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Magal Security Systems (MAGS) Message Board

  • bengrahamvalueinvestor bengrahamvalueinvestor Nov 6, 2007 12:39 PM Flag

    Conference Call

    Ehud. Good day, everyone, and welcome to our third quarter, nine months 2007 results conference call. I would like
    to thank you for your continued interest in Magal and for joining us on this call.
    This has been a very interesting and challenging quarter. We have continued to generate revenue growth in new continents,
    while continuing to execute on our three core growth drivers. The first one is acquisition activity. I will elaborate later. The
    second is increasing marketing activities in new geographic areas and participating in more and more tenders in new regions
    worldwide. The third (inaudible) is large scale integration projects.
    Regarding the acquisitions we've accomplished this quarter. We have completed three major milestones in the Company's
    expansion strategy and acquired a European integration company. The acquisition was completed in August and has contributed
    very much to our results this quarter. Magal has a strong track record of post-merger integration, and we expect this acquisition
    to be successful in contributing and driving our business in quarters and years to come.
    This acquisition is in line with our strategic focus and vision, meaning it will strengthen our position in full integration projects,
    (inaudible) in our day-to-day business, as we participate in more and more tenders for security integration projects in different
    places, and in new regions where we had limited success in the past.
    This quarter we also executed on our second growth driver, expanding our participation in tenders for projects. We announced
    about several projects, which include our innovative video solutions DreamBox and FORTIS. Regarding the FORTIS, I am pleased
    to say that the system now has more than 40 installations in more than 20 cities in Israel and 10 installations throughout Europe,
    with more and more demand for this kind of solution.
    We recently announced than an order has been removed from our backlog. While this is unfortunate, we would like to note
    that no expense has been incurred in the quarter on account of this transaction. We believe that this customer will do business
    with us in the future.
    Regarding increasing marketing activity in new geographical areas, this quarter we intensified our efforts to target integration
    projects worldwide with many of the tenders we are currently studying, including the range of our products. We are looking
    forward to announce some of them in coming months.
    Now, the quarter. This was a strong quarter in terms of organic growth and continued product innovation, ending the quarter
    with a higher backlog than last quarter. Revenues for the quarter include strong revenue generation from North America
    customers. This quarter [also had] several one-time effects, which pushed down margin, driving us to (inaudible) to a net loss.
    An interesting factor was an order of several million dollars for a strategic site for the Israeli government. We believe that stressing
    our success with this particular client will benefit us in the future, and is in line with our long-term vision. (Inaudible) is at a very
    low gross margin and as such affected throughout our financial statement, driving down the margin (inaudible).
    The second factor was several one-time exceptional charges recorded this quarter, which Raya will elaborate on in a few
    moments. These charges altogether had a negative impact of roughly $1.5m on our results.

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    • Looking ahead, we continue to execute on our three main growth drivers and levering our recent acquisition, intent to further
      grow and expand our presence to new geographies and regions with our broad solution offering. As noted, we ended the third
      quarter with a higher backlog compared to the last quarter and, together with several additional orders in the pipeline, we
      expect 2007 to be another year of growth over 2006 in terms of revenues, and when excluding the one-time charges also in
      terms of profit.
      Now, I would like to turn over the call to Raya Asher, first of all, to review the third quarter financial results. Raya, please.
      Raya Asher - Magal Security Systems - VP Finance & CFO
      Thank you, Izhar. I will now provide you with a summary of the results. You can find the results in more detail in the press release
      we issued earlier today.
      [Before the P&L], I would like to point out that this quarter our results were affected by a few one-time charges, which are not
      indicative of our ongoing performance and goals. As [our document] states, we would relate to both GAAP and non-GAAP
      figures, which exclude these charges.
      The non-GAAP financial measures exclude the effect of one-time post-employment benefit charge relating to our retiring
      Chairman, and the provision for final tax assessments for prior years. We believe that non-GAAP financial measures are the
      principal indicators of the operating and financial performance of our business. These eliminated charges are not part of the
      day-to-day business or reflective of core operational activities of the Company. Management uses these non-GAAP financial
      measures as a basis for strategic decisions, forecasting future results and evaluating our performance. A full reconciliation
      between our GAAP and non-GAAP results is available in our earnings release published earlier.
      In addition to these charges, this quarter we also suffered from the substantial weakening of the U.S. dollar against two of our
      main currencies, the Israeli shekel and the Canadian dollar.
      Let me also remind you that the third quarter results include the consolidation of our recently acquired European company as
      of September 1.
      Revenue for the third quarter was $21.9m, a substantial 35% increase over the third quarter last year and 46% higher than the
      second quarter of this year. Revenues for nine months totaled $51.9m, which is a 17% increase compared to $44.5m in the same
      period last year.
      Let me now provide you with the breakdown of our revenues on a geographic basis for the nine months. Israel represented
      21%, North America 26%, Europe 24% and the rest of the world 30%.
      Gross profit for the third quarter was $7.9m, up by 15% from $6.9m and up by 20% compared to $6.6m in the second quarter
      of 2007.
      Gross margin for the third quarter was 36.1%, compared with 42.6% in the third quarter of 2006 and 44.1% in the second quarter
      of 2007. This lower gross margin was the result of the special and prestigious project for the Israeli government which bears a
      low margin, as Izhar explained earlier.

    • Operating income, including that charge, was $95,000. Operating income on a non-GAAP basis, which excludes this charge,
      totaled $1.1m compared to $1.2m operating income in the third quarter of 2006, a 39% sequential increase over the $761,000
      operating income in the second quarter of 2007.
      Operating margin for the quarter, excluding the one-time benefit charge, totaled 4.8%, compared to 7.6% in the third quarter
      last year and 5.1% in the second quarter. As noted, the margin was affected by the low-margin order to the Israeli government.
      Operating income for the nine months, excluding the charge, was $2.6m or 4.9% operating margin, up 9% compared to $2.4m
      or 5.3% operating margin in the same period last year. Operating income for the nine months, including the one-time benefit
      charge this quarter, totaled $1.6m.
      Financial expenses for the third quarter totaled $981,000, which includes approximately $700,000 of currency exchange losses
      due to the weakening of the U.S. dollar by approximately 6% against each of the new Israeli shekel and the Canadian dollar.
      Compared to the third quarter last year, by comparison, in the third quarter last year financial expenses totaled $260,000.
      Taxes on income for the third quarter of 2007 totaled $749,000, and included a tax provision for final tax assessments in the
      amount of $0.5m relating to the years 2001 to 2004. Net result for the quarter was therefore affected by the one-time
      compensation benefit as well as the tax provisions, causing us to present a net loss of $1.6m.
      Non-GAAP net loss, excluding the one-time benefit charge and tax provision, totaled $367,000. The non-GAAP net loss still
      includes the impact of the weaker dollar, which increased our financial expenses by approximately $700,000, compared to
      $623,000 net income in the third quarter of 2006 and a net income of $342,000 in the previous quarter. Diluted loss per share
      was $0.16 compared to diluted earnings per share of $0.06 in the third quarter last year.
      Net loss for the nine months, including the one-time charges in the third quarter, totaled $1m compared to a $1m net income
      in 2006. Diluted loss per share for the nine months totaled $0.10, compared with diluted earnings per share of $0.10 last year.
      Turning to the balance sheet, cash, cash equivalents, marketable securities and bank deposits as of September 30 were $27.2m.
      And now I would like to open the call for questions. Operator?

    • Gary Markoff - Smith Barney - Analyst
      Good morning, everybody. Could you break down the annualized number of the acquisition? You said that there was one month
      that contributed to the third quarter. What would the annualized number be? So what was the number you contributed?

      Izhar Dekel - Magal Security Systems - CEO
      You know, concerning the breakdown of the acquisitions, you know that we are not providing [any kind] of a breakdown of
      any certain activity of the acquisition in general. But we can say that it contributed a few millions to the third quarter revenue
      and we believe that the main contribution will be 2008/2009.
      Gary Markoff - Smith Barney - Analyst
      Has the quarter come in smoothly over the quarter, month to month to month, or is it back-end loaded? I am trying to calibrate
      here. You are saying a few million. I am going to define it as three, or you would have said it was a couple. If you say it's a few
      million, that leads you to the potential that it's in the range of $9m a quarter. That would be an enormous contribution to the
      Company.
      Izhar Dekel - Magal Security Systems - CEO
      It's very difficult now to judge the meaning of the contribution. We will say [out] in advance, but what I can -- what I told you,
      how much about it's going to be. This quarter, we believe it will make a much more -- will contribute in 2008/2009. And as I
      said, and say again, it's very difficult to estimate now how it will develop every quarter.
      Gary Markoff - Smith Barney - Analyst
      And the normal profit margin for this company, the acquired company, versus what Magal has been doing historically, the gross
      margin?
      Izhar Dekel - Magal Security Systems - CEO
      Yes. The gross margin in this company historically is similar to our normal gross margin with our financial statement, maybe a
      little bit less because it is more an integration company but it's hard to say.
      Gary Markoff - Smith Barney - Analyst
      Well, that could be huge then. Okay. You made a comment that the order that was removed from backlog announced last week,
      that you will do business with -- they will do business with us in the future. Does that mean that particular order, or the entity
      that was going to do business will do some other business? It was very unclear what the designation of the not duly authorized
      meant, the specific order. Could you give us some clarification there?
      Izhar Dekel - Magal Security Systems - CEO
      We are talking about other orders, other business with the same client.
      Gary Markoff - Smith Barney - Analyst
      Okay. So you are saying that the order for $8m is not likely to come back with additional signatures to become duly authorized?

      • 1 Reply to bengrahamvalueinvestor
      • Izhar Dekel - Magal Security Systems - CEO
        That order is not now on the agenda.
        Gary Markoff - Smith Barney - Analyst
        Could you give us any other additional information about what happened?
        Izhar Dekel - Magal Security Systems - CEO
        In the later stage it was somehow not a problem from the client side. It was not a problem with authorization. In the company
        that is [definitely] why we took it off.
        Gary Markoff - Smith Barney - Analyst
        Okay. Could you talk a little bit about what's in the pipeline?
        Izhar Dekel - Magal Security Systems - CEO
        PipeGuard or pipeline?
        Gary Markoff - Smith Barney - Analyst
        In the pipeline. You can talk about PipeGuard if you wish.
        Izhar Dekel - Magal Security Systems - CEO
        Regarding PipeGuard, we started normally (inaudible) months, which might be interesting. Regarding the pipeline, I said that
        the backlog today is better than the backlog last quarter end, meaning we improved our backlog.
        Gary Markoff - Smith Barney - Analyst
        Can you give us some line of sight in terms of what may or may not be on the horizon with regard to PipeGuard projects?
        Izhar Dekel - Magal Security Systems - CEO
        Regarding the PipeGuard, we are still in negotiation with a few big oil companies to testing, to installing it. But it takes much
        longer than it should. We are under -- we are in the negotiation process with three different oil companies, big oil companies
        all over the world but it takes more time than we expected.
        Gary Markoff - Smith Barney - Analyst
        Okay. Could you tell us anything about the special project you did for Israel that showed up in this quarter?

    • Izhar Dekel - Magal Security Systems - CEO
      A little bit about it. It [was a very, very big] project for us. We decided -- we before the tender decided -- the management decided
      to tender to this project in a very low margin because we see the potential. We see the importance to be in connection with
      that particular client and that's the reason we decided to take this project in a lower margin [circle].
      Gary Markoff - Smith Barney - Analyst
      Okay. Do you expect to do any additional ones based on this particular order?
      Izhar Dekel - Magal Security Systems - CEO
      I hope so but not in the same margin, not the same margin. (Multiple speakers) sorry. That margin was a penetrating project
      which was very important for us from a strategic point of view, and that's the reason why we set it so.
      Gary Markoff - Smith Barney - Analyst
      Okay. Could you give us any update on what's happened with Smart?
      Izhar Dekel - Magal Security Systems - CEO
      Smart, first, the customer is positive. From a profit point of view, we are now [giving] some very small loss and we continue to
      continue the sales projection. They are interesting for investors to buy their activity and we will see what it will be.
      Gary Markoff - Smith Barney - Analyst
      Okay. And could you go back and review what you said on FORTIS? I wrote down that you said you are now in 20 cities. That
      doesn't seem logical, to me, that you would be up to that number. What did I miss?
      Izhar Dekel - Magal Security Systems - CEO
      I said it was 40 installations of FORTIS, with more than 20 cities in Israel now is protected with that system.
      Gary Markoff - Smith Barney - Analyst
      20 cities in Israel have FORTIS?
      Izhar Dekel - Magal Security Systems - CEO
      Sorry?
      Gary Markoff - Smith Barney - Analyst
      20 cities in Israel have FORTIS?

    • Izhar Dekel - Magal Security Systems - CEO
      Yes. 20 cities in Israel is protected with it. [Generally speaking], part of them are big installations, part of them are small towns.
      It's not only (inaudible) of cities. And we continue to expand our activity with that system. There is a big demand. There is a
      strong demand to that system of command and control in many -- and our penetration is very, very wide (inaudible) system.
      Gary Markoff - Smith Barney - Analyst
      And what's happening on the international front with regard to FORTIS? You have made some comments of a potentially large
      order in Europe or Eastern Europe.
      Izhar Dekel - Magal Security Systems - CEO
      I said also that in Europe is about 10 installations in Europe. It's just a system that, for example, in one of the -- in the airport in
      Bucharest and the other one is in Italy on an oil company, and others in East Europe and West Europe. And the bigger of the
      clients are very, very pleased with that system.
      Gary Markoff - Smith Barney - Analyst
      And a last question, then I will jump back into queue. There was some article recently talking about MAGS protecting the U.S.
      water supply in various areas. Could you update us on that?
      Izhar Dekel - Magal Security Systems - CEO
      We released, six months ago, something like that, one announcement about (inaudible) which is protected by our system.
      Meanwhile, there are no -- there's a big potential for that, but meanwhile there are not any new installations with that client.
      Gary Markoff - Smith Barney - Analyst
      Okay. Thanks a lot.
      Izhar Dekel - Magal Security Systems - CEO
      Thank you very much. Have a nice day.
      Operator
      Thank you, sir. The next question is from Mark Diker from Diker Management. Mark, go ahead.
      Mark Diker - Diker Management - Analyst
      Hi, good morning. On the acquisition, I want to go back, the line of questioning from your prior caller, trying to get a sense of
      the magnitude. And I know you talk about '08 and '09 that you will see the real effects of it. Can you give us a little bit more
      clarity on the annualized run rate, or is it a very lumpy business and that's why you are not able to do that? Is it going to be $7m
      to $10m? Should we expect $7m to $10m of incremental revenue? Should we expect $1m to $5m, $1m to $4m over the course
      of the next 12 months?
      Izhar Dekel - Magal Security Systems - CEO
      No, the figures are not providing the figures breakdown regarding certain activity. What I can tell and what I told the caller
      before, we expect that acquisition will contribute meaningfully to our activity in 2008/2009. It is very difficult now to estimate
      exactly how much. But when we acquired this company, we made our calculations very carefully and we came to the conclusion
      it will contribute, as I said before, it will contribute not much, so not immaterial but meaningful to our revenue in the coming
      years (inaudible).
      Mark Diker - Diker Management - Analyst
      I would imagine meaningful would mean north of 20%. Is that fair?
      Izhar Dekel - Magal Security Systems - CEO
      You are always pulling me to a percentage.
      Mark Diker - Diker Management - Analyst
      Well, I am just trying to understand that magnitude, I mean meaningful.
      Izhar Dekel - Magal Security Systems - CEO
      No, less.

    • Mark Diker - Diker Management - Analyst
      Less than 20%. Okay. Thanks. That's helpful. And then, in terms of strategy going forward, we've seen you working with a lot of
      system integrators and oftentimes, when they are taking multiple bids, customer [differentiators] and what not is taking multiple
      bids from different system integrators. You are kind of a -- the [perimeter front team] or the technology of choice for your
      category, and you are part of every bit. Now you are making an acquisition where you are actually essentially owning one of
      the integrators.
      The first question, I guess, is that -- could that potentially create a conflict when you are trying to supply to maybe other
      competing bids and bidders in a situation? And what is the strategy of the Company going forward, to make more of these
      types of acquisitions or was this just a one-off?
      Izhar Dekel - Magal Security Systems - CEO
      I will start with the second question. In general, yes, one of our strategies is to acquire more companies in our business. Regarding
      the third question, the point you make, the risk of conflict between (inaudible) producer and a competitors' company, it might
      exist but not in that case. In that case, the client company -- integration company which is still in an area which you don't see
      such a conflict like that can be expected. And because of that, I don't see that risk of conflict between the integration and the
      product activity.
      Mark Diker - Diker Management - Analyst
      Okay. So you say acquire more companies in our business. I wouldn't say your business is a technology provider, not necessarily
      a system integrator, you acquired a system. It seems, from my understanding, you acquired a system integrator. That helps you
      deploy your products. Do you expect to acquire more integrator types like this?
      Izhar Dekel - Magal Security Systems - CEO
      We are looking for companies, also products and also some integration companies, and prepared in which area and what exactly
      type of integration company. With that acquisition, we also can increase our products to be sold to certain integration companies.
      Mark Diker - Diker Management - Analyst
      Okay. And did you - and maybe I missed it - did you state what you paid for the company and whether it was cash or stock?
      Izhar Dekel - Magal Security Systems - CEO
      We paid $6.8m in cash.
      Mark Diker - Diker Management - Analyst
      And is there an earn out?
      Izhar Dekel - Magal Security Systems - CEO
      Yes. There is an earn out, yes.
      Mark Diker - Diker Management - Analyst
      How big is the earn out?
      Izhar Dekel - Magal Security Systems - CEO
      15%.
      Mark Diker - Diker Management - Analyst
      15% of future revenues?
      Izhar Dekel - Magal Security Systems - CEO
      Yes. (Inaudible).
      Mark Diker - Diker Management - Analyst
      Profits, not in revenues?
      Izhar Dekel - Magal Security Systems - CEO
      Yes.
      Mark Diker - Diker Management - Analyst
      For two years?
      Izhar Dekel - Magal Security Systems - CEO
      Five.
      Mark Diker - Diker Management - Analyst
      Okay. And then, in terms of we talked about the pipeline, can you talk specifically about the U.S.? And for the past couple of
      years we've been talking about the low amount of penetration in perimeter security around airports and other types of
      installations, but specifically airports and we've talked about ports as well. And then we've been waiting for funds to be released
      from the government to either local governments or national governments to fund those. Are we starting to see more RFPs
      and more activity in that front or is it still not happening?

    • Izhar Dekel - Magal Security Systems - CEO
      Regarding airports, as far as we know, all the airports now, not all, but we don't measure activities regarding perimeter security
      at airports all over the U.S. Announcements what we've released is about $1.5m. We have said in the U.S., not overall. But that
      is for other activities, the (inaudible) activities but not for airports. Regarding the airports and other security areas in the U.S.,
      we still don't see big gaps from our side in that market.

    • Mark Diker - Diker Management - Analyst
      So you still don't see the RFPs coming through?
      Izhar Dekel - Magal Security Systems - CEO
      No, I said -- we've basically said we are making a lot of effort, a lot of penetration effort, to get into that market. We'll see. And
      it's not steps in (inaudible) and in new clients and so on. But for the first point, we still don't see the big jobs. We believe in 2007,
      2008 and '09 we can reach to that target in tripling our sales in the U.S.

    • Izhar Dekel - Magal Security Systems - CEO
      No, I said -- we've basically said we are making a lot of effort, a lot of penetration effort, to get into that market. We'll see. And
      it's not steps in (inaudible) and in new clients and so on. But for the first point, we still don't see the big jobs. We believe in 2007,
      2008 and '09 we can reach to that target in tripling our sales in the U.S.
      Mark Diker - Diker Management - Analyst
      Okay, got it. Thank you.
      Operator
      Thank you, sir. The next question is from Ken Liddy from Wachovia Security. Ken, go ahead, please.
      Ken Liddy - Wachovia Securities - Analyst
      Hi, how are you? I wanted to get back to this prestigious project you're working for the Israeli government in the quarter. Is that
      project ongoing?
      Izhar Dekel - Magal Security Systems - CEO
      Yes, that project is ongoing and we'll accomplish it in the coming two or three quarters.
      Ken Liddy - Wachovia Securities - Analyst
      And could you give us an idea of how large of an order this is in revenue?
      Izhar Dekel - Magal Security Systems - CEO
      Yes. The order is between $6m to $7m.
      Ken Liddy - Wachovia Securities - Analyst
      And is there a sensitive nature of it that is the reason you didn't announce it?
      Izhar Dekel - Magal Security Systems - CEO
      We announced now that project. We announced the (inaudible) with every project we do.
      Ken Liddy - Wachovia Securities - Analyst
      Okay. What was the order, specifically?
      Izhar Dekel - Magal Security Systems - CEO
      Yes. What we also announced about the project, you will read it from the announcement, a turnkey project to protect several
      military bases in Israel.
      Ken Liddy - Wachovia Securities - Analyst
      Okay, okay. Now, with regard to your acquisition, could you give us a better idea of what areas that integrator specifically serves
      as far as region? Does it serve Asia? Does it serve Europe, Africa?

    • Izhar Dekel - Magal Security Systems - CEO
      That is a very interesting question. But when we announced about the acquisition, we haven't had information -- more information
      than it is a European company, integration European company. And therefore, from this [message] we cannot elaborate about
      the areas of activity.
      Ken Liddy - Wachovia Securities - Analyst
      Can you give us any idea of how much revenue that company did in 2006 or 2005?
      Izhar Dekel - Magal Security Systems - CEO
      When we due diligenced that company, we had all information of the past record but we are not providing the details. But you
      can understand that when we considered to make the acquisition, we checked very, very thoroughly all the details on the past
      record.
      Ken Liddy - Wachovia Securities - Analyst
      Now, in the quarter your backlog increased, so obviously you have orders of over -- you've booked order of over $21m, $22m.
      Could you give us an idea if it was closer to $30m, closer to $25m, as far as booked orders in the quarter?
      Izhar Dekel - Magal Security Systems - CEO
      As far as the backlog, it's now higher than it was compared to the last quarter. But we are not providing figures on the sales as
      of today.
      Ken Liddy - Wachovia Securities - Analyst
      Was it substantially higher or just higher?
      Izhar Dekel - Magal Security Systems - CEO
      Is it higher? Yes. [Yes, large deals].
      Ken Liddy - Wachovia Securities - Analyst
      And as far as your work on the seam line fence, I understand that work has been halted for the remainder of the year and that
      will probably pick up in a big way in 2008. Is that what you're hearing or what I'm reading is wrong?
      Izhar Dekel - Magal Security Systems - CEO
      Can you repeat, please? I didn't understand the question.
      Ken Liddy - Wachovia Securities - Analyst
      I understand that there's been a slowdown in the work in the seam line fence. Is that true?
      Izhar Dekel - Magal Security Systems - CEO
      Regarding the seam line, it's interesting. The seam line slowed down because of the budget issue, and only because of the
      budget issue. The foundation is ready. It's a very powerful system to install. And meanwhile, [it's because] of the budget. As far
      as we understand, as far as we know, in a month's time or even less the budget issue will be solved and we believe then we can
      continue with that project. All together, around 200 -- about 251 kilometers will be made to be installed. And we believe a big
      portion of that remaining section of the seam line will be ours.

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