Senstar Technologies Corp Q3 FY2024 Earnings Call

Greetings. And welcome to the Senstar Third Quarter 2024 Financial Results 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. It is now my pleasure to hand over to Kim Rogers of Investor Relations. Thank you, and you may proceed, Kim.

Thank you, Claudia. Welcome, and thank you for joining us today. I want to thank the management of Senstar Technologies for hosting today’s call. With us on the call from the company are Mr. Fabien Haubert, CEO; and Ms. Alicia Kelly, 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, as well as other risks identified in the document 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 reconciliation. With that, I’ll now hand the call over to Senstar Technologies CEO, Fabien Haubert. Fabien, please go ahead.

Thank you, Kim. Thank you for joining us today to review our third quarter 2024 financial results. Starting with an overview of this quarter's performance, our revenue increased by 8% compared to Q3 2023 and is up 7% year-to-date compared to the same period last year. Gross margin was exceptionally strong at 68%, representing an 11.4 percentage point increase over Q3 2023. The improvement in the quarter was primarily driven by our ongoing streamlining activities, recent price adjustments, normalization in the component markets and a favorable product mix. Year-to-date, our gross margin of 63.9% aligns with our expectation to deliver a gross margin of 60% or better. Due to diligent expense controls, operating expenses decreased by 3.6% from Q3 2023 and 9.2% year-to-date. Our revenue growth and gross margin expansions combined with a decrease in operating expenses led to a significant increase in our profitability. We experienced encouraging growth trends in the U.S. and EMEA, along with a 2% increase in revenue in our core verticals in Q3 2024 and a 9.8% increase year-to-date. Our growth this quarter reflects both our strategic focus on high-potential sectors and the success of our tailored solutions. Demand for enhanced security in correctional facilities is growing, driven by the increasing emphasis on advanced security technology for public safety. Our integrated solution continues to resonate well in this sector, especially in the U.S., where correctional facilities are investing in modernization. Our offerings have helped strengthen our position as a trusted partner, leading to an increase in contract wins. In regards to utilities, this vertical continues to be one of our strongest, with broad-based demand across data centers, solar farms, energy generation, as well as telecom infrastructure. The security sector is increasingly focused on integrating security and monitoring for critical infrastructure, and our solution addresses these needs with precision. In particular, data centers and solar farms have increasingly integrated our offerings, underscoring the reliability and scalability of our technology in protecting vital assets. This growth also reflects our expanded reach in the EMEA, U.S. and APAC regions, where utilities and large infrastructure projects prioritize improved security solutions. In the transport sector, our growth has been driven by a mix of established customers and new market entrants, particularly in EMEA, where transport infrastructure development is advancing rapidly. We’ve seen strong adoption of our solution in the airport sector, which recognizes the need for secure monitoring systems. The market remains a priority as our technology aligns well with the demands of modern transportation security, particularly in EMEA and Asia. Logistics and oil and gas experienced a slight revenue decline, but we continue to see opportunities in these sectors as companies seek ways to enhance operational efficiency and protect critical assets. We’re seeing positive trends in the oil and gas industry, particularly in North America and EMEA, and we’re hopeful this will contribute positively to future orders. By focusing on core verticals in these critical sectors and fine-tuning our solution to meet their unique needs with new products like the MultiSensor, we’re enhancing customer value and positioning ourselves for sustained growth. I’m happy to share that initial sales from MultiSensor are promising, highlighting the product’s innovative impact in the market. The future enhances our position and builds on this initial momentum. We appointed a new VP of Product Management and Marketing with a solid background and proven track record in video technology to help expand our market presence beyond our traditional perimeter-focused solutions. Our strategy remains focused on business development to expand global market share across key verticals. We aim to bring on new end-users in existing markets while also gaining customers in new regions. The investments we made in established markets are already yielding results, driving growth in the second half of 2024. Likewise, our investments in new territories are beginning to pay off with identified projects now being rolled out. We’re seeing strong sustainable demand growth and are scaling our effort to meet it. In conclusion, we are encouraged by our financial progress this quarter and the strides we’ve made in key verticals. The Senstar team remains dedicated to executing our growth strategy and driving operational efficiency. We’re excited to build on these successes as we continue delivering value to our shareholders and advancing our long-term goals. Now, I will pass the call to our CFO, Alicia Kelly. Alicia, please go ahead and review the financial results.

Thank you, Fabien. Our revenue for the third quarter of 2024 was $9.7 million, an increase of 8.2% compared with the revenue of $9 million in the third quarter of 2023. We saw sales growth in the U.S. of 12%. Growth was experienced in all four of our key verticals, but the most significant growth was reported from correctional sales as facilities invest in modernization. We reported an increase in sales of 26% in Q3 versus the same period last year. Incremental sales were reported in oil and gas, utilities, and the transportation segment. Other regions saw slight declines this quarter, but nothing material in nature. The geographical breakdown of the percentage of revenue for the third quarter of 2024 compared to the year-ago quarter is as follows; North America, 44% versus 43%; EMEA, 39% versus 34%; APAC, 14% versus 16%; Latin America, 3% versus 7%. All other regions had a change of less than 1% in both periods. The third quarter reported gross margins of 68% of revenue, up compared to 56.5% in the year-ago period. The increase in gross margin was primarily due to product mix and price increases in the fourth quarter of 2023. Our operating expenses were $4.8 million, down 3.6%, compared to $4.9 million in the prior year’s third quarter. The decrease is a result of the streamlining of our corporate structure and realignment of our resources that we implemented in 2023. A strong gross margin and lower operating expenses drove an increase in our operating income for the third quarter to $1.8 million, a significant increase compared to $123,000 in the year-ago period. Financial income was $111,000 in the third quarter of this year, compared to a financial expense of $64,000 in the third quarter of last year. This is mainly a non-cash accounting effect we regularly report due to the adjustments of the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of our operating entities in the group, in accordance with GAAP. Net income attributable to Senstar Technologies shareholders in the third quarter was $1.3 million, or $0.06 per share, compared to a net loss attributable to Senstar Technologies shareholders of $122,000, or $0.01 per share, in the third quarter of last year. The company's EBITDA for the third quarter was $2 million, compared to $322,000 in the third quarter of last year. Added to Senstar's operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses for the third quarter were approximately $1.5 million. Cash and cash equivalents and short-term bank deposits as of September 30, 2024, were $19.5 million, or $0.84 per share. That concludes my remarks. Operator, we would like to open the call to questions now.

Thank you very much. The first question comes from Danny Levine from LiveCo. Please proceed with your question, Danny.

Yeah. I’m happy to see that you are getting a new marketing person in there because the stock is under the radar. Do you know what the updated book value per share is on the stock?

The book value, you mean?

You are right?

The bookings or…

No. The book value per share at this point.

No. We don’t have that information in front of us at this moment.

It appears that you are currently trading at around the same level as your book value, and with only a 50 million share float, it wouldn't take much for one or two significant announcements to greatly increase your stock price. There is very little float available. I'm curious to know if you are focusing on the AI sector and if there is any demand from AI companies for your products. Are there any potential synergies with AI?

So, basically, AI is the generic word for intelligence and like…

Right.

We are working on enhancing the intelligence of our devices across the industry. We already have video intelligence and analyze component signals. Our focus is on deepening our knowledge and performance in AI overall.

In terms of AI companies, is there any demand for your products for security purposes in terms of their facilities and so forth?

So, yes, I’m sure I’m getting your question properly. The need for AI basically is requested a bit everywhere from our customers who want solutions more and more intelligent. And to this extent, we’re improving, we’re striving at least, on increasing the intelligence of our solutions by using basically available technologies.

Right. And what I’m trying to ask, basically, is that the AI sector itself, the corporations, do they have a demand for your product in terms of securing their facilities and so forth?

I apologize for not fully understanding your question. We are primarily focusing on four to six key sectors, which include utilities, corrections, oil and gas, logistics, as well as transport, airports, military, and border control. These sectors are our main areas of service, and they are seeking solutions that provide greater intelligence in their operations.

Thank you very much. The next question comes from Ted Liddy from Oppenheimer & Co. Please proceed with your questions, Ted.

Hi. This is Ken Liddy. I just wanted to know, as far as the MultiSensor, you seem to be very optimistic. Do you see a material impact on growth in revenue in 2025 from the MultiSensor?

We are not making any forward-looking statements, but we can say that the market is responding very positively, evidenced by interesting sales and a significant amount of interest from various customers that we are currently addressing. However, it is still too early to assess how much our sales will generate.

As far as profitability, given the low expenses, are you comfortable in saying that you expect to be profitable in the fourth quarter?

So we’re not giving forward-looking statements on where we’re going to be in the year.

Okay. And you mentioned some new areas of markets for your verticals. Could you talk a little bit more about solar farm and the opportunity there?

We are currently addressing solar farms as part of our verticals, classifying it within utilities. There is a significant global push to build solar farms, and we see oil and gas companies investing in green energy. Consequently, there's a high demand for solar farm plant protection, which we are responding to, and we are making progress in our sales in this area.

Thank you very much. The next question is a follow-up question from Ted Liddy from Oppenheimer. Please proceed with your question.

Yes. I wanted to have you expand on what you categorize as data centers.

Oh! Interesting. So basically, data centers encompass all places that host hard disk storage for utilities in distribution for video on demand, and related data. These are where the data is processed. I think data is everywhere. So the main category of foresight is that big Internet providers will generally provide storage or video on demand or any cloud services. Then you have many banking and financial institutions that build their own data centers to provide services. It’s quite broad. I would say it’s everywhere where hard disk is storing data for different types of customers where confidentiality requires a high level of protection. These are the data centers we’re focusing on. We’re not addressing small company data centers where it’s only large providers offering services to third parties. That’s where we’re focusing today. Hope I answered your question.

Yes. You did. I have a follow up. Have you looked at markets for the big coin miners and the data centers, the farming mining they do there for some of the critical infrastructure for some of the companies like Intel and NVIDIA?

So we’re trying to follow the requests of everywhere people are building data centers. We haven’t focused on those in particular, but among others, we are addressing those as well.

Okay. Great. Thanks for your comment.

Thanks.

Thank you. The next question comes from Joseph Judge, who is a private investor. Please proceed with your questions, Joseph.

Yes. Hi, sir. I was wondering, do you think that your technology will play any role with deporting some illegal immigrants and helping track them down?

Never directly. We’re striving to make people safer in the world, and what we’re doing is mainly focused on that.

Same with Israel, I hope you can secure some significant contracts for the Israeli border as well. It would be great if you could help enhance their border security, including ours. I know you have border security initiatives in Canada, but not yet on the Southern border.

So, we’re a Canadian entity and we’re trying worldwide to try to make people safer. We’re working on making sure that when there’s separation between two countries or two areas, we can detect intrusion attempts. Yes, the border market is one of the ones we’re covering, and we’re striving to make the world safer in this direction. The more we can help, the more we’ll be happy to contribute.

Yeah. Because I believe you also have the technology to look at some people’s tags. And will you be possibly helping law enforcement and the federal government track down certain people by being able to zoom in with their tags? Are you going to play any part of that?

Not directly. What we’re doing today is securing our first mission to detect intrusion wherever it may occur, mainly in our verticals, and to report it. When we provide this information, we leave it to the authorities to track and take any necessary action. Our job today is to try to understand the situation and provide awareness about whether there is an intrusion or not and of which nature. Our sensors work together to find the best accuracy in identifying where an intrusion attempt is happening, and that information is then communicated to other parties for follow-up.

Thank you. The next question comes from Mike Distler from AMX Holdings. Please proceed with your questions, Mike.

Yes. Good afternoon, gentlemen. As a longer-than-two-decade holder and shareholder, I’ve been following the trajectory of the company for a very long time. I’m gratified with the results, so well done. My question, really, is to just more direct your focus rather than an answer, and that is, you already have the utility vertical as one of your three primary verticals, and these data centers that you spoke of just two questions ago to Ken, etc., that you are pursuing; it seems you have an automatic entree through the utilities who will be providing the power, and therefore you could be working hand-in-hand as they try to garner data center business. You would be providing the security for both the utility and the data center themselves. I just want to point that out. I don’t mean to sound patronizing in any way. I’m just a shareholder trying to help out, but I think the opportunity is vast and substantial, and I think you guys have the ability now to execute. I wish you luck on that, and if you have any comments, I’d appreciate it. Thank you very much.

Thank you so much for this really great comment. It’s exactly why we love data centers, because on top of protecting the data centers themselves, they indeed provide the possibility to secure the infrastructure needed to transmit the data and to power them. So we’re totally aligned with this strategy, and that’s where we’re putting our efforts.

I had no doubt.

And thank you for your investment and trust in us.

Oh! Yes. No. Thank you. You guys are doing great. Appreciate it.

Thank you.

Thank you very much. Ladies and gentlemen, we have reached the end of the question-and-answer session. I’d now like to turn the call back to Fabien Haubert for closing remarks. Thank you, sir.

So on behalf of the management of Senstar, I’d like to thank you for your continued interest and long-term support of our business. We look forward to sharing more updates with you in the coming quarters. Have a good day.

Thank you very much. Ladies and gentlemen, that does conclude today’s conference. Thank you so much for joining us. You may now disconnect your lines.