Senstar Technologies Ltd. (SNT) Q2 2020 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen and welcome to the Magal Security Systems Ltd Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Brett Maas with Hayder IR. Thank you. You may begin.

Thank you, operator. Welcome to Magal's second quarter 2020 earnings conference call. I would like to welcome all of you to the conference call and thank Magal's management for hosting this call. With us on the call today is Dror Sharon, CEO of Magal; and Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review Magal's financial results for the second quarter. We will then open the call for questions-and-answers session. Before we start, I would like to point out that this conference call may contain projections and other forward-looking statements regarding future events or 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, the unanticipated and unknown effect of the coronavirus including on our operations and on our clients, 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 requirement. You can also refer to our website at magalsecurity.com for the most directly comparable financial measures and related reconciliations. With that, I would like to now hand the call over to Dror. Dror, please go ahead.

Thank you, Brett. I'd like to welcome all of you to our call, and thank you for joining us today. I hope that everyone's families and friends are safe and healthy. In my comments, all compares are year-over-year referring to the second quarter of 2019. I'm pleased that during this time of economic uncertainty, we continue to achieve our strategic goals while managing cost and maintaining profitability. For the second quarter of 2020, we delivered positive net income and grew EBITDA by 78%, on a revenue decrease of 17%. Gross margin rose to 47% of reported revenue due to the increase in same store sales and cost reduction in the quarter. With the onset of COVID, we shifted our focus to managing our cost with goal of maintaining annual profitability, while positioning the company for recovery in growth longer term. This action provided flexibility to management to manage operational expenses for the remaining of the year without jeopardizing our sales and R&D capabilities and effort. In the second quarter, we reduced operating expenses by 22% through cost management, delaying new hires and incurring lower sales and marketing expenses. As a result, operating income increased to $796,000 from $195,000, the second quarter of last year. We improved net - year-over-year, we improved net income to $154,000 from a net loss of $302,000 and delivered an EBITDA margin of 7.8% on a 78% increase in EBITDA. We also had another quarter of positive cash flow, generating $1.1 million in cash from operations. Our two business segments; Magal's Integrated Solutions and the Senstar Products division have been impacted quite differently in the quarter by the COVID. Project delays along with the travel limitations, the restrictions on face-to-face meetings with prospect clients crucial to closing new business affected our division differently. Magal's Integrated Solutions division was more affected than the Senstar Products division this quarter, closing large project deals is dependent on face-to-face meeting and the repeated in-person interaction with various teams. Although government and large entities particularly some of our target verticals are delaying new projects to conserve cash in the period of economic uncertainty. As a result, Magal's Integrated Solutions second quarter revenue reduced by 26% year-over-year. The COVID-19 impacted our Senstar Products Division to a lesser degree due to the high geographical and product line diversity. As a result, since the revenue declined only 40% year-over-year. We continue diversifying our revenue streams across verticals and territories during the global COVID outbreak. As a result, Magal project revenue was more transactional coming from smaller contracts and deals rather than large contracts as in prior years. In the second quarter, we landed several turnkey projects including a VIP resident in Mexico and an African seaport and an extension to our turnkey project with the Port of Tarragona in Spain. Shifting to an update on our four key verticals: The Oil and Gas, Correctional facilities; Critical infrastructures and Logistics. In the second quarter, the oil and gas sector continue to be affected by oil prices fluctuation related to the uneven global economic recovery, and large projects remaining on hold. We expect this vertical to begin to improve next year and remain engaged with those customers very closely. The Correctional Vertical particularly in Canada experienced delays in project execution due to the COVID-19 related limitations on facilities and access. We do expect Correctional to recover in Canada - [Tech Difficulty]

Hello, Kobi, you want to continue reading for him?

Yes for now. And apologies for technical issue. We do expect Correctional to recover in Canada in 2020 where this vertical has grown nicely over the last few years. A new solution developed for collections is our recently launched anti-drone system. This system can be used for the detection, tracking and neutralizing of drones that bring listed or prohibited materials into facilities. We also intend to target homeland security and public safety with the anti-drone system. The system operates in a unique distributed solution based on our proprietary Magal Fortis command and control capabilities and electro optics solution. The Critical Infrastructure Vertical has been active for our teams this quarter, but outcomes vary depending on the region. As mentioned earlier, we closed several infrastructure contracts in Europe and Africa during the quarter. We continue to invest in the logistics vertical logistics [Tech Difficulty]

Okay. So sorry about it. I just - I was disconnected. Kobi, where did you stop?

So we just started discussing the logistics vertical.

Logistics critical continue, okay, we continue to invest in the logistics vertical. Logistical requirements are going worldwide due to the COVID-19. This has generated an up surge in online shopping, and increased focus on improving expand and distribution capability. These larger, more complex logistics facilities have greater security and operation needs. To expand our scope of services in the vertical, we are leveraging our PIDS, the PIDS, the VMS software and the dedicated analytics to provide specialized solution for securing the facility, as well as tracking and managing passive movement. Another new innovative product we just launched is the Safe Spaces in response to the COVID requirements. This new Video Analytics Solution is camera and VMS platform-agnostic to enable businesses to reopen, while maintaining COVID related public safety requirements. Safe Spaces Video Analytics identifies individuals not wearing masks and monitors social distancing occupancy limited, enhanced sanitation stands in public facilities and buildings. Currently, we have distribution channel, partners and the potential clients testing the system. We are also closing new business with prior customers, notably the new contract announced yesterday to secure military assets for an intergovernmental alliance. The $6.5 million contract will provide physical security perimeter detection, video surveillance access control, public address and associated command and control equipment and structure for assets globally. This key contract award recognized technology differentiation and the scope of sensor product offering for deployable security solutions. The RSC was very competitive, requiring robust, modular equipment; the technological sophistication, capable of being mounted, connected and dismounted rapidly and easily integrated with existing assets. This win is an endorsement for Senstar technology experience and customer support. Shifting to an overview of our performance by region. North America saw growth in all product operation during the second quarter, deliveries have mostly continued in this region as security for critical sites is considered as essential services. The Canadian territory was primarily affected by the slowdown in the construction sector, where the backlog of orders which we able to fulfill as the restrictions in the country are lifted. In the EMEA region where seaports are considered essential services, Spain has been active territory for our experienced team. In Israel, the impact of the crisis is mixed with Israeli [Indiscernible] district active while other sectors have slowed down. Africa is also mixed but we are winning new business there as well - well under the seaport security system design and installation in Djibouti, a new territory where we see future opportunities. The APAC region has been impacted the longest by the COVID. With lockdown and the restrictions that began in the early 2019 - excuse me early 2020 and still continue in many regions that we still - that we sell into. We began to see some activity in the APAC region in July but large areas including the Philippines and Indonesia are still under lockdown. Another region still managing COVID outbreaks that are severely impacted the economic activity is Latin America; several large countries in South Africa and Central America are fighting to control the rate of outbreak. This dynamic has impacted our businesses in this region, though we have had some small contract wins recently. Magal's sound financial standing with the net cash and related cash balance gives us - give me confidence in our ability to respond to the challenges and opportunities ahead. We will prioritize our use of capital in these areas; investing in R&D to increase our competitive advantages, maintaining our pool of talented, experienced people critical to our future goals; and M&A, specifically - specific opportunities to add in synergies products in them, growth market and leverage existing platforms. I've already discussed some examples of investments in our R&D roadmap and the innovation it has delivered. Another element essential for the company post crisis recovery is employee retention. We believe that keeping our teams on board will provide support to our customers, close new business and continue to improve our products, solutions and software is a competitive advantage that enables us to preserve the strategic direction of Magal. The M&A target in our pipeline would add technology to leverage our existing capabilities and bring innovation and expertise. We hoped to close at least one to two deals in 2020; we have resumed dialogue with the target put on hold at the end of the first quarter, and just a week ago; we submitted the non-binding LOI to one of the interesting targets that we are working on. I want to thank the global Magal team for their dedication and spirit in dealing with all the diverse challenges we are facing, both at work and their personal lives. I'm confident that with our strong balance sheet, our backlog of business and our skilled team; we will emerge from the crisis strong and positions for growth. And now I would like to hand the call over to Kobi to summarize the financial result. Kobi, please go ahead.

Thank you, Dror. Revenue for the second quarter of 2020 was $16.4 million, a decline of 17% compared with revenue of $19.7 million in the second quarter of 2019. The geographic breakdown as a percentage of revenue for the second quarter was as follows: Israel 24% versus 23%, North America 26% versus 23%; Latin America 3% versus 9%, Europe 17% versus 19%; Africa 15% to 16%; Asia and the rest of the world 16% versus 10%. The breakout between Magal's Integrated Solutions and Senstar Products divisions was 47% products and 53% projects. Magal's Integrated Solutions division revenue declined by 26% year-over-year and Senstar Products division revenue declined by 4% year-over-year. Second quarter blended gross margin was 44.2% of revenue versus 42.6% last year. The gross margin increase was driven due to the high gross profit contribution related to the increase of Senstar Products sales, as well as of savings in the quarter. Our operating expenses were $6.4 million, a 22% reduction from the prior year's second quarter operating expenses of $8.2 million. The reduction in operating expenses is attributable primarily to payroll related actions, such as the delays in hiring and reduction implication liability, as well as the reduction in other expenses such as travel and marketing. We delivered these reductions while maintaining our continuous investments in R&D and sales personnel. Operating income was $796,000 in second quarter of 2020, compared to $195,000 in second quarter of 2019. Financial expense was $457,000 compared to financial expense of $363,000 in the second quarter of last year. This is the non-cash expenses as a result of end of period valuation of monetary assets and liabilities. At the end of each period, the change in currency valuation of monetary assets and liabilities is recorded as a non-cash financial expense or income, therefore we use EBITDA and non-GAAP metrics leaving out the variable impact of foreign exchange fluctuations, and other non-cash factors; and I believe that EBITDA is better good of the company's performance. EBITDA for the second quarter was $1.3 million versus EBITDA of $716,000 in the second quarter of last year. Net income attributable to Magal's shareholders in the quarter was $153,000 or $0.01 per share versus a net loss of $236,000 or $0.01 per share in second quarter of the prior year. Cash and cash equivalents short term deposits and specific cash and deposits, net of short-term debt and credit as of June 30, 2020 were $56.4 million or $2.44 per share compared with cash and short-term deposits of $51.6 million, or $2.23 per share as of December 31, 2019 and $54.4 million or $2.35 per share as of March 31, 2020. Our working capital decreased by almost $5 million at June 30, 2020 in comparison to the end of the last year. And majority of the decrease is driven by the trade receivables collections related to high billing levels in Q4 2019. We delivered positive cash flow through operations of $1.1 million in quarter. So we are pleased with the company's ability to generate cash in such tough environment. That concludes my remarks. We're happy to take your questions now. Operator, please?

[Operator Instructions] Our first question comes from the line of Sam Rebotsky with SER Asset Management. Please proceed with your question.

Yes. Good morning, Dror. Good morning, Kobi or afternoon in Israel. The $6.5 million contract in the language assistance contract has a value of $6.5 million with final acceptance expected in second half of 2021. Does that mean you started working on the contract and they will complete it? When do you start working on it? And when do you get the money?

The idea again, we signed it just last week. So we booked it last week in our backlog; starting to work on it immediately. I assume that - let's say up to 20% will be done during the 2020 and the rest should be finished by the end of 2021.

Well, that sounds very good. Your profit or the - even though the sales went down for the quarter, you managed to show a small profit. I assume with all the - with the additional contracts, if you increase sales your profit will increased proportionately going forward.

In this - hi, Sam; this is Kobi. In this respect, we should remember that currently in this quarter, we are not at our quarterly OpEx run rate. So the reduction in operational expenses is a reaction. It's a reaction basically to the specific situation related to COVID-19 impact. Obviously, elements like travel and other expenses will get back at least partially as the overall situation and the economy is getting back to normal. So I wouldn't say it will be a pure increase or improvement. It's a bit more complex than that. But definitely, this contrast is accretive to our profitability.

Okay. I'm going to say something which if you recall, Thurman Willis, who was on the call and had always, asked for activity in Investor Relations. Unfortunately, he passed and I would appreciate in his name that you would do as much as you can in investor relations in memory of Thurman Willis. And hopefully you have your story improves and your earnings improve. And he would appreciate knowing that Magal has improved. And thank you.

Thank you, Sam. Thurman did believe very much in the company and we join your wishes.

Our next question comes from one of Ken Liddy with Oppenheimer. Please proceed with your question.

Hi. Good afternoon. I just had two questions. First, have you had any additional feedback on your Safe Spaces Video Analytics at this point yet?

Safe Spaces, we are now introducing it to several customers and distributors, and now evaluating the solution. I assume that in the next few weeks or a month, we start to secure orders. But again, something we have to see in the - but we see lot of traction and enthusiasm about this solution.

And given COVID-19, do you see any new verticals that will provide growth or has things change at this point that you can discuss?

As I mentioned in my script, the logistics looks very promising. The amount of logistics warehouses and centers is growing, people are buying more and more online and logistics provider, suppliers are looking for solutions in two levels. One is to secure the logistics centers themselves. And we started to provide them also with parcel management. And we did already the first project in Europe and the customers were pretty please by using our BMS software. We are managing the movements of the parcels by unique analytics solution developed for this system. So logistics looks very promising; for some reason, also the construction facilities, especially in North America is a growing market.

Good to hear. And just one last question, what was your cash flow for the quarter?

So we had positive cash flow from operations of just about $1 million.

Our next question comes from the line of Bruce Tuckman, a Private Investor. Please proceed with your question.

Both aware at least, Kobi, I know was where. It's been a disappointing run. And I know that in the past people have said to emphasize Investor Relations and get the word out, but it's really a matter of increasing sales, if you guys can get either a better salesforce or a kick in the butt to the current salesforce in this environment in the past 10 years with terrorism with everything else going on in the world. You folks should be doing a much better job of getting your product out there. And I keep hearing the good news on this contract and that contract. But the stock at $3.35 this morning is not reflecting a growing company, and I had hoped that you folks would be growing a lot better and increasing sales. So it's really not a question. It's a comment. And I've been a dedicated shareholder and hope to be longer because I believe in the product, I believe in the company. And I believe in the need for the product. So if you could comment, that would be great. But otherwise, I wish you all a great day.

Well, maybe one comment was the company for the last few years, 2018- 2019 grew very nice. We grew the sales in between 30% to 50% year-over-year. And the plan for 2020 was pretty much to keep this trend. In part everybody, we have to speak more with the investors but revenue wise and also profit wise, the company grew very nice in those two years. 2020 started very promising and unfortunately, we got hit like the rest of the world in beginning of the year with the COVID situation. It slows us down and hopefully in the next within six months or so once the COVID will be controlled in a better manner worldwide we will be able to go back on track and grow the company because we see lots of traction. I assume that security will grow even more than what it will grow in the last 10 years. So I still believe that the security is a good place to be - there is some kind of slowdown during 2020 because of the COVID but other than that the company grew very nice in the previous two years.

Our next question is a follow-up question from the line of Sam Rebotsky with SER Asset Management. Please proceed with your question.

Yes, Dror. You spoke of acquisitions had been previously. What is the status of the acquisitions we're looking at and as prices come down on a potential acquisition?

We are looking in few directions. We have a few posters in front of us, and with one also actually two in line with LOIs outside. I cannot say that prices went down, but at least there are some good opportunities in front of us. And any how we will proceed exploring those companies. And hopefully once we would be able to move out of Israel and meet them face-to-face, will be able to and try and close this one if not two during the next few months.

Okay. And could you sort of comment relative to the tender offer for stock, which was unsuccessful by the major stockholder that owns about 40%, and what is the company's position on that? They were member of the board of directors. And what has been the recommendation of this type of procedure and what did that accomplish? And if this was not successful, but the stock managed to move up after that and based on this contract. So would you comment that something on that?

The tender offer is basically between the shareholders. So from that perspective we as the company's management - we are kind of outside of this transaction, of course, which eventually did not happen. The Board of Directors did convene twice as required by the law to discuss and provide their recommendations. And eventually they decided to be neutral in terms of their recommendation. And I think this is how we see it from the management team perspective.

From my point of view, the stock is undervalued and you've hired a new IR firm, and they will do whatever they think and recommend to you to get exposure as best they can with the COVID. But there is all the security needs and hopefully the contract that you just signed, it is decently profitable and that we could get the stock to trade on a regular basis at a higher price. Good luck. Thank you very much.

Thank you, Sam. Just to add that we are going to attend - from the IR perspective, we work very closely with the Hayden IR and Brett and Ken were very pleased with their service. We are going to attend LD Micro beginning of September, hoping to market successfully the stock. We also have schedules calls almost every week with the new potential investors. We also extended some very nicely, our IR work in Israel and our home country. And we also conducted almost weekly meetings with potential investors' base. So we hope that eventually our story gets out there, and get understood and we will see some traction in the stock price.

Our next question comes from the line of Greg Ross, a Private Investor. Please proceed with your question.

Good afternoon. I just had a question about cash just to confirm the cash per share is $2.44 US. And regarding the changes in expenses to follow on the proportional comment earlier, as business increases again and your expenses rise, do you anticipate using cash? The reason I have the question is that even with this, you increase your cash on hand. So how should I understand that going forward, please?

Yes, so, in terms of the calculation, it's indeed a number that you mentioned, we have $56 million around $56 million in cash, around $23 million of shares out there. So this is the situation. We do generate, we show positive EBITDA, we generate cash; we generate cash from operations. And this is the result of cash increase. We had - we finished basically 2018 and 2019 with positive EBITDA and basically the cash increased during 2020; obviously, is also related to the collection of income as it was in Q4 2019. From our perspective, where the cash - the use of the cash is for the M&A activity. And as we mentioned, our target list gets longer during the last few months. And we are in quite intense stages with these two targets. And on top of that, there is working capital operational use of cash. I hope that I addressed your question.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Okay. Thank you, operator. On behalf of the management of Magal, we'd like to thank you for your continued interest and long-term support to our business. I look forward to updating you next quarter. Have a good day, all of you. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.