Senstar Technologies Corp (SNT) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Magal's fourth-quarter 2013 results conference call. (Operator Instructions). As a reminder, this conference is being recorded. You should have all received by now the Company's press release. If you have not received it please contact Magal's investor relations team at G.K. Investor Relations or view it in the news section of the Company's website, www.Magal-S3.com.

I would now like to hand over the call to Mr. Ehud Helft of G.K. Investor Relations. Mr. Helft, would you like to begin?

Thank you, operator. Good day to all of you. Welcome to Magal's fourth-quarter 2013 conference call. I would like to welcome all of you to the conference call and thank Magal management for hosting the call.

With us on the line today are Mr. Eitan Livneh, President and CEO, and Mr. Ilan Ovadia, the CFO. Eitan will summarize the key highlights followed by Ilan who will review Magal's financial performance. We will then open the call for a 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 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 system industry as well as other risks identified in the documents filed by the Company with the SEC.

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

Thank you, Ehud. I would like to welcome you all and thank you for joining us today. 2013 ends a tough year for Magal. While I am disappointed with our weaker performance, the year is behind us and we are working hard on returning to growth and profitability in 2014. As we move through the first quarter of 2014, the signs we see are positive and I am encouraged by the recent increase in our backlog and strong pipeline ahead of us.

We reported full-year 2013 revenue of $52 million, a 33% decrease compared with last year's revenue of $78 million. There were a number of reasons for the weaker year. I would like first to note 2012 included some major projects including end of the Gabon Africa Cup of Nations project as well as a large portion of Port of Mombasa project.

In addition, we were affected by slower business in a number of regions most notably Europe due to the regional negative economic climate. We also saw a complete [hard] in new projects in Mexico following the election due to a delay in Homeland Security budget which we believe is now beginning to free up. All of these added up to a weak year.

On the positive side, we ended 2013 with a backlog of $31 million which is actually a higher level than we had at the end of 2012. In addition, we have increased business in the early part of 2014 and as of today our backlog stands at $35 million so this underlines my expectations of much improved year in 2014.

I would like to highlight that while the business that we are in does mean lumpiness in revenue, Magal is a very different and much stronger situation than it was only a few short years back. One of the clearest changes in Magal is our long-term financial and balance sheet strength. Our balance sheet is exceptionally strong for a company of our size with over $36 million in net cash and it is that about half of the value of our current market capitalization. It provides us with significant financial flexibility and we are using this strong cash position to invest in Magal's future through R&D and mergers and acquisitions.

While I do aim to grow organically in 2014, I also hope to leverage our strong cash position to grow our business through acquisitions. This may be either an acquisition of new technologies and products in order to expand our capabilities and offering or an acquisition of a [blaster] -- two [blasters], our presence in key target geographies.

Earlier this year we completed the strategy reviewed to identify mergers and acquisition opportunities in areas adjacent to our core business that will expand our addressable market and we intend to execute this strategy during 2014. We have been actively examining opportunities and have been in discussions with potential candidates that have not yet materialized but we expect some will do in 2014.

I would like to discuss what we are currently seeing in our region. While Latin America was particularly weak in 2013, it remains a key target for us and we have been using the down time to invest in it. As we move into 2014, we are seeing new momentum in budgets which were frozen in Mexico are beginning to free up. Our pipeline in Latin America is strong and we see significant potential for growth in the coming year.

Europe was weak throughout 2013 due to the economic situation in the region. However, as we move into 2014, we have already seen an increase in orders and general economic improvement there. I believe 2014 will be a good year in this area.

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 received this year were smaller and more diverse. As you can see from the press release we put out recently, we received a follow-on at the Port of Mombasa Kenya. The fact that we continue to receive orders from this customer how orders and building close working relationships with our customers can lead to many additional and follow-on orders. Our pipeline in the region remains strong and we are working hard to win additional projects.

Our North American subsidiaries covering the United States and Canada are performing well and we expect to see further growth in 2014. We recently announced a number of orders for installing system in correctional facilities and prisons in the United States and Canada. We announced a $5.2 million order for the Duress systems upgrading 11 existing sites and do installation of a further eight sites utilizing our latest command and control system. A further $1 million was for securing the perimeter of two prisons in Canada.

We are very pleased with the progress that Cyber Series has made, our Cyber company. A month ago we appointed Ilan Kaplan as the CEO of the CyberSeal business. He boosted significant experience in the networking and communication infrastructure earlier and will spread ahead CyberSeal growth. The team at CyberSeal has been working hard to bring out the complementary offering of monitoring solutions for networks combining protection in both the physical and logical worlds.

The discussion we have had with customers so far see strong interest in our integrated solution. In fact we are already seeing some initial revenue and we expect a more significant contribution this year. Next week we will showcase the product at the ISC West 2014 Security Exhibition taking place in Las Vegas. Our effort in cyber security space underlines our strategy to become a leader in the convergence of physical and cyber security.

We are also investing R&D dollars in new security technologies. We released a product called FlexZone, a new state-of-the-art ranging fence mounted sensor at a competitive price. The product provides high sensitivity with lower nuisance alarm as well as 3 meter location accuracy. It can distinguish between nearby simultaneous intrusions and it also contains many improvements that should make the life of installers simpler. We are also in the final stage of acquiring some advanced technologies and products broadening our portfolio of solution for perimeter intrusion detection.

In summary, 2013 is behind and we are fully focused on growing our business in 2014, returning it to growth and profitability. Our strong backlog combined with an improving pipeline, budgets which are finally moving forward as well as economic improvement in some of our key geographies should all contribute to growth in the coming year. I remain excited about our future and long-term potential.

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

Thanks, Eitan. Revenues for the fourth quarter of 2013 were $13 million, a decrease of 42% compared with $22.2 million in revenues for the fourth quarter of 2012.

Sales by geography in the quarter were as follows. North America 23%, Israel 24%, Africa 6%, Europe 18%, South and Latin America 11% and the rest of the world amounting to 18%. Full-year revenue was $51.5 million, 34% below the $78 million reported in 2012.

Gross profit in the quarter was $4.5 million or 34.5% of revenues, a decrease of 56% compared to gross profit of $10.1 million or 45.7% of revenues in the fourth quarter of 2012. For the year gross profit was $20.5 million or 39.7% of revenues compared with $33.5 million or 43.2% of revenues in 2012.

The lower gross margin was a function of changes in revenue mix between periods. It should be noted that our typical gross margin level is expected in the high 30s. Our gross margin for 2013 at 39.7% is in the expected range.

Operating expenses in the quarter amounted to $6.9 million almost as we reported in the fourth quarter of last year, as we continue to keep tight control of our expenses in light of the lower level of revenues. For the year our operating expenses were $25 million. This is lower than the $28 million last year as we continue to keep tight control of our expenses in light of the lower level of revenues.

As Eitan mentioned, we are investing more strongly in our R&D activities and our R&D expenses at $1.2 million were at the same level as last quarter and higher than the average of the past few quarters. The operating loss for the quarter was $2.4 million compared with an operating income of $3.2 million in the fourth quarter of last year. For the year, we reported an operating loss of $4.5 million versus an operating income of $5.6 million in 2013.

Net loss in the quarter was $2.3 million compared with a net income of $1.3 million in the fourth quarter of 2012. For the year, we reported a net loss of $4.5 million compared with a net income of $4.1 million last year.

Cash and short-term deposits net of bank debt as of December 31, 2013 were $36.3 million or $2.26 per share compared with a cash and short-term deposit net of current bank debt of $41 million or $2.55 per share on December 31, 2012.

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

(Operator Instructions). Thurman Willis.

Good morning, gentlemen. I was just wondering, can you give us any more flavor as to how soon we might improve. I'm sure this quarter to the Street was unexpected as the stock as you can see is down $0.61. I know we say we are going to improve and I firmly believe that, I have a long investment in this Company, believe in the Company, believe in management, believe in your cyber security. I think we are way undervalued and should we see an improvement in first quarter and since first quarter is really ended almost, how soon do you think we can return to profitability? Then I have one follow-up.

Good morning to you. As you know, we are not yet at the end of the first quarter. We do see for sure signs of improvement comes from the fact that we are running much more business. We are in the end of the quarter. We have higher backlog and the first quarter is not yet finalized. We cannot refer to numbers for the first quarter, we don't know yet if the first quarter will be as good as we expected this year to be.

As you know, projects happen in the year sometimes over a year and therefore the recognition of revenue is not necessarily happening in the first quarter. The first quarter in Magal traditionally is weaker than the rest of the year. That is the way we do. You know better than I how cold is the last month in the United States and in Canada for example and that has an impact on our business. But at the same time, we see the pipeline in front of us. We have the backlog in hand and with this too we are confident about the remaining of the year not necessarily the first quarter.

Thank you. My follow-up question pertains to the monies that we may or may not spend relative to cyber security. While I believe that we should make an acquisition, are we gaining much traction? We don't break out the revenue relative to cyber security but can you put a little bit more emphasis on the progress that we are making? And I would take it that any acquisition that we make would be accretive at the time we make it. Can you expound on that please, sir?

First of all, we have acquired about a year ago a company, CyberSeal. CyberSeal invested in 2013 a lot of effort and they are going to introduce new products which are not only new for ourselves but they might be new for the world in the upcoming ISC show next week. So that is first based on the activity we have already done. Yes, you are right. We see the cyber field or domain as promising and while we are looking to invest in new business, cyber is one of the most interesting ones to become an engine for our growth.

Definitely acquisition is a process, it is not something that happens in one day. As I mentioned in my summary, we are in the process, we have already at least we are working with the new vice president in the company for mergers and acquisitions as we announced a nomination of that in early February and we are taking that very seriously. And the cyber -- among the security products, because cyber companies that are out there in the world whether it is the United States or domestic markets and Israel, relatively small companies out there. We are not looking to acquire a startup. We are looking to acquire a mature company that has revenue already exposed to the market, some added value already recognized by the world, and that is a challenge within the cyber.

Do you think that it would be accretive immediately? And of our $35 million in cash, would we look to spend half of it, all of it or can you give us some range of how much cash we may spend or we may have to spend some ranges that we may have to spend to buy a mature company?

Well, our target is to acquire a company that immediately will be part of our growth both in revenue and in bottom line. Whether it will work or not that is the challenge but that is the way we go.

And we plan to spend what percentage of our money?

That remains to be seen, it depends on the target company that we will find.

Okay, and you can't we would spend all of our money, half of it or whatever? You can't define that any better?

No, no. I cannot.

And then I do have one follow-up relative to Croatia, Ukraine, Russia, etc. Surely there will be some security built in this area to protect those communities. Have we gotten any potential requests or do we think are we involved in that part of the world and would we think we may get some business out of this?

We are involved in this part of the world for many years. We do business in the region but if you refer to the latest events in the region, it is too early to say. Anything that will come out of these changes will take I wouldn't say years but definitely over a year so we are following it closely and we will keep ourselves in the region.

So you said we could possibly expect on these cyber in a week or two to hear about a new program that we may have?

No, nothing that will happen in a week or two. The only thing that will happen in a week or two is the new product launch in ISC West which is Las Vegas next week.

Right, but you said that may be a state-of-the-art program.

That will be state-of-the-art products.

Thank you for taking my question.

Thank you very much.

Nathan Weinstein, CL King.

Thanks a lot. I just want to say I agree with the first caller, my opinion is it is a great business. I just had one quick comment and one question.

The comment as a shareholder, always love to see insider buying as the ultimate vote of confidence so that would be nice. And then the question is about your salesforce. Can you describe it and then whether you guys are growing that salesforce and making hires there? Thank you.

Would you mind to repeat your question, I am not sure it is clear.

Yes, the question is on your salesforce, your sales team and whether you are growing the sales force?

In general we grow the sales force according to our plans. We work on a budget and we have different expectations in different regions of the world. Where we have expectations and we see some growth potential yes, we do increase our sales force. We did it also during 2013 according to our 2014 plan. Yes, the answer in general is our salesforce is growing as we need.

Thank you.

James Kahn, Oppenheimer.

Gentlemen, hi. I am a long-term shareholder. I have two questions. One is, I have always been a little bit fuzzy on the connection between perimeter security and cyber security. I am wondering if you can explain that particularly in regards to does this give you some kind of competitive edge because there is a lot of firms out there in cyber security but few that are also doing perimeter security.

My second question is this Las Vegas thing sounds exciting and we on this call are your shareholders. I am wondering if you can give us a little advance preview of what you will be saying in Las Vegas?

First of all regarding the cyber and the convergence between the physical and what we call logical, I invite you to walk through our website. There are nice video clips which gives you the overall idea. But in the short call I can say that we definitely see the critical assets in the world whether oil and gas facilities or power stations, it comes from the government regulatory that impose on this site to be protected both physically and logically. At the end of the day, the threat coming from the outside world whether it is physical intruding via the physical fence or logical, intruders that will come via logical net -- not necessarily the IT because IT is protected or there is a system to protect IT many years back, firewalls and etc.

Now we are speaking about the non-IT networking that goes for operational, that goes for the security network itself. You know how much exposure you have in the CCTV that protects any critical asset you can think about in the United States so we are looking towards that. The convergence starts to evolve in the world mainly the United States and the Western world and we really believe that this is the future of security we are developing.

And that brings me to the next question, product and you can also see those in the CyberSeal website which will be the first time exposed in the show in Vegas but they are already on the website. One of them is a cyber protected field switch for example and the standard switches that everybody uses in networking and networks are not cyber protected, means everybody can pass them.

We have developed, it is intellectual property protected and this was our CyberSeal IP and I am sure that this will be a very attractive new product in this show.

Thank you.

Thank you very much.

[Samir Botski], [SCR Asset Management].

Good morning, good afternoon. The backlog, could you sort of indicate what kind of timeframe you expect it to be reported? Is it a year, is it two years? Is the backlog made up in a similar manner to your sales of the current year?

The answer for the last part is yes, most of the backlog is similar in nature to what we are doing in the last year. The backlog we have in hand is I would say 80% is about to be reported this year. Of course we expect it to collect much additional and more orders in the coming months as we sell products, sensor. The cycle is much shorter and we are collecting orders and make the sale within the same quarter. So that will add of course to these projects that we expect to sign contracts for whether they will start this year part of them will be recognized this year and part of them will go definitely to 2015 and hopefully some of them will be big enough in order to take us over 2015 but that is the nature of the projects. So we see that as a very positive situation at this moment.

Okay. You alluded to the fact that you are impacted by weather and the first quarter is your weaker quarter. So is it fair to say that the contracts that don't begin because of the colder weather will start in the subsequent year quarter? And what is your necessary quarterly revenue to breakeven? Could you sort of indicate that situation?

First of all, it is very much dependent on the mixture between our different activities. Second, as we think about our breakeven point, we see a quarterly $15 million to $18 million, maybe $16 million to $17 million or $19 million a quarter. Depends very much on the mixture what is there. So if we have a highly product quarter which contribute more than it works in the lower number and the mix of projects is very much dependent also on the length of the project; the shorter projects are better, are better from the profitability I mean.

The question how much of infrastructure we have to implement into a project has a lot to do but generally speaking we are in the neighborhood of $17 million per quarter in order to be breaking even over the year. Quarter three is less measurable because of the nature of projects.

Okay. Now as far as your pipeline, is the pipeline higher or lower than it was at this time last year? And are you winning or losing jobs that you are bidding against your competition? And presumably you are not going to bid on a job you are not going to make money so could you give a range and the timeframe for a job in the pipeline before you could feel you could get a contract?

First of all, the answer on the first part is yes. Our pipeline at this point is higher than it was a year ago. Second, the nature of the project that we are competing and it depends a lot about the regions you are speaking about. In Latin America, I just mentioned in my review the fact that the election in Mexico put everything on hold so projects we expected in 2013 which means we start work on them in 2012 didn't materialize and hopefully they will materialize this year. So if you count them from end to end it is over 24, months. So that has to do with projects that come from governmental or semi-governmental institutions. So that is as much as I can say about the length of those.

We have now in our pipeline project that we have start working on them between a year ago from the top of my head, some of them over a year means we are waiting between start approaching a project, participating a tender. Hopefully nobody will put any obstacles and any appeal against the results of such a tender.

I can tell you that in Africa for example, we are now participating the same side, third tender, started two years ago. Three times it was canceled. Now we are expecting the fourth. So that is the nature of this business when you will speak about projects. When you speak about smaller projects and if I speak about the United States of America, at the end of the day we are selling to integrators. Those integrators are doing projects and if the budget in the United States last year was on hold, then last year we are behind our expectations. I hope that this year we will see much better results.

I think one last question. You indicated the first quarters will be slower and it sounded like you expect -- indicated that you will be profitable for the year. And is it fair to say to be profitable for the year based on the breakeven of $17 million you need around $70 million or somewhere between $65 million and $70 million to be profitable and your expectation is to be profitable for the current year?

It would be fair to quote you and this I would not repeat but that is what we have in mind.

All right. Good luck. Hope you get there.

I hope so as well.

[Mike Dissler].

Good morning, gentlemen. You may recall I am the person who cautioned about dipping your toes in Brazil and not relinquishing control and I did receive emails back from the Company saying that you would be very careful in doing so.

I'm a long-term holder in Magal. This will mark -- this year will mark I think a full decade that I actually began accumulating shares. I own them personally through family trust, several friends, etc. so actually control a fair amount of stock for an individual.

The reason I called, I always listen into the conference calls as you know and I just want to point out a couple of quick things and I don't mean to be in any way patronizing and that is just in terms of the current sales force that you already have, just lighting the fire under them with a bonus of some sort of sales incentive for them to close -- in particular I'm sure you have something in place like that but that always helps. I find a little push doesn't hurt when it comes from corporate like you guys.

Secondarily, regarding the quarter, this past quarter, the Q4, I was not at all surprised based on your particular comments, Mr. Livneh, in your third-quarter commentary you pretty much indicated that the fourth quarter would be approximately the same or a little slower so I was not at all surprised by the small headwinds you may have faced in Q4.

Regarding Q1 in terms of weather weakness, I don't really have a comment there. I know quarterly, Q1 is weakest so I'm not going to be concerned about it. I have actually (inaudible) today on the shares.

And finally and this is somewhat more important and that is this, there is another company that I have been dealing with and I know you don't like to hear this, I know that the first speaker has often recommended things but I am only recommending that you take a look and not from Mrs. (inaudible) position, not suggesting any sort of business combination but in terms of cross marketing or sales alliance or a potential future customer from Mr. Kaplan, that he take a look at a small company in Olathe, Kansas called Elecsys Corporation. It's a public company, a small company, I also have a stake in that company, full disclosure. I am not seeking anything from either you or them except for they are in several businesses that you wish to be in in terms of the CyberSeal growth potential and that has to do with wireless remote monitoring in both gas pipelines, water pipelines, data acquisition controls. They do their own electronics manufacturing and they do have an extreme harsh environment product line.

So I don't want you to misread my intention here, my intention is just to make you guys aware of each other. I have in the past told them of you approximately three or four months ago. I don't know if they contacted you. Once again, this has nothing to do with -- I am not an investment banker, I'm a shareholder in both, long-term shareholder in both but I do believe that some cross-marketing and/or some sort of potential customer relationship could develop between you two. Especially you were talking about fence mounted systems recently. That would be perfect because they are doing these control and wireless remote and that would fit right in with both perimeter security as well as the new CyberSeal protection that you are talking about.

That is it. I probably will not speak to you guys until the next quarter so I wish you a terrific Passover and if you have any comment, I will listen from the queue. Thank you very much.

First, we are very proud to have you as a shareholder for a decade. That is first. Second, your remarks on Brazil were seriously considered. As you can see from my report we are not going there and we are not going to invest in Brazil at this point. As for the company you have mentioned, if you would been so kind and give me the name again.

Yes, it is Elecsys Corporation, E-L-E-C-S-Y-S Corporation and they are based in Kansas; has a ticker symbol and a website, the website is elecsyscorp.com. Once again, I have no affiliation other than I am a shareholder in both of your companies for long periods of time. I'm not looking for you to do anything in terms of business combination so Mrs. (inaudible) can take a bring. But Mr. Kaplan may wish to pursue some of their product offerings or vice versa, offer some of your products to them and integrate them into their programs.

Okay. I appreciate this idea. We will look into that and other than that, I really see our this year -- coming quarters and we will have a chance to talk again in the next quarter improvements. Thank you very much, sir.

Absolutely. Thank you, sir.

Thurman Willis.

I like the last caller recommended a company that you look at that I think would crossover very nicely. It is a 45-year-old public company, Mace Securities. You know it is the pepper spray but they are going into new products working with NASA that you can read about. And I think that the cross-sell, they have about $15 million in cash, no debt and I just think it is a company that you could buy rather inexpensively and they have cleaned this company up.

I have been involved in it 10 years where I have been involved with you five years. And one gentleman owns 40% of it, Richard Barone and another gentleman, Andrew Shapiro owns 10% of it. I am very confident of what they are doing because they are a nonlethal security company and I think that this would round you off with the various products that you sell with the products that they sell and I strongly urge you to contact Richard Barone or John McCann and that is Mace and you will see that if you read recently what they are doing with NASA and that it could complement your Company and would make a beautiful combination. And I do not think the expense would be that expensive and I think it would be accretive immediately so please, I encourage you, John McCann of Mace Corporation.

Thank you. We will take a look.

(Operator Instructions) Beverly Machtinger, Grace and White.

I was wondering, there has been a lot of news lately about the vulnerability of the electric grid in the United States and I was wondering if you have heard anything about steps that are perhaps going to be taken or if your Company has been involved or approached about any work that might be done to better secure these locations?

The answer in general is yes. We have appointed a guy in the United States to take care of our cyber sales and business development activities. Just by coincidence I have heard that last week or two weeks before the week before that we have been in contact with some of the authorities that are involved with the standards for cyber security in the utilities business, electrical stations and so forth. So we are not yet involved, we are starting the process but this market and this vertical we call it, show a lot of needs in what we are doing.

Great. Thanks.

Thank you very much.

Thurman Willis.

Let me make sure that I understood about Q1 with the winter being so bad in the US. Does that give us an indication knowing that Q1 is a weak quarter that we really don't expect much out of Q1 because of the weather and in all likelihood it would be lower revenues and a lost quarter?

I wouldn't refer to the numbers compared with last quarter. In general, Q1 is the lowest quarter. The weather is bad in the United States and Canada compared with previous years, you face it on a day to day basis but for us, the first quarter is always a slow quarter due to the normal winter even though this one was abnormal but nothing special.

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 Magal's website, www.magal-s3.com.

Mr. Livneh, would you like to make your concluding statement?

On behalf of the management of Magal, I would like to thank you all for your continued interest. We have heard about some of you with us from decades and maybe some of you even more. Thank you for that, for the long-term support of our business. If you have any questions, please feel free to call me or our investor relations team whose contact details are on the press release. I look forward to speaking with you and updating you again next quarter. Have a good day. Thank you all.

Thank you. This concludes the Magal Security Systems fourth-quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.