Senstar Technologies Ltd (SNT) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Magal's second 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 and Public Relations, or view it in the news section of the Company's website, www.Magal-S3.com. I will now like to hand over the call to Mr. Kenny Green, of GK Investor and Public Relations. Mr. Green, would you like to begin.

Thank you, operator. Welcome to everyone. Welcome to Magal's second-quarter 2014 conference call. I would like to welcome all of you to this call and I would like to thank management for hosting this call.

With us on the call today are Mr. Eitan Livneh, President and CEO, and Mr. Ilan Ovadia, CFO. As Eitan has lost his voice, he will save his responses for the Q&A session. Ilan will summarize the key highlights followed by a review of Magal's financial performance of the quarter. We will then open the call for the question and answer session where both Eitan and Ilan will be available to answer your questions.

Before we start, I would like to point out that this conference call may contain projections to 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 the documents filed by the Company with the Securities and Exchange Commission.

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

Thank you, Kenny. I would like to welcome all of you and thank you for joining us today. We are pleased with the improvement in our revenues in the second quarter. We showed strong growth, amounting to 33% over the last year and 30% over the prior quarter.

I do note that this quarter is the first time that we are including the result of our newly-acquired fiber optic US-based company, which added approximately $1 million out of the $4 million increase this quarter to the revenues. Another positive factor was our gross margin strength due to the product mix which favored higher margin products in the quarter. I note that our operating expenses were higher in the quarter, which was the main reason we were not able to attend to profitability in the second quarter.

Excluding other continued investments in CyberSeal, as well as the recent acquisition of an optical fiber sensor business, our ongoing core business would have shown operating profitability in the quarter. I do believe that based on our plans for the second half of the year, I expect revenues to continue to grow from these levels, which should lead to an overall profitable second half of 2014.

While we do expect to continue our organic growth in 2014 over 2013, we are also looking to further leverage our strong cash position to grow our businesses through acquisitions. As I mentioned, at the beginning of the second quarter we purchased a small company in the US for about $4 million, which is literally in the center of fiber-optic sensing and security. The acquisition added key advanced fiber-optic sensing technology to our portfolio, opening for us a potential market growth about [$40 million] per year with relatively high growth rate.

From a guidance role, the acquisition currently adds approximately $4 million per year of higher margin fiber-optic sensor sales and we do expect these sales to grow. On the other hand, it is important to note that this acquisition, together with our combined investment inside in CyberSeal, has led to some increases in operating expenses in both R&D and sales and marketing.

In addition, during the second quarter, we launched a number of new products of which we have seen much potential, which further increased our sales and marketing expenses. Compared to the second quarter of last year, during the quarter our sales and marketing expenses were about $1.4 million higher. R&D expenses were about $300,000 higher, while we managed to keep our G&A expenses stable.

We do see our increase in sales and marketing, as well as R&D, as paving the way for future increases in revenue and profit. We recently launched three new products. FlexZone is our latest generation ranging fence-mounted sensor. It detects and it can also currently locate any attempts to cut, climb, or otherwise disturb a perimeter fence.

Both power and data can run over the sensor cables, minimizing infrastructure requirements and making it simple to install. It locates intrusions to within 3 meters, even when there are multiple simultaneous intrusions and in the presence of background environmental noise such as wind. This is one of the most advanced fence-mounted sensors out there in the market today, optimized for small to medium sites.

We also recently released a new anti-aggression detection fence-mounted sensor called FlexZone. The underlying technology is based on solid state electronics rather than electromechanical components, increasing energy efficiency and sensitivity.

As you saw yesterday, we announced our first of its kind RoboGuard border. We are especially excited about this product, as it can significantly reduce the expensive manpower needed for routine perimeter patrol. RoboGuard is an agile surveillance (technical difficulty) along a perimeter fence, constantly patrolling a secured perimeter to ensure the integrity of the fence. It conducts regular inspections over the fence line which are essential to maintaining the integrity of the perimeter.

It can also pointedly respond and check on any suspected intrusion as needed. A complete system consists of autonomous robots each covering up to 1 kilometer with battery recharging docking station for every two hours. RoboGuard is the ideal solution for remotely monitoring unmanned sites. We're a timely first response where manned guards would be impractical alternative.

RoboGuard can also cost-effectively augment guard forces for larger typical sites like airports, depots, prisons, and military base where there may be insufficient resources to provide a timely response. We have only recently launched this product and we are already seeing strong market interest.

I would like to spend a few minutes talking about our Safe City, or municipal security projects, as it has been quite a topic in the news recently. The Safe City is a concept for bringing security, safety, and quality of life to today's complex cities for the use of technology, infrastructure, personal and positive. It combines the street patrolman's intuitive approach with state-of-the-art observation, communication and information management, managed by a control center. The results are faster, more effective responses to service outage, streamlined law-enforcement operations and leadtime management of crisis situations.

Just a few weeks ago, we announced that our Safe City project in Ramat Ha'sharon has led to further orders and was recently expanded to include additional sites. As well as Israel, we are seeing traction for our Safe City solutions in Africa and South America and we do believe this area continues to be long-term growth area for Magal.

I would like now to briefly summarize the performance in our various regions. In Latin America, in particular Mexico, we are seeing some shifting of orders out into later this year or next year. However, business in Mexico is still focusing after coming to a complete halt last year, and budgets which were frozen following the elections, they are beginning to be freed up.

As such, in May we announced $4.5 million contract to supply a full perimeter security solution for a manpower distribution center in Mexico. We are also seeing strong business improvement in the western part of the Continental Europe, rising by a general improvement in the macroeconomic climate in the region.

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 project projects in the region, the new projects we have received in the past few months are smaller, but more diverse.

In May, we announced the $6.4 million turnkey contract with the Kenyan airport authority to secure critical areas of the international airport in Nairobi. The project includes multiple civilians in access control core technologies integrated by FORTIS, and are expected to complete the project in the first half of 2015. Kenya is a classic example of turnkey in which we have successfully delivered a number of security projects for critical national assets, which have cyclically led to significant further businesses.

Our North American subsidiaries are also performing well, and we expect to see further growth in 2014. Earlier this year, we announced a number of orders for installing systems in correctional facilities and prisons in US and Canada. In addition, we recently announced orders for our fiber-sensing technology to protect industrial and seaports in the United States.

In Israel, businesses performed well through -- first, we are also seeing some order push-outs into the later half of this year and next year. We recently announced $2 million for a dual technology SmartSense including taut wire integration sensors for our homeland security application in Israel. We expect to receive additional homeland security orders later this year.

With regard to CyberSeal, we continue to make progress. In June we demonstrated our systems to ISC West show in Las Vegas, one of the largest US security trade show events. And we are seeing very strong interest, especially in our latest developed fiber cyber products.

Because CyberSeal is a new concept for many of our customers, we are educating the market with regard to being potent self-combining physical and logical security. This is also meant it has taken us longer than originally anticipated to grow our products served in this market, which also means the CyberSeal continues to contribute to our operating loss. However, we have already seen the initial evidence for CyberSeal earlier this year, and we hope to also see our first integrated physical security and logical security projects later this year, adapting our convergence concept.

In summary, Magal continues to invest in the future and I do believe that this second half of the year will be much stronger than the first half, with growth in revenue and returning to profitability.

Revenues for the second quarter of 2014 were $16.2 million, an increase of 33% compared with $12.2 million in revenues for the second quarter of 2013. Sales by geography in the quarter were as follows: North America, 31%; Israel, 17%; Africa, 16%; Europe, 11%; South and Latin America, 8%, and the rest of the world amounted to 17%.

Loss profit in the quarter was $7.1 million or 43.6% of revenue, an increase of 45% compared to gross profit of $4.9 million or 39.8 percentage of revenues in the second quarter of 2013. The higher gross margin was a function of changes in the revenue mix between periods and the higher revenue level this quarter. Operating expenses in the quarter amounted to $7.7 million compared to the $6 million in the second quarter of last year.

We are investing more strongly in our R&D activities, particularly in CyberSeal. And our R&D expenses at $1.2 million were 30% higher than the R&D expenses in the second quarter of last year. In addition, our marketing and sales expenses, which were at $4.5 million, were 45% higher than total the second quarter last year.

The increase was due to the early second quarter acquisition of an optical fiber sensing border security business. It was also due to the recent launch of Magal's new product in the associated trade shows which we presented them during the quarter.

G&A expenses were almost the same as the second quarter of last year at $1.9 million. The operating loss for the quarter was reduced to $601,000 compared to an operating loss of $1.1 million in the second quarter of last year.

Due to the weakness of the dollar -- US dollar versus the Israeli shekel, the quarter -- in the quarter we saw some financial expenses amounting to $641,000 versus an income last year of $411,000. Net loss in the quarter was $1.1 million or loss per share of $0.07, compared with a net loss of [$715,000] or loss of $0.04 per share in the second quarter of 2013.

Cash and short term deposits net of bank debt as of June 30, 2014, were $27.4 million or $1.69 per share, compared with cash and short term deposits net of current bank debt of $36.3 million or $2.25 per share on December 31, 2013. The decrease in the cash level was primarily due to the net investment in the purchase of fiber optic security business in the United States, as well as cash used in continuing operations.

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

(Operator Instructions) Fred Ehrman, BMI Capital.

I have a couple of questions regarding RoboGuard. You are launching the product on September 29. When do you think it will be ready for commercial sale?

Hello, everybody. Eitan speaking. I hope my voice will stay with me for the rest of the question and answer session. As regard to Fred's question, we see already some interest from very important customers, both Israel, US and Canada. And the product will be ready for commercial installation and sales by the end of the year.

Are you able to demonstrate to your potential customers the kind of cost savings that this product will provide?

Yes, of course. When we speak with specific customers for a specific site, we analyze with the customer and we show them, as we actually mentioned yesterday in the PR, that the return on investment is in the range of 12 to 18 months.

Okay. And it seems to me that the perimeter fence guard could revolutionize that whole segment of the industry. Would you agree with that?

Yes. Actually, we invested into that looking towards change in the industry. But, at the same time, we still think that it has to do with the cost of manpower. As much as the manpower costs higher, then this RoboGuard is attractive. But that works not all over the world.

Right. Would you say that -- I would say, probably, in the United States and Western Europe, it would be more effective and let's say Africa would be less effective. Is that correct?

Yes. At this stage, yes.

Okay. In the areas where it would be used, would it cannibalize any of your other sales of sensors that you now provide?

No. Basically, the concept is that this has to work together with the sensors on the fence as an aid to replace the guards. It is not to replace our current sensors.

Okay. It replaces the manpower only, correct?

Right. And (multiple speakers) additional features and capabilities, which are beyond the current sensors and beyond the guard's capabilities, because as we announced, as you can see in the short video attached in our site, we have in that also comrades day and night, laser, radar, and even the ability to talk and to stray into the intruder some teargas or any other thing.

Okay. Lastly, this is just a suggestion on your PR release today of your report for the second quarter. In the written part, you show the second quarter results and you do not give the six months. But, in your balance sheet and income statement, you show the six months and not -- unless I am missing something, and not the three-month results.

That is the way we do it every quarter. We show the numbers and we refer to the quarter. The balance sheet is always to the date of the end of the quarter or the period. The P&L (multiple speakers)

Unless my page was cut off, I only show six months ended June 30. I don't show the three-month comparison unless my page was cut off.

Regarding the balance sheet or regarding the P&L?

I am talking about the P&L.

P&L is supposed to be six months and three months. This is the way that we publish. Maybe something went wrong with the -- I don't know, the way it printed.

Okay. And in the -- but, in the written part, you talk about the quarter and not -- you do not discuss the six months. Often, companies show -- give us three months and a six-month comparison in the written part.

This is really the only way that we are analyzing the quarter.

Okay. I understand. I'm just telling you most companies give both. I think that would be helpful. Okay. Thank you very much. That is all I have.

Sam Rebotsky, SER Asset Management.

Good evening, good afternoon; trusting things are going better in Israel now. And as far as the RoboGuard, is there a size of the market? And is there any other product that is competitive with RoboGuard?

As for the size of the market, is too early to say. As for competitors, there is no direct competitors. There is many robots running around for various applications, but such a robot that is directly dealing with the perimeter, we don't know about.

Okay. And you speak of being profitable in the second half. Are you able to make a statement that you are going to be profitable for the full year? Or is it premature to be able to do that?

I will answer you in a different way. As I didn't make the presentation during this call, I had a chance to listen to what Ilan says. And listening to what Ilan says, and I am 100%, of course, behind every word, I feel that we are going in the right direction and we are going to improve our performance in the second half of this year and the years to come. But, answer directly to your question, it is early to say.

Okay. Okay. And is there -- is any particular area stronger for your future business? I know that what is going on with Israel. Are there additional security that you have to put in that will create additional business? Or is there any other areas that your backlog -- is your backlog higher than it was the previous quarter, that leads you to be profitable or expect to be profitable in the second half?

As for the Israeli business situation, as we are part of the vendors for the Ministry of Defense as for borders, then if you follow, there is a lot of activity in the Israeli borders. We can expect some business to come. As for the backlog, our backlog at the end of the quarter is lower than the previous quarter. And, as we can say at this point, we are -- see some additional business coming before year-end, so we feel comfortable with that.

Okay. Thank you. Good luck.

Mike Distler.

As you know, I always try to get to these conference calls. I raced home from oral surgery this morning. So I, too, may stumble over a word or two. One, congratulations on the increase in revenues.

Two, these are just general questions, so they are kind of softballs for you guys. I assume from the press release yesterday that all of your current -- well, certainly, the future fencing that you would be putting in, but I assume all of the current fences have the capability to be retrofitted with the new monorail system above them to accommodate RoboGuard, should an existing customer choose to add it. Is that a fair assumption?

Yes, of course. Our fences -- so our customers' installations, but much more than that, this can (multiple speakers)

Yes. No, I understand. I heard the previous caller. Clearly, the additional capabilities of the laser scanner and the two cameras with the infrared for a short and medium range, is a terrific thing that a human being couldn't sense, certainly not at night, without vision goggles. And, of course, the communication to identify a potential intruder from an accidental passerby is terrific.

I assume you are either at the charge point between the two -- I guess, the charging station that exists between the two RoboGuards would have an embedded satellite modem within it or wireless embedded system. Whether it is in each unit or whether it is at the charging station, I assume it is something like that. I am not asking for any details, so you can just say yes or no to that general question.

In general, we installed this with communication system.

Right. I saw that. Okay.

That's it.

Okay. I wasn't looking for details. I think that is Joe espionage information. Would it be fair to say that the new RoboGuard, along with the -- your existing perimeter system, along with your entire PSIM and the FORTIS system together actually becomes a point of integration for presenting CyberSeal as a new total package for -- like the Kenya, the Nairobi airport, although that is already a customer. Would it be fair to say that this actually is almost -- and, pardon the pun, but seals the deal for CyberSeal because you are presenting now a vision as well as security, and as well as instant response over a short period of time, over a short length of field.

Exactly (multiple speakers).

I am assuming that would be (multiple speakers) --

Actually, you did the marketing pitch as good as we do. And we are approaching the same or we are doing the same thing. Just to make it more coherent with the market situation, not many of our customers at this point, even in the United States, are ready to pay in order to have this comprehensive solution.

Right. Which is -- but leads to my final area that I want to discuss, and I will let you go because I don't want your voice to fail. Assuming we could get -- we, Magal S-3, could get the range of the RoboGuard unit up from the approximate 1 kilometer that we are talking about in between charging stations, are there certain economies of scale that you could look at that you could foresee over a three- to five-year period, whereby new advances in both battery technology, monorail technology, the use of magnets -- I don't know exactly what is propelling your system now -- so that we could, through economies of scale, and improved production capability, handle large enough orders and capture enough business to someday force-feed, for example, border patrol between say Israel and Egypt, which I know is always a contention, or border control patrol between US and Canada?

In other words, I realize now it is an unreachable, but is that something that in these three- to five- to ten-year period, appear that it could be on the horizon if nothing better comes along?

Even today, the robot can do more than 1 kilometer. The question is the response time to an alert and how fast it can reach the point. In order to be efficient and operationally useful, we built it or we suggested for 1 kilometer. But you can do more. As for the future, speaking about long lines like borders and better technology and better production and reliability, it is too early to say.

Okay. I appreciate that. I thank you and I am anxiously awaiting September 29 and the market response, and an early Shana Tova to everyone in Israel. And please be safe and I always appreciate your time. Thank you.

Thank you, too, and Shana Tova.

(Operator Instructions) Mark Miller.

Could you explain the transaction agreement on July 30 of this year with Key Corporation? Who is Key Corporation? Thanks.

Key Corporation is the major shareholder of our Company for over 35 years. Its investors' main office is in London. The FIMI Fund is an Israeli fund. The deal was signed in July. The closing is still on its way. It is waiting for the approval by the antitrust commissioner in Israel. But, other than that, that is what I can tell you.

So these will be newly issued shares?

No, no. It is they exchange shares and they buy KI shares, and they will hold 40% of the Company.

All right. And you said they have been with you for three decades or longer?

Yes.

That is almost a rarity in US equity investing. Okay. And then, one more, sir. Your RoboGuard that is going to launch on September 29, is this a proprietary product that was developed by your own R&D? Or was this acquired through the acquisition channels?

No, no. It is our own R&D and it will be presented during the ASIS show by the end of this month, beginning of October in Atlanta.

Where and what time -- what date in Atlanta?

I think the ASIS show is in -- starts on the 29th or 30th of this month, goes all the week.

And what is the name of the show?

ASIS, A-S-I-S. It is 29 September to 2nd of October.

FIF?

A-S-I-S. It's a very big show (multiple speakers) in the US.

Thank you very much and I wish you all the best.

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

Yes. Thank you very much. Thank you all for joining us. On behalf of the management of Magal, I would like to thank you for continued interest and long-term support of our business. As you understand, I am very excited with what we are doing.

If you have any questions, please feel free to call me or my IR team, whose contact details are on the press release. I do look forward to speaking with you and updating you again in the next quarter. And I will take this opportunity and wish you happy new year, happy Jewish New Year, as probably we will not talk before this. Thank you all and have a nice day.

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