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spk00: Greetings and welcome to the SendStar Technologies second quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Moss, with Hayden IR. Thank you. Please go ahead.
spk01: Thank you, operator. Welcome to Senstar's second quarter 2021 earnings conference call. I'd like to welcome all of you to the conference call and thank Senstar Technologies Management for hosting this call. With us on the call today is Mr. Dror Sharone, CEO of Senstar Technologies, and Tomer Hay, CFO. Dror will summarize key financial and business highlights, followed by Tomer, who will review Senstar's financial results for the second quarter. We'll then open the call for questions and answer session. Before we start, I'd like to point out that this call may contain projections or other forward-looking statements regarding future events or the company's future performance. These statements are only predictions, and SynStar cannot guarantee that they will, in fact, occur. SynStar 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 our clients, as well as other risks identified in the documents followed by the company's 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.senstar.com for the most directly comparable financial measures in related reconciliation. And with that, I'd like to now hand the call to Dror. Dror, please go ahead.
spk06: Thank you, Boaz. Thank you for joining us today to review Senstar Technologies' second quarter 2021 financial results. For the sake of clarity, while Senstar Technologies is the name chosen for the companies following the divestiture of its integrated solution division, The company's legal name remains Magal Security Systems Limited until the name change will be formally approved by the Israeli company's register, which we expect will take place later this month. In the second quarter, Senstar delivered 30% revenue growth, along with an improvement of 270 basis points in gross margin and an EBITDA increase of 95% to $2.5 million. The strength of our financial results in the quarter demonstrates the results of executing well against our growth strategy and the benefit of our strategic decision to divest the project division. We are now singularly focused on developing Senstar's highly scalable business model, having completed the divestment of the integrated solution division on June 30, 2021. At the shareholders' meeting on August 15, The company name of Senstar Technology Limited will be submitted to a shareholder's vote and we are confident that it will pass. Afterward, we will work with Nasdaq to change the stock symbol. As the Integrated Solution Division was considered a related party of Senstar until June 30, 2021, our reported consolidated revenue excludes Senstar sales to the Integrated Solution Division of $112,000, or 1% of consolidated revenue. As of the third quarter and on, sales to former integrated solution division will be included in our revenue like any other customer. In the second quarter, many business activities returned to standard procedures following several quarters of disruption caused by COVID. Borders reopening, people returning to workplaces and offices, and the resumption of trade shows are improving the business climate facilitating Senstar's ability to grow its pipeline. Based on our pipeline closing ratio, the outlook for Q3 and remainder of 2021 looks very positive. We hope that the COVID Delta variant will not undermine the positive business atmosphere evident in the last quarter. Senstar growth margin is the second quarter Since the gross margin in the second quarter was 69%, on par with last year's second quarter, and upped nicely from 62% in the prior quarter. However, the industry has been impacted by various supply chain dynamics, and for the remainder of 2021, some material costs may increase, particularly for semiconductors, but not only. We have long-term procurement agreements in place and are working to secure necessary components and mitigate further price increase. However, supply chain challenges may affect gross margin in the second half of 2021 and potentially the first half of 2022. Anyhow, Senstar's gross margin is expected to be above 60% for the full year. With the launch of our new fusion hardware software offering in the second half of 2021, We anticipate software sales to increase post-launch and result in raising gross margin over time. We expect that main impact will be evident during 2022. Since the EBITDA margin in the second quarter was 25%, an increase of 800 basis points from Q2 2020. One factor contributing to the higher EBITDA margin was the subsidies received from the Canadian government in the quarter. But even without those subsidies, the EBITDA was in the range of 90%, which is better than last year's results. Looking out into the second half of 2021, we anticipate continued revenue growth with Q4 typically being our strongest quarter. Operating expenses are expected to remain relatively stable for the remainder of the year. Our public company expenses and amortization are expected to be stable or lower for the corporate entity each quarter, thereby improving our record operating performance by the second half of 2021. We anticipate positive net income through the end of the year. Now, with the divestiture being behind us, we are focused on driving growth across each of our key verticals. We are executing our tactical plans to achieve this, including further improvement of our solution along with strengthened sales structure. We have transformed the company image with the Senstar technology branding, which has deeper connection with technology innovation. This allows us to leverage Senstar's strong industry standing to bring an enhanced technology offering to the market later this year. In addition, we plan to cross-sell and up-sell to our existing customer base. Lastly, we intend to continue growing the business pipeline with new distribution channels by leveraging OEMs, system integrators, and value-added resellers. As I stated last quarter, the drivers for growth for 2021 are growing sales in our four key verticals, broadening our sales and sales distribution, leveraging our R&D investment into new sales, making acquisitions to provide technology and expertise. This quarter, we increased revenue from each of our four key verticals, energy, corrections, logistics, and critical infrastructure. The most significant contribution this quarter was our multi-million dollar contract with a major Russian airport for an integrated perimeter security system. Our revenue growth is attributable to our product strategy and our technology-rich speed solutions. This, paired with our software offering, delivers a high-value solution to thousands of Senstar customers in over hundreds of countries. Changes made this year to leadership in key regions and the implementation of new KPIs are working, as evidenced by the growth in the second quarter. Today, half of our employees are customer-facing. This close relationship with customers is an evidence that improves our ability to lend new customers and enhanced our ability to upsell to existing customers. In the second quarter, we enjoy success with both new and existing customers. Our sales team is growing our pipeline in all regions and is successfully converting new opportunity into booking. In the second quarter, booking increased year over year, a strong foundation for future revenue growth. The investment we are making in R&D gives SenseStar a competitive advantage in the market. We're extending the advantage with the recent launch of version 8 of our Symfony Common Operating Platform. Symfony 8 is an SMS, a security management system with functionality beyond the traditional VMS platform. Symphony 8 includes AI analytics, access control, video integration, and inputs from our PIDs products. What sets Sensor Symphony apart from the competition is the sensor fusion engine. By intelligently combining sensor data with video analytics, the sensor fusion engine delivers performance significantly above that of individual devices. Sensor Fusion combines the input from our traditional PID products into a solution that enhances the intelligence gathering for end users. The Sensor product development team is working on a new product to further develop the performance of our current offering. In early 2022, we plan to release a new fiber patrol, a short-range and optimized solution. Our product technologies, cross-platform analytics are components that leverage data to improve the analytics of our Symfony 8 common operating platform. This improved platform puts us in a solution provider category by combining our SMS capabilities with our first-in-class speeds for system integrators and end users. With this strategy, we are targeting new customers, higher contact value, and stickier revenue streams. The Diversion of Magal integrated solution closed on June 30, 2021. Now the transaction is completed, we have a cash of $50.5 million with no debt. We have funds budgeted for ongoing R&D investments and targeted M&As. Our pristine balance sheet gives us leeway to pursue our M&A strategy. We are selectively considering opportunities to acquire innovative technology and essential expertise that will support our brand leadership. Senstal has an attractive economic profile that generates free cash flow. We remain careful in how we allocate our capital. We prioritize our uses of cash for internal investment R&D to drive future growth, targeted technology acquisitions, and returning cash to shareholders when there is an excess beyond what is needed for R&D investment. Presently, we are engaged in active discussion for potential acquisition of a company that would add sophisticated technology applicable to several key verticals. Ideally, any acquisition we pursue will allow the company capabilities to increase sales with existing clients and attract new clients. We are negotiating certain elements of this particular transaction and the timing is uncertain, but we are optimistic and highly engaged with this target. Lastly, in proxy statement that filed on July 16th, we are asking shareholders to approve a dividend distribution not to exceed $40 million, with a final amount to be decided by the company's board. The vote will take place next week on August 15th at our annual general meeting. Afterwards, we will issue a press release with details of any dividend-related decision by the board. In closing, I'd like to thank all of our employees worldwide for the commitment and the excellent work. Collectively, we are working to deliver growth, improve our profitability, and ultimately deliver shareholders' value. I would like also to thank the employees and leadership of the Magal Integration Solutions Division for their hard work during the years and wish them lots of success. I'm sure Magal, Senstar, Magan and Senstar will continue to work together as partners for many years to come. Lastly, I want to thank my dear friend, Kobi Vinokor, our former CFO, for his excellent contribution to the company and wish him lots of success in his new role. And now, I will pass the call to Tomer, who seamlessly took over the CFO role as a natural replacement for Kobi. Tomer worked closely with Kobi during his tenure with the company and brings years of excellent experience, especially as Magal VP Finance for the last 10 years. Tomo, please go ahead and review the financial results.
spk05: Thank you, Dror. First, I would like to join Dror in wishing Kobi lots of success in his new role. And in more personal note, I would like to thank Kobi for his mentorship, professionalism, friendship, and for being there for me whenever I need it. As Dror mentioned, we are reporting this quarter the results of continuing operation based primarily on SEMSTAR standalone revenues and on the corporate entity containing the cost of a public platform. In addition, we show in a separate line on our P&L the net results of Magal integrated solution operation and divestiture, defined as income or loss from discontinued operations. As a reminder, up until completion of the divestiture which occurred at June 30, 2021, the Integrated Solution Division was still a controlled operation and therefore was considered as a related party. This means that SEM star cells to Magal were eliminated from the top line in this quarter. With the completion of the divestiture, SEM star cells to the Integrated Solution Division as an unrelated external customer will be included in the reported revenues starting July 1st. Our reported revenues for the second quarter of 2021 was $10.1 million, an increase of 30.9% compared with reported revenues of $7.7 million in the second quarter of 2020. The increase was primarily due to increased sales across all geography regions. The geographic breakdown as a percentage of revenues for the second quarter of 2021 compared to the year-ago quarter are as follows. North America, 47% versus 54%. Europe, 22% versus 24%. APAC, 28% versus 19%. and Latin America remains flat at 3%. The second quarter reported gross margin was 69.8% of revenues versus 67.1% last year. The increase in gross margins was primarily due to increased sales and a shift in sales mix toward high-margin products. Our reported operating expenses were $4.8 million, a 16.1% increase from the prior year second quarter operating expenses of $4.2 million. The increase in the operating expenses is due primarily to an increase in business and sales expenses, such as travel and marketing, offset by the benefit of payroll subsidies granted by the Canadian government. Our reported operating income for the second quarter was $2.2 million, compared to $1 million in the year-ago period. Our reported income from continuing operation was $0.7 million in the second quarter of 2021, compared to $0.5 million in the year-ago quarter. The company's reported EBITDA from continuing operation for the second quarter was $2.5 million, versus $1.3 million in the second quarter of last year. Financial expenses was $0.2 million compared to $0.5 million in the second quarter last year. This is an accounting effect we regularly experience due to the adjustments of our monetary assets and liabilities denominated in currencies other than the functional currency of the operational entities in the group. As Dror mentioned, thanks to our operating leverage and with the anticipated ramp-up in quarterly revenues, we expect to report improving operation performance. We also anticipate that we will continue to produce positive net income for continuing operation during the remaining of 2021. Net income attributed to Senstar Technology shareholders in the quarter was $11.8 million, or $0.51 per share, versus $0.2 million, or $0.01 per share, in the second quarter of last year. The reported net income includes $11.1 million in income from this continued operation, versus a net loss from this continued operation of $0.4 million in the same period last year. The net results from this continuous operation include the net loss of the integrated solution division in the quarter, certain transactional expenses, as well as the expected capital gain impact of the divestiture completed on June 30, 2021. Added to SenStar operational contribution is the public platform expenses and amortization of intangible assets from historical acquisitions. For both the second quarter of 2021 and 2020, those expenses were $0.9 million. Cash and cash equivalents as of June 30, 2021, were $15.5 million, or $2.18 per share. As of June 30, 2021, assets attributed to discontinued operation were $4.8 million, with liabilities attributed to discontinued operation of $5.3 million, as compared to assets attributed to discontinued operation of $49.6 million and liabilities attributed to discontinued operation of $25.2 million as of December 31, 2020. That concludes my remarks. We are happy to take your questions now. Operator?
spk00: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing star keys. Once again, that is star 1 to register a question at this time. One moment, please, while we poll for questions. Once again, that is Star 1 to register questions at this time. Our first question is coming from Sam Robotsky of SCR Asset Management. Please go ahead.
spk03: Good morning, Drawer, or afternoon. Do we have of the $40 million, are we looking at any acquisitions and how close are we to an acquisition and how much of the $40 million do we expect to give as a dividend, and when would this happen?
spk06: Well, you asked a few. First, as I mentioned, we are negotiating now an acquisition. I don't know yet when we'll be able to close it, mainly due to the other party. So this is one. So we are on top of it, but I don't know yet what will be the date of closing, if it will be closed. We asked the AGM to vote on distributing up to $40 million in dividends. Actually, it's going to be next week. And then the board will take a decision what will be the amount of money that is distributed.
spk03: But do we want to submit... distribute a significant amount of cash, or do we want to hold most of it back and run the company with the extra cash that we have?
spk06: We have excess cash above this. Again, I don't know yet what will be the amount that the board will approve, but we have excess cash above the 40, and on top of it, 10-star generates cash as well, so I don't see any problem of using this cash generation to acquire companies.
spk03: Okay. Can you discuss at this time what a range these potential acquisitions are for the use of the cash? I assume we expect to use part of the cash for an acquisition and not stock.
spk06: Look, there are things that are under NDA, so I cannot elaborate too much on this opportunity, but usually we are looking between $10 million to $20 million in investments of $10 million to $20 million.
spk03: Okay. Well, good luck. Hopefully something works out, and good luck. Thank you.
spk06: Thank you, Sam. Good to hear you.
spk00: Thank you. Once again, that is Star 1 to register a question at this time. Our next question is coming from Sal Ferderis, a private investor. Please go ahead.
spk02: Good morning, gentlemen, and congratulations on an outstanding quarter. Hey, I have a question that I asked before, and I'm trying to catch the status of this. On the foreign tax that was withheld on the McGaugh dividend in December 2020, it was noted that there would be an instruction letter posted on the Magar website to see if one could qualify for an exemption or a lower tax rate. I have not seen anything on that yet. Could you give us a status on that instruction letter?
spk05: So, thanks for the question and for graduating this quarter. Regarding this, unfortunately, we are stuck at the same position we were at the previous quarter. The tax authorities in Israel working slowly on that because of COVID we are waiting for some kind of document to support and we are pushing month after month and hopefully it will be solved in the upcoming weeks we are also frustrated from this situation but again hopefully we are pushing our consultants are pushing and we hope to get it
spk02: Okay, when that comes out, would that be announced in a press release, do you think?
spk05: We'll do whatever it takes, yeah. We will make sure everyone will get the message. We can do a press release.
spk06: Yeah, we can do even a press release in order to update everyone.
spk02: Okay, I appreciate that. Thank you very much for your response.
spk06: Thank you. Thank you, sir.
spk00: Thank you. Again, that is star one for any questions. Our next question is coming from Fred Ehrman, a private investor. Please go ahead.
spk04: Good afternoon, Dror and Tomer. Tomer, nice to make your acquaintance. I also want to add my thanks to Kobe, who was just a pleasure to deal with as an investor and wish him the best of luck as well. My question also has to do a little bit with the previous question. We've been asking for quite a long time to get this tax ruling, and I know you've been frustrated as well. Possibly, since there may be another dividend coming shortly, is it possible that maybe the authorities will combine both dividends into one ruling?
spk05: So look, we will wait first for the decision of the AGMM and then the decision of the potential distribution. For sure, if that will happen, we will try to approach by using our consultant again and try to see if we can take it as one and not need to wait a few more months for the second one. But we don't have the answer now. We didn't approach it. We're still waiting for the decision of the AGM and then the Board of Directors. And then we will approach the tax authorities for sure.
spk04: My second question has to do with the potential acquisition you've mentioned. And you commented that the ball is in the court of the other side. They're apparently the ones that have been holding up any any closing of it. Are the problems potential other buyers or that are competing or are the terms more or less agreed upon, but at least from your point of view, or are there still a lot of open issues? The company has been involved in in merger discussions over the last few years, some of which have not been completed. And just wondering what the possibilities are for this one closing. I know you can't answer that question because it's not up to you, but can you give the shareholders at least an indication of how it looks?
spk06: First, as far as we know, there are a few other competitors on this target, but I think we are in a good position, basically. The main issue over there is they are dealing with some kind of litigation, and we want to acquire a clean company. So once it will be resolved, Hopefully we'll be able to close it, but again, things can be changed any day. It's not in our pocket, so we'll have to wait. We are doing everything to be able to close it, but now it's not only up to us.
spk04: All right. Okay, again, congratulations on the quarter, and good luck in the coming periods.
spk05: Thank you very much, Fred.
spk00: At this time, I'd like to turn the floor back over to management for any additional or closing comments.
spk06: Thank you, operator. On behalf of the management of Senstar Technologies and Senstar, I would like to thank you for your continued interest and long-term support of our business. I look forward to updating you next quarter, and have a good day and keep safe. Thank you very much. Bye-bye.
spk00: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.
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