Earnings Call Transcript - SNT Q4 2021

Operator, Operator

Greetings, and welcome to the Senstar Technologies Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ms. Kim Rogers with Hayden IR. You may begin.

Kim Rogers, Host

Thank you, Stacey. Welcome to today’s call. I'd like to welcome you all to the conference call, and thank Senstar Technologies management for hosting today's call. With us today are Mr. Dror Sharon, CEO of Senstar Technologies; and Mr. Tomer Hay, CFO. Dror will summarize key financial and business highlights, followed by Tomer, who will review Senstar's financial results for the full year and the fourth 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 that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand, the competitive nature of the security systems industry, the unanticipated and unknown effects 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 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 senstartechnologies.com for the most directly comparable financial measures and related reconciliations. And with that, I'll now hand the call over to Dror. Dror, please go ahead.

Dror Sharon, CEO

Thank you, Kim. Thank you for joining us today to review Senstar Technologies' fourth quarter and full year 2021 financial results. As a reminder, following the divestiture of Magal Security Systems in 2021, our year-to-date financial statement reflects the Magal contribution in 2021 as net income from discontinued operations. Senstar sales to the former Integrated Solutions Division in the second half of 2021 are included in our revenue as a third-party customer. 2021 was an important year for our company. On June 30, we completed the divestiture of Magal Integration Solutions, receiving $35 million in cash at the closing and rebranding as Senstar Technologies. In September, we returned $40 million in cash to our shareholders in a cash distribution. With the transition behind us, we are now 100% focused on our products combined PIDS, VMS, Access Control, and Analytics, creating a unified and unique solution for our customers in our four key verticals. As a standalone company, we are leveraging our reputation as a technology leader to capture a meaningful share of new market opportunities. For 2021, Senstar grew revenue by 5% to $34.9 million and delivered gross profit of $22 million, for an annual gross margin of 63%. Our results in 2021 were impacted by the divestiture of the Magal Division, which consumed a significant portion of management time, and by the COVID pandemic. We estimate that our revenue in 2021 was reduced by around 10% as a result of the impact of COVID globally, which affected the closing of deals, workplace effectiveness, and limited client interactions. Although COVID impacted our top line, we managed to keep our operational expenses low, and delivered an EBITDA of 20% for Senstar's operational entities. We ended the year with $26.4 million in cash and cash equivalents after the $40 million cash distribution to shareholders that I mentioned earlier, and $25 million in cash distribution the year before. In 2021, we launched several new products, including our Sensor Fusion Engine and our OEM thermal cameras. These new solutions, together with the ongoing product offerings, run on the latest version of our Symphony Common Operating Platform. In December, our Symphony platform, with our Sensor Fusion Engine, won the platinum award from ASTORs homeland security in the video surveillance solution segment. The platform was also named a top 30 security technology innovation by Security Sales & Integration, a leading industry publication. All this to say that Senstar is well positioned for expanding market share and returning to growth. We have industry-leading products and solutions, and the global need for our products and solutions continues to grow. We have streamlined our business, focusing on key verticals, with the sales pipeline increasing in all principal geographies. There are a few factors affecting our business in the current global environment. We have several projects that have been delayed due to COVID and the supply chain disruption of our customers. The supply chain remains stressed due to several factors, most recently related to the lockdown in China. Shortages of materials and labor are increasing costs for companies in all sectors, including ours. We monitor all those elements as we plan the remainder of 2022. Luckily, through very tight control, we don't anticipate a major impact on our 2022 revenue due to lack of material. However, developments in this field may change rapidly. In the fourth quarter, we felt the effect of a few of those business obstacles, as Senstar's revenue declined by 6% year-over-year for the fourth quarter. The decline in our fourth-quarter revenue was primarily due to timing; two large customer projects were postponed into 2022. I'm happy to say that one of those projects closed in the first quarter of 2022, and we’ll provide you with more details shortly. The second project for a large energy company in North America is in the advanced stages of negotiation. It is likely to be closed in the first half of 2022. Importantly, looking into our growing pipeline, demand for our products remains robust and new business is progressing. Like so many industries, business is taking slightly longer to close. We're navigating the mismatch between supply and demand. Senstar’s gross profit in the fourth quarter was $5.2 million, and gross profit margin was 58%, down from last year's 69%. Several factors impacted our gross margin, including the mix of product sold, higher material costs, component availability, and labor costs. On our last earnings call, I stated that we expected supply chain challenges to continue in the fourth quarter of 2021, and potentially into the first half of 2022. We have secured the necessary components to manufacture products for customer orders, but things are subject to change on short-term notice. We have successfully raised our prices, with no negative backlash from our customers, and are trying to mitigate further cost increases to keep gross margins above 60% in 2022. In recent months, many business activities have returned to pre-COVID levels. We are encouraged by the interest level in our solutions at trade shows and customer meetings. The increase in our marketing activity has led to pipeline growth in our key verticals, and we have several large potential opportunities. In energy, we are engaging with global energy companies for several opportunities across multiple continents that will help to protect facilities, reserves, pipelines, and oil fields. I referenced one project earlier; we have two other large projects that we are negotiating. One project is a blanket agreement with a large multinational energy company, and the other is for an African oil field facility to secure its oil pipelines and their pumps. In logistics, we are advanced with a global logistics and fulfillment network to provide a solution that will secure communication fiber within its facilities and enable the testing of fiber optics with our FiberPatrol solution. Critical infrastructure on ports is another vertical with multiple opportunities in Europe, Africa, and APAC. We remain cautiously optimistic that COVID variants and geopolitical tensions will not escalate further to disrupt the ongoing recovery of global business. Our platform is now a true SMS, or security management system that offers AI analytics, access control, video integration, and inputs from our PIDS products. The enhanced data intelligence functionality of the Symphony platform combines video surveillance with analytics, security sensors, and data from customer security systems. This superior functionality is achieved by linking inputs from our PIDS product and any other sensor into a solution that enriches the intelligence gathering for end users. The result is an improved surveillance system that provides valuable operational intelligence, positioning Senstar as a solution provider that opens new customer targets and can bring bigger contracts with recurring revenue streams. The Senstar team continuously enhances our offerings to improve the value we bring to thousands of Senstar customers worldwide. The new products and software launched in 2021, and the increased awareness created by winning industry awards and prizes for our innovation in perimeter security technology, are working together to improve our 2022 sales pipeline in Europe, North America, and APAC. We anticipate releasing a new short-range FiberPatrol solution later this year. Our current outlook for the year indicates revenue and pipeline growth compared to 2021. With new highly innovative products, we are leveraging Senstar’s strong industry standing to provide future growth. In addition, we are cross-selling and upselling products and solutions to our existing customer base in our four key verticals. Another factor supporting our pipeline growth is our restructured sales organization with six senior sales directors closer to the customers, with clear performance targets in each of the three key regions. The result is a smaller team working more closely with clients, all under the direct supervision of a SSD, a senior sales director, in the region. Each one of those teams has its own quota and goals. This allows for streamlined customer interactions, which should help us convert pipeline prospects into bookings. In summary, Senstar has earned an industry-leading reputation in PIDS, and now as an established provider of world-class solutions, with the ability to combine hardware and software into one platform, and deliver innovative technology and software solutions that are gaining industry attention. Global trends are increasing the need for sophisticated security of large physical assets like oil fields, ports, and manufacturing and distribution facilities. We continue to improve our offering and refine our business package to build a better company worldwide. Senstar has a strong balance sheet with no debt and a high cash balance. All these factors position the company for continuous success and growth. In closing, I want to thank all of our employees worldwide for their ongoing commitment to our strategy to deliver excellence in product and services, improve our profitability, and ultimately deliver shareholder value. And now I will pass the call to our CFO, Tomer Hay. Tomer, please go ahead and review the financial results.

Tomer Hay, CFO

Thank you, Dror. Our reported revenues for the fourth quarter of 2021 were $9 million, a decrease of 6.4% compared with reported revenues of $9.6 million in the fourth quarter of 2020. As mentioned by Dror, the decline was primarily due to the timing of two customer projects that were delayed beyond year-end, one of which closed in the first quarter of 2022, as well as overall market conditions that continue to be impacted by supply chain challenges. The geography breakdown as a percentage of revenues for the fourth quarter of 2021 compared to the year-ago quarter is as follows: North America, 41% versus 52%; Europe, 25% versus 28%; APAC, 24% versus 13%; Latin America, 5% versus 6%; Others, 5% versus 1%. The fourth-quarter reported gross margin was 58.1% of revenues compared to 68.6% last year. The decrease in gross margin was primarily due to a shift in the mix of products sold during the quarter and macro-level business conditions related to high material costs, component availability, and labor costs. Our reported operating expenses were $6.5 million, an increase of 21.5% from the prior year’s fourth-quarter operating expenses of $5.3 million. The year-over-year increase in operating expenses is due primarily to a reversal of government COVID subsidies received in 2021 that was retroactive, as well as increased marketing and selling expenses related to travel, trade shows, and other customer engagements. Our reported operating losses for the fourth quarter were $1.2 million, compared to operating income of $5.3 million in the year-ago period. Financial expenses were $0.4 million compared to $1.2 million in the fourth quarter last year. This is a non-cash accounting effect we regularly report due to adjustments in the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operational entities in the group, in accordance with US GAAP. Our reported loss from continuing operations was $2.2 million in the fourth quarter of 2021, compared to a loss from continuing operations of $1.2 million in the year-ago quarter. The company reported EBITDA from continuing operations for the fourth quarter was negative $0.7 million, versus positive EBITDA from continuing operations of $1.6 million in the fourth quarter of last year. Net loss attributed to Senstar Technologies’ shareholders in the fourth quarter was $3.2 million or $0.14 per share, versus a net loss of $0.8 million or $0.05 per share in the fourth quarter of last year. The reported net loss includes a net loss of $0.9 million from discontinued operations, versus net income from discontinued operations of $0.7 million in the same period last year. Added to Senstar's operational contribution is the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses and amortization expenses for the fourth quarter were $1.4 million versus $1.3 million in the fourth quarter of the year before. Revenues for the year ended December 31, 2021, were $34.9 million, compared with revenues of $33.4 million in the prior year. The year-over-year increase of 4.7% relates to some recovery in our business which was impacted by the COVID-19 pandemic. The geography breakdown as a percentage of revenues for 2021 compared to 2020 is as follows: North America, 46% versus 53%; Europe, 26% versus 27%; APAC, 23% versus 15%; Latin America, 4% in both periods; and others 1% in both periods. The full-year gross profit was $22 million, representing a gross margin of 63% compared to $22.1 million or a gross margin of 66.3% last year. The lower gross margin was primarily due to our revenue mix and some increases in material costs. Our 2021 operating expenses were $20.9 million, an increase of 9.7% compared to $19.1 million last year. Operating income from continuing operations was $1.1 million, compared with $3.1 million in 2020. The decrease in operating income was due to lower gross margin contributions and higher operating expenses. Net income attributable to Senstar Technologies’ shareholders for 2021 was $6.4 million or $0.28 per share, versus $0.4 million or 1% per share in 2020. The reported net income in 2021 includes net income of $8.6 million from discontinued operations, versus $8.4 million in the same period last year. In 2021, our EBITDA was $2.6 million, representing an EBITDA margin of 7.4%, compared with $4.3 million, representing an EBITDA margin of 12.8% in 2020. The corporate expenses and amortization expenses for the public platform were $4.4 million versus $4 million in the same period of the year before. Cash and cash equivalents as of December 31, 2021, were $26.4 million or $1.13 per share. That concludes my remarks. Operator, we would like to open the call to questions now.

Operator, Operator

The first question comes from Ken Liddy with Oppenheimer.

Ken Liddy, Analyst

Good afternoon. On previous calls, you talked about finding a merger partner, and that you had some delays due to the COVID pandemic. Could you give us an update on your status with acquisitions?

Dror Sharon, CEO

Currently, we have a few in our pipeline, but nothing is in - let's say in a stage that we can really discuss. We don't have anything in front of us in an advanced situation.

Ken Liddy, Analyst

Is that a status change? It seems to us that you had some deals that you were close to closing.

Dror Sharon, CEO

Can you repeat please, Ken? I didn't hear you.

Ken Liddy, Analyst

I'm sorry. Is that a status change? It seemed like you were close to closing something based on your previous calls.

Dror Sharon, CEO

Yes, you're right. We didn't succeed in acquiring the opportunities that we had. Someone offered a much higher number than we did.

Ken Liddy, Analyst

And are there still some targets that you have that potentially could get closed this year?

Dror Sharon, CEO

We are looking, but nothing is mature enough that we can discuss it now, because we don't have anything in front of us in a mature stage now.

Ken Liddy, Analyst

Understood. And with regards to your warehouse offering for warehouse distributors and throughout the world, is there any type of update on larger projects there?

Dror Sharon, CEO

On the logistics side of the business?

Ken Liddy, Analyst

Exactly, yes.

Dror Sharon, CEO

Yes. As I mentioned in the script, we have a few opportunities. Some of them are very progressed, securing - again, we are securing warehouses and logistics centers worldwide, and this is a vertical that is going very well.

Ken Liddy, Analyst

I understand your backlog isn't going to be quite what it was when you were Magal, but how is the backlog comparing, or pipeline of orders comparing this year compared to last year's same time or last quarter at the same time?

Dror Sharon, CEO

Well, it's a pretty stable backlog. Compared to Magal, Magal was a project company or project division, and you had the backlog for Europe or sometimes more. Since the turnaround between getting APO until the fulfillment can vary between a week and days up to two, three months. So, backlog is not a problem that’s too important now. More important is the pipeline. The pipeline is very strong today; the way we see it, and hopefully we'll be able to grow it and transfer it to real sales.

Ken Liddy, Analyst

And as far as containing costs, is there anything that you can do besides grow revenue to offset some of the cost increases? I understand you're raising prices a bit. Are you confident that you'll be able to return to positive EBITDA in coming quarters?

Tomer Hay, CFO

Again, for the operation, so the company, Senstar itself, the EBITDA is very nice. As I mentioned, it was around 20%. Gross margin is above 60%. We are targeting to keep it above 60%. And again, as I said, we don't see a major hit due to material shortage, because we are managing it very tightly with our suppliers and subcontractors. It looks like, again, nothing is stable today, but it looks like we can support our 2022 targets as we see today.

Ken Liddy, Analyst

Okay. Thanks for taking my calls.

Operator, Operator

There are no further questions. I would like to turn the floor over to Dror Sharon for closing remarks.

Dror Sharon, CEO

Thank you. On behalf of the management of Senstar, I would 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 and keep safe. Thank you. Bye-bye.

Operator, Operator

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