Senstar Technologies Corp Q3 FY2021 Earnings Call

Hello and welcome to the Senstar Technologies Third Quarter 2021 Earnings Call and Webcast. As a reminder, this conference call is being recorded. It's now my pleasure to turn the call over to Kim Rogers with Hayden IR. Please go ahead, Kim.

Thank you, Kevin. Welcome to Senstar's third quarter 2021 earnings conference call. I'd like to welcome all of you to the conference call and thank Senstar Technologies management for hosting today's call. On the call today with us are Dror Sharon, 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 third quarter. We'll then open the call for a questions-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 Senstar cannot guarantee that they will, in fact, occur. Senstar does not assume any obligation to update any 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 filed by the company with the 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 and related reconciliations. And with that, I'd like to hand the call over to Dror. Dror, please go ahead.

Thank you, Kim. Thank you for joining us today to review Senstar Technologies' third quarter 2021 financial results. As a reminder, Senstar Technologies is the company's name following the divestiture of Magal Security Systems. The ticker is now SNT. Our year-to-date financial statement reflects the Magal contribution to 2021 as net income from discontinued operations. As with the third quarter and going forward, sales with the former integrated solution division will be included in our revenue as a third-party customer. In the third quarter, revenues increased by 11%, with growth primarily due to solid performance, especially in the APAC region for Magal's infrastructure contracts with a major Asian airport for an integrated perimeter security system announced in the second quarter. The strength in this region was modestly offset by complications in the US market from waiting customers due to supply chain issues and government contract delays due to COVID. These orders remain in our queue for fulfillment as this delay was mainly a timing shift. Our gross profit was modestly lower in the third quarter at $5.6 million, but the gross profit margin declined to 61%, down from last year's 64%. Several other factors impacted the gross margin this quarter, including higher material costs, component availability, and labor costs, which are seen across many industries. In our second quarter call, I stated that supply chain dynamics were impacting the industry with higher component costs and shortages. For the remainder of 2021, we anticipate an increase in some material costs, particularly in semiconductors. We are working to secure the necessary components and mitigate further price increases. As expected, supply chain challenges affected gross margin this quarter, and we anticipate this trend to continue into the fourth quarter of 2021 and potentially into the first half of 2022. That said, we expect gross margin to remain above 60% for the full year and in 2022. The year-to-date gross margin is 65%, flat with last year for the same period. In many regions around the world, we see some business activity starting to return to pre-COVID levels. Travel restrictions are being lifted in some regions, locals are returning to their offices, and trade shows have resumed. In the third quarter, we attended several outstanding trade shows in the US, Europe, and the UK, and we're delighted to be hosting interest and meetings again. These events facilitate connections as we engage with new customers and increase awareness of our industry-leading technology. While positive developments are occurring, there are still factors constraining us in several regions, including new restrictions in EMEA, limitations in the US, and remaining travel controls in APAC. We remain cautious. Resuming trade shows and increasing marketing expenses and business service costs operating expenses have risen from the low COVID-related levels of last year when we did not attend trade shows. We've used the related marketing spend increase this quarter as growth spending and productive investment for the future of our business. Based on our pipeline, the outlook for 2022 looks positive, showing growth for 2021. We remain optimistic that COVID variants over the winter will not disrupt the recovery of global business conditions. This quarter, we enhanced our PIDS offering with our thermal camera. This unique, powerful solution complements our intelligent detection system and integrates with our sensor e-commerce operation platform. We also released our game-changing Fusion Hardware-Software engine, which we anticipate will increase our software sales and benefit gross margin over time. The main value to the end user is a dramatic reduction in false alarms. We expect the positive impact of the Fusion engine to begin in 2022. Net income in the third quarter declined by $800,000, and EBITDA margin was 12%, below the third quarter 2020 margin of 15%. One factor contributing to the low EBITDA margin was the slightly higher operating expenses, primarily related to our growth spending. Our public company expenses and amortization are expected to be stable, and marketing expenses are anticipated to be flat to down sequentially. As a result, we anticipate Q4 operating income to be positive. We remain focused on gross revenue from our four key verticals, with two new highly innovative products launched just in time for the busy third quarter trade show season. We are leveraging Senstar's strong industry spending to drive future business. In addition, we have a strategy in place to cross-sell and up-sell products and solutions to our existing customer base. Lastly, we are adding new distribution channels by leveraging OEMs and system integrators. This quarter, we increased revenue across our four key verticals: energy, corrections, logistics, and critical infrastructure. Our revenue growth is attributable to our strategy of continuously enhancing our technology-rich bids and our software offerings to provide high-value solutions to thousands of Senstar customers in hundreds of countries. To maximize our benefits from the improving business environment in the APAC region and sustain our momentum, we are announcing the new regional director. I'm pleased to welcome Vance Lou as the Senior Regional Director in Greater China. Vance comes with extensive experience and a successful track record in leadership positions in the logistics industry as well. He will be based in Hong Kong and will be in charge of the China, Hong Kong, Taiwan, and Macau markets. We have also promoted Alex Cohen, a very successful regional sales manager based in Malaysia, to the position of Senior Sales Director of South Asia and Japan to manage the local team and further accelerate our growth in this region, where we have seen great success. Finally, I'm glad to announce that Sean Thompson has joined us as Senior Sales Director of Canada to grow our market presence domestically. Sean comes with a strong track record as a sales executive in the Canadian market and with companies such as Chubb, ABT, and Telos. Our global sales team is successfully growing our pipeline in all regions where we have established a presence and regularly converts new opportunities into bookings. This quarter showcases the productivity of our R&D investments and gives us a competitive advantage in the market. The thermal camera and the Fusion engine follow closely on the heels of version eight of our Symphony common operating platform. This platform is a comprehensive Security Management System that offers AI analytics, access control, video integration, and inputs from all products. The intelligent functionality of the Symphony platform combines video surveillance with analytics, security sensors, and data for manufacturing logistics systems. This functionality is achieved by linking inputs from our field products into solutions that enhance intelligence gathering for the end users. The result is an enhanced surveillance system that provides valuable operational intelligence, thereby increasing our customers' ROI. This improved platform elevates us to the solution provider category and opens new customer targets, higher contract values, and stickier revenue streams. Looking down the road, our product lineup includes expanding and completing the performance of our current offerings. In early 2022, we plan to release a new short-range FiberPatrol solution. Our cash balance at the end of the quarter was $24 million after making the $40 million cash distribution to shareholders in September. We have not yet closed any M&A deals as this remains a top priority of our growth strategy. There are several opportunities that could bring innovative technology and essential experience to support our brand leadership, but for now, we remain vigilant in balancing the allocation of capital between investing in R&D to drive future growth and strategic technology acquisitions at reasonable valuations. In closing, I'd like to thank all of our employees around the world for their ongoing commitment to our strategy, which aims to deliver growth, improve profitability, and ultimately deliver shareholder value. Now I will pass the call to our CFO, Tomer Hay. Tomer, please go ahead.

Thank you, Dror. Our reported revenues for the third quarter of 2021 was $9.3 million, an increase of 10.6% compared with the reported revenues of $8.4 million in the third quarter of 2020. The increase was primarily due to increased sales in APAC, which was partially offset by a modest decline in North America and European sales. The geographical breakdown as a percentage of revenues for the third quarter of 2021 compared to the year-ago quarter is as follows: North America 46% versus 51%, Europe 24% versus 53%, APAC 26% versus 13%, and Latin America 4% versus 3%. The third quarter reported gross margin was 60.7% of revenues versus 64.1% last year. The decrease in gross margin was primarily due to the shift in the mix of products sold during the quarter and macro-level business conditions related to higher material costs, component availability, and labor costs as Dror discussed. Our reported operating expenses were $4.8 million, a 10% increase from the prior year's third-quarter operating expenses of $4.4 million and in line with the prior quarter. The year-over-year increase in operating expenses was due primarily to an increase in marketing and selling expenses related to travel, trade shows, and other engagements with customers. Our reported operating income for the quarter was $0.8 million compared to $1 million in the year-ago period. Our reported income from continuing operations was $44,000 in the third quarter of 2021, compared to $0.5 million in the year-ago quarter. The company reported EBITDA from continuing operations for the third quarter was $1.1 million versus $1.3 million in the third quarter of last year. Financial expenses were $0.1 million compared to $0.4 million in the third quarter last year. This is a non-cash accounting effect we regularly experience due to the adjustments of our monetary assets and our ability denominated in currencies other than the functional currency of the operating entity in the group. As Dror mentioned, thanks to our operating leverage and the anticipated ramp-up in quarterly revenues, we expect to report positive operating income from continuing operations for the upcoming fourth quarter. The net loss attributed to Senstar Technologies shareholders in the quarter was $0.2 million or negative $0.01 per share versus a net income of $0.6 million or $0.01 per share in the third quarter of last year. The reported net loss includes a net loss of $0.3 million from discontinued operations versus net income from discontinued operations of $0.5 million in the same period last year. Senstar's operations contribute to public platform expenses and amortization of intangible assets from historical acquisitions. For both the third quarter of 2021 and 2020, corporate expenses and amortization costs were about $1 million. Cash and cash equivalents as of September 30, 2021 were $24 million or $1.03 per share. As of September 30, 2021, assets attributed to discontinued operations were $2 million with liabilities attributed to discontinued operations of $4.3 million as compared to assets attributed to discontinued operations of $49.6 million and liabilities attributed to discontinued operations of $25.2 million as of December 31, 2020. That concludes my remarks. We're happy to take your questions now.

Dror Sharon: Okay. Thank you, operator. On behalf of the management of Senstar, we'd 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, everyone. Thanks. Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.