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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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    • THANK YOU X 100!!!

    • Thanks, Ben. Fantastic job on the transcripts of conference!
      Must confess, although I listened to the call, I still find their accents a bit tricky, so your work really helps to clear up some points.
      On balance, a very encouraging report!

    • Wow! Thank you.

    • Gary Markoff - Smith Barney - Analyst
      Yes. I just wanted to clarify a comment. I'm sure you misspoke it, or perhaps I misheard it, in answer to Ken Liddy's question
      regarding 2008 being better than 2007. I thought I heard you say that you expect 2007 to be better than 2008, but I'm not sure
      you meant it. Could you clarify, please?
      Izhar Dekel - Magal Security Systems - CEO
      Yes, we made a mistake (inaudible) saying that it was a mistake. But we expect 2007 will be better than 2006. If I said 2008, it's
      my mistake.
      Gary Markoff - Smith Barney - Analyst
      And you mean to suggest that 2008 will be better than 2007, correct?
      Izhar Dekel - Magal Security Systems - CEO
      Yes, absolutely correct.
      Gary Markoff - Smith Barney - Analyst
      Okay. Thank you.
      Izhar Dekel - Magal Security Systems - CEO
      Thank you. Have a nice day.
      Operator
      There are no further questions at this time. Mr. Dekel, would you like to make a concluding statement?
      Izhar Dekel - Magal Security Systems - CEO
      Ladies and gentlemen, on behalf of the management of Magal, I would like to thank you all for your continued interest in our
      business. We look forward to speaking to you again in three months' time. Have a good day to everybody.

    • Jeff Kessler - Lehman Brothers - Analyst
      Okay. I may have missed something in your opening remarks, one final question. That is your video leasing business in the U.S.,
      what point are -- where are you with that financially?
      Izhar Dekel - Magal Security Systems - CEO
      Financially, the cash flow is positive. Regarding the profit and loss, we're about practically breakeven but (multiple speakers).
      Jeff Kessler - Lehman Brothers - Analyst
      You're at breakeven now?
      Izhar Dekel - Magal Security Systems - CEO
      Almost breakeven. Very small costs. That is almost breakeven. Maybe in a few months it will be at breakeven.
      Jeff Kessler - Lehman Brothers - Analyst
      Okay. But it is now cash flow positive?
      Izhar Dekel - Magal Security Systems - CEO
      Yes, positive cash.
      Jeff Kessler - Lehman Brothers - Analyst
      Okay. All right. Thank you very much.
      Izhar Dekel - Magal Security Systems - CEO
      Thank you. Have a nice day.
      Operator
      Thanks very much, sir. We now have a follow-up question from Gary Markoff from Smith Barney. Go ahead, sir.
      Gary Markoff - Smith Barney - Analyst
      Yes. I just wanted to clarify a comment. I'm sure you misspoke it, or perhaps I misheard it, in answer to Ken Liddy's question
      regarding 2008 being better than 2007. I thought I heard you say that you expect 2007 to be better than 2008, but I'm not sure
      you meant it. Could you clarify, please?

    • Jeff Kessler - Lehman Brothers - Analyst
      Right. So even though you're getting involved in much more -- the percentage of business moving towards projects, you believe
      you can keep the gross margin within a couple of percentage points of where it is?
      Izhar Dekel - Magal Security Systems - CEO
      Yes, I believe so. And based on our past experience, I'm not only pretty sure, I'm sure we'll succeed to keep about the same
      margin. Of course, this will sometimes, regarding the last project we executed, the gross margin sometimes might (inaudible).
      But in general, our number we are working is to keep the same gross -- the same level of gross margin.
      Jeff Kessler - Lehman Brothers - Analyst
      Okay. A question on DreamBox. You just received a contract in DreamBox and by itself, when you look at it, it's a very, very
      interesting product because it does so much in a one-box system. However, the trend in video surveillance and security
      surveillance has been moving towards open systems, open architectures that can actually be interoperable with other systems,
      so that software writers and others can add to it. Obviously, that has not been the strategy up till now with DreamBox. You've
      kept it proprietary. You've kept it so that basically all of the features and functions are unique to Magal.
      And I guess my question to you is are you at a point at which you're willing to -- or the Company is willing to start opening up
      DreamBox a little bit and sharing some of the code? Will writers feel that it can be a bigger-selling product? Or is there technology
      in it that is so specific that you think that you can continue to sell it to whoever you're selling it to that you don't ever intend to
      open up and make it an open architecture video system?
      Izhar Dekel - Magal Security Systems - CEO
      Well, Jeff, it's very interesting to see the different approach in between U.S. and Europe. Most of our -- not just in Europe but in
      non-U.S. countries. Most of our DreamBox installation is out of U.S. and in that area it's the idea of DreamBox to include in one
      box so many features is very attractive. In the U.S. they prefer and are defining a more open arch -- so difficult to pronounce it,
      architecture, open architecture. But we in Magal, we respect that fact and we are working now to develop a product which will
      be much more open and will include, in certain cases, features to [simplify it] that might be with response to the market demand
      in the U.S.
      Jeff Kessler - Lehman Brothers - Analyst
      So if you could just recap here, the proprietary DreamBox product that you have now will be continued to be sold to who, to
      the Israeli army or various airports that just want a specific product? The more open product will be marketed to who?
      Izhar Dekel - Magal Security Systems - CEO
      The DreamBox as of today we are selling to many clients all over, also in the U.S. but in other countries it's much more acceptable,
      much more popular, that kind of concept. In the U.S. sometimes, if they prefer a different concept of product, that -- also to our
      clients, potential clients in Europe which prefer the concept of the DreamBox. It depends what is the application and what's
      the client, exactly what they're doing, but we will continue to sell both. We'll continue to sell the DreamBox and we'll develop
      the new generation which will be more open.

    • Izhar Dekel - Magal Security Systems - CEO
      Hello, Jeff.
      Jeff Kessler - Lehman Brothers - Analyst
      A question on your margin, on your gross margin, and the mix as you go forward. As you've got a lot of revenue with a changing
      margin mix, I'm wondering if that has to do with the mix of the way your business is shifting towards systems integration and
      away from just specific products. Systems integration can have, not always but can have, lower gross margins. And should we
      be used to seeing some larger revenue numbers going forward with a little bit less of a gross margin, as you get into more
      project management and away from selling just specific products?
      Izhar Dekel - Magal Security Systems - CEO
      Hello, Jeff. I missed you, missed your question. [I have to now adjust to the] -- in general, you are correct. When we are doing
      more projects, more interesting projects, we expect that the gross margin will decrease. Meanwhile, till now we succeeded to
      keep the same margin, our normal margin, even when we're entering into more and more projects. I believe that we will continue
      to keep our margin about the same level as we are seeing today. What exactly, one doesn't know. In general, we'll continue and
      we will succeed to keep the same margin for the future.

    • To give us a better idea, I guess, of what type of impact you think acquisitions would mean to you, looking beyond 2008, looking
      at 2009, do you think between organic growth of Magal up until this acquisition along with this acquisition will be enough to
      get the Company to $100m in revenue or close to $100m of revenue?
      Izhar Dekel - Magal Security Systems - CEO
      I believe so, and even above.
      Ken Liddy - Wachovia Securities - Analyst
      Okay. That's helpful. And are there any new items in the pipeline that you could share with us in terms of what you're seeing
      out there as far as potential projects for you to be working on?
      Izhar Dekel - Magal Security Systems - CEO
      Before we have a solid order in our hands, we do not elaborate about projects in the pipelines. But there are a few interesting
      projects and, as I said in my opening, I hope in the coming few months to announce about a few projects that will help (inaudible)
      everything.
      Ken Liddy - Wachovia Securities - Analyst
      With regard to the order that you put back, the $8m order, you've mentioned that there is other potential projects that you
      would be working with that customer. Do those potential projects equal, or around the same amount of money, $8m? Or do
      you think that relationship could be much larger or smaller?
      Izhar Dekel - Magal Security Systems - CEO
      With that particular client, we are talking about smaller projects, not the same size but more than one.
      Ken Liddy - Wachovia Securities - Analyst
      And I might have missed it, what -- did someone jump the gun on the customer? Where did they, I guess, screw up when they
      booked the order?
      Izhar Dekel - Magal Security Systems - CEO
      No. What I -- I do not know what order you said before. It was something only for figures, the authorization. That client was the
      reason why we [dropped] that order.
      Ken Liddy - Wachovia Securities - Analyst
      Now, looking to the fourth quarter and first quarter of next year, do you expect revenues to increase year over year, profits to
      increase?Izhar Dekel - Magal Security Systems - CEO
      I expect, as I said before, 2007 will be better than 2008. The quarters -- the last quarter in Magal is traditionally stronger. Also, I
      believe it will be continued to the coming quarter in 2008.
      Ken Liddy - Wachovia Securities - Analyst
      Do you -- is this $20m revenue mark something that you think you can sustain?
      Izhar Dekel - Magal Security Systems - CEO
      Yes.
      Ken Liddy - Wachovia Securities - Analyst
      Okay. Well, I'll get back in the queue. Thank you.
      Operator
      Thank you, Mr. Liddy. (OPERATOR INSTRUCTIONS). The next question is from Jeff Kessler from Lehman Brothers. Jeff, go ahead.
      Jeff Kessler - Lehman Brothers - Analyst
      Thank you. Hello there.

    • 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.
      Ken Liddy - Wachovia Securities - Analyst
      And could you quantify that in dollars? Is that $20m, $25m or $5m to $10m?
      Izhar Dekel - Magal Security Systems - CEO
      It's something between $30m to $40m. It depends, solely depends by the other conditions, but it's something between $30m
      to $40m.
      Ken Liddy - Wachovia Securities - Analyst
      And you would expect that to be completed between the end of this year and 2008 or 2009?
      Izhar Dekel - Magal Security Systems - CEO
      I believe today, 2000 -- look, the government -- what the government has declared, what the government is wanting to do it
      as of yesterday, not for tomorrow. But of course the budget issue has delayed it. It will be now 2008 and maybe will remain
      [start to] 2009.
      Ken Liddy - Wachovia Securities - Analyst
      Understood. Now, in the past you've talked about some large projects in the pipeline. You used the phrase, "several hundred
      million dollars of potential projects." Could you give us any specific updates? Are any of these closer to being at the bid process,
      or the timing that we could expect to see or not see when these come to fruition?
      Izhar Dekel - Magal Security Systems - CEO
      Yes. We are in very sensitive negotiation contacts with the new contracts in new regions. We are working, we are working. It
      takes time and the projects [start again]. We admit bigger and bigger projects. We are not in negotiation but we are in contact.
      We have submitted the tenders. We are bidding with that kind of project. The big largest projects before, that big number is
      remaining. The big [numbers] remain even intrigued by our last acquisition, which now involves us in many other big projects.Ken Liddy - Wachovia Securities - Analyst
      To give us a better idea, I guess, of what type of impact you think acquisitions would mean to you, looking beyond 2008, looking
      at 2009, do you think between organic growth of Magal up until this acquisition along with this acquisition will be enough to
      get the Company to $100m in revenue or close to $100m of revenue?
      Izhar Dekel - Magal Security Systems - CEO
      I believe so, and even above.
      Ken Liddy - Wachovia Securities - Analyst
      Okay. That's helpful. And are there any new items in the pipeline that you could share with us in terms of what you're seeing
      out there as far as potential projects for you to be working on?
      Izhar Dekel - Magal Security Systems - CEO
      Before we have a solid order in our hands, we do not elaborate about projects in the pipelines. But there are a few interesting
      projects and, as I said in my opening, I hope in the coming few months to announce about a few projects that will help (inaudible)
      everything.
      Ken Liddy - Wachovia Securities - Analyst
      With regard to the order that you put back, the $8m order, you've mentioned that there is other potential projects that you
      would be working with that customer. Do those potential projects equal, or around the same amount of money, $8m? Or do
      you think that relationship could be much larger or smaller?
      Izhar Dekel - Magal Security Systems - CEO
      With that particular client, we are talking about smaller projects, not the same size but more than one.

    • 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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