Q2 2021 Magal Security Systems Ltd Earnings Call
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Greetings and welcome to the Sun Star Technologies second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If he would like to ask a question. Please press star one on your telephone keypad, 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 Brett Maas with Hayden IR. Thank you. Please go ahead.
Thank you operator, welcome to our second quarter 2021 earnings conference call I'd like to welcome all of you to the conference call. Thanks, and start technologies management for hosting this call with us on the call today is a Joshua CEO of sensor technologies and Tomer Hay CFO drew I will summarize key financial and business highlights followed by Tomer, who will review <unk> financial results for the SEC.
Quarter, well then open the call for questions and answer session. Before we started 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 as dense dark cannot guarantee that they will in fact occur.
<unk> does not assume any obligation to update that information actual results.
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 Corona virus, including on our operations and our clients as well as other risks identified in the documents filed 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 compete.
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 <unk> com for the most directly comparable financial measures and related reconciliation and with that I'd like to now hand, the call over to Dror Dror. Please go ahead.
Thank you Brad.
Thank you for joining us today to review of sensor technologies second quarter 'twenty 'twenty, one financial results for.
For the sake of clarity well setup technologies as the name chosen for the company is following the divestiture of its integrated solution Division.
The company's legal name remains Mcgough security system limited until the name change will be formally approved by the Israeli companies Register.
Which we expect will take place later this month.
In the second quarter sensor deliver 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 such a highly scalable business model, having completed the divestiture of the <unk>.
Integrated solutions Division on June 32021.
At the shareholders' meeting on August 15, the company name of sensor technology limited will be submitted to the shareholders vote and we are confident that it will pass after award we will work with NASDAQ to change the stock symbol.
As the integrated solution Division was considered.
Related profit of Sinter until June 32021.
Our reported consolidated revenue excludes sensor sales to into the integrated solution division of $112000 or 1% of consolidated revenue.
As of the third quarter and on sales to former integrated solution Division would be included in our revenue like any other customer.
In the second quarter, mainly business activities return to standard procedures. Following several quarters of disruption caused by Covid.
Reopening people returning to work place in the offices and the resumption of Tradeshows are improving the business climate.
Facilitating central <unk> ability to grow its pipeline.
Based on our pipeline closing ratio the outlook for Q3, and the remainder of 2021 looks very positive and we hope that the Covid Delta volumes will not undermine the positive business atmosphere evidenced in the last quarter.
First our gross margin is the second quarter.
First our gross margin in the second quarter was 69% compared with last year's second quarter on the up nicely from six 2% in the parallel quarter. However, the industry has been impacted by various supply chain dynamics and for the remainder of 2021, some material cost may increase, particularly.
Semiconductors, but not only we have long term procurement agreement 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.
<unk> gross margin is expected to be above 60% for the full year.
With the launch of our new fusion to hardware software offering in the second half of 2021, we anticipate software sales to increase post launch and result in a raising gross margin over time.
We expect that main impact will be evident during 2022.
Since our EBITDA margin in the second quarter was 25% an increase of 800 basis points from Q2.2021, 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 19% which is.
Better than last year results.
Looking out into the second half of 'twenty 'twenty. One we anticipate continued revenue growth with Q4, typically being our strongest quarter.
Operating operating expenses are expected to remain relatively stable for the remainder of the year, our public company expenses and the amortization.
I expect it to be stable or lower for the cobalt.
Entity, each quarter, thereby improving our record operating performance by the 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.
Growth across the across each of our key verticals, while executing our tactical plans to achieve this including further improvement our solution along with the strengthened sales structure.
We have transferred transformed the company image into with the sensor technology, blending, which which is deeper connection with technology innovation.
This allows us to leverage our strong industry spending to bring an enhanced technology offering to the market. Later. This year. In addition, we plan to cross sell and up sell to existing customers base. Lastly, we intend to continue growing our hour going the business pipeline with new distribution channel by leveraging Oems.
System integrators in the value of the value added resellers.
As I stated last quarter the drivers for growth for 2021, our growing sales in our four key verticals broadening our sales and sales distribution leveraging our R&D investment into new sales, making acquisition to provide technology and expertise.
This quarter, we increased revenue from each of our four key verticals MLG collections logistics and critical infrastructure.
The most significant contribution this quarter was a multimillion dollar contract with a major Austrian airports for an integrated perimeter security system.
Our revenue growth is attributable to our product strategy and our technology reach speed solutions. This paired with our software offering delivers a high value solution to thousands of customers in over 100 countries.
Changes made this year to our 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 our customer facing this close relationship with customers is an evidence that improve our debt.
Our ability to land, new customers and enhanced our ability to upsell to existing customers.
In the second quarter, we enjoyed success with both new and existing customers.
Our sales team is growing our pipeline all region and is successfully converting new opportunity into bookings in.
In the second quarter bookings increased year over year laying a strong foundation for future revenue growth.
The investment the investment we are making in R&D give <unk> a competitive advantage in the market, we're extending the advantage with the recent launch of version eight of our Symphony common operating platform Symphony atheist in SMS, a security management system with function with functionality beyond this.
Traditional Vms platform.
Symphony eight includes AI analytics access control video integration and inputs from our <unk> products.
Since the Symphony apart from the competition is a sensor fusion engine by intelligently combining sensor data with video analytics the sensor fusion engine delivers performance significantly above.
Net of individual devices.
Sensor fusion combines the input from our traditional <unk> product into solutions that enhance 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 cyber patrol a short range of optimized solution.
Product technologies cross platform analytics.
Components that leverage data to improve the analytics of our symphony eight common operating platform or platform.
This improved platform puts us in a solution provider category 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 contract value and stickier revenue streams.
The Divesture of <unk> integrated solution closed on June 32021 now.
Now the transaction is completed we have a cash of $55 million with no debt, we have funds budgeted for ongoing R&D investments in the <unk>.
Targeted M&A.
Our pristine balance sheet gives us the leeway to pursue our M&A strategy.
We are selectively selectively concern considering opportunities to acquire innovative technology and the essential expertise that will support our brand leadership.
Since there is an attractive economic profile that generates free cash flow.
We remain careful in how we allocate our capital where prioritize 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 discussions for potential acquisition of a company.
Sophisticated technology applicable to several key verticals.
Ideally any acquisition, we pursue will allow the company capabilities to increase sales and with existing clients and attract new clients, who 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 filed on July 16th we are asking shareholders to approve a dividend distributions not to exceed $40 million with the 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 after.
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 shareholder value.
I would like also to thank the employees and leadership of the <unk> integration solutions Division for their hard work during the years and wish.
Lots of success and should I assume a garden style.
<unk> will continue to work together as partners for many years to come.
I want to thank my different Kobe vehicle, 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 Tom Mill will seamlessly took over the CFO role as the natural the natural replacement for Colby.
Tom will work closely with Kobe during his tenure with the company and brings years of excellent experience, especially the mogul VP finance for the last 10 years.
Thomas Please go ahead and review the financial results.
Thank you so first.
So I would like to join <unk> and wishing Kobe lots of success in his new role.
And in more personal note I would like to thank <unk> for his mentorship professionalism friendship and for Big Therefore me whenever they need it.
As Tom mentioned, we're reporting this quarter. The result of continuing operation based primarily on same store standalone revenues into the corporate entity.
Containing the cost of a public platform.
In addition, we show in a separate line on our P&L. The net result, mogul integrated solution operation and Divesture defined as income or loss from discontinued operation.
As a reminder, up until completion of the Divesture, which occur at June 32021, the integrated solution Division was still a controlled operation and therefore was considered as it related to policy.
This means that since delfin to begun when eliminated from the top line in this quarter.
With the completion of the divestiture since doses to the integrated solution Division.
And then unrelated external customer will be included in the reported revenue starting July trends.
Our reported revenues for the second quarter of 2021 was $10.1 million.
An increase of 39% compared with reported revenue.
Seven 7 million.
In the second quarter of 2020.
The increase was primarily due to increased sales across all geographic regions.
To grow profit 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 remained flat at 3%.
Second quarter reported gross margin.
69, 8% of revenues.
67, 1% last year.
The increase in gross margin was primarily due to increased the increased sales and a shift in sales mix toward higher margin products.
Our reporting of our reported operating expenses were $4.8 million.
16, 1% increase from the prior review 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 profit and marketing.
Quite the benefit of favorable subsidies granted by the Canadian government.
Our reported operating income for the second quarter was $2.2 million.
Compared to $1 million in.
In the year ago period.
Our reported income from continuing operation was <unk> 7 million.
In the second quarter of 2021 compared to zero point $5 million in.
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 zero point $2 million.
Two zero point $5 million in the second quarter of last year.
This is an accounting effect, we regularly experience.
Due to the adjustment of our monetary assets and liabilities denominated in currencies other than the functional currency of the operational entities in the group.
As Doyle mentioned, thanks to our operating leverage and with the anticipated ramp up in quarterly revenue, we expect to report improving operation before we also anticipate that we could.
<unk> to produce positive net income for continuing operation during the remainder of 2021.
Net income attributed defense Dod technology to shareholders in the quarter was 11.8 million or 51 cents.
Sure.
Versus zero point $2 million.
One person one cents per share in the second quarter of last year.
The reported net income include $11.1 million.
And income from discontinued operation.
The net loss from discontinued operation of zero point $4 million in the same period last year.
Results from discontinued operation include the net loss of the integrated solution division in the quarter.
Certain transactional expenses.
As well as the expected capital gain the impact of the divestiture completed on June 32021.
Added to <unk> 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 <unk> $9 million.
Cash and cash equivalents as of June 32021.
<unk> $15.5 million.
Or $2.18 per share.
As of June 32021 assets attributed to discontinued operation were $4.8 million with liabilities attributed to discontinued operation of $5.3 million below it.
As compared to us at Ulta beauty to discontinued operation.
$59.6 million.
And liabilities attributed to discontinued operation of $25.2 million as of December 31st 2020.
That concludes my remarks, we are happy to take your questions now operator.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
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Once again that is star.
One to register a question at this time one moment, please while we poll for questions.
Okay.
Okay.
Once again that is star one to register your questions at this time.
Our first question is coming from Sam <unk> of SCR asset management. Please go ahead.
Good morning, Dror or afternoon.
Do we have the $40 million due are we looking at any acquisitions and how close are we to wind acquisition and how much of the $40 million do we expect to give us the dividend and when would this happen.
Well you asked a few first.
As I mentioned, we are negotiating now.
An acquisition I don't know yet when it would be when we'd 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 what would be the date of closing.
If it would be close.
Second.
We ask the AGM.
To vote on.
<unk>.
Distributing up to $40 million in dividend.
Actually it's going to be next week and then the board will take a decision.
What would be the amount of money that is distributed.
But what what do we do.
Do we do we wanted to submit.
Distribute.
A significant amount of cash or do we wanted to hold most of it back in and run would run the company with the extra cash that we have.
We have we have excess cash above this again I don't know yet what will be the amount that the board will approve but.
We are asset cash above the 40 and on.
Some of it can still generate cash as well.
I don't see any problem of.
Using this.
This cash generation to acquire companies.
Okay.
Ken can you discuss at this time.
What a range.
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.
Okay. Thanks.
It's under NDA, so I cannot elaborate too much in on.
This opportunity.
Trinity, but usually we're looking between $10 million to $20 million in investments of $10 million to $20 million.
Okay, well good luck hopefully.
Something works out and <unk>.
Good luck. Thank you.
Thank you Sir.
Thank you once again that is star one to register a question at this time.
Our next question is coming from so Burger is a private investor. Please go ahead.
Good morning, gentlemen, and congratulations on an outstanding quarter.
Had 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 Mcdonald dividend in December 2020 was noted that there would be an instruction letter.
Posted on <unk> web site to see if one could qualify for an exemption.
Lower tax rate I have not seen anything on that yet can you give us a status on that instruction letter.
Yeah.
So thanks for the question and for graduate from this quarter regarding this unfortunately, we're 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 it.
We are pushing month after month in <unk>.
Hopefully it will be sold in the upcoming weeks.
We are also frustrated from this situation, but again hopefully we are pushing our consultants are pushing in.
We hope to.
To get it.
Great when that comes out would that be announced in a press release do you think.
We will do whatever it takes we will make sure everyone will get the message.
Okay.
Okay, well the press release, we can do even a trust we can do even a press release in order to.
Update everyone.
Okay I appreciate that thank you very much for your response.
Thank you. Thank you. Thank you.
Again that is star one for any questions. Our next question is coming from Fred Harman a private investor. Please go ahead.
Good afternoon, Dror and tell them their.
All of them are nice to make your acquaintance.
I also wanted to add my mic.
Alright, thanks to Kobe.
<unk>.
It's just a pleasure to deal with.
As an investor.
And wish him the best of luck as well.
My question also has to do 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.
Maybe another dividend coming shortly.
Is it possible that maybe the authorities will combine.
Both dividends into one.
<unk> ruling.
So Luke.
We will wait for the decision of the AGM and then the decision of the.
Potential distribution for sure.
That will happen, we will try to approach by using our consultant again.
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 the board are critical and then we will approach the tax authorities across Europe.
Okay.
My second question has to do with the.
Potential acquisition you are you've mentioned.
And your you commented that the ball is in the court of the.
Others other side.
They are apparently the ones that have been.
Holding up any any closing of it.
Is the are the problems.
Potential other buyers or.
Competing or.
The chart on the terms.
More or less.
Agreed upon but.
At least from your point of view.
Or or are there still a lot of open issues.
The company has been involved in.
And merger and merger discussions over the last few years.
Yeah.
Some of which have not been completed.
Just wondering what the.
What the possibilities are for this one closing I know you can't answer that question because that up to you.
But could you give us the shareholders.
At least a year an indication of how it looks.
First as far as we know there are a few other competitors on this.
On this target.
But I think we're in a good position basically.
The main.
Stop the.
The main issue over there is they are dealing with some kind of litigation.
And we want to acquire clean company.
So once it will be resolved.
Hopefully we were able to close it but again things can be changed any day you know.
Sure.
It's not it's not in our pocket.
So we'll have to wait we are doing everything to be able to close it but.
No I totally up to us.
Alright, Okay again, congratulations on the quarter and good luck.
During periods.
Thank you very very much Fred.
That's it.
Tom I'd like to turn the floor back over to management for any additional or closing comments.
Thank you operator on behalf of the management of <unk> technologies, and since though I would like to thank you for your continued interest and long term support of our business.
Look forward to updating you next quarter and have a good day and good day and keep safe. Thank you very much bye.
Bye bye.
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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