Magal Security Systems' (MAGS) CEO Saar Koursh on Q4 2015 Results - Earnings Call Transcript

| About: Magal Security (MAGS)
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Magal Security Systems Ltd. (NASDAQ:MAGS) Q4 2015 Earnings Conference Call March 29, 2016 10:00 AM ET

Executives

Saar Koursh - CEO

Ilan Ovadia - CFO

Analysts

Mike Dissler - Private Investor

Sam Rebotsky - SER Asset Management

Saar Koursh

[Call starts abruptly] From an additional presume and we ought to receive further orders from this customer in the upcoming months. We are also seeing solid interest in our fiber solution and we look forward to further of this. In Israel, there was a delay in the national budget which was finally approved in December in 2015. This means that some potential projects were pushed off into 2016, so we feel good about the year ahead. We are participating in several tender processes and we feel we have good chances of winning at least good portion of this.

In summary, as you can hear, I'm optimistic. I'm pleased with our progress, particularly in the second half of the year. In addition, our backlog of March end is ahead than the same time last year. Looking ahead, I believe that we'll demonstrate a solid revenue growth in 2016 which would be driven organic growth in product and services sales, as well as potential inorganic growth. I will now hand the call over to Ilan for the financial review. Ilan?

Ilan Ovadia

Thanks. Revenues for the fourth quarter of 2015 were $19.3 million. These were 13% above those of the prior quarter and 29% below those of the fourth quarter in last year.

Sales by geography in the quarter were as follows; Israel 13%, North America 31%, Africa 12%, Europe 18%, South and Latin America 15%, and the rest of the world amounting to 11%. Gross profit in the quarter was $10.9 million or 56.4% of the revenues. This is compared with $8.4 million or 49.6% of revenues in the prior quarter, a $13 million or 47.5% of revenues in the fourth quarter of last year. The gross margin is the function of revenue mix in the quarter.

Our operating expenses in the quarter amounted to $7.9 million in the quarter compared to $7.1 million in the first quarter and $11.3 million in the fourth quarter of last year. Operating income in the quarter was $2.9 million. Operating income in the prior quarter was $1.3 million and in the fourth quarter our last year was $1.7 million. Financial income in the quarter amounted to $0.1 million. Financial income in the prior quarter was $0.8 million. Financial income in the fourth quarter of last year was $0.9 million.

Net income in the quarter was $2.5 million or $4.16 dollar per share. Net income in the prior quarter was $0.9 million or 5% or $0.05 per share and net income in the fourth quarter of last year was $2.9 million or $0.18 per share. To sum up our full results, we reported revenues of $63.7 million which decreased by 18% compared with $77 million last year. Cost profit was $31 million or 48.7% of revenues versus $34.5 million or 44.5% of revenues last year.

Operating expenses were $26.6 million in 2015, 19% below $33.1 million last year. This led to an increase in [ph] operating income in 2015 which amounted to $4.4 million or 6.9% of revenues. In 2014 our operating income was $1.4 million which included a $2.4 million impairment. Excluding this impairment, our 2014 operating income was $3.8 million or 5% of 2014 revenues. Our full year 2016 net income was $3.1 million or 4.9% of revenues versus $3.4 million or 4.3% of revenues last year. EPS was $0.19 per diluted share versus $0.21 last year.

Cash, short-term deposits and restricted deposits, net of bank debt, as of December 31, 2015 were $31.1 million or $1.90 per share compared with cash, short-term deposits and restricted deposits, net of bank debt of $28 million or $1.73 per share on December 31, 2014.

That concludes my remarks. We will be ready to take your questions now. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question is from Mike Dissler. Please go ahead.

Mike Dissler

Yes, good morning gentlemen. How are you? Actually good evening over there, great quarter, good job. See you settled in great Mr Koursh, I am so pleased to see that. Two things I just wanted to discuss. One is in light of your history and background dealing with Latin America for your former employer, how do you see the turn coming in South and Latin America in terms of potential growth and I know from your history you would be proceeding very cautiously because courts in Brazil and other countries have not been particularly friendly to outside corporations over the years but you see that region beginning to turn even more or it's going to be about the same mix in sales, that's question number one?

Saar Koursh

So first, thank you for the question and for the comments. South America again is a big region but you specifically addressed Brazil so you are very familiar, last year it's not doing so good. Looking ahead in the end of the day, Brazil would recover. Brazil have more than 200 million inhabitants. Basic fundamentals are very strong but they are have several issues political issues, corruption issues that once they come to it, they overcome it and they will someday. And no doubt it would be a great place of doing business. At this stage Magal is not operating in Brazil. But there is potential. We are keeping an open eye on Brazil and when the time is right definitely will go to this market.

Mike Dissler

I am so gratified to hear you say that especially in light of your background. Because I am always Leary and I realize it's a battleship turning and I have a speed boat turning so I understand completely thank you for that. Secondarily you mentioned you had a U.S. electric company choosing CyberSeal systems and I know that basically I'm doing the press releases and being on every conference call for the last decade, just in terms of a quick question, the recent dam hack in Rhine, New York in United States by arguably a bunch of ‘Iranian Hackers', would the CyberSeal product with any future add-on plus the way it existed today be the type of solution that dam hackers problem could be addressed. Rather your product could have addressed that problem. And in the same way I guess it would for the current U.S. electric company that you provided the CyberSeal system or do you need to build on to the current base product to make it even that much more hack proof?

Saar Koursh

Okay, once again, I will start by saying thank you for the question. I don't know enough, I read the press, and I read the news as you did but I don't know enough details on this specific event. But without going specific I would say that our solutions, it's basically-- it's giving cyber security network and for the physical security network usually the security network is segregated network than the operational network. My assumption that in this specific event and again this is only an assumption they attacked the operational network which is not in our core business. Core business is security and our CyberSeal product and solution, it's basically compulsory complimentary solution to the security network. So if this is the case, it's not for this specific-- it's not relevant for this specific attack but I must tell you that for many discussions and just recently I have been myself two weeks ago in the U.S. discussing with security officers of very similar sites, this is the solution they are looking for because then they understand that today where all the security network is based on IP device and it doesn't matter if it's a camera or it's an access control. And they are currently without any solution and our product is just in the right time to address the security threats.

Mike Dissler

Yes, I know I fully agree. Thank you for your clarity and finally that pretty much summed it up. I am just saying down the road, taking in light of your entire comment previously it seems to me that as an important add-on, to those looking to larger corporations who are doing that internet, internal internet etcetera anti-hacking possibilities. You could possibly join them in terms of providing the physical cyber connection and be the preferred provider for those other multiple large corporations that are actually just focused on the company's internal anti-hackable kind of software solutions. If you become the married partner or the quiet third cousin at the wedding that wouldn't be too bad either but I think everything sounds great and I thank you for all your hard work over the last year and I wish you both well. Thank you.

Saar Koursh

Thank you very much.

Mike Dissler

All right.

Operator

The next question is from Sam Rebotsky of SER Asset Management. Please go ahead.

Sam Rebotsky

Good morning, good afternoon, Saar and Ilan. This quarter was extremely good, improvement over the earnings and of the previous quarters. Could you sort of give an indication whether you turned the quarter and which quarters are considered in one through four which are the better quarters? And can you achieve this type of quarter each quarter going forward?

Saar Koursh

Thank you for the question. As you know, our co-business is experimental security, and usually parameter security project are executed during the spring and the summer time, and this is the reason that our business is quite seasonal. So if you look over the years you saw that usually our first quarter is the weakest quarter of the year and when we are progressing over the year usually we are doing better than the beginning. That was the case for 2014 and 2015 as well, and basically as a trend we thought going to the specific, this would continue in the trends for 2016 as well, so just to summarize it as on the specific quarter. Usually our third and fourth quarter are the strongest quarters in our business.

Sam Rebotsky

Okay. And as far as the backlog you indicated, it was higher than it was. This time, is it the last quarter? Is it the same quarter last year? And could you sort of quantify what it was last year? I'm not sure. And what does the pipeline of your bidding on smaller orders, is it so it's a shorter timeframe to complete? Could you sort of quantify that and are there many or more orders to be bid on?

Saar Koursh

So you asked several questions. I will try to address them one by one. Basically we referred both to the year end 2015 compared to 2014, and the first quarter since we're already in the end of March versus the same period last year. So comparing both end of year and the first quarter versus last year, I could say that our backlog is better. Unfortunately, we are not giving forecast, we are not giving data on backlog, and the reason for that that you have to remember that the way we operate it's basically divided to two arms; our sensed [ph] subsidiary, it's mainly selling product where the cycle there is relatively short. When talking of products we are talking on cycles that's usually for few weeks. It can last from one week all the way to six weeks on average. And on the projects arm that usually is done by Magal usually the process there is much longer and the project usually last for an average of 12 months. So in order not to mix things, and as you can see from our results we're basically 50-50 over the years, again not on specific years. It's quite confusing to give you the details of the numbers of the backlog. But once again comparing it to last year we are in much better shape.

Sam Rebotsky

Okay, that's good. And as far as when you're bidding on the draw by, I assume you see bigger companies and smaller companies, and you sort of indicated you might be making acquisitions or looking at things. How firm are you on making an acquisition in the next six months or so?

Saar Koursh

As we mentioned before, our strategy includes acquisition. We are basically looking for acquisition on the product size, looking to strengthen our product arm. And over the next six years, I would say hopefully we're going to be there.

Sam Rebotsky

Okay. And when you get a contract and you bid somebody else out, is it based on quality, price or what? How are you effective on that?

Saar Koursh

It depends on the different, usually I would say I prefer to be always better quality, better performance, in the higher price. That's what I prefer, but the market is acting a little bit different. They want better quality, better performance and better price. So we tailor it to the different tandem. It depends on the customer and the location.

Sam Rebotsky

All right, sounds good. Keep up the good work, and hopefully the profit margins could stay pretty close. Good luck.

Saar Koursh

Thank you very much.

Operator

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Koursh to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available in three hours on Magal's website. Mr. Koursh, would you like to make your concluding statement?

Saar Koursh

Yes, thank you. On behalf of the management of Magal, I would like to thank you for your continued support. I look forward to talking with you next quarter. Have a good day. Bye.

Operator

Thank you. This concludes the Magal Security Systems fourth quarter and full year 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.

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