Magal Security Systems' (MAGS) CEO Saar Koursh on Q3 2016 Results - Earnings Call Transcript

| About: Magal Security (MAGS)

Magal Security Systems, Ltd. (NASDAQ:MAGS)

Q3 2016 Earnings Conference Call

November 29, 2016 10:00 ET

Executives

Kenny Green - IR, GK Investor Relations

Saar Koursh - Chief Executive Officer

Kobi Vinokur - Chief Financial Officer

Analysts

Sam Rebotsky - SER Asset Management

Ken Liddy - Wells Fargo

Mike Drescher - Private Investor

Mark Miller - Private Investor

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Magal’s Third Quarter 2016 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company’s press release. If you have not received it, please contact Magal’s Investor Relations team at GK Investor Relations or view it in the news section of the company’s website www.magal-s3.com.

I would now like to hand the call over to Mr. Kenny Green of GK Investor Relations. Mr. Green, please go ahead.

Kenny Green

Thank you, operator. Welcome to Magal’s third quarter 2016 conference call. I would like to welcome all of you to this conference call and I would like to thank Magal’s management for hosting this call.

With us on the call today are Mr. Saar Koursh, CEO and Mr. Kobi Vinokur, CFO. Saar will summarize the 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 would like to point out that this conference call may contain forward-looking 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.

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

Saar Koursh

Thank you, Kenny. I would like to welcome all of you to the conference call and thank you for joining us today. We are pleased with the results of the quarter which represent an improvement over those of the previous quarter as well as over that of the third quarter last year. If you remember last quarter, I mentioned that I expect the second half of the year to be stronger than the first half. And this is very much setting up to be the case.

Revenues in the quarter were $21.3 million, up 57% compared with the prior quarter and 25% year-over-year and operating income was $1.6 million compared with the loss last quarter and up 22% versus the third quarter last year. Therefore, all-in-all, we are happy with our overall financial performance. More importantly, our results reflect the initial thoughts of our strategy of becoming a small product-centric business.

Our third quarter results show the positive trend of increasing both the product portion as well as the recurring portion of our revenues. In the quarter, around half of our revenue were product revenue and half were project revenues. This is the significant change from the average we saw throughout last years, which was weighted more towards 60% project revenue. Further than that, we have steadily grown the portion of our revenue, which [recall] [ph] currently amounting to around 50% of revenues. Looking ahead, our strategy is to continue to grow our product portion of our revenues and our goal is for products to tend toward 70% of the overall mix in the coming years.

Another important event which closed just after the end of the quarter was our rights offering to our shareholders. It was very encouraging to see our enthusiastic support amongst all of our shareholders who participated and benefited toward our oversubscribed rights offering which has now significantly strengthened our balance sheet. The additional $23.8 million we just raised which add to our existing cash position of $21 million at the end of the quarter will enable us to complement our organic growth with the growth to M&A and our goal is to complete an acquisition in 2017.

I would like to spend a few moments talking about some of our newer products which are gaining traction. Our North American subsidiaries received and delivered an order for PAS, personal alarm system, for personnel at four prisons in the United States. The system provides a men down capability which enable quick response from other security personnel to the location of any prison guard which is in distress or down. We are also adding a new application to our fiber product line gathering to the oil and gas industry, which can detect leaks from pipelines. The product development and testing is in its final stages and we have recently showcased our product at an oil and gas exhibition in Calgary and have received a very positive response.

I would like now to move what we are seeing in some of our key regions. We had an excellent quarter in our product predominant North American market where we saw a broad interest across the full range of our products. We received an order from international U.S. airports for our Fiber and FlexZone product. Additionally, we received an important order from a major U.S. defense contractor for sensors, which will be deployed on the Middle Eastern borders.

As you saw yesterday, we recently delivered an order for rapidly deployable perimeter electronic security system, which NATO will use for its temporary camps throughout the world. The system will include FlexZone ranging fence-mounted sensor for insertion detection as well as video surveillance, access control and public address system. Furthermore, since our recent and latest product release of our flagship VMS and analytic software, Aimetis Symphony 7, we have seen an increased interest in our solution especially in the U.S. market.

Moving on to Latin America, we have seen some good bookings; a few months ago we announced $10 million in order to secure and maintain a critical power utility site belonging to a major national power supplier, a project we are currently delivering. I would like to add that Aimetis has a strong presence in this region having supplied among other the video system to Brasilia and Campinas Airport in Brazil.

With regard to Africa, we are running several midsized security projects, including utility, power substation, seaports and airports expansion. In parallel, we are working on a number of larger opportunities. We continue to feel positive with regards to our ongoing potential from the African region. In Israel, we are delivering on our Safe City project in Holon. Looking ahead, we expect to receive some orders for our border solution for the southern border from the Israeli Ministry of Defense in the coming months.

In summary, 2016 is shaping up to be an important transition year for Magal. Our goal is to structure Magal for improved profitability with a more stable long-term growth profile, with a very broad range of leading online security products. Our results demonstrate that we are well on track and process is ongoing. In the near term, we will continue to invest in our organic growth through our R&D and sales effort to capitalize on the many opportunities we are seeing. At the same time, we will use our substantial cash position to pursue acquisition and we expect to complete such an acquisition in 2017.

Finally, I would like to introduce Kobi Vinokur, our new CFO replacing Ilan Ovadia. Kobi joined us from Miya, a part of the Arison Group, a global provider of comprehensive water efficiency solution and water utility operator where he was CFO. This year in 2016, Kobi was honored by the Israeli CFO Forum with an annual CFO Excellence award. Kobi is a certified public accountant in the United States and in Israel and is also a graduate from Harvard Business School’s Leadership Development Program. We are definitely honored to have him join our team. At the same time, I want to thank Ilan for all his hard work for Magal over the many years and wish him much luck in his future.

And now, over to you, Kobi. Please go ahead.

Kobi Vinokur

Thank you, Saar for that introduction and I am very happy to be here as part of the Magal team. I do look forward to advancing Magal to the next step. With regard to the financial results, revenues for the third quarter of 2016 were $21.3 million. These were 26% above those of the third quarter last year. Sales by geography in the quarter were as follows: North America 37%, South and Latin America 23%, Israel 10%, Africa 10%, Europe 10% and the rest of the world amounted to 10%. Gross profit in the quarter was $10.9 million or 51.1% of revenues. This is compared with an $8.4 million or 49.6% of the revenues in the third quarter of the last year. The variance in the gross margin was due to the mix of projects and products sold in the quarter.

Our operating expenses in the quarter amounted to $9.3 million in the quarter compared with $7.2 million reported in the third quarter of the last year. We had $0.5 million amortization on purchase price allocation and retention expenses related to Aimetis acquisition. Most of it is expected to continue for the next three quarters after which it will be reduced. Operating income in the quarter was $1.6 million compared with operating income of $1.3 million in the third quarter of the last year. Net income in the quarter was $647,000 or $0.04 per share, compared with the net income of $864,000 or $0.05 per share in the third quarter of the last year.

Cash, short-term deposits and restricted deposits, net of bank debt, as of September 30, 2016, was $21.2 million, or $1.29 per share, compared with cash and short-term deposits, net of current bank debt of $31.1 million or $1.90 per share at December 31, 2015. On April 1, 2016, Senstar, Magal’s owned – wholly owned Canadian subsidiary acquired Aimetis for approximately $15.2 million in cash. Cash and cash equivalents do not reflect the proceeds from the company’s rights offering which concluded on September 30, 2016. The company issued 6,170,386 shares in the offering and received $23.8 million in proceeds in early October 2016.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Sam Rebotsky of SER Asset Management. Please go ahead.

Sam Rebotsky

Good morning Saar and Kobi. As your raise seem to be very successful, the rights offering, do you plan – is there an acquisition that you are presently looking at to use the cash or is this something that you will look at?

Saar Koursh

Again, good morning, yes, we do look on this actually several opportunities, several targets. It’s going to take time. It’s not going to happen still this year as you can imagine. It’s definitely something that we are looking to finalize during 2017.

Sam Rebotsky

Okay. And as far as your sales, the $21 million is that a minimum going forward, is it possible to be profitable for the year the current fiscal year calendar year ending December 31?

Saar Koursh

Definitely, this is our goal, to be profitable and we are working hard to make it happen, but it’s still too early to comment on that focus for the full year.

Sam Rebotsky

Is it possible to say that we could – that the current sales is a minimum going forward based on your expectations right now?

Saar Koursh

I cannot say if it’s minimum or - it’s definitely it’s my – our goal. But again it’s too early to comment specifically for the next quarters.

Sam Rebotsky

With the relationship with NATO, is there a possibility some direct relationship with the United States to add your skills in building perimeters whether it’s Mexico or any other place?

Saar Koursh

It’s not related to NATO. NATO, it’s different project and we are working very successfully with NATO on these projects and hopefully for a future project as well. With U.S. government we are working on a separate channel.

Sam Rebotsky

Okay. Is there any – can you quantify your backlog at this point?

Saar Koursh

We cannot quantify backlog, as we say it’s very dependent on the different mix between the projects and products. But what we can say is that it’s better than what we used to have in the same quarter last year.

Sam Rebotsky

Okay. Thank you very much. Good luck.

Saar Koursh

Thank you.

Operator

[Operator Instructions] There are no further questions at this time – I am sorry, there is a question from Ken Liddy of Wells Fargo. Please go ahead.

Ken Liddy

Hi, could you talk about some of the opportunities with RoboGuard which came out with a couple of years ago?

Saar Koursh

Yes. RoboGuard was an autonomous patrol solution that it’s aiming to replace the men patrol in the critical assets. We deployed the first system in a classified Israeli military base. It was actually certified a month ago by the MOD. And we are currently working with the MOD to receiving orders for this product.

Ken Liddy

And how large is the range, is that something that you have expanded since the product was launched?

Saar Koursh

I am not sure I fully understood the question?

Ken Liddy

I think it was like 1 mile it cover or how long do each RoboGuard cover, how long will it be…?

Saar Koursh

So and again it’s very dependent on the operational scenario. Our recommendation is to use RoboGuard one system for 500 meters to 1 kilometer, so it’s basically on average of 0.5 mile for each system.

Ken Liddy

Okay. And as far as your oil and gas PipeGuard, what type of opportunities are you looking for there?

Saar Koursh

The opportunities are endless. The – it’s actually, we are entering the oil and gas up to now we were targeting the oil and gas security solution. The development I spoke earlier today it’s more related to safety. The oil and gas according to market research, the oil and gas leak detection with various technologies amount for $1.6 billion. This is the size of the market. There are several different technologies deployed to detect leak, but definitely it’s a major concern to all the oil and gas and we are coming to the market with a very – I would say very improved solution. And we have a very positive feedback so far, but definitely it’s going to take time. It’s not going to happen tomorrow morning, but the future is very good for these products.

Ken Liddy

And you mentioned as far as becoming more of a product company versus the project, what percentage of your products are now in cyber security [inaudible] and things like that, the software?

Saar Koursh

We have basically both cyber security and video management system which both are software driven. All-in-all, it’s accounted for – we are looking for 50-50 projects versus products, specifically for software is about 20% of the products, but again it’s not just related to cyber, it’s video and command and control.

Ken Liddy

Could you talk a little bit about your new facial recognition software?

Saar Koursh

Yes, this is a product that we launched a month ago. It’s very successful application that basically if you treat the modeling that you can use resource from open source, for example, you can take pictures from the web from your Facebook or LinkedIn and basically it builds up a blacklist and you are placing a camera, I would say, off-the-shelf camera and you are using a software that is running on the server to identify a suspect from the blacklist. And this is quite unusual – we are seeing an unusual performance for that application and especially the success rate we are talking more than 99% success rate of identifying suspects from that blacklist.

The applications are endless. The applications for facial recognition, it’s of course from security from let’s – I would say the straightforward example you can take the retail business. You can – once you have a shoplifter, let’s take a Wal-Mart for example, that is running thousands of stores in the U.S. Once you record one shoplifter in one of the location and you have them on record, the next day the guy that will go in different place, different space, immediately if assuming that they will use our system, immediately, it’s identity will pop out and will give alert to the security officer. So, this is the security application, but there are many more applications for similar solution.

Ken Liddy

With regard to earnings, it appeared there was a non-cash charge of currency adjustment, could you explain that?

Saar Koursh

Sorry, could you please repeat the question?

Ken Liddy

For the net income for the quarter or year-over-year, could you talk about the currency adjustments last year versus this year?

Saar Koursh

In terms of currency adjustments, we don’t have anything there significant to mention. We do have since our operation is global we do have an FX impact on some territories like Mexico, for example. And so this is something that needs to be taken into account.

Ken Liddy

Okay. So, there was no adjustment based on the strength of the dollar?

Saar Koursh

On the FX.

Ken Liddy

Okay.

Operator

The next question is from Mike Drescher [ph]. Please go ahead.

Mike Drescher

Good morning, gentlemen or good afternoon as it were. Mr. Liddy covered most of my questions. I just had two that are directly applicable. Regarding the oil and gas detection of leaks in pipelines and the response you had at the Calgary show, my question is, is that a product line able to be used both within cities as well as over just in cities out in the open, in other words, will it be an underground system as well as those pipelines that are say transcontinental or they mostly for the transcontinental and have nothing to do with city underground infrastructure?

Saar Koursh

Basically, it can be used on both what we are using is a fiber technology. When we are using the same hardware for covered fiber patrol which we are using for security application, basically the fiber is very sensitive to change in temperature and the fiber is able to sense slight changes in the temperature around the pipeline up to 0.01% of a degree. The beauty with this system, that it’s a long-range system that we can use single processor for more than 70 to 80 kilometers long. They are sending pulse of laser and by rating the reflection of the lights that we are receiving in the process, so we are able to pinpoint to 3 meters if there is a leak and exact location of the leak.

Mike Drescher

And I assume that these are therefore minimal energy which is also terrific selling point?

Saar Koursh

Correct. Minimal energy and no communication.

Mike Drescher

Right. Secondarily, just as a corollary of that, is that – I assume you could be already working on this, applying that same technology whether temperature is currently – whether the changes there, the change in pressure as it would be in oil and gas for the leak to water systems and water pipelines, would that be an assumption, that’s the possibility down the road?

Saar Koursh

It is a possibility, but the oil and gas industry it’s investing heavily in such a system and it’s much easier to penetrate the market with oil and gas.

Mike Drescher

I can understand that as municipalities are struggling to keep their heads above water in terms of protecting water supplies, although over the next 20 years, 30 years I suspect that water will be more precious than gas and oil. In any case congratulations on the excellent showing for the additional financing and continued success and welcome to Kobi. Thank you very much.

Saar Koursh

Thank you.

Kobi Vinokur

Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Koursh to go ahead with his closing statement – one moment, we have a question from Mike Miller [ph]. Please go ahead.

Mark Miller

Hi it’s Mark. I saw – I have spoke with you earlier this year, congratulations on your quarter. When we spoke, you mentioned something about having applications or using your product possibly for prison systems, it just seems there are so many applications that you have wonderful technology, where is the low-hanging fruit that you can grab that’s going to reward the shareholders and keep the company that’s in the direction you want to go, where do you think the opportunity right in front of you is?

Saar Koursh

I think as we mentioned this quarter we installed full [indiscernible] system for locating guards on stress in four different prisons in the U.S. As you may know, there are 5,000 prisons all over the U.S. and we are chasing now to install our system which is proven, I would say even by the proven using the term and to install it in many other prisons around the U.S. And until now we installed that system in tens of different prisons in the U.S. and we are going to roll the revenue from this, definitely it will go to the bottom line.

Mark Miller

What percent of revenue was this for the nine months, can you comment on that?

Saar Koursh

I cannot comment on specific sell directly.

Mark Miller

How many sales people do you have out in the field…?

Saar Koursh

Actually, this is a very good question, because what we did and I just realized that we failed to mention it that over the last two months or three months we increased substantially our sales team in the U.S., understanding their potential of the portfolio that we have with him. So we basically today we have about 25 sales representatives all over the United States, so we basically almost doubled our sales team in the last three months.

Mark Miller

Excellent. Good luck with it all guys and keep up the great work. Thank you.

Saar Koursh

Thank you very much.

Operator

There are no further questions at this time. Before I ask Mr. Koursh to go ahead with his closing statement, I would like to remind participants a replay of this call will be available in three hours on Magal’s website www.magal-s3.com. Mr. Koursh would you like to make concluding statement.

Saar Koursh

On behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business. I look forward talking with you all next quarter. Have a good day. Thank you.

Operator

Thank you. This concludes the Magal Security Systems’ third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.

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