Senstar Technologies Ltd. (SNT) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Magal's Fourth Quarter and Full Year 2018 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 GK Investor and Public Relations at 1-646-688-3559 or view it in the News section of the company's website, www.magalsecurity.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, please?

Thank you, Operator. Welcome to Magal's Fourth Quarter and Full Year 2018 Conference Call. I would like to welcome all of you to this conference call, and I'd like to thank Magal's management for hosting this call. With us on the line today are Mr. Dror Sharon, CEO of Magal; and Mr. Kobi Vinokur, CFO. Dror will summarize some key highlights, followed by Kobi who will review Magal's financial performance of the quarter. We will then open the call for the question-and-answer session. Before we start, I'd 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 demands 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. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.magalsecurity.com for the most directly comparable financial measures and related reconciliations. And with that, I would now like to hand the call over to Dror. Dror, please go ahead.

Thank you, Kenny. I'd like to welcome you all to our conference call, and thank you for joining us today. I'm pleased with our results, which ends a fantastic year of strong growth from Magal. Reported record revenues of $93 million for 2018, which is up a significant 44% over those of last year. Even stripping out the additional revenues from our acquisition of the Esc Baz in April 2018, our organic growth in 2018 was 38%, a growth rate we are really proud of and ahead of our expectation at this time of the year -- at this time last year. Furthermore, looking ahead to 2019, we remain in a strong position. Our year-end backlog was $60 million, which was higher than which we started in 2018. Furthermore, our pipeline remains broad and is full of potential opportunities, healthier and more diverse than what Magal has seen in the past few years. We are hopeful that we can turn a good portion of our pipeline to additional orders and revenues in the coming quarters. We are therefore excited with our potential ahead. Our success in 2018 was due to the increased market interest for our products and services in each and every geography that we serve. Another aspect of our performance that we are pleased with is that our revenues were also more diverse -- diversified than we have seen in previous years. It's a good sign for the future to come. Our project revenue grew by over 60% versus the 2017 and came from a broader mix of customers and geographies. Our product sales, which include video, were also highly diversified across hundreds of customers and represented around 40% of the overall mix, growing by over 20% from 2017. And finally, around 1/5 of our overall revenue in 2018 were recurring in nature, providing us with good revenue visibility for the years to come. Kobi will discuss the results in greater details, including the onetime and noncash expenses we had in Q4 in few moments. Cash generation was also strong throughout the year. And despite completing an acquisition, we ended the year with $55 million in net cash and no debt. This is more than we need for ongoing working capital, and our goal is to leverage this strong cash position for value-adding acquisitions, an example of which was the Esc Baz acquisition earlier in 2018. This remains a key part of Magal's strategy, and we are looking to acquire technology for that -- for new markets, leveraging our current business platform to bring increased sales and open up a new sales channel for us. We are also exploring entering the new verticals for sales of our business services and technology and enabling us to address a larger total market. One area we recently began to focus on is access control. In the past few months, after acquiring this technology, we've been integrating electronic access control into our Senstar, VMS solution. Our solution combines a bundle of solutions, including video management, access control and video analytics. Our broad-ended software solution, together with our tools and capabilities, expands our addressable market, increases the attractiveness of our offering to the market and bring differentiated course to the security market. Looking at our performance in the specific regions as we operate. North America, which includes the United States and Canada, performed well for us throughout 2018 and is continuing to 2019. Strategically, we have made a number of improvements in North America. Last year, we combined our 2 operations, the products and the video, into one entity under Senstar. This allowed us to generate cost saving and operate our North America business more efficiently. Recently, in January 2019, we also appointed a new VP of Sales in North America. Kristen Cory brings Magal over 20 years of experience in senior sales management experience, especially the IP cameras and the associated products. We believe Kristen will enable us to further develop our business in this region. With regard to U.S.-Mexico border wall, while we have yet to see real development, we remain in close discussion with the CBP, the U.S. Customs and Border Patrol Agency and the Department of Homeland Security. We do believe that when they do fund and move forward with this project, they will choose a smart technology border solution, the type of solution which Magal has a truly global competitive lead. In all our other regions around the world, Magal continued to perform well. EMEA enjoyed a solid year of recovery in 2018 and restructured our sales force to be more focused on agile. Latin America was also strong in 2018, particularly in Mexico, where we have been implementing deposits to protect energy infrastructure, including our recently announced order of close to $8 million [indiscernible] Asia Pacific was also a strong geography for Magal. And towards the end of the year, we announced $7 million in new orders from that region. To summarize everything, we are very pleased with our performance in 2018, a record year in terms of revenue growth for Magal. Furthermore, we started 2019 in the best position we have ever had in the beginning of the year. Our backlog is strong, and our pipeline remains broad and full of potential opportunities. Finally, Magal will be showcasing its technology in Las Vegas at the ISC West show on April 10 and 11. On April 17 and 18, I'll be in New York meeting with institutional investors and analysts. So I hope to meet some of you then. And now I would like to hand over to Kobi to summarize the financial results. Kobi, please?

Thanks, Dror. Revenues for the fourth quarter of 2018 were $26.1 million, up 13% year-over-year. The revenue mix was 57% for projects and 43% for products and videos. The geographic revenue breakdown for the quarter was as follows: North America, 22%; Latin America, 28%; Africa, 6%; Europe, 17%; Israel, 14%; Asia and the rest of the world, 13%. Fourth quarter gross margin was 40.6% of revenues versus 46.6% last year. The variance was due to the increase in video hardware sales and execution of lower gross margin projects within strategic core verticals. Our general and administrative expenses were $4.2 million versus $2.2 million in the fourth quarter of 2017. This does not represent our run rate G&A expense level. During the quarter, we had a number of expenses, which were onetime and noncash in nature, which increased our G&A expenses and we do not expect to recur in the upcoming quarters. We had a noncash write-off of $1 million in goodwill related to the Cyberseal acquisition made in 2013 and $0.7 million of noncash provision for doubtful receivables. Another impact in the fourth quarter was higher annual incentive expenses, rewarding employees for Magal's very strong performance in 2018. The higher expenses led to an operating loss of $0.4 million in the quarter compared with an operating profit of $1.8 million last year. Net loss in the quarter was $0.1 million or $0.01 per share. Net income in the fourth quarter of the last year was $0.3 million or $0.01 per share. The EBITDA, which is more representative of the performance of our business in the quarter, was $1.3 million positive compared with EBITDA of $2.3 million in fourth quarter of the last year. To summarize our full year 2018 results. We posted revenue of $92.6 million, which increased by 44% year-over-year, 38% of which was organic revenue growth. The revenue growth was generated across all the business units. However, the project sales growth was higher than that of product sales. While the product sales grew by approximately 20% over 2017, the projects recorded over 60% growth. Overall, yearly revenue from projects was 60% of the total -- out of the total revenue compared with 53% of revenues in 2017. Sales by geography in 2018 were as follows: North America, 26%; Israel, 15%; Latin America, 28%; Europe, 15%; Africa, 8%; Asia and the rest of the world amounted to 8%. Gross margin was 43.5% versus 48.7% last year. The decrease was driven mainly by the projects versus product sales mix as well as the lower-margin video hardware sales and projects sold during 2018. Operating income in 2018 was $3.8 million compared with operating loss of $1.2 million in 2017. During 2018, our net financial income was $1.4 million compared with a net financial expense of $4 million in 2017. Our net financial income and expense consist of interest received on our cash deposits as well as the noncash financial charges generated by the foreign currency exposure in shekels of our U.S. dollar-denominated deposits. In terms of the taxes, in 2018, our tax expense was $2.1 million versus $1.7 million in 2017. Following the merger of our North American divisions into one entity, we have been able to use the carry-forward losses of Aimetis, and we will be able to save taxes in the region over the coming two years. Our full 2018 net income was $2.9 million versus a net loss of $6.9 million last year. EBITDA for 2018 was $7 million versus EBITDA of $0.6 million last year. Our balance sheet position remains strong. Cash, short-term deposits and restricted deposits as of December 31, 2018, were $55 million or $2.38 per share compared with $52.3 million or $2.27 per share as at December 31, 2017. There is no financial debt at the company. Despite the strong revenue growth, we managed to maintain stable working capital levels. That concludes my remarks. We would be happy to take your questions now. Operator?

[Operator Instructions]. The first question is from Sam Rebotsky from SER Asset Management.

Tell me, the success in the fourth quarter that's not being repeated, could you sort of quantify the sales and profit contribution of that success?

Sam, this is Kobi. Just to clarify, the nonrecurring item is a G&A expense. It's not the revenue.

Oh, it's not revenue, okay. So it's a benefit or -- so you had the expense -- how much was the expense?

So within the G&A, we recorded -- in terms of the nonrecurring items, we recorded $1 million of goodwill impairment.

Okay, yes. Okay. That was expense. All right. Let me -- you talked about the back -- Dror, you talked about the best position for the backlog. So you say, is the backlog higher than it's ever been in the current quarter or in previous quarters? Could you sort of quantify that, what the backlog and relative percentage increases and what the time frame for the backlog to be included in the current fiscal year or calendar year?

Sam, currently, the backlog -- we started 2019 with a backlog of $60 million, which I don't know all over the years of Magal, but for the last few years, it's a pretty strong one, around 15% above the previous year. And a majority of this backlog is going to be utilized and will be turned into booking -- to billing in 2019.

Okay. The fourth quarter, without -- with the increased sales and even without the extraordinary items, is basically flat. Is this the expectation on the 23 -- your sales not to be really profitable? Or what do you have to do to be profitable on the $23 million in sales?

So if you take the nonrecurring expenses of around $2 million out of the OP, you get basically a profitable quarter with around $2 million of net income over -- a turnover of $26 million. So it's overall a good result.

I'm sorry for interrupting, Kobi, but I'm looking at $26 million in sales versus $92 million for the full year. You're profitable on $0.12 but basically breakeven on the $26 million. I'm just wondering, is this normal? Or what do we need to get a greater profitability and the business, the $60 million that we have, do we expect it to be more profitable than the past year? I'm looking -- I guess sales is good, but profits are better.

So again, the -- what we need to do is we need to take -- if we want to conclude and to put some sort of run rate expectation, we need to exclude the one-off item of -- basically reduces the quarterly profit to almost 0. So if, basically, you disregard these one-off expenses, onetime expenses, then it's basically $2 million of income that are associated with $26 million of revenue.

The next question is from Dan Weston of Westcap Management.

Yes. Just a couple for me. You mentioned that the recurring revenue portion was about 20% for the full year. Was that consistent with what your 2 -- Q4 recurring revenue was as well?

Yes. So it's pretty consistent rate. We worked hard to gradually increase it, but this is the way that we experienced overall during the year.

Great. And then on your gross margin profile, when you look into 2019, would you still expect for the full year you should be coming in somewhere in the mid-40s range?

I would say so.

Okay. And then on the pipeline, Dror, you're talking about the pipeline being maybe the strongest ever. Could you give us a little bit of a look in terms of the composition of your pipeline, maybe project versus product? Any other color you can provide would be helpful.

Again, the projects -- Dan, it's Dror. The project pipeline is more diversified on different regions. And also, the product pipeline is also pretty much diversified in different verticals, in different regions. It's very strong for the U.S. and EMEA for the products. And then for the projects, it's strong in Eastern Europe, in Africa, in Latin America.

By the way -- and the breakdown in the pipeline, if you don't mind, would you say it's pretty consistent with the current profile that you reported, about 60% project and then 40% product?

No, the pipeline is more tied to projects. The product is -- the time between putting a potential opportunity into the pipeline and turning it into booking is pretty short. So the pipeline for the products is growing through the year. The projects is more -- so currently, the pipeline is more filled up with the projects and less with products, but this is the way the business is behaving.

Very good. When you exit -- when you look out at the end of this year, would you expect that your recurring revenue would be higher than 20% of your overall revenue? Or just an outlook maybe for the next couple of years, what do you expect that to get to?

Yes. Our goal is definitely to increase it from this level. And how do we plan to do it? Each product has its own recurring solution, I would say. So our video software sales, we try to bundle it as much as possible with the maintenance and support contracts, which are recurring in nature. Our sensor product sales, we try to -- we encourage our customers to buy our Senstar Care, basically maintenance solution for our projects -- products, sorry. And for the projects part, we definitely encourage the customers to buy our longer-term maintenance and support services for the projects that we already commissioned.

Very good. And just last couple, if I may. Are you able to get into any more granularity in terms of what the gross margins are on your recurring revenue portion?

I would say, naturally, they are at the same level or even higher than the original sales, typically.

Would you say it's significantly higher or somewhere kind of in the same range?

It's very case-by-case basis, but I would say they are high.

The next question is from Mike Disler of Almanacs [ph].

This is the softball portion of the question. I just want to congratulate you guys and Magal for the great year in revenues, a record year. Number two, sort of addressing what Sam Rebotsky has said. He's always on these calls as well. It looks to me if you back in the 1.7 in the nonrecurring and you add it in over the year, it looks to me you're somewhere in the $0.07 to $0.08 for the quarter, which would be remarkable. Extrapolating into next year, anything close to that per quarter would be just a truly great year. And finally, last off, I was just wondering, I missed the date that you said you'd be in New York City. I'm going to try and be there, but no guarantees. I tend to be in Chicago that day. I didn't hear the date.

The dates are the 17th and 18th of April.

All right. I will check my schedule. But congratulations and please continue to do the great work you're doing. We appreciate it.

Thank you very much, Mike.

The next question is from Thurman Willis [ph].

I, too, would like to congratulate you, and I'm glad that your last participant pointed out without the onetime reoccurring items, you would have earned $0.07 or $0.08 for the quarter, which, on a quarterly basis, would be very strong, especially with the cash position. My question is similar to that of last time, and that is, we have very few institutional investors, and the stock is really not held extensively by institutions. I'm glad you'll be in New York on the 17th and 18th. Will, this year, you make more of an attempt to get institutional ownership into the stock?

Yes. We definitely noticed that the stock price, and it's our goal definitely to increase the level of participation of institutional shareholders. In fact, at least in the U.S., based on our information and statistics, we see a nice increase in the number of institutional shareholders. We need to do more. And if -- I believe that you noticed that we try to provide more and more financial and business information to our investors community to help you and the financial institutions to evaluate our potential. So we hope to see the results during 2019.

I'm glad you'll make that. I think it'll really pay off, and I plan to see you in New York on the 17th and 18th. A couple of very quick follow-ups. If you do a back of the envelope and you pull the cash out, you're trading at less than 1x revenue, which is very undervalued for stocks. So again, congratulations on the growth of that 44% in revenues, and trading at 1 -- less than 1x revenues is outstanding. My last question, I didn't get real good clarification on the U.S. border wall. Could you clarify that or be a little more specific about if we think contractors are interested in our technology relative to the border wall?

It's Dror. Let me elaborate a little bit more. We are working in different levels. We are working with the CBP and also with the Homeland Security Office to try and specify a few of our products as a product of choice for this solution. In parallel, we're also in contact with a few major integrators in the U.S. that will bid in this tender once the government will issue it. So this is what we are doing constantly, pushing it. We don't know yet when the U.S. government will open its budget for technology. They release some budget for infrastructure but not for technology yet. So we are in contact with them, waiting for their decision. But in parallel, we are doing test and trying to put our product in front of them and to make sure that the product is specified once the tender is out.

And one last quick question. I believe, last year, at the Vegas show, we won Product of the Year. Do we plan to show even some new surprises possibly on new technology that we have that will help us even be more competitive with other companies?

As I mentioned earlier, we are going to launch during the show a new software product, which is a combination of our video management solutions together with access control. Just a few months, we acquired this technology, integrated it into our software solution, and now we're going to launch it in the coming show.

The next question is from Ken Liddy of Oppenheimer.

Do you see opportunities in India, in particular their border with Pakistan? I understand they're working on a smart fence, which would seem to indicate an opportunity for Magal.

Again, I joined the company only 6, 7 months ago, but it started almost 2 years ago, those experiments. And -- but nothing is done yet. Once they'll issue the tender, we can bid again with one of our products in India, and this is what we are now exploring. We saw this article in the news about it, and we have our Magal India company in India, and they are monitoring it. Once the tender will be out, we'll probably participate in it.

Are there other major projects that you're bidding on that you can provide a little bit of idea to us as much as possible in other parts of the world?

For the Indian border?

No, no. Are there other parts of the world where you're bidding large projects like you've had in the past in Africa, in Kenya or some other regions that maybe aren't as publicly announced that you could actually talk about the scope of the project without maybe naming it?

Again, I don't want to reveal all the projects that we are working on, but we are focusing in the territory we are stronger. Kenya is one of them, and we are doing lots of other -- pursuing other opportunities in the other parts of Africa now, also in China and the other parts of Asia and, of course, Latin America. So in those parts of the world, we are dealing -- we are pursuing projects. And of course, Eastern Europe, countries like Azerbaijan and other countries in this area we are pursuing projects for Magal.

Do you see a reason where you may be needing more salesmen to penetrate some of these regions? I don't ever remember seeing the company be more diversified than you are today.

Again, I don't think I understand the question, but we are doing reorganization in the U.S. and also in EMEA, focusing on specific verticals and increasing our sales force in those areas.

[Operator Instructions]. The next question is from Nahum Moshet [ph].

I have a couple of questions. First of all, I wanted to know. I'm just wondering, why did you report the fourth quarter and the whole year so late? I mean, it's already almost end of the first quarter of 2019.

Nahum [ph], this is Kobi. Actually, you are right. We do want to report going forward our fourth quarter results a bit earlier. Next year, the current year, the end of March, actually, this is the reporting date that historically Magal went to the market with the results. We are -- we do plan to improve and shorten the reporting time lines for the Q4 results. I think we did a good -- we made some good progress for the Q1 to Q3 reporting timing, and Q4 is still something that we hope to achieve.

Okay, okay. That's great news. And another question for Mr. Sharon. You've been in the company like for maybe more than half a year. And I just -- I was wondering to myself, what's your conception about the company? Is it any different than your previous CEO? In other words, do you think you could step the company forward to somewhere it hasn't been yet? And if yes, how?

So first, we'll start with the market. I'm studying the market for the last 6, 7 months. And all the verticals that we are now targeting are doing pretty good. Our product -- we are starting to work from 2019 and on in two divisions. One is the Senstar division that deals with products, and the other one is Magal that deals with the projects. We've specified in every division what are the verticals that this division is focusing on, what is the right way to market, what are the technology and products that we want to offer in these -- in those verticals.

Yes. But is it different than what your previous CEOs did? Or is it just you continuing the same way that they were?

We did some adaptation to the strategic that was done a few years ago, more focused strategy and I can say it's a continuation of -- some of it's a continuation of what was done and some of it's new.

Well, can you elaborate about the new things you did?

The focus on the verticals is more -- now the verticals are more focused, we are not jumping on each and every opportunity. We are aligning the R&D resources to meet those verticals' requirements. So the R&D is now more focused, and we have specific road map for each and every vertical. We're investing in the leadership team. Kristen Cory, that we brought to the North America part of company is a good reinforce to the team of the company. The guidance we have in EMEA is also pretty strong, and we are restructuring everything over there as well, increasing the amount of [indiscernible] and also reducing the costs by closing few facilities. So those are the things that we are doing now.

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

Yes. Again, thank you, everyone. On behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business and company. I look forward to an active 2019 and to updating you next quarter. Wish you all happy holidays, and talk to you in 3 months and the one that's in New York, hope to see you as well. Thank you.

Thank you. This conclude the Magal Security Systems Fourth Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.