this year. So there were elections and then the president entered his office and the Homeland Security Department Ministry has been gone through a very major organizational change.

They changed the structure of responsibilities. And we expect it that it is stabilized now actually at the very last moment of the year. And we hope to see some better business in the next year, yes, we do.

Okay, great. And then you also mentioned that backlog improved.

Can you give any more specifics? Is backlog higher than it was at the end of last quarter, is at the highest it has been so far this year, what can you maybe say a little bit more?

As we announced lately about the recent orders and I can say that the backlog at this point is better than it was three months ago, definitely. It is the orders that we have been expected for many months and it's in the high 20s, I would say. I don't want to refer to the specific number because just in order not to bring bad luck for --

Right, right, right, okay.

Next two months expectations.

Right. Excellent. And then I know that in the last couple of years the early results were affected by very large deals but outside of that what do you see in terms of seasonality?

Is Q4 usually better than Q3, or isn't Q3 supposed to be stronger because it is the government yearend? Is there any pattern to your business, or is a completely unrelated?

Well, we don't have any rule in our behavior. Some years we have a better Q4 and some lower than Q3. It has a lot to do a lot on the projects in hand.

Those projects that we have announced lately will have very little if at all any impact on this year because most of them just started and recognition of projects takes time. So we will have fourth quarter which will not show much better numbers. But we are looking towards the execution of those projects in the next year and as I mentioned, very little impact on the fourth quarter.

Okay, great. And one last question from me, this is about CyberSeal.

I believe that you have mentioned that you expect to see deals in 2014. Do have a sense of deal size and the gross margins for CyberSeal?

No, we expect that CyberSeal will start selling products. And we expect higher-margin than on our regulars numbers. But deal size -- I doubt if we will pull in deals at the beginning.

Once we will make a project that will implement the convergence that we are trying to push into the market, then the CyberSeal will come as part of the overall solution Magal has offered. So in general, yes, we expect the higher numbers with CyberSeal both on the revenue as well as in the margins.

Okay, great. That's it for me. Thank you.

Ken Liddy, Wells Fargo.

Good afternoon. You mentioned in your press release that you are part of a group that is going to be securing the southern border of Israel. Could you speak a little bit more about that?

Well, we are not part of a group. We are Magal and we are competing with others. The Ministry of Defense is expected to choose three companies out of more following the test and these three companies are taking part of the next step and that is it.

So three of the four companies are going to be securing the border?

No, no, three -- I don't know out of how many. Three were chosen and qualified to go for the next test phase, not yet any announcement on the results of the operational test. It is already in process.

And if you do win business then there, with that be something that will impact 2014, or 2015, or beginning in later 2014, or --?

As Magal's experience in the Israeli border goes back over 30 years, we are looking at that as the potential business for the coming 20 years. So we refer to that as a strategy challenge to us.

We expect the decision on vendors will come sometime late 2014. And as in the past, there is more likely that they will pick up at least two, maybe three, that three will become vendors, qualified, but if the three will be there we will be there. We hope that we will be there anyhow and this business will be with us on a yearly basis not big numbers but every year for the coming decade at least.

When you say not big numbers are you talking about $5 million to $10 million, or $2 million to $5 million here?

I don't know yet but the first phase will be higher because that will come with the installations of the new solution on the new barriers. And then after it will become like ongoing in the lower end of the numbers.

Okay. As far as the recent wins you had quite a few in the last 45 days. Is there any macroeconomic reason that it all kind of just started flowing like this, or is there any type of renewed interest in securing sites because of the recent terrorist bombings such as Kenya?

Well, I have the same information on that level as you have. Yes, I can imagine that in Kenya some of the processes was moving faster in the last two months or lately due to the terrorist attack that they have faced. But I can see some of the project delayed until the last quarter due to slow moving with the government budgets but once -- that goes all over the world.

People realize that the year comes to its end and they are trying to materialize their plans. But no, I don't have any specific economy understanding that brings that in the last 45 days.

Do you see the momentum continuing as far as wins in the next few months?

Not the same momentum because we are not expecting that level of new orders. But we see some additional that size order will come and we will have those in the next three months or so. And of course we will announce on them when they will come.

As far as looking at 2014, is there anything that you are particularly -- as far as your pipeline -- is there anything out there that you are particularly looking for as far as larger contracts?

We are expecting 2014 to continue and improve over 2013, as I mentioned. We cannot refer to any specific large order, or small order.

We are doing our efforts on both. If there are large opportunities we try to be competitive and we are looking after the relatively small, if you speak about $2.5 million to $5 million project but taking advantage of our selves being in many territories considered as a local domestic players like in Latin America.

While in Africa, Magal Israel gained some reputation and that helps us a lot. But other than that there are nothing special that we expected.

As far as your North America subsidiary, it seems like it has been quiet for some time there. Do you expect any sort of rebound in that division?

We do not see any major change in the North American market. We are happy with the fact that we have succeeded in 2013 to improve over our 2012 North American numbers. And we expect to see some increase also in next year but not of any major change.

Has there been any progress with the US border in Mexico and Canada (multiple speakers)

Not to tell about.

Is that still an active pipeline issue?

Yes but you know better than I about the US authorities are facing in the border with Mexico mainly. We are looking after that. We have placed our proposal with one of the large American enterprises and we are still waiting in line with others.

The third quarter you really had a dramatically lower third quarter this year than last year in revenue. Did any revenue fall into the fourth quarter, did anything like --?

No, we don't see any major falls between the third and the fourth quarter. Some of the projects that were delayed this year, and we have announced on them lately, will have a better -- we will enjoy the portion in our 2014 but not necessarily -- or very little of that in 2014 fourth quarter. That is, sorry, 2013.

And the other dramatic thing is, it is shocking that you have lowered your overhead as much as you have. How have you done that?

The numbers are baffling that you are basically breaking even at the $12 million level. Could you talk a little bit about that?

You can see part of it has to do with the reduction of our revenue that has an impact on our sales and marketing expenses. And the other part of our G&A or our overhead, this was planned and this is according our policy to keep as tight as possible on that level. Because we are familiar with the instability coming from our projects and we try to keep ourselves -- I would call it athletics.

Previously you had mentioned about being profitable the second half of the year. Do you still think that you can achieve profitability for the second half of the year?

It looks now following the results of the third quarter, it looks different and I assume we will not be profitable.

Okay. And when would you be expecting the recent orders, starting to hit revenue like the second and third quarter of next year?

You can imagine that part of them even on the first one.

Okay. Okay, great. Thanks for answering my questions.

(Operator Instructions). Ken Liddy, Wells Fargo.

Just one more question. Do you plan on doing any type of roadshow, talking to investors in the near future?

That will -- I think will be part of our activity in the mergers and acquisitions domain. And that will come together once we will have something in hand and we will make something different than we are doing now.

And with your CyberSeal, how is the reception of your existing customers with that product? The idea of the product?

As I mentioned, most of the people we speak on the idea whether they are consultants all over the world, customers in certain regions in the world, the reaction was very positive. But it has not turned yet to any real request for proposal or a tender.

That will take time and we know that from day one. It's not a surprise to us.

How much do you think -- say that in 2015, 2016 how much do you think that could add to your revenue and profits?

That is too early to say, I'm sorry.

Okay, understood. Okay, thanks again.

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 statements?

Just before making my concluding statement I would like to invite you all to visit Magal website. We have added some videos and reports on events which will give you an idea of the latest marketing activity we have done here in Israel with the exposure or the presentation of our new technology and new product.

And with that I would like to thank you all for continue to show continue interest and long-term support of our business. If you have any questions feel free to call me or my Investor Relations team whose contact details on our press releases.

I do look forward to speaking with you and updating you again next quarter. Have a good day. Thank you very much.

Thank you. This concludes the Magal Security Systems third-quarter 2013 results conference call.

Thank you for your participation. You may go ahead and disconnect.