Bos Better Online Solutions Ltd Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the BOS conference call. All participants are at present in listen-only mode. As a reminder, this conference call is being recorded and will be available on the BOS website as of tomorrow. Before I turn the call over to Mr. Cohen, I would like to remind everyone that forward-looking statements for the respective company's business, financial condition, and results of its operations are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks and product and technology development, and the effect of the company's accounting policies as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities. I would now like to turn the call over to Mr. Eyal Cohen, CEO.

Thank you. Thank you for joining our call today. On the call with me today is Mr. Ziv Dekel, Chairman, and Moshe Zelter, CFO. I'm excited to launch our new conference call for March through Zoom, which is live with the management presentation. The results of the first half of the year '23 were above our expectations. Compared to the first half of '22, revenues grew by 11%, EBITDA by 56%, net income by 168%, and EPS by 144%. In a three-year perspective, our performance has improved very consistently. Compared to year '20, our last 12 months revenue grew by 31% to $44 million. Our EBITDA increased by 342% to $3.1 million, and a net loss of $1 million in year '20 turned into income of $2.5 million in the last 12 months ended June. Our balance sheet has significantly strengthened over those years. Our shareholders' equity increased from $12 million at the end of '20 to $18 million in June '23. Our bank loans remain roughly the same at around $2 million. The business trends that impacted our results in the first half of this year include intense demand from the Israeli defense market, which has positively affected the growth of our Supply Chain division. These demands are attributed to military conflict in Europe and the Middle East. These demands will probably continue to support our Supply Chain division's growth this year. Our Robotics division is transitioning toward the Israeli defense market, and currently, most of our projects in process are attributed to one of the major defense companies in Israel. There are signs of a slowdown in the Israeli civil market, which negatively impacted the RFID division revenues in the second quarter of this year. Our growth strategy is based on both organic growth and M&A. The key elements of our organic growth plan include strengthening our competitiveness by adding more brands to our existing offering, developing new markets by expanding our offering with complementary technologies, and maintaining a high market presence through trade shows and digital marketing. At this stage, I want to turn the call over to Mr. Ziv Dekel, our Chairman, who will elaborate on our M&A strategy. Thank you.

Thank you, Eyal, and good morning and afternoon to everybody. The second dimension of our growth planning is the M&A strategy. Within this framework, the typical profile of the target acquisition is based on five criteria. The first criterion is that the acquisition company has a strong competitive position with a track record of profitable results over the last three years. The second criterion is that the company's business model should have a significant portion of recurrent revenues and not just current revenues. Market dynamics should reflect attractive market conditions, such as growth, a high level of innovation, and fundamentally high margins. The fourth and fifth elements focus on the size of the target company, which should exceed $5 million in new revenues. Our planned investment is up to $5 million with a target equity share of around 51%. Thus, we are also hedging our forward-looking risk. To define the scope of our search, we first need to categorize our business goals, as this will be the basis for leveraging hard, soft, and high-level synergies. This element is crucial due to comparing or maintaining our risk profile. RFIDs are our traditional core business, automation comes next, followed by supply chain, and at the highest level is the improved technologies of the innovation process, representing the broadest scope of our capabilities, know-how, and fine expertise. This slide describes BOS' specific scope of M&A in which we are going to focus. Our strategy is to include targets that are around our core business. We will also look for adjacent targets and may find opportunities in higher core areas. These targets need to be very, very attractive. We run a structured process comprising six phases. I will now take you along each phase so that you can all be aligned. The first phase is to engage with an agent. This is completed; we are currently engaging with two or three agents who are conducting an intensive and comprehensive search for us along the criteria I elaborated. The second phase is defining the scope of M&A, which we are currently working on together. The third phase is to acquire a list of target companies. Phase four is the most attractive, which involves meetings, followed by due diligence and raising equity. The sixth phase is, of course, the closing phase. Viewing this from a broader perspective, I trust the entire BOS team, led by Eyal, to navigate this challenging process and, in the broader view, manage the overall company strategy and operational plan. Thank you all for your attention. I will now hand the presentation back to Eyal.

Thank you, Ziv. At this time, we will begin the Q&A session. If you have a question, please unmute and present yourself. Usually, Todd asks a question. I see that...

Hey, guys. Can you hear me?

Yes. We are glad to hear you, Todd.

Congratulations on another great quarter. I was a little surprised that the revenues were that high given the devaluation of the shekel. Can you talk a little bit about how that has affected you? I know a lot of your contracts are done in U.S. dollars, but I thought it would have more of an effect on your revenue.

Okay. Actually, most of our revenues are quoted in dollars, and the effect of the devaluation of the NIS, again, the U.S. dollar, is mainly on our operational expenses on one side. On the other hand, the devaluation affects our financial expenses. When there is a devaluation, our operational expenses decrease, but our financial expenses increase. From the financial report aspect, the strong dollar is good for performance due to the effect on the operational expenses, which has a higher impact than the effect on the financial expenses. However, in the long term, I think that the devaluation of the NIS will cause inflation, and we will ultimately need to upgrade and update our employees' payroll.

Okay. That’s helpful. I was also wondering if you could comment on some of your growth. I know a lot is coming from the Israeli defense industry. Recently, you've had some new business with countries like Saudi Arabia and are also moving into some new verticals, like retail and clothing lines. Can you talk about the growth and where this is coming from?

Okay. The growth is coming from two segments. One, the Defense segment, which mainly comes from the supply chain, and recently, the Robotics division has transitioned to the defense market. This market is growing through sales to Israeli players. We are not selling directly to the clients of Israeli manufacturers; rather, we are selling to the Israeli manufacturers and their subcontractors around the world. In recent years, there has been growing demand, and the entire industry is experiencing rapid and consistent growth. So we have a very strong position in this segment. In the Civil segment, which is the main focus of the RFID division, there has been significant investment in logistics centers, driving growth in this division. However, as I mentioned in the recent second quarter, we faced signs of a slowdown. We hope this is temporary, and we're taking several actions to strengthen our competitive position in the market and expand our product offering to continue the growth of this division.

Okay. Thanks. I’ll hop back in the queue. Congratulations to you and your team on an outstanding quarter.

Thank you, Todd.

Thank you very much. Any other questions?

Any other questions?

Hi, how are you?

Hi, good to see you.

Thank you. Long time no see.

Yeah. You were here the last time that we talked.

Yeah. Time is doing the job. Eyal, I wanted to ask you about the Intelligent Robotics division. I see that in the second quarter, you were around breakeven. Do you see it improving in the second half, say, to be a little profitable? What's the near future that you see for this division? I also wanted to ask about the RFID division, which in the first quarter was much better than in the second quarter, as you said. But do you see it stabilizing? Or do you think it won't be profitable in the near future? Or will it stabilize with small net income, more or less? What do you see?

Thank you. First, regarding the Robotics division, it's currently a small division that carries significant business risk due to its automation and projects. We have minimized that risk and reduced the size of this division, but it remains important as it provides valuable solutions to customers in the industrial and logistics sectors. We are now transitioning into the Defense segment, and that progress is going well. However, this division still operates on high-risk projects. Our goal is to make it profitable, and while we have reached a breakeven point, we are focused on ensuring continued improvement in the upcoming quarters leading to profit generation. As we deepen our penetration into the defense market, I believe our potential for significant profits will grow since negotiations in this sector tend to be easier and budgets are generally larger. This is in contrast to the civil industry, where budgets are tighter and competition is intense. We are licensed to operate in the defense sector and have established beneficial vendor relationships. Regarding the RFID division, it is closely linked to the Israeli GDP, which is performing well. The civil market in Israel, however, is currently stagnant, which is influencing investments in logistics centers and the number of new centers opening. We hope this situation is temporary and anticipate growth in the Israeli civil market. We are actively working to strengthen our competitive standing and expand our offerings to sustain growth. I do not see a risk of this division incurring losses.

Yeah, okay.

I don't see such a scenario.

Great. Thank you, Eyal.

Thank you. Any further questions? Okay. So thank you for being with us today, and I look forward to meeting you again on BOS's third-quarter call. Thank you again.

Thank you, everybody.