Earnings Call Transcript - SNT Q1 2024

Operator, Operator

Greetings, and welcome to the Senstar Technologies First Quarter 2024 Financial Results. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Rogers, with Hayden IR. Thank you, Kim. You may begin.

Kim Rogers, Host

Thank you, Camilla. I'd like to welcome everyone to the conference call and thank Senstar Technologies management for hosting today's call. With us on the call today are Mr. Fabien Haubert, CEO of Senstar Technologies; and Ms. Alicia Kelly, CFO. Fabien will summarize key financial and business highlights, followed by Alicia, who will review Senstar's financial results for the first quarter of 2024. We will then open the call for a question-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 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 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 non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G's requirements. You can also refer to the company's website for the most directly comparable financial measures and related reconciliations. And with that, I'd now like to hand the call over to Fabien. Fabien, please go ahead.

Fabien Haubert, CEO

Thank you, Kim. Thank you for joining us today to review Senstar Technologies' first quarter 2024 financial results. We're off to a strong start in 2024 with first quarter results that improved year-over-year across major financial metrics. We delivered revenue growth of 17% compared to the first quarter of last year. And importantly, our profitability from operations improved significantly. Before diving into our financial and business highlights, I'd like to highlight a major accomplishment for the first quarter. In March, we issued a press release announcing Senstar's successful redomiciling to Canada, which streamlines the organization and reduces operating costs. Additionally, I had the honor of being confirmed as the CEO, and Alicia was promoted to CFO. These steps position Alicia and me to effectively achieve our strategic objectives. Revenue in the first quarter was derived from higher-margin products and price adjustments compared to last year, driving our gross margin to nearly 60% of revenue, in line with our target gross margin goal. Operating expenses decreased 15% and represented 60.6% of revenue compared to 80.6% in the year-ago quarter. In terms of profitability, our operating loss improved significantly from a loss of $1.07 million in the year-ago quarter to a loss of $73,000, approaching breakeven from operations. Cost control measures and price adjustments that we implemented over the course of 2023 have taken hold and are more apparent in our financial results. Notably, for the first quarter, we delivered growth in most of our geographic regions, with notable strength in Asia Pacific and Latin America. In the U.S., our largest market as a percent of revenue, revenue increased by 6% in the first quarter, mainly due to achievement in the correction and utility markets. Under our recently appointed new leadership, the U.S. team is making fantastic progress in developing our position with strong business development activity, especially in the data centers and utilities segment. In Europe, one of our largest markets, revenue increased by 8% in the first quarter. Market demand in Europe remains strong, especially in the utilities, energy, and transport sectors. Senstar has invested in Europe in previous years, developing promising opportunities in markets where we were underrepresented. Additionally, Senstar has improved its market share in established territories, which also contributed to our growth in Q1. Sustaining focus on key accounts and targeted verticals has been key to our success. In Asia Pacific, our revenue grew by 150% compared to the previous year's first quarter under the drive of new leadership. Growth was mainly generated from the utilities and transport verticals with concentrated efforts on existing territories from north to south APAC. In the Latin American region, we sustained the higher growth rate we experienced in late 2023, again this quarter, primarily due to wins in the correction vertical, delivering 39% growth in Q1. Looking at the revenue contribution from our key four verticals: utilities, correction, energy, and logistics. Revenue increased by 30% in these key market segments. We remain committed to our business development strategy with key accounts in these verticals to drive our growth. Looking ahead, we're most excited about the official launch of MultiSensor this quarter. MultiSensor is our new AI-based intrusion detection system that uses an embedded sensor fusion engine to intelligently synthesize data from multiple sensing technologies, providing full intrusion situation awareness and reducing false alarm rates close to 0%. The system includes short-range radar, PIR, accelerometer, high-frequency vibration, and image sensor. The MultiSensor is being extremely well-received by major players in our industry and recognized as an advanced and versatile solution unlike anything else on the market. We are building a better pipeline of new sales opportunities, and we expect to begin recording sales in the second half of the year. In summary, the first quarter delivered solid results across key metrics, with growth in important geographies and gains in target verticals, resulting in year-over-year revenue growth and improved profitability. We remain focused on achieving continued growth and improvements on these metrics as we progress through 2024. I will now turn the call over to Alicia for a review of the financial results in more detail.

Alicia Kelly, CFO

Thank you, Fabien. Our reported revenue for the first quarter of 2024 was $7.5 million, an increase of 17% compared with reported revenue of $6.4 million in the first quarter of 2023. As Fabien discussed, the increase was primarily due to revenue growth of 30% in our key vertical markets. The geographical breakdown as a percentage of revenue for the first quarter of 2024 compared with the prior year quarter is as follows: North America, 52% versus 58%; Europe, 28% versus 31%; APAC, 14% versus 6%; Latin America, 5% versus 4%; and others remained flat at 1%. Reported gross margin was 59.6% of revenue for the first quarter of 2024 compared to 55.7% of revenue for the first quarter of 2023. This revenue improvement was primarily the result of a shift in our product mix to higher-margin products in the quarter and price adjustments taken in 2023. Our reported operating expenses were $4.6 million, a decrease of 15% from the prior year's quarter of $5.3 million. The year-over-year decrease in operating expenses is due primarily to lower G&A expenses and lower selling and marketing expenses as a result of our efforts to streamline operations and diligently manage our overhead costs. Our operating loss narrowed significantly in the first quarter to a loss of $73,000 compared to a loss of $1.7 million in the prior year's period. The year-over-year improvement was due to higher gross margins on higher sales and lower operating costs. Financial income was $54,000 compared to $40,000 in the first quarter of last year. This is mainly a noncash accounting effect we regularly report due to the adjustment to the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operating entities in the group in accordance with GAAP. Net loss attributable to Senstar Technologies' shareholders in the quarter was $746,000 or $0.03 per share versus a net loss of $1.9 million or $0.08 per share in the first quarter of last year. The company reported positive EBITDA for the first quarter of $114,000 versus an EBITDA loss of $1.4 million in the first quarter of last year. Taxes on income were $700,000 compared to $200,000 in the first quarter of last year. The exceptional increase was primarily due to a tax provision related to reorganizing the group structure and a reduction in tax assets, which was offset by the recovery provision for an uncertain tax position due to the statute of limitations. Senstar's operational expenses include its public platform, and amortization of intangible assets from historical acquisitions. The corporate expenses and amortization expenses for the first quarter were $600,000 versus $1.1 million in the first quarter of the year before. Cash and cash equivalents as of March 31, 2024, were $15.8 million or $0.68 per share as compared to $14.9 million as of December 31, 2023. That concludes my remarks. Operator, we would like to open the call to questions now.

Operator, Operator

Our first question comes from Ken Liddy with Oppenheimer. Please proceed with your question.

Ken Liddy, Analyst

Hi. Congratulations on the solid quarter. Just wanted to know in the first quarter, was there any significant costs or savings from your redomiciling in Canada?

Fabien Haubert, CEO

Okay. Thank you for your question.

Alicia Kelly, CFO

Yes, there were some savings attributable to the redomiciliation. As we mentioned, we have restructured and we've redomiciled to Canada. In doing so, essentially, there were some headcount that were eliminated naturally from the headquarter level. And then there were also some savings that were less significant in the operating entities as well.

Ken Liddy, Analyst

Were there any one-time charges in the quarter that were significant or material due to the changes?

Alicia Kelly, CFO

No. No one-time charges this quarter.

Ken Liddy, Analyst

Okay. It seems you had strong positive cash flow in the quarter. What was the reason for that?

Alicia Kelly, CFO

That was just the natural effect of us completing Q4. So a large portion of our cash came from the collections of our Q4 sales, which were higher during Q4 of 2023.

Ken Liddy, Analyst

Okay. And one last question. Regarding the launch of the MultiSensor, I would like to understand how significant this launch is. Can you compare it to another product in Senstar's history? Is it a big deal or a very big deal? Is it expected to be a solid contributor?

Fabien Haubert, CEO

So it is expected to be a major change for many reasons. The first thing is the MultiSensor is a technology that is totally new. Most sensors today in the perimeter detection segment are focusing on one technology. We believe that we've reached the limit of every one of those technologies. The MultiSensor has a target to reduce the false alarms to zero. So to give you an analogy of the human body, the best sight will never replace the hearing, the smelling, and the brain to compile all this information to have a clear situational awareness of what's going to happen. Today, perimeter sensors do it and it's going to be combined eventually with another technology like video to check whether an alarm has occurred or not. It's going to be combined with another technology on top of it. We like to give the analogy of the mobile phone, the iPhone typically. 15 years back, we all had our flip phones together with an MPEG-3 player to listen to music, a GPS, a PDA, and a digital camera. Today, it's one device. We believe that to improve performance in perimeter detection and reduce it to zero, the only way to do it is to use the convergence of technology to combine it in the device and to use intelligence to be able to translate the data into situational awareness and then the right decision. So we believe we are ahead of the market by proposing that. So it's a step that is not only adding another technology, but using different technologies to provide basically a single device, an intelligent device, able to provide a decision and understanding that is better than anything you're seeing today. So that's why we did it. In terms of where we expect growth, first of all, we're going to position it at the high end of our solution portfolio. We expect it to be one of the best solutions. But on top of it, we expect to take market share from other technologies like video cameras by having a system that can do many things at once. Finally, we expect the product to target not only critical infrastructure but also critical points of non-critical infrastructure, heavily broadening our targeted markets. I hope I have answered your question with this long response.

Ken Liddy, Analyst

That's a lot of color. I really appreciate it. Is there any type of groundswell of interest from your customer base or outside of your customer base?

Fabien Haubert, CEO

Today, we have a huge positive reaction from the market of the first introduction, translating into a lot of desire to test it, to do proof of concept, and so forth. So we're extremely excited about the release, which will happen in two weeks' time.

Ken Liddy, Analyst

Are you currently at the stage of pilot testing it? Will you be making any announcements regarding a pilot test?

Fabien Haubert, CEO

We're not going to communicate on that so far.

Ken Liddy, Analyst

Okay. Okay. And then one last question, I'm sorry. Has the company thought about or is the company having any discussions regarding a stock buyback given the low value of company shares?

Fabien Haubert, CEO

It is not planned in the short term, sir.

Ken Liddy, Analyst

Understood. Thanks for taking my question.

Fabien Haubert, CEO

You're welcome.

Operator, Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. Fabien Haubert for any closing comments.

Fabien Haubert, CEO

On behalf of Senstar management, I would like to thank our investors for their interest and long-term support of our business. Have a good day.

Operator, Operator

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