B.O.S. Better Online Solutions Ltd. (BOSC) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the BOS Second Quarter 2018 Results Conference Call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded and will be available on the BOS website as of tomorrow. I would now like to turn over the call to Mr. John Nesbett of IMS. Please go ahead.

Good morning, and thank you for calling in to review BOS second quarter 2018 results. Management will provide an overview of the results, followed by question-answer session. I'll now take a brief moment to read the Safe Harbor statement. The forward-looking statements contained herein reflect management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially from those in the forward-looking statements, all of which are difficult to predict and many of which are beyond the control of BOS. These risk factors and uncertainties include amongst others the dependency of sales being generated from one or a few major customers, the uncertainty of BOS being able to maintain current gross profit margins and ability to keep up or ahead of technology and to succeed in a highly competitive industry; inability to maintain marketing and distribution agreements and to expand overseas markets uncertainty with respect to the prospects of legal claims against BOS. The effect of exchange rate fluctuations, general worldwide economic conditions, and continued availability of financing for working capital purposes and to refinance outstanding indebtedness. And additional risk and uncertainties detailed in BOS' periodic reports and registration statements filed with the U.S. Securities Exchange Commission. BOS undertakes no obligation to publicly update or revise any such forward-looking statements to reflect any change in its expectations or an events, conditions or circumstances on which any such statements may be based or that may affect a likelihood that actual results will differ from those set forth in the forward-looking statements. On the call this morning, we have Yuval Viner, Co-CEO; and Eyal Cohen, Co-CEO and Chief Financial Officer. I will now turn the call over to Eyal for a financial overview of the quarter. Please go ahead, Eyal.

Thank you, John and Ilana. And thanks to those who have also joined the call today. I will take you through the financial details of the report and then Yuval will provide a business overview. Looking on the second quarter, during the quarter, we announced three new orders for our comprehensive Supply Chain solutions and we also completed delivery of a Mobile system order for top tier Israeli customer. Our second quarter results reflect continued momentum as demonstrated by increased revenues, consistent growth in profitability, and EBITDA. We remain focused on bringing our solution to an extended base of customers, as well as growing our presence overseas. During the second quarter, we achieved strong organic revenues growth, and increase in international sales. Revenues for the quarter grew by 12% to $7.6 million. Sales for the RFID and Mobile division grew by 14%, mainly related to increased orders from both existing and new customers. Sales in the Supply Chain division increased by 11%, which was largely due to a 60% increase in sales to the Fareast, mainly India. Our revenue growth in the quarter was entirely organic. Gross margin was 20.6% for the quarter, down from 21.7% in the second quarter last year. Looking at our two divisions, Supply Chain gross margin increased to 19.7% and in RFID and Mobile division it declined to 21.7%, compared to the second quarter of 2017. The decrease in the gross margin ratio of the RFID and Mobile was primarily related to product mix and timing. As we move to 2018, we expect to achieve improved blended gross margin in RFID and Mobile division that are consistent with 2017. Operating expenses increased by 8% as compared to the second quarter of 2017, primarily related to increased sales and marketing expenses as the company focuses on growing market share. Net income grew by 16% to $192,000 or $0.05 per share for the second quarter of 2018, compared to $166,000 or $0.05 per share in the second quarter of 2017. For the six months ended June 30, 2018 revenue grew by 15% to $15.8 million. Sales for the RFID and Mobile division and the Supply Chain division grew by 15% demonstrating solid organic growth in the first six months of 2018. Net income for the first half of 2018 grew by 26% to $397,000 or $0.12 per share, compared to $313,000, or $0.10 per share in the first half of 2017. Turning to the balance sheet, at June 30, 2018, we had working capital of $7.4 million or current ratio of 2.1. With shareholders equity of $10.9 million or $3.07 per share. Finally, I would like to mention that BOS. was recently featured as a Company of the Month for the July issue of The Bowser Report and Investor Newsletter. The Newsletter utilizes an extensive rating system evaluating 12 financial metrics, including such item as earning in the last five years, book value, current ratio, and long-term debt when considering its selection for the Company of the Month and we are very pleased to have met 11 out of the 12 criteria, which is particularly high rating. I encourage you all to visit BOS website to read the full article should you get a change. I will now turn the call over to Yuval to review our business. Yuval, please go ahead.

Thank you, Eyal. Through our two divisions, RFID and Mobile and Supply Chain, BOS is well-positioned to provide a wide range of solution to attractive and growing market and we are pleased with organic revenue growth we achieved in both divisions during this quarter. In our RFID and Mobile division, we are seeing increasing demand from our customers for IoT solutions that enable them to track and monitor assets and inventory, possibility to deliver proven turnkey solution in corporation RFID and vision technology is competitive advantage as we position our solution to meet market demand. As a leading integrator in Israel, recognized the importance of our continued investment in integration, innovation technology solution to capture even more market share and grow our leadership position. In our Supply Chain division, we continue to increase our international revenues during the second quarter. We are seeing growing interest in our services from the India market and recently in China as well. We are pleased with our progress during the quarter and excited by the opportunities ahead. Our customers are industry leaders representing different variety of industries, including avionic, retail manufacture, defense and government entities. With our proven expertise and capabilities, we are focused on winning new programs from existing customer and also on attracting new customers and contracts. We’re engaged by the steady growth we show from both divisions during the second quarter and we remain focused on bringing [ph] momentum as we continue through the balance of year 2018. Looking forward, we believe that we are on-track to deliver fiscal 2018 revenues exceeding $29 million with net income of $800,000. Since management was appointed in 2010, we have met all the financial outlooks that we have provided and we are confident in our ability to execute in fiscal 2018. We will now take questions.

Thank you. [Operator Instructions] The first question from [Bryce Thompson] of North Grove Asset Management. Please go ahead.

Hi, Yuval and Eyal. You showed nice growth of 50% revenues in the first of the year, while your cash remained roughly the same and loans reduced, how did you finance the growth?

Hi, Bryce [ph], thank you for the question. During the first half of 2010, we made a great move with our accounts receivable and inventory. During the first of the year, the accounts receivable reduced by about $1.6 million and inventory by $0.5 million, So, total reduction of $2 million in accounts receivables and inventory, while we grew 15%. So, it was a great move. And return – accounts receivables and inventory converted into $2 million in cash, which absolutely supported our 15% growth in revenues.

Got you. And do you expect to continue to pay down debt or are you comfortable with debt around the current levels?

As of June, we had a long-term loan of $2 million. According to the terms of the loans with the banks, we are paying the principle on a monthly basis and an annual amount of $0.5 million over six years period commencing the beginning of 2018. I am comfortable with the current level of the loans and more that with our financial position. Today, lot of cash and restricted bank deposit are even below $1 million. We also have a very strong working capital of about $7.4 million. So, we have no plan to raise additional equity, unless we will consume an acquisition, and in that case most of the acquisitions will be financed through loans. So, I hope I answered your question.

Yes. Thank you.

[Operator Instructions] The next question is from Todd Felte of RHK Capital. Please go ahead.

Hi, Yuval, Eyal, great quarter. Really appreciate all the hard work you all are doing with the company. Just noticed that one of your contracts in the quarter was from Brink’s Israel, do you have any ability to kind of parley that into more – to approach Brink’s on an international level and get contracts in other countries or are you just limited to Israel with companies like that?

As a matter of fact, the project with Brink’s was locally by the demands of Brink’s Israel and most of the cases in Brink’s Israel, they start moving project by themselves, by their need locally. And through their demand or through their connections through Brink’s worldwide it is on their hand, so we cross the fingers, but we can't do anything at this point. It is just a matter of our customers how they want to move it ahead.

Sure.

Okay.

The next question is from Michael Porter of [Modern Capital Group]. Please go ahead.

Another solid quarter. Just two follow-ups from the first question. What was the cash generated from operations for Q2 and for the first half of the year versus last year?

Actually, we did not publish the cash flow report for the – under the current press release, but the major move was significant reduction in accounts receivable and inventory in the amount of $0.5 million, and also a reduction of $1 million in the supplier and this was the major element in the working – in the cash flow from current activities.

Okay. And then you’ve given good guidance for the second half of the year, can you give us a little bit of inside of our backlog at the – perhaps at the end of the quarter and perhaps where the backlog currently stands? And how much of the guidance you are giving is currently contracted?

Actually, we have a good visibility for the second half of the year, and we have a strong backlog of the supply chain, which is around $6 million, which most of it is for delivery for the second half of 2018. And we also have a backlog of about $1.5 million for the RFID and Mobile, also for delivery in the second-half of the year, and the trend that we think that will be in the second half of the year is related with strong revenues in the USA from the Supply Chain innovation. As we also already mentioned in previous PR, regarding the growth in the U.S. market.

Okay.

The next question is from Mike Hussey of Katamon Capital. Please go ahead.

Yes. Good morning. I had actually two questions. I wanted to go back to acquisitions and whether they remain at a strategic priority for you and if you could help us understand your parameters around acquisitions? And also, just if you could, on another note provide some insight as to what’s driving the increased demand for your Supply Chain solutions in the Fareast? Thank you.

Okay. Thank you for the question. Yes, regarding acquisition, acquisitions continue to be a strategic priority and both management and the Board of Directors are fully committed to achieve the target. And regarding the parameters that you ask, we [indiscernible] policy of the investment and for example, the major parameters are, for example the size up to $4 million investment, it should be a profitable company located in Israel. So, it will be easy to integrate a company with a quality management and of course it should be synergic to one of our two divisions, RFID or the Supply Chain. And again, regarding the financing of the acquisition, we planned that more than 50% of the investment will be financed through loans and the rest by internal sources and equity. So, I guess the equity portion will be big. And regarding the question on the India market, actually this is a market of the Supply Chain division and one of the most valuable assets of our Supply Chain division is its strong and long business relationship with the leading distance manufacturer in Israel. Most of the revenues that we generate in India is derived from subcontractors both Israeli [indiscernible] manufacturers, and since 2013, we made approximately more than $70 million orders revenues from the continuing growth of trading between Israel and India. This is [indiscernible] and I hope it will continue. I hope I answered your questions?

Yes, thank you.

Thank you.

There are no further questions at this time. Before I ask Mr. Viner to go-ahead with his closing statement, I would like to remind participants that a replay of this call will be available on the company's website www.boscorporate.com by tomorrow. Mr. Viner, would you like to me make your concluding statement?

Yes, thank you. I want to thank you all for joining us today and we are looking forward to our next call. Thank you all.

This concludes BOS’ second quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.