Senstar Technologies Corp Q3 FY2022 Earnings Call

Greetings and welcome to Senstar Technologies' Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Kim Rogers of Hayden IR. Thank you. You may begin.

Thank you, Melissa and welcome to our third quarter earnings conference call. With me today are, Mr. Dror Sharon, CEO of Senstar Technologies, and Mr. Tomer Hay, CFO. 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 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 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.senstartechnologies.com for the most directly comparable financial measures and related reconciliations. And with that, I'd now hand over the call to Dror. Dror, go ahead please.

Thank you, Kim. Thank you for joining us today to review Senstar Technologies' third quarter financial results. Our third quarter revenue increased by 5% to $9.7 million compared to last year's third quarter. Our bookings were particularly strong in the quarter compared to last year despite longer sales cycles across the industry. Strength in our Canadian and European business is balancing contract award delays for government projects tied to further funding in the U.S. and the effect of prolonged lockdowns related to COVID, which presents similar challenges in the Asia-Pacific region. While it's frustrating to see projects postponed, I'm happy to say we are not seeing any order cancellations and we are optimistic about the opportunities that are in our pipeline. We have a strong backlog of revenue that we expect to deliver the majority of it over the next 12 months and several larger projects that have advanced negotiations that we expect to close in the coming months. Let's dive into the regional performance details. The U.S. is down due to delays in federal budgets related to correctional facilities. The corrections vertical, which was delivering the most growth previously, has been the hardest hit by the federal government budget delays as the current administration redirects correctional facilities funding away from infrastructure. These are contracts that have been awarded but not closed, primarily due to an extended closing cycle that I referenced earlier, causing our revenue from those projects to shift into further quarters. The U.S. has been an active region for us in the energy sector. We recently closed a new project to provide perimeter security for an important oil and gas reserve facility. We are in the final negotiation stage with a large U.S. oil and gas provider that anticipates closing shortly to become the main supplier of our goods to their facilities worldwide. In addition, we will help boost our U.S. sales. We are investing in marketing to other key verticals that we are focused on growing. APAC is another region that has been helped by market conditions. The Zero COVID policy and related lockdowns in China have impacted the greater APAC region and seen headwinds for Senstar year-to-date. On a positive note, we expanded our business with a larger Asian airport that we announced in June 2021, with two large follow-on orders. The initial contract includes an integrated perimeter security system and includes multilayer intrusion detection systems featuring fence-mounted and buried sensors and the software platform for security management integrated with the facility's existing cameras and secured infrastructure. The APAC region is starting to open slowly and we are optimistic about a rebound in 2023. The EMEA region has positive news this quarter, starting with the closing of the large oil and gas projects, which we are currently fulfilling. In addition, the large project for a customer in Europe that was awarded in 2019 is now moving forward and fulfillment has begun after a long slowdown due to COVID. We expanded our European sales capabilities with the appointment of a new regional Sales Manager who is responsible for Spain, Portugal, and Italy. This executive has already established a great track record of developing market opportunities in North and South America and brings strong field sales engineering and regional sales management experience to the position. Senstar remains well positioned in Canada, our home market. This year, we have added salespeople to the Canadian region to maximize our home court advantage. The increased focus has delivered nice returns, and Canada delivered solid performance again in Q3. We landed several large projects in the Critical Infrastructure vertical, specifically for our utility facilities. The corrections vertical has also contributed to our steady growth year-to-date. On the marketing and brand development front, we participated in numerous trade shows and industry events in the third quarter in all of our regions. We reconnected with our existing customers at these events and focused on developing our pipeline. Higher and more engaged attendees compared to last year enabled us to identify new opportunities and meet with new prospective customers. Backlog remains solid at the end of Q3. While our backlog is not growing at this time, we are replenishing it at a steady rate with bookings that approximate the revenue recognized as work is completed. Last year, we received subsidies from the Canadian emergency wage subsidy program of approximately $0.4 million in the third quarter. This subsidy expired in the third quarter of 2021. It has impacted the year-over-year comparison in this quarter and the year-to-date result of the cost of goods sold and operating expenses. Regarding product introductions, Senstar continued improvements to the Senstar Symphony Common Operation Platform with the release of version 8.4 and our new fiber solution is also being assessed internally. We are getting positive feedback from customers on our Fusion solution, which links our PIDS devices with our software and is currently running at a few sites in various versions. We plan to release two new products in the fourth quarter of this year or the first quarter of next year. We ended the third quarter with cash and cash equivalents of $15.2 million. This compares to $26.4 million at the end of 2021. The use of cash in the first nine months of 2022 was primarily for working capital purposes, specifically investments in inventories and increased accounts receivable, in addition to a significant reduction in other accounts payable. We also regularly invested in research and development, which has produced advanced solutions. As a result, we have developed a valuable competitive advantage with a comprehensive and innovative solution platform. Senstar solutions protect essential assets and facilities that are crucial to global security. There are macro trends that benefit us in our three verticals, including Energy and Critical Infrastructure, where there is an increased sensitivity to protecting facilities to keep them fully operational. Geographical unrest has increased the demand for integrated security solutions. Likewise, increasing volumes of global shipping and fulfillment mean that an essential objective for logistics facilities is consistent operational efficiency. Senstar delivered solutions for each of those critical objectives. As a result, our products are increasingly deployed in Critical Infrastructure, logistics, correctional, and energy sites worldwide. In summary, Senstar has a solid balance sheet with no debt. We prioritize our cash to create value with a focus on growth. We remain committed to delivering product innovations, strengthening our brand, and expanding our global footprint to ultimately increase shareholder value. Now, I will pass the call to our CFO, Mr. Tomer Hay. Tomer, please go ahead and review the financial results.

Thank you, Dror. Our revenues for the third quarter of 2022 were $9.7 million, an increase of 5.1% compared with revenues of $9.3 million in the third quarter of 2021. As Dror discussed, the increase was primarily due to new business signings, particularly in Canada as well as EMEA. The geography breakdown as a percentage of revenues for the third quarter of 2022 compared to the year-ago quarter is as follows: North America, 44% compared to 47%; Europe, 30% compared to 26%; APAC, 22% compared to 24%; and Latin America, 4% compared to 3%. The third quarter reported gross margin was 61.1% of revenues, essentially flat compared with 60.7% in the year-ago quarter. The change was primarily due to a shift in the mix of products sold during the quarter. Year-to-date, our gross profit as a percentage of revenues is lower primarily due to challenging comparables, as 2021 included subsidies granted to our Canadian subsidiaries as part of the Canadian emergency wages subsidy plan that was allocated partially to the cost of goods sold. Additionally, cost of goods sold was impacted by higher prices despite our mitigating some of the increases by raising prices. Our reported operating expenses were $4.8 million, again, essentially flat compared to the prior year's third quarter. On a year-to-date basis, like the increase in the cost of goods sold, the year-over-year increases in operating expenses are primarily due to a portion of the Canadian subsidies being allocated to operating expenses in the year-ago. Our reported operating income for the third quarter was $1.1 million compared to $0.8 million in the year-ago period. Financial income was $0.2 million in the third quarter of this year compared to financial expenses of $0.4 million in the third quarter of last year. This is mainly a non-cash accounting effect we regularly report due to the adjustments to the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operational entities in the group and according with GAAP. Our reported income from continuing operations was $1.2 million in the third quarter of 2022 compared to $44,000 in the year-ago quarter. The company's reported EBITDA for continuing operations for the third quarter was $1.5 million compared to $1.1 million in the third quarter of last year. Net income attributable to Senstar Technology shareholders in the third quarter was $1.3 million or $0.06 per share compared to a net loss attributable to Senstar Technology shareholders of $0.2 million or $0.01 per share in the third quarter of last year. The reported net income in the third quarter of last year includes a net loss of $266,000 for discontinued operations. This compared to net income of $66,000 for discontinued operations in the third quarter of 2022. Added to Senstar's operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate and amortization expenses for the third quarter were approximately $1 million, the same as in the third quarter of the prior year. Cash and cash equivalents as of September 30, 2022, were $15.2 million or $0.65 per share. That concludes my prepared remarks. Operator, we would like to open the call to questions now.

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question comes from the line of Norman, a private investor. Please proceed with your question.

Yes. Cherry-picking numbers for your current earnings, really don't serve a great purpose. Revenue for the company is down for the last five years. Yesterday, the stock market was up 500 points, Senstar stock was down 2%. You've reached an all-time low in your stock value on December 13, 10 days ago. During this short period, there were two attacks on the electrical infrastructure in the United States, North Carolina, where these electric grids were attacked. Now, this was the frontline news on every channel and newspaper in the country. Not one word, not one squeak from Senstar. We could protect against these types of things. We could install equipment; we could protect you from these kinds of attacks. You recently appointed a bunch of Sales Managers; where were they? Sitting on their hands? They could have gotten interviews on every news channel in the United States and said this is what could have been done. Why was that not done?

Thank you for your question, Norman. The stock market is currently struggling, and we are facing challenges like everyone else due to this situation. We are exploring various strategies and partnerships to enhance our performance. Regarding revenue, I believe it's important to be precise; I don't think it's lower than what we've seen over the past five years. Last year, we had Magal and the Project division with us, which contributed to much higher revenue. Additionally, the stock declined following our dividend distribution, and the broader market also affected it. As for North Carolina, I need to look into this specific matter. We typically collaborate closely with system integrators, engineering teams, and end users, but I'm not well-versed in the situation there. We can discuss it further offline, or I can reach out to the sales team in the U.S. to find out what's happening. If you have any insights, feel free to contact me or Tomer, and we'll address it.

Thank you. Our next question comes from the line of Mike Distler with AMX. Please proceed with your question.

Good afternoon everyone. I’ll keep it short. I’d like to reiterate Mr. Norman's points about the missed public relations opportunities following the recent shooting incidents at the Duke Energy power plants in North Carolina. I trust that your team will handle this promptly. Utilities are one of your main focus areas. Regarding the first part of your question, it's true that there were distributions that lessened the impact of the stock price drop, but the fact remains that the stock is down, along with many others. I want to take this moment to commend the management for successfully navigating the challenges of COVID-19 over the past two and a half years and for the spin-off process that benefited shareholders. I believe we should be more proactive and pay greater attention on a global scale. Since Senstar operates out of both Colorado and Canada, and with your representatives spread across the U.S., it seems there was a missed opportunity for us to gain more visibility and show how we can contribute to preventing such incidents from happening again. Wishing you all a happy, healthy holiday season and a successful new year.

Thank you very much.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Sharon for any final comments.

Thank you very much. As I mentioned earlier, if any investors, including those on the call or others, wish to reach out to Tomer or me regarding any issues, you are always welcome to do so, and you can easily get in touch with us. On behalf of the management of Senstar, I want to express my gratitude for your ongoing interest and long-term support of our business. I look forward to updating you next quarter and hopefully with positive news. Enjoy the holidays, and happy Hanukkah to everyone. Thank you.

Happy holidays.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.