Senstar Technologies Ltd (SNT) 2014 Q1 法說會逐字稿

Welcome to Magal's first quarter 2014 results conference call. All participants are at present in listen only-mode. Following management's formal presentation, instructions will be given for the question and answer session. 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 GK 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. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. Welcome, everyone, to Magal's first quarter 2014 conference call. I would like to welcome all of you to this conference call and I would like to 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 -- Magal's financial performance in 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 in fact occur. Magal does not assume any obligation to update this 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.

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

Thank you, Kenny. I would like to welcome you all and thank you for joining us today. While our results of the first quarter were not yet what we would be happy with, on the positive side, we are seeing strong signs of positive momentum in our business in general, which will benefit us later this year. In this conference call, I will focus more on the improvements we are seeing today in our market and our outlook for the rest of this year.

I would like to return to what we said in today's press release. I expected that the 2014 will be demonstrated significant revenue growth over 2013. In addition, I believe we will show full-year profitability in our ongoing business. As we move through 2014, we signed -- the signs we see continue to be increasingly positive, and I am encouraged that there is an increase in our backlog driven by our recent project and orders wins.

Our backlog as of today stands at $44 million versus a backlog of $31 million at the end of 2013. I would like to also to note that the backlog is healthy, spread across various geographies and many small to midsize projects. This growth in backlog combined with a strong pipeline of business ahead of us, underlined my expectations of much improved year in 2014.

I would like to highlight our continued balance sheet strength. We ended the quarter with $34 million in net cash, long-term financial and balance sheet strength. While we do aim to grow organically in 2014, we also hope to leverage our strong cash position to grow our business through acquisitions.

On April, Senstar, our fully-owned subsidiary in North America, acquired a company with a very strong fiber optic sensor technology for about $4 million. Fiber optic technology has gained much acceptance and has seen momentum in recent years, thanks to the ease of installation and setup. It is considered to be a mature technology and it is extremely cost-effective for long perimeter.

The acquisition fills the product gap that we have had in this type of technology. It further broadens our technological capability and product offering, which is the broadest in the market. We believe this acquisition further secures our leadership in the market. We continue to look for further acquisitions, whether new technologies or product which will allow us to expand our capabilities and offerings, and increase our total addressable markets.

I would like now to discuss the progress we are making in our regions. While Latin America was particularly weak last year, it remains a key target for us. Our backlog in the region has grown and we expect additional orders of this market in the coming months.

With regard to Mexico in particular, we are finally seeing momentum and the budgets which were frozen in Mexico following the election last year of being -- beginning to be freed now. We recently announced a $4.5 million contract to supply the full perimeter of security solutions for the main power distribution center in Mexico. We are encouraged by this large order, making -- regenerate of business in the region. Our local office in Mexico is all set to kick off this important project in the near future and we aim to complete it before the end of this year.

We're also seeing strong business improvement in Europe as well, driven by the general improvement in the macroeconomics climate. I believe 2014 will be a good year in the region with strong year-over-year growth.

With regard to Africa, the continent continues to provide us with a good level of business, while during 2012 and 2013, we completed some major projects in the region. The new project we have received in the past few months are smaller, but much more diverse. A few weeks ago, we announced on a $6.4 million turnkey contract with the Kenyan airport authorities to secure critical areas in Jomo Kenyatta International Airport, Nairobi, Kenya. The project includes multiple surveillance and access control technologies integrated by Fortis, and we expect to complete the project in the first half of 2015.

Kenya is a classic example of a country in which we have successfully delivered a number of security projects for critical national assets. The successful deliveries have -- subsequently leads to significant further business and continues to do so. Our pipeline in the region remains strong, and we are working hard to win additional products.

Our North American subsidiaries, covering the United States and Canada, also performing well and we expect to see further growth in 2014. We recently announced a number of orders for installing systems in correctional facilities and prisons in the US and Canada.

We announced a $5.2 million order for FORTIS system upgrading 11 existing sites and new installation at the further eight sites, utilizing our latest command and control system. A further $1 million was for securing the perimeter of two prisons in Canada.

CyberSeal. CyberSeal continued to make progress. We demonstrated our system at the recent ISC West show in Las Vegas, one of the largest US security trade shows, and we are seeing very strong interest, especially in our latest development cyber products. We have already seen some initial revenue and we hope to also see our first integrated physical security and logical security projects this year, adopting our convergence concept. Our effort in the cyber security space underlines our strategy to become a leader in the convergence of physical and cyber security.

In summary, we are looking ahead and we are fully focused on converting our strong pipeline into backlog, and what we have in -- had already. I believe we will -- it will allow us to show growth and a profitable year in 2014. I am very much looking forward to the improvements I expect to show this year. I will now hand the call over to Ilan for the financial review. Ilan, please.

Revenues for the first quarter of 2014 were $12.5 million, a decrease of 7% compared to $13.5 million in revenues for the first quarter of 2013. Sales by geography in the quarter were as follows: North America, 27%; Israel 20%; Africa 15%; Europe 16%; South and Latin America, 10%; and the rest of the world amounted to 12%.

The gross profit in the quarter was $4.1 million or 22.7% (sic -- 32.7%, see press release) of revenues, a decrease of 17% percent compared to the gross profit of $5 million or 36.8% of revenues in the first quarter of 2013. The lower gross margin was a function of changes in the revenue mix between periods and lower revenues. It should be noted that our typical gross margin level is expected in the high 30s.

Operating expenses in the quarter amounted to $6.4 million compared with $5.8 million in the first quarter of last year. We are investing more strongly in our R&D activities, and our R&D expenses at $1.3 million were [29%] higher than R&D expenses in the first quarter of last year.

The operating loss for the quarter was $2.3 million compared with an operating loss of $890,000 in the first quarter of last year. Net loss in the quarter was $2 million or loss per share of $0.12 compared with a net loss of $1.1 million or loss of $0.07 per share in the first quarter of 2013.

Cash and short term deposits net of bank debt as of May 31, 2014 was $33.9 million or $2.10 per share, compared with cash and short term deposits net of bank debt of $36.3 million or $2.25 per share on December 31, 2013.

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

(Operator Instructions). Thurman Willis, PI.

Thank you for taking my call. My first question is, and I apologize; I think you said it twice. What is your present backlog and what was your backlog 12/31/13?

Our current backlog is $44 million, while it was $32 million at the end of the year.

And your -- this approaches a high backlog for you, other than the one other time when we had the large construction job. Is that correct?

Most of it is in projects that will be implemented this year and, of course, some of them would continue for next year.

Right. You said that you think you will be profitable this year. Does that mean you can be profitable possibly next quarter or are you looking more for the latter part of the year?

We are talking on the overall expectations as of this coming quarter. We cannot say that it will achieve that, but we don't know yet. In projects it takes time to incur the revenue.

But am I correct in assuming that you said you thought you would be profitable this year?

That's right.

Okay. And my last question -- and thank you for taking that -- is that we continue talking about NII. Congratulate you on your patience in buying the right company at the right price. We have $2.10 a share now in cash. How much could you foresee that we spend for an acquisition?

That has a lot to do with the targets -- the companies that we will acquire, and I have no idea. I can tell you that we are searching to acquire a company in the security domain. It can be -- hopefully won't to be in the exact area of perimeter security where we have already most of the technologies that are available in the world, as you know.

As I mentioned in my presentation earlier in the discussion that we have already acquired in the first quarter a technology of fiber. By that, we have complement our coverage the technology of the perimeter. Other than that, it can be in a different security domain.

And, as you can imagine, the cash in hand is not the only way to fund an acquisition. And that will -- of course, a very important part, but not the only one.

Thank you for your time. I have one other question, and I will get back in the queue to give some other people time. Thank you.

Thank you very much.

Mark Silk, Silk Investments.

My question is also on the profitability for 2014. Is this something that you are looking at third and fourth quarter to be profitable or are we just hoping that the fourth quarter, everything will come into place to get you to profitability?

I mentioned earlier in my presentation, as well as answer the previous question, yes. We expect to be profitable. That is what we see coming. Other than that, I can say very little on the profitability and on the second quarter as well.

Okay. Let's hope that this comes true. Thank you.

Mark Lanier, Pegasus Capital.

Thank you for your comments about the backlog. I wanted to ask about the pipeline and what you see as the approximate size of the pipeline for possible bids in 2014.

I am not sure I understand your question, but I will try to answer the best way. First of all, we are looking after projects and product sales where we are active. Project is at the range of a few hundred thousand; the million-dollar is also a project to us and it can go up to a few millions.

So we do have a few projects in our product pipeline that we hope to be awarded in the coming future and, of course, we will announce on them. And part of what we will award and assign to the contract will also have to do with this year revenue and bottom line.

My other question has to do with CyberSeal. To what extent does CyberSeal offer standalone products versus products that are tied in with perimeter security of other parts of your business?

At this time, CyberSeal is a CyberSeal company, is active in selling products by itself. And we have developed a few cyber products and we think that some of them are very, very unique. And we are trying to -- as I mentioned, we first exposed them in the ISC West show last April, and we will show them again in the upcoming IPSIC show in London next month. And that is CyberSeal as a business for itself.

As part of our Group activity, we think that the convergence concept of securing critical aspects from both the logical and the physical is a concept that will really -- first of all, we think that is the right thing to do. And, second, we see the preliminary RFPs that refer to that, and we hope that this year we will have the first convergence project to implement.

Thank you. Good luck.

Thurman Willis.

If you remember, I mentioned a couple of times, and a company that I would like for you to explore, that I think would fit into your business, is Mace International. And I am sure you have heard of the company. It is at a price that I think could be bought that could be accretive for you and for them, and I think they may have tried to get in touch with you.

I will just give you a number; John McCain. His number is 440-570-1441. I think this would be complementary to your business and so I would just -- I would pass that along again. Thank you.

Thank you very much, and the guy you have mentioned is mostly welcome to introduce himself to me, and you have my details in the PR.

Ken Liddy, Wells Fargo.

Wanted to talk to you a little bit about Optellios, the fiber optic company you acquired. Are you going to be using their existing line of security products?

To start with, of course. We bought the company for its technology, its products, its activity. So we do plan to use the product. We think that they have very good technology and a line of products that we will be able to sell, actually. It is an ongoing business. We haven't bought the technology as such.

We bought an ongoing business and we will continue to operate the business. And, as part of our planned involvement, we will develop in the future as we understand the market.

Do you have any type of a backlog within that -- from the acquisition? Do you have any existing contracts?

They have backlog, but it is not part of what we are reporting yet in our first quarter. It is a deal that was concluded only in April. So, the backlog in the product business, by its nature, is of course in a much lower scale. It is a short cycle of sale. But there are a [few thousands of hundreds] of dollars in the backlog.

How do you think this acquisition will affect your profitability in the second quarter (multiple speakers) as far as the charges for the acquisition itself, not for the overall profitability?

I don't think we can refer to this yet. I don't see a major impact on the ongoing activity in the P&L of second quarter as such. Of course, the investment is -- the amount we paid will come up in the second quarter, but other than that, not in the P&L as such.

And, as far as integrating, have you -- has your research and development team been working with the fiber solutions yet? Or where are you in that strategy?

Yes. We are in the business of fiber by ourselves. Senstar has fiber products, but not based on the same technology. We are selling Optellios product based on OEM agreements for the last 18 months, and we are exposed to that market. It is part of our ongoing business. It just implements different technology and, in some cases, in different type of sites.

But, other than that, it is part of the perimeter intrusion detection system in the world. And we find out that the best way for us is to buy the company and the technology that we feel is a good way to enter this technology.

You talked about making other acquisitions. Is there any type of general area that you would like to improve Magal, or is there a specific type of technology out there, products? Can you discuss your strategy at all?

In general, we are looking to acquire a product company, not in the same of line product that we already have in hand. And it can be in different areas. I won't go into details, because we didn't define the final alternative. We are open to different directions, as we are open to acquire a cyber product company in other than Israel.

And it can happen or a company that has already some presence in other markets in Israel, better to say. So it can be cyber company and it can be other type of security, active company that has a decent revenue, growing and profitable.

Do you have your sights on any particular companies at this point?

Do we what?

Are you -- do you have your sights on any acquisitions at this point in any specific companies? Or are you just still canvassing trying to find companies?

We are in the process. As part of the process, we identified some potential targets, but I am not going to detail on that.

Understood. As far as your business in Israel, has there been any significant movement in the sense -- the fiber optic side through the SmartSense discussions?

The activity in Israel has very little to do with the fiber at this point. I can say that, as I mentioned in the past, we are part of the Israeli Defense Force's activity in all our borders. And that is going on, and there is no major change on that.

And is there any significant development as far as the Egyptian fence and Magal's participating participation in that?

We have been doing our part in this part of the border as planned, and we install our latest development on that border as part of the Israeli Defense Force's plan. We are there.

Is there any type of -- do you expect any type of significant revenue from that area?

Not that I can tell about.

Okay. But you are -- and do you expect that to -- do you expect revenue in 2014 -- any significant revenue in 2014?

With regard to that specific border, I cannot tell more than I have told already. I don't know yet.

Okay. As far as Latin America, what happened in 2013 that there wasn't any movement as far as projects? It just seems like that was one of your biggest growth areas, and was really probably where you suffered the most as far as revenue.

In Mexico, where we are very active with a major subsidiary towards projects, 2013 was really -- everything was put on hold. There was an election. There was a new administration. So, in 2013, for the administration -- and we are very much dependent on the administration, whether it is direct or indirect -- the condition period between the previous and the new administration took -- to us, created a situation where we lost a year.

As the new order came in the last two weeks -- and I can tell you from personal experience; I have been to Mexico last week -- we do see some movement and we expect to get additional orders there.

That is good to hear. And are you noticing any government across your areas that you are strong, like in Africa, Latin America, and then also in Europe and North America? Are you noticing that there is more talk of pipeline everywhere as far as projects?

As I mentioned earlier, we are active in Africa region in many countries. And we expect some -- some of our pipeline, I would say, is coming from Africa. Some of it is related to other regions, but Africa is still an active and promising region to us.

Do you expect significant revenues in Kenya going past 2014?

This project that we have announced last month is going to be executed this year, but part of it will go to next year.

Is there a strong pipeline for other projects there?

As part of our African activity, Kenya is an important target country to us.

Last year, in the second quarter, you did -- you had a rather low revenue quarter; I think $12 million or so. Do you expect to improve upon the revenues in the second quarter year-over-year?

Hope to improve, but will have still to see how we are making progress. And this is something that we learn at the end of the quarter and we will inform you in the next quarter.

Understood. And, as far as the health of the Company, you continue to be strong financially. Your pipeline is growing. Your backlog is growing. Are you a lot more confident that the business is headed in the right direction this year than you were at the same time last year?

Yes. I mentioned it -- that I believe this year we will grow the business and we will be profitable. Compared with last year, well, we have not a very good year, as you know.

Okay. Great. Look forward to a very good year. Thank you.

Sam Rebotsky, SER Asset Management.

It seems that everything should be improving. And I am just trying to understand, as far as -- the backlog you have given indications exactly what it is. But, the pipeline -- could you sort of quantify a valuation or a range of valuation, the pipeline exists from this quarter two the previous quarter?

And, it appears that the contracts for future business should increase. But could you sort of quantify any what the pipeline is, how much improving it is, so that it may possibly get into backlog sooner?

Pipeline is projects that we -- orders that we expect to get. But, in pipeline, we can see also activity that will become real next year as well. So, as projects, if you are aware, is a long process and sometimes, like in Mexico -- I just referred to this earlier; we waited a year for the project we expected last year. So it is very difficult to evaluate exactly where it will take us.

But, in general, I said, and I can repeat, we have expectation that our pipeline will turn to orders, at least part of it in this year, of course. And that will help us to grow the business this year, as well as to enter into the next year in a better situation. It comes from Africa; it comes from Latin America as well as other regions that we are active in.

Would it be fair to say that the pipeline could be 25% to 50% better than it was at the end of December or another -- some kind of metric you might be able to use and say that the pipeline is stronger than it might have been at a previous period in time?

First of all, I am happy to say that the pipeline that was on the table at the end of the year tends to become older. As you understand, we grow the pipeline from the last -- the end of last year to this conference call quite impressive. I hope that that will also work for us in the coming half year, let's say. So I believe that once we will talk again in the next call, we will have even stronger in backlog than today.

That's wonderful. And I guess, just to reiterate, I guess you are not going to clarify when exactly on a quarter to quarter basis you expect to be profitable, although you clearly have stated that you could be profitable for the year. That is what your expectations are. But you are not able to make a prediction which quarter the profits will begin and will they continue on a quarter to quarter basis.

Yes. You are right in your analysis. I can add very little to that.

Thank you. Good luck, Eitan.

(Operator Instructions) (inaudible)

As you know, we have spoken every quarter for a long time. Just two quick things. One was on the fiber-optic company, which I didn't quite get the name of, whether it was actually us or Optellios or Octellus, and I didn't see a press release on that. But my question, irrespective -- you will spell it out for me in a minute. Is that -- I know you said that you bought them; they have a standalone business prior to your taking them over.

But, do you foresee the fiber optic as being part of the link between your physical presence and the CyberSeal presence? Or was it really an overall fit. If you never owned CyberSeal, would you still have considered that purchase? So that is question number one. And, two, when you get a minute, could you spell the name of the firm? Thank you.

Sure. The name of the firm is Optellios.

Yes. And how do you spell that?

O-p-t-e-l-l-i-o-s.

Okay. Thank you.

Then, coming to your question, or to the first part of it, yes, we would acquire Optellios without having CyberSeal in our business. Optellios (multiple speakers) and fiber technology is very relevant to our position traditional (multiple speakers) --

I just wanted to make sure I got it. I don't want to waste your time. As you know, I am a long-term holder in the Company and believe in your long-term. I never try to pin you guys down.

The only other thing -- I know the gentlemen has often mentioned Mace to you, and I mentioned on our last -- on your last quarterly call a company called Alexis. I am sure you looked it up. I believe I forwarded an email to your secretary. And the reason I point it out again is merely because I know that your experience with ports, railroads, airports, sports venues, et cetera, is preeminent in the industry.

And the other company, this Alexis Corp, that I have mentioned, is more in pipelines et cetera. However, they have developed into this, quote, Internet of Things. I'm sure you have heard John Chambers of Cisco talk about it in many things. But the sensors that you use, they also would be able to provide RFID, harsh environment, et cetera, for water, gas, perimeter. They have embedded wireless products.

And the reason I only mention it again is just merely because the gentlemen has mentioned Mace so many times. I would be remiss if I didn't point out a possible synergistic -- and I merely mean this in the point of customer relationship; no other thing. I am, as you know, a shareholder in both your firm and theirs for -- yours north of 10 years as well as theirs, I believe, about 10 years. So I have no vested interest other than to see both of you succeed.

And, finally, I just wanted to congratulate you on having a long-term vision, which is what investing is about. It is not about quarter to quarter. I realized that many of the people are trying to pin you down on a quarter, when it is going to turn profitable and whatever.

But the reality is, as you are trying to build something for the long-term. And I think many of your long-term shareholders recognize that and I applaud you and thank you for that. You need not comment. Please take a look at that other firm that I mentioned and I look forward to next quarter's conference call. Thank you very much.

Thank you very much for the close, and, yes, we are looking long-term. I hope it will be -- happen and success. As for the company you have mentioned, please be kind and tell your colleague that he is mostly welcome to communicate directly to me.

Thurman Willis.

I think the gentleman spoke about Mace. The only reason I mentioned about Mace, you described perfectly a company that is not in the same field that is in security, though, that is a non-lethal company that is predominant in their area, and that would break you away from what you are doing, plus be in other parts of the country, plus also give you a totally different revenue, profitable stream that -- I will also have this gentleman, and hopefully he can call you directly up also.

It would be a beautiful fit and it would be something I think you could pick up that would not expend too much of our money. Thank you for letting me mention it.

Thank you very much, and as I mentioned to you earlier and to your colleague, please ask these people to communicate to me. We are now in the process of looking and searching, and they will be part of our picture. Thank you very much.

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 very much operator. On behalf the management of Magal, I would like to thank you for your continued interest and long-term support of our business. 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 speaking to you in under -- and updating you again next quarter.

Have a good day, all of you, in this other part of the world. Thank you very much for joining us.

Thank you. This concludes the Magal Security Systems first quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.