Senstar Technologies Corporation

Greetings and welcome to the CentStar Technologies fourth quarter and full year 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kim Rogers. With Hayden Iyer, you may begin.

Thank you, Stacey. Welcome to today's call. I'd like to welcome you all to the conference call and thank Sunstar Technologies Management for hosting today's call. With us on the call today are Mr. Dror Sharan, CEO of Sunstar Technologies, and Mr. Tomer Hay, CFO. Dror will summarize key financial and business highlights, followed by Tomer, who will review SendStar's financial results for the full year and the fourth quarter. We will then open the call for 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 company's future performance. These statements are only predictions, and SendStar cannot guarantee that they will, in fact, occur. Then Star 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 our 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 filed by the company with the Security and Exchange Commission. In addition, during the course of the 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.sensestartechnologies.com for the most directly comparable financial measures and related reconciliations. And with that, I'll now hand the call over to Dror. Dror, please go ahead.

Thank you, Kim. Thank you for joining us today to review Senstar Technologies' fourth quarter and full year 2021 financial results. As a reminder, following the divestiture of Magad's security system in 2021, our year-to-date financial statements reflect the Magal contribution in 2021 as net income from this continual operation. Senstar sales to the former integrated solution division in the second half of 2021 are included in our revenue as a third-party customer. 2021 was an important year for our company. On June 30th, we have completed the divestiture of Magal integration solution, receiving $35 million in cash at the closing and rebranding the sensor technologies. In September, we returned $40 million in cash to our shareholders in cash distribution. With the transition behind us, we are now 100% focused on our product combined piece, VMS, asset control, and analytics, creating an unfilled, unified, and unique solution for our customers in our four key verticals. As a standalone firm, And as a standalone company, we are leveraging our reputation as a technology leader to capture a meaningful share of new market opportunities. For 2021, Senstar grew revenue by 5% to $34.9 million and delivered gross profit of $22 million for an annual gross margin of 63%. Our results in 2021 were impacted by They are a venture of Magal division, which consumed a significant portion of management time and by the COVID pandemic. We estimate that our revenue in 2021 was reduced by around 10% as a result of the impact of COVID globally, which affected the closing of deals, the effectiveness of workplace and limited client interactions. Although COVID impacted our top line, we managed to keep our operational expenses low and delivered an EBITDA of 20%, for sensor operational entities. We ended the year with $26.4 million in cash and cash equivalent after the $40 million cash distribution to shareholders that I mentioned earlier and $25 million in cash distribution the year before. In 2021, we launched several new products, including our sensor fusion engine and our OEM thermal cameras. These new solutions, together with the ongoing products offering, run on the latest version of our Symfony Common Operating Platform. In December, our Symfony platform, with our Sensor Fusion Engine, won the Platinum Award from Astos, Homeland Security and the Video Surveillance Solutions segment. The platform was also named the Top 30 Security Technology Innovation by Security Sales and Integration, a leading industry publication. All this to say that Sensor is well positioned for expanding market share and returning to growth. We have industry-leading products and solutions, and the global need for our products and solutions continue to grow. We have streamlined our business, focusing on key verticals with a sales pipeline increasing in all principal geographics. There are a few factors affecting our business in the current global environment. We have several projects that have been delayed due to COVID and the supply chain disruption of our customers. Supply chain remains stressed due to several factors, most recently related to the lockdown in China. Shortages of material and labor are increasing costs for companies in all sectors, including ours. We monitor all those elements as we plan the remainder of 2022. Luckily, through very tight control, we don't anticipate a major impact on our 2022 revenue due to lack of material. However, development in this field may change rapidly. In the fourth quarter, we felt the effect of a few of those business hurdles. Celsa revenue declined by 6% year-over-year for the fourth quarter. The decline in our fourth quarter revenue was primarily due to timing. Two large customers' projects were postponed into 2022. I'm happy to say that one of those projects closed in the first quarter of 2022, and we will provide you with more details shortly. The second project for a large energy company in North America is in the advanced stages of negotiation. It is likely to be closed in the first half of 2022. Importantly, looking into our growing pipeline, demand for our products remains robust and new businesses progressing. Like so many industries, businesses are taking slightly longer to close. We are navigating the mismatch between supply and demand. Census growth Profit in the fourth quarter was $5.2 million, and gross profit margin was 58%, down from last year of 69%. This quarter, several factors impacted our gross margin, including the mix of product sold, higher material costs, component availability, and labor costs. On our last earning call, I stated that we expected supply chain challenges to continue in the fourth quarter of 2021, and potentially into the first half of 2022. We have secured the necessary components to manufacture products for customers' orders, but things are subjected to change in short notice. We have successfully raised our prices with no negative backlash from our customers and are trying to mitigate further cost increases to keep gross margins above the 60% in 2022. In recent months, many business activities have returned to pre-COVID levels. We are encouraged by the interest level in our solutions at trade shows and customer meetings. The increase in our marketing activity has led to pipeline growth in our key verticals, and we have several large potential opportunities. In energy, we are engaging with global energy companies on several opportunities across multiple continents that will help to protect facilities, reserves, pipelines, and oil fields. I referenced one project earlier, and we have two other large projects that we are negotiating. One project is a blanket agreement with a large multinational energy company, and the other is for an African oil field facility to secure its oil pipelines and pumps. In logistics, we are in advanced discussion with the Global Logistics and Fulfillment Network to provide a solution that will secure communication fiber within its facilities, and enable the testing of fiber optics with our fiber patrol solution. Critical infrastructure and ports are another vertical with multiple opportunities in Europe, Africa, and APAC. We remain cautiously optimistic that COVID variants and geopolitical tensions will not escalate further to disrupt the ongoing recovery of global business. Our platform is now a full SMS. of security management system that offers AI analytics, access control, video integration, and inputs from our PIDs products. The enhanced data intelligence functionality of the Symfony platform combines video surveillance with analytics, security sensors, and data from customer security, manufacturers, or logistics systems. This superior functionality is achieved by linking inputs from our PIDs products and any other sensor into a solution that enrich the intelligence gathering for end users. The result is an improved surveillance system that provides valuable operational intelligence positioning SenStar as a solution provider that opens new customers' targets and can bring bigger contracts with recurring revenue streams. The SenStar team has continuously enhanced our offering to improve the value we bring to the thousands of SenStar customers worldwide. The new product and software launched in 2021 and increased awareness created by winning industry awards and prizes for our innovation in perimeter security technology are working together to improve our 2022 CELS pipeline in Europe, North America, and APAC. We anticipate releasing a new short-range fiber patrol solution later this year. Our current outlook for the year indicates revenue and pipeline growth compared to 2021. With new, highly innovative products, we are leveraging Senstar's strong industry standing to provide future growth. In addition, we are cross-selling and up-selling products and solutions to our existing customer base in our four key verticals. Another factor of supporting our pipeline growth is our restructured sales organization with six senior sales directors, SSDs, closer to the customers with clear performance targets in each of the three key regions. The result is a smaller team working more closely with clients, all under the direct supervision of a SSD, a senior sales director, in the region. Each one of those teams has its own quota and goals. This allows the streamlined customer's interaction, which should help us convert pipeline prospects into bookings. In summary, Senstar has earned an industry-leading reputation in PIDs and now as an established provider of broad solution with the ability to combine hardware and software into one platform and deliver innovative technology and software solutions that are gaining industry attention. Global trends are increasing the need for sophisticated security, large physical assets like oil fields, ports and manufacturing and distribution facilities. We continue to improve our offering and refine our business practice to build a better company worldwide. Senstar has a strong balance sheet with no debt and high cash balance. All those factors position the company for continuous success and growth. In closing, I want to thank all of our employees worldwide for their ongoing commitment to our strategy to deliver excellence in products and services, improve our profitability, and ultimately deliver shareholders' value. And now I will pass the call to our CFO, Tomer Hai. Tomer, please go ahead and review the financial results.

Thank you, Dror. Our reported revenues for the fourth quarter of 2021 was $9 million, a decrease of 6.4% compared with reported revenues of $9.6 million in the fourth quarter of 2020. As mentioned by Dror, the decline was primarily due to the timing of two customer projects that were delayed beyond year-end, one of which closed in the first quarter of 2022, as well as overall market conditions that continue to be impacted by supply chain challenges. The geography breakdown as a percentage of revenues for the fourth quarter of 2021 compared to the year-ago quarter is as follows. North America, 41% versus 52%. Europe, 25% versus 28%. APAC, 24% versus 13%. Latin America, 5% versus 6%. Adels, 5% versus 1%. fourth quarter reported gross margin was 58.1% of revenues versus 68.6% last year. The decrease in gross margin was primarily due to a shift in the mix of products sold during the quarter and macro-level business conditions related to high material costs, components availability, and labor costs. Our reported operating expenses were $6.5 an increase of 21.5% from the prior year fourth quarter operating expenses of $5.3 million. The year-over-year increase in operating expenses is due primarily to a reversal of government COVID subsidies receiving in 2021 that will retroactively increase as well as increased marketing and selling expenses related to travel, trade shows, and other customer engagements. Our reported operating losses for the fourth quarter was $1.2 million compared to operating income of $1.3 million in the year-ago period. Financial expenses was $0.4 million compared to $1.2 million in the fourth quarter last year. This is a non-cash accounting effect We regularly report due to adjustment of the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operational entities in the group, in according with the US GAAP. Our reported loss from continuing operation was $2.2 million in the fourth quarter of 2021, compared to a loss from continuing operation $1.2 million in the year-ago quarter. The company reported EBITDA from continuing operation for the fourth quarter was negative $0.7 million versus positive EBITDA from continuing operation of $1.6 million in the fourth quarter of last year. Net loss attributed to Senstar Technologies shareholders in the fourth quarter was $3.2 million, or $0.14 per share, versus a net loss of $0.8 million, or $0.05 per share, in the fourth quarter of last year. The reported net loss includes a net loss of $0.9 million from discontinued operation versus net income from discontinued operation of $0.7 million in the same period last year. Added to SenStar operational contribution is the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses and amortization expenses for the fourth quarter were $1.4 million versus $1.3 million in the fourth quarter of the year before. Revenues for the year end, December 31, 2021, was $34.9 million compared with revenues of $33.4 million in the fourth quarter in the prior year. The year-over-year increase of 4.7% relates to some recovery in our business, which was impacted by COVID-19 pandemic. The geography breakdown as a percentage of revenues for 2021 compared to 2020 is as follows. North America, 46% versus 53%. Europe, 26% versus 27%. APAC, 23% versus 15%. Latin America, 4% in both periods, and others is 1% in both periods. The full year gross profit was $22 million, representing gross margin of 63% versus $22.1 million, or gross margin of 66.3% last year. The lower gross margin was primarily due to our revenue mix and some increases in the material cost. Our 2021 operating expenses was $20.9 million, an increase of 9.7% compared to $19.1 million last year. Operating income from continuing operation was $1.1 million compared with $3.1 million in 2020. The decrease in operating income was due to lower gross margin contribution and higher operating expense. Net income attributable to Senstar Technology shareholders for 2021 was $6.4 million or 28 cents per share versus $0.4 million or 1% per share in 2020. The reported net income in 2021 includes net income of $8.6 million from discontinued operation versus $8.4 million in the same period last year. In 2021, our EBITDA was $2.6 million representing an EBITDA margin of 7.4% compared with $4.3 million representing an EBITDA margin of 12.8% in 2020. The corporate expenses and amortization expenses for the public platform were $4.4 million versus $4 million in the same period of the year before. Cash and cash equivalent as of December 31st, 2021 were $26.4 million or $1.13 per share. That concludes my remarks. Operator, we would like to open the call to questions now.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. 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. First question comes from Ken Liddy with Oppenheimer.

Good afternoon. On previous calls, you talked about finding a merger partner and that you had some delays due to the COVID pandemic. Could you give us an update on your status with acquisitions?

Currently, we have a few in the pipeline, but nothing is in a stage that we can further discuss. We don't have anything in front of us which is in a in the advanced situation.

Is that a status change? It seemed to us that you had a... Some deals that you were close to closing.

Can you repeat, please, Ken? I didn't hear you.

I'm sorry. Is that a status change? It seemed like you were close to closing something based on your previous calls.

Yeah, you're right. We didn't succeed in acquiring the opportunities that we had. Someone offered a much higher number than we did.

And are there still some targets that you have that potentially could get closed this year?

We're looking, but nothing is mature enough that we can discuss it now. We don't have nothing in front of us in a mature stage now.

Understood. And with regards to your warehouse offering for warehouse distributors throughout the world, Is there any type of update on larger projects there?

On the logistics side of the business?

Exactly, yes.

Yeah, as I mentioned in the script, we have a few opportunities. Some of them are very in a progress stage. Again, we are securing warehouses and logistics centers worldwide. And this is a vertical that is growing very nice.

I understand your backlog isn't going to be quite what it was when you were McGaugh. But how is the backlog comparing or pipeline of orders comparing this year compared to last year's same time or last quarter at the same time?

Well, it's a pretty stable backlog. Compared to Magal, Magal was a project company or project division, and you had the backlog for a year or sometimes more. Since then, the turnaround between getting a PO until the fulfillment can vary between a week, 10 days, up to two, three months. Backlog is not a parameter too important now. More important is the pipeline. The pipeline is very strong today, the way we see it. And hopefully, we'll be able to grow it and transfer it to real sales.

And as far as containing costs, is there anything that you can do besides grow revenue to offset some of the cost increases? I understand you're raising prices a bit. Are you confident that you'll be able to return to a positive EBITDA in the coming quarters?

Again, for the operation, the company, Senstar itself, the EBITDA is very nice. As I mentioned, it was around 20%. Gross margins are above 60%. We are targeting to keep it above 60%. And again, as I said, we don't see a major hit due to material shortage because we are managing it very tight with our suppliers and subcontractors. It looks like, again, nothing is stable today, but it looks like we can support our 2022 targets as we see today.

Okay, thanks for taking my calls.

Thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

There are no further questions.

I would like to turn the floor over to Javor Sharon for closing remarks.

Thank you. On behalf of the management of 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. Have a good day and keep safe. Thank you. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.