Bos Better Online Solutions Ltd Q2 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the BOS conference call. 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. Mr. Cohen, please go ahead.

Good morning, everyone, and welcome to BOS Second Quarter 2025 Earnings Call. I am joined today by our CFO, Mr. Moshe Zeltzer. On our previous calls, I emphasized our focus on the defense sector while diversifying our customer base. That strategy is paying off. I'm excited to share what has been another exceptional quarter for BOS as the momentum from our record-setting first quarter continued in the second. We have delivered our strongest revenue growth in recent years with sales jumping 36% year-over-year to $11.5 million this quarter. This growth is being driven primarily by the exceptional performance of our Supply Chain division, which increased revenues by 57% to $8.3 million this quarter. While we are addressing some temporary challenges in our RFID division, the overall trajectory gives us confidence for the remainder of 2025. Profitability, our net income surged 53% to $765,000 compared to the same quarter last year. That is $0.13 of earnings per share just in the second quarter. This outpaced our revenue growth, which tells you we are not just chasing top line numbers, we are building a more efficient operation and leveraging our scale to drive profit efficiency. Our EBITDA increased to $900,000, up from about $800,000 in the second quarter of 2024. This gives us the operational cash flow we need to invest in growth while maintaining financial stability. Now let's talk about our contracted backlog and what it tells us about business momentum. We ended 2024 with a record $27 million in contracted backlog. As expected, it declined to $22 million by March this year as we executed on those contracts and converted backlog to revenue for a record first quarter result. Our backlog has grown back to $24 million as of June 30 this year, giving us increasingly clear visibility into the back half of the year. Our financial foundation has never been stronger. Cash and equivalents grew to $5.2 million, up from $3.6 million at the year-end. Combined with $24 million in total equity, we have the resources to execute our expansion plans without compromising operational stability. We have the flexibility to capitalize on opportunities as they arise, whether that's supporting organic growth or pursuing strategic acquisitions. Based on that, we are seeing in our business and our contracted activity for the second half, we are raising our full year guidance. We now expect revenue between $45 million and $48 million. That's up from our previous guidance of $44 million. At the midpoint, it's about 16% year-over-year, and that is entirely organic growth from our business initiatives before any additional benefit of possible strategic initiatives. More importantly, we are raising our net income guidance up from $2.5 million to between $2.6 million and $3.1 million. At the midpoint, it's about 24% year-over-year. This reflects not just stronger revenue expectations, but our confidence in our ability to convert that revenue into bottom line results, plus profit leverage as we scale the operating base of our business. Our guidance is based on concrete contracted activity with both existing and new customers, diligent execution and commitment to deliver the best results for our stakeholders. With that, I will turn the call over to Moshe to cover the financials.

Thank you, Eyal. I'd like to focus on some of the operational dynamics that are driving these results and address a few specific items that deserve your attention. While we are thrilled with our revenue growth and our net income, we see additional opportunity in our margin performance. That is an area we are focused to improve and deliver even better bottom line performance in the future. Our overall gross profit margin was 23% compared to 26% in the same quarter last year. This quarter's margins were a little lower than target, while last year was higher than typical. We are aiming to achieve a balance in the middle where we can deliver sustained performance. Let me break this down by division so we can understand how we can drive even better performance down the road. Our RFID division saw a gross profit margin temporarily decreased to 19.1% from 21.1%. This was primarily due to certain service line challenges that we have already identified and addressed. We have implemented restructuring initiatives, and we expect this division to return to normalized performance levels by Q4 2025. Our Supply Chain division delivered a 24% gross profit margin, which is within our expected parameters. The 28% margin in Q2 2024 benefited from a particularly favorable product mix that quarter. So the current level represents a more sustainable baseline. As part of the RFID restructuring, we recorded a noncash goodwill charge of $700,000 this quarter. This charge was largely offset by $696,000 in favorable currency fluctuation between the U.S. dollar and the Israeli new shekel. Our cash position improvement to $5.2 million reflects strong operational cash generation, supplemented by $400,000 from warrant and option exercises in the second quarter. We are managing working capital efficiently while supporting our growth trajectory. The increase in deferred revenue to $3.2 million from $2 million at year-end indicates strong advanced booking and provides additional confidence in our near-term revenue visibility. Thank you. And now let's open it up for your questions.

This is Todd Felte from StoneX Wealth Management. Congratulations on a great quarter and raising the guidance and the strong outlook. Just had a couple of quick questions. What percent of your revenue is now defense based?

It's more than 60% of our total consolidated revenues, and we anticipate that it will grow in year '26 because of the growing demand in this Defense segment.

Okay. And is that Defense business, is it mostly directly with the IDF? Or is it through other companies like Rafael or Elbit?

Yes, it's mostly through Rafael, Elbit, and the Israeli Aircraft Industry. Recently, we are bidding directly with the IDF. As you know, our new director, a new Board member has a good record in the IDF, and he is helping us to open the gate there.

Okay. And your tax loss carryforward is still around $60 million, but only an Israeli-based company could take advantage of that if they acquired you. Is that correct?

I think even if a foreign company acquires control of BOS, the company is still registered in Israel. If it continues to generate profit, it won't pay taxes regardless of the holder of the company.

Okay. I know you've talked about M&A activity, but help me understand why someone like Elbit Systems, which is Israeli-based and NASDAQ listed with a $450 stock price and a $20-plus billion market cap, wouldn't they acquire you for onetime sales or $8 a share or $48 million and then take advantage of the $60 million tax loss carryforward? Is there antitrust laws or something that I'm missing here?

No, I don't think there is any limitation to do that. I think it's maybe their strategic move, which company to acquire. I don't think there is any obstacle to do it.

Okay. And on you guys acquiring other companies, have you made any progress? Or are there any targets out there that you're willing to discuss at this point?

Yes. As I mentioned in previous quarters, we have at least 2 opportunities on the table. We are checking and negotiating, and once we decide that the company is the right one to acquire, we will move ahead. But we are checking, negotiating, and once we see it's a good deal for our shareholders, we will pursue it.

Congratulations again on an outstanding quarter.

Can I ask a question?

Yes, please.

Congrats on the great quarter, first of all. Can you highlight any new major customers in this quarter that you got? Or did the bulk of the business come from your existing customer base?

I think it's less new customers. We have new customers, but more importantly, we are expanding the offering to the existing customer base. We are doing very well with the new line of products of wiring for our clients in Israel, especially our clients in India, and it's going very well, and it's one of the growth engines of our revenues in '25 and in '26 as well.

Okay. And then secondly and lastly, despite the raise on the guidance, it sounds like the second half is going to be down versus the first half of the year. Are there any seasonal headwinds? Can you flesh that out, please?

Yes. I think we had an exceptional first quarter, as you remember, with record revenues, which were extraordinary. This is the reason why the second half of the year will be at a lower revenue rate and profit compared to the first half of the year. Additionally, we have to be cautious because our backlog covers the second half of the year, but we have to be alert to supply chain issues. Not all the time, we will be able to provide on time and to record the revenue as we did in the fourth quarter of year '24 when some major orders were pushed to the first quarter of year '25, and we saw the results. This caution is why we provided conservative estimation for the second half of the year with the range that we will be in between.

Sorry. Congratulations on a great quarter. I was just wondering if you can shed a little bit more light on your Robotics division and any new product roadmap that you may have?

Yes. The Robotics division is strategically focused on the defense clients in Israel. The main client is Elbit Systems, which invests heavily in establishing new factories, and those factories are supposed to work with robotic systems. We are trying to be involved in as many systems as we can. The backlog of this division is about $3 million. We can deliver it in the second half of the year, but there are some delays from our client as their facility is not ready for installation. However, it will be ready in the second half of the year, so it will be a great year for the Robotics division. Meanwhile, there is one robotic production line system for Elbit that is on the road to a European country, and it will be the first installation of our line in Europe through our client. We hope that there will be more sites like that through Elbit around the world.

Just a quick follow-up. So currently, it's just so concentrated on one customer. I'm just wondering if you have a feel for potentially repurposing this technology into other industries. And especially, I'm interested in the U.S. Do you have any feelers for what you could do for the U.S. market?

We can cater to the U.S. market, but through our clients because they handle the sales, and we provide a complete solution for the automation line. I think it's more secure for us to work that way. In Israel, we also work in the civil market, especially in logistics centers where we provide robotic cells primarily for palletizing. Our major focus is defense for at least the coming 2 or 3 years. I think we can increase the business significantly once we secure more projects from Elbit, and there are projects with budgets available.

I have one follow-up. From an Investor Relations perspective, you had previously indicated that you're going to be in the United States doing some marketing. Have you firmed up those plans yet? And what dates and cities will you be here?

I believe someone is on the call. Next week, we will inform all interested investors about my availability for meetings. The schedule will be sent out, and I expect it will take place in October. I would be glad to meet with you, Scott. Are there any further questions?

Could I ask a question? I'm not sure how to properly get in the queue. I apologize.

Yes.

I have a question about the defense spending, which is this year is obviously the major part of your revenue. How much of it is cyclicality? Obviously, there was a war with Iran and there is a war in Gaza, unfortunately still ongoing, and the budget is elevated. I understand that the defense budget in Israel is higher than in previous years and will probably continue growing. But how much of your business is actually due to replenishing Elbit and Rafael due to the exhausted stocks of the defense after especially the war with Iran and also the operations in Gaza? What do you think would happen like 1 or 2 years down the road if hopefully the peace prevails? How will it impact your revenue?

I think that the Israeli defense industry is a strong industry even before the war. They are leaders in the global defense industry, and they will continue to be for many years. We are trying to connect with them. They are giants. We are small. So every budgetary allocation that we can obtain has a fantastic and significant influence on us. Regardless of this point, we believe that in the coming 2 years, there will be extensive budget expansion due to the depletion of ammunition in warehouses and the establishment of new production lines. This decision is driven, in part, by the current embargo in Israel. Therefore, we believe that this situation will propel the Israeli economy, and the defense industry will likely lead that growth. Strategically, this is where we want to focus.

My other question, also related to defense, is about international opportunities. Especially, obviously, encouraging sales to India. Do you see significant expansion of your opportunities given that Israeli military has showcased itself to be superior during recent events? How do you see future expansion in other countries? Is it direct work with the companies or is this basically through your subcontracting with Rafael, Elbit, and other Israeli companies?

Yes. The major country we are focusing on is India because it's a global hub for assembly that serves the defense industry. During my recent visit there, I noticed buildings designated for the Israeli Aircraft Industry, Elbit, Boeing, etc. This is a hub, and we want to expand our business regardless of the dealings we have with Rafael and Elbit's subcontractors in India. We are even considering opening a local office in India to seize more business opportunities, particularly in our cabling and wiring line. Any further questions? Okay. As we look ahead, I'm optimistic about several key factors. First, market positioning. Our focus on the defense, industrial, and retail sectors positions us in markets with sustained demand for our supply chain optimization and automation solutions. Second, technology integration. The convergence of our three divisions, the Intelligent Robotics, RFID, and Supply Chain division, is creating a unique value proposition for customers who will need comprehensive solutions. Third, customer relationships. We are seeing deeper engagement with existing customers and successful expansion into new accounts. Our $24 million backlog reflects this growing confidence in our capabilities. Let's close with this: Q2 represents more than just strong quarterly results. It demonstrates the effectiveness of our strategic focus, the strength of our market position, and the capabilities of our team. We are building sustainable profitable growth while maintaining the financial flexibility to capitalize on future opportunities. With our raised guidance for 2025, we are confident in our trajectory. Thank you for joining us today, and please don't hesitate to reach out if you need additional information or would like to schedule a follow-up discussion by phone or during my visit in the U.S. in October. Have a great day, and thank you again.

Bye-bye. Thank you.