Roundhill Magnificent Seven ETF
Q4 2016 Earnings Call Transcript

Published: 30 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Magal’s First Quarter 2017 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the Company’s press release. If you have not received it, please contact Magal’s Investor Relations team at GK Investor and Public Relations at 1646-688-3559 or view it in the News Section of the Company’s Web site www.magal-s3.com. I would now like to hand the call over to Mr. Gavriel Frohwein of GK Investor Relations. Mr. Frohwein, would you like to begin, please?

[Gavriel Frohwein:]

Yes, thank you, operator. Welcome to Magal’s first quarter 2017 conference call. I would like to welcome all of you to the conference call and thank Magal’s management for hosting this call. With us on the call today are Mr. Saar Koursh, CEO and Mr. Kobi Vinokur, CFO. Saar will summarize the key highlights of the quarter, followed of the quarter by Kobi who will review Magal’s financial performance in the quarter. We’ll then open the call for the question-and-answer session. Before we start, I’d like to point out that this conference call may contain projections and other forward-looking statements regarding future events or the future performance of the Company. These statements are only predictions and Magal cannot guarantee that they would in fact occur. Magal 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 demands 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. And with that, I would like to now hand over the call to Saar. Saar, please go ahead.

[Saar Koursh:]

Thank you, Gavriel. I would like to welcome all of you to our conference call and thank you for joining us today. As you know by now, our first quarter is seasonally weak for us. However, we are happy to report growth in revenue by 14% over the first quarter of last year. We reported an operating loss of $0.9 million, and I’d like to go into the main effects contributing to the loss. We continued our investment in sales and marketing, which amounted to $4.8 million in the quarter. This was in large part due to the reason blustering of our presence in the North American market. We do see some of very strong opportunities in our end markets, especially North America, that we aim to capitalize on. Our sales and marketing investment have led to a growth in our sales pipeline and also include demo installation at strategic customers. We are currently working closely with some very strategic accounts, which own large number of physical sites. Our systems are currently in the testing phase at these customers and we hope to see the fruits of the investment in the coming quarters. Together with our strong balance sheet with over $50 million in net cash, we are very well positioned to invest in our growth on both an organic and inorganic basis. Our bottom line this quarter was affected by a non-cash financial expense, which amounted to $2.4 million. Since its non-cash charge, unrelated to our operation and driven by accounting worlds, Kobi will elaborate on this in a few minutes. Starting from the beginning of 2017, we’ll include the EBITDA metric on our income statement. We see there’s a clear bottom-line number, especially this quarter, which stripped out the volatility from non-cash financial expenses, as well amortization related to the acquisition of Aimetis last year. We believe it will help you better understand our performance in the quarter and provide for better comparisons between quarters. Our EBITDA in the first quarter of 2017 was negative $0.4 million, compared with positive $0.9 million in the first quarter of 2016 without Aimetis. I would like to spend a few moments talking about some of the trends we saw during the quarter in the Far East region we operate. In North America, the first quarter was slower than we have liked. This was particularly because the first quarter given the poor weather in the region, although it tends to be slow. Furthermore, this year, projects and budgets have been delayed as state budget awaits clarity on the federal budget giving the reason exchange in U.S. administrations and priority. However, since this administration see investment in Homeland Security has a high priority, we expect budget to be released an increase in the second half of the year and onwards. In fact, during the first quarter, our sales for the U.S. government for critical sites have increased and we see that the value our products and technologies. With regard to the U.S. southern border project, or Trump’s Wall as it better known, an undisclosed shortlist of around 10 to 20 major integrators that are being considered have been notified. The U.S. government will not release detailed information about the results of the town selection, including the names of the dealer and the exact number of offers who are selected for Phase 2. As a technology provider, we are in ongoing contact with both CBP U.S. Customs and Border Protection and DHS, U.S. Department of Homeland Security, as well as the number of those integrators. Based on our discussion, the current intention of the U.S. government is to split the technology providers into a later process, which is more relevant to us then from the current process, which focus on the actual physical barrier. In Israel, we started walk on the southern border project and business in general in this region is robust. In March, we announced the first order for our RoboGuard system following a rigorous in the field test from Israeli Government customer, representing a strong step up approval. The system in also being evaluated by federal governmental agencies for critical sites perimeter security and we believe we’ll see further orders in the upcoming months. We also announced the sales of purchase orders amounting to $8.5 million for the supply integrator in support of a new innovative border and perimeter protection solution to the Israeli Minister of Defense. The Defense Ministry is the first adopter of our new perimeter technologies, which are outcome for our ongoing R&D efforts. In Africa, we successfully completed the upgrade of the integrated security system in the Gabon for the African Cup of Nations football tournament. In this region, in general, we have received smaller and more varied orders for integrated security solution. In EMEA, Europe and the Middle East, we see a stable business overall. We see some project moving ahead in the second half of the year. We did partnership with major European OEMs signed in the last few months started to show initial sales this quarter, and we expect it to wrap up later this year. And finally, we are expanding our activity in Asia, in particular in India. We signed a cooperation agreement with Dynamatic Technology. This new cooperation aims to meet the market demand for high end security product and solution for critical infrastructure in that region. It also aims to provide combined integrated border management solution to address the challenges in securing India borders. In summary, we are investing in our organic growth through both R&D and our sales and marketing efforts to capitalize on the many opportunities we are seeing, especially in the U.S. We believe we’ll see results in the coming quarters and years. At a same time, we’ll use our strong cash position of over $50 million with zero financial debt to pursue acquisition, which will complement our organic growth. And now, over to you Kobi, please go ahead.

[Kobi Vinokur:]

Thanks Saar. The revenues for the first quarter of 2017 were $14.3 million, up 14% year-over-year. The geographic revenue breakdown for the quarter was fairly evenly spread across all regions as follows; Africa 22%; North America 20%; Israel 17%; Latin America, 15%; Europe, 12%; Asia and the rest of the world, 14%. First quarter gross margin improved to 51.7% of revenues versus 49.6% last year. Operating loss in the quarter was $0.9 million compared with profit of $0.6 million last year. We had a higher level of operating expenses in the current quarter, which as Saar explained, was primarily driven by investment in sales and marketing. Those expenses grew to $4.8 million in the current quarter from $2.6 million in the last year’s first quarter. Financial expenses, net for the first quarter of 2017, were $2.6 million compared with financial expenses of $623,000 in the first quarter of 2016. As I mentioned, this includes a non-cash financial charge of $2.4 million, because there was sharp strengthening of the shekel versus the U.S. dollar. The functional currency of Magal’s Israeli entity is the Israeli shekel and under accounting rules to recognize that include in our P&L, any changes in value of this entity’s monetary assets and liabilities. This includes foreign currency holdings, which in this case are U.S. dollar holdings. Because the U.S. dollar declined in value by 5.5% against the Israeli shekel between the end of 2016 and the end of the first quarter of 2017, we recorded a non-cash financial expense due to the accounting valuation of our cash and short term deposits, which are held mostly in the U.S. dollars. Although this valuation expense reflects the reduction of the cash deposits value in terms of the Israel currency, the original U.S. dollar value of the deposits actually does not change and even increases due to the U.S. dollar interest earned. So we maintain the purchasing power of our cash deposits for the future acquisitions. Net loss in the quarter was $3.7 million or $0.16 per share. Net loss in the first quarter of the year -- over the last year was $0.5 million or $0.03 per share. I note that there was an increase in the number of shares outstanding in the first quarter of the last year due to our rights offering to shareholder in September. EBITDA in the first quarter of 2017 was negative $0.4 million compared to positive EBITDA of $0.9 million in the first quarter of 2016. Cash short term deposits and restricted deposits as of March 31, 2017 was $50.7 million or $2.21 per share versus $52.5 million or $2.29 per share in December 31, 2016. As of March 31, 2017, we have no bank debt in Magal. So that concludes my remarks. We would be happy to take your questions now, operator?

[Saar Koursh:]

On behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business. Have a good day. Thank you.

[Operator:]

Thank you. This concludes the Magal Security Systems first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.