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Edited Transcript of MAGS earnings conference call or presentation 16-Mar-20 2:00pm GMT

Q4 2019 Magal Security Systems Ltd Earnings Call

Yahud Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Magal Security Systems Ltd earnings conference call or presentation Monday, March 16, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett Maas

Hayden IR, LLC - Managing Principal

* Dror Sharon

Magal Security Systems Ltd. - CEO

* Yaacov Vinokur

Magal Security Systems Ltd. - CFO

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Conference Call Participants

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* Dan Weston

* Kenneth Liddy

* Sam Rebotsky

* Stephen Hansel

* Thurman Willis

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Presentation

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Operator [1]

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Greetings, and welcome to the Magal Security Systems Fourth Quarter and Full Year 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas with Hayden IR. Please go ahead, sir.

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Brett Maas, Hayden IR, LLC - Managing Principal [2]

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Thank you, operator. Welcome to Magal's Fourth Quarter and Full Year 2019 Conference Call. I would like to welcome all of you to the conference call, and thank Magal's management team for hosting this call.

With us on the call today is Mr. Dror Sharon, CEO of Magal; and Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review Magal's financial performance of fourth quarter and the full year. We will then open the call for questions-and-answer session. Before we start, I'd like to point out this call -- this conference call may contain projections and other forward-looking statements regarding future events or future performance of the company. These statements are only predictions and Magal cannot guarantee that they will, in fact, occur. Magal does not assume any obligation to update that information. Actual results or results -- or I'm sorry, 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, the unanticipated and unknown effect 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 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 our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirement. You can also refer to our website at magalsecurity.com for the most directly comparable financial measures and related reconciliation. With that, I'd like to hand the call over to Dror. Dror, please go ahead.

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Dror Sharon, Magal Security Systems Ltd. - CEO [3]

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Thank you, Brett. I'd like to welcome all of you to our call, and thank you for joining us today. I just hope that your family and friends are well and everyone is okay with this crisis around us. For 2019, we reported $86.8 million of revenue, achieving a 10%-plus reduction in operating expenses that fueled the 61% in operating income. 2019 EBITDA rose 17% to $8.1 million, resulting in an expansion of EBITDA margin from 7.5% to 9.4%. We maintained an elevated level of revenue in 2019 by offsetting the Latin America contract that did not recur last year, with solid execution of our strategy to expand in new markets and new vertical, along with strong product and software sales. In parallel, we also maintained a high level of backlog, which was the same level as the one we had by the end of 2018.

Excuse me just a moment. Thank you. When I joined Magal in July 2018, I led in varieties of markets and with Magal, macro opportunities to identify the company's capabilities and strength. And from this, we developed a growth strategy to increase revenue and improve profitability. Our team has been executing this strategy to diversify revenue sources, improving growth by expanding our geographic presence with an increased focus on critical vertical market and aligning R&D resources to meet the requirements of those verticals.

We have been improving the operational performance of the business in order to increase cash generation and improve EBITDA margin, key indicators of our business performance that drive shareholders' value. We have made a number of organizational changes, including creating 2 business divisions, which improved the overall structure of the business, facilitating an increase in revenue for new verticals and geographics.

Our performance in 2019 confirms that our strategy to deliver our revenue is working as evidenced by the broad-based 90% growth in the Magal Integrated Solutions Division, excluding the Latin America region and the Senstar Products Division, delivering 9% growth across all regions. The diversification of revenue streams, as evidenced by the addition of new geographics, new customers and consecutive year-over-year growth in the Senstar Products Division has elevated revenue levels from those seen in the years prior to executing this growth strategy.

Our strategy has also been successful in improving margins and client profitability. Gross margin improved in 2019 by 120 basis points, primarily due to the increase in Senstar gross profit as the division software sales have risen, driven by Symphony, our video management solutions software and our enhancement to this most flexible platform.

As disclosed in our last year's results, I mean Q2 nonrecurring expenses item last year, totaling $2.3 million, which did not recur in 2019. With our continuing efforts to achieve operational efficiencies in 2019, we realized a 61% increase in operating income year-over-year. In order to support our future growth, we have been able to consolidate business units and realize cost savings, which we have used to efficiently make new hires to sell to our sales team. We anticipate maintaining operating expenses growth below revenue growth, which will improve profitability as we go. Net income in 2019 was impacted by a noncash foreign exchange expenses and accounting effect we regularly experience due to variance from the currency adjustments, cash balances as in the U.S. dollars currency.

At the end of each period, the changes in currency valuation is recorded as noncash financial expense or income. This adjustment does not affect the actual level of U.S. dollar assets, but has a variable impact on net income, making comparison across reporting period inconsistent. As a result, variance in foreign exchange rate can obscure our profitability performance. For this reason, we use EBITDA and non-GAAP metrics to even out the variable impact of foreign exchange fluctuation and other noncash factors and believe that EBITDA is a better measure of the company's performance.

For 2019, we delivered an outstanding 17% increase in EBITDA, with an annual EBITDA margin of 9.4%. In 2019, we made solid progress in our historical and new geographics, including Kenya, Spain, CIS countries. We had several new wins for our perimeter intrusion detection, the PID technology. Two of these were sizable border protection projects, as well as extensive PIDS installation contract for 2 major international airports. In Spain, we extended our overall solution to include further security with advanced cameras and small sensors at a key seaport. We also won a significant contract with the Israeli military for vehicle-mounted electro-optic system for day and night observation capability.

In terms of vertical markets, in 2019, we made advancement in Oil and Gas, Correction and Critical Infrastructure, including airports. We landed the new contract with a global operator for airports in Armenia. In Southeast Asia, we secured a new contract with a correctional facility.

On the product front, we advanced the Symphony platform, our open software all-in-one solution for video, security and information management with new access control features. Using electronic access control software code that we acquired, our R&D team is in the process of integrating access control capabilities as a module of our existing video management solution platform.

Before I move on to talk about future growth, I'd like to highlight the outstanding performance of the fourth quarter. Gross margin improved in the quarter by 740 basis points to 48%. Operating income increased to $2.9 million compared to $435,000 plus last year, delivering net income of $1.8 million compared to a loss of $100,000 in the last year. As a result, EBITDA in the fourth quarter rose to $3.4 million, an increase of over 160% from the prior year fourth quarter. EBITDA margin was 14.1% of the fourth quarter, up from 4.9% last year. This is a strong finish to the year, especially given the challenging revenue compared with the prior year.

Let me shift my comments to the -- to our own natural growth. We have set ambitious goals, and I want to explain how we plan to achieve them. Recently, we announced new leadership for both business divisions with a mandate to streamline the organizational structure and a focus on 4 key verticals. The new appointments have impressive track record and brings tremendous industry experience. Both will report directly to me, and this new structure will enable us to improve execution and drive our performance globally. Each division has an increased focus on the technology and operate with their own tailored go-to-market strategy. As we leverage our capabilities with the new organizational structure and company directing its resources and growing in 4 key verticals: the Oil and Gas, Logistics, Correctional Institute -- Institutions and Critical Infrastructure. We are approaching those verticals with a twofold strategy to expand sales with tailored security solution features, featuring tech-rich products and software from physical security solution and with the new adjustment solution that leverage core capabilities in each of those verticals. In each of those verticals, we can provide unique solution beyond security. For example, in the Oil and Gas sector, the company currently secured facilities and pipelines using optical fiber, that plays down the pipe business. The fiber gives a high indication of someone who's trying to dig next to it, and can identify if it is person, animal or vehicle. We intend to apply this technology to detect gas or fuel leaks from a pipeline for the same customer, giving pipeline maintenance crews the ability to rapidly find the address -- find and address their problem. This is an area which we will allocate resources to expand our capability.

In the Logistics vertical, our security cameras installed in the warehouse is monitoring the activity of people and vehicles, and now can also monitor the movement of packages. The system can alert if a package has accidently reaches a different conveyor belt than it was intent for or if it is handled in unauthorized manner.

For Correctional Institutions, Magal is developing a system to detect and disrupt the ones to prevent the possibility of those devices being used to deliver illicit goods to prisoners. In the Critical Infrastructure vertical, we are targeting managing functionality to manage on-site assets, such as computers, generators and other physical assets into the command and control capabilities, giving us stable recurring revenue.

The M&A targets we have identified for 2020 support our key verticals and capabilities, expansion goals. We want to acquire technology that can leverage the capabilities of our existing platform and bring new technology, innovation and expertise. We are currently in advanced stage with several acquisition targets. Given our net cash and related cash balance of $51.6 million with no debt, we believe that we are well positioned to respond to challenges and opportunities ahead. By increasing the technology in our offering both organically and through M&A, growing revenue, particularly from our higher gross margin sensor division, while maintaining expenses controls and the increasing operational performance, we anticipate continued improvement in profitability and cash generation for Magal. With these strategic initiatives, with new leadership and enhanced offering, combined with strategic M&A, Magal is now well positioned to continue its growth.

In summary, our strategy to diversify our revenue streams and improve the performance of our business is showing marked progress. While executing a strategy focused in growth in 4 key verticals, we have made significant steps to improve the operational performance of our company and retain our financial position. I'd like to thank the entire Magal team for their exceptional performance in 2019 to deliver those outstanding results. I value the dedication and hard work of our global team and appreciate their commitment to our strategy. Before I hand the call over to Kobi, I'd like to comment on the impact of the coronavirus on our business. We have a worldwide sales force that is embedded in the countries they support, and therefore, we have relatively little international travel. We do have a no-travel ban on our employees at this time. The company is present in China, and sales in that country have declined recently, but this has had little impact on our overall results.

In Africa and Latin America, it is less clear what the impact will be, but at this time we have not seen a slowdown. We manufacture in Israel and Canada and that's how we have had no disruption in our manufacturing functions. We are looking at contingency plans in the event of -- our teams need to work remotely in any of our countries. Though it is still unclear how long this global crisis will continue, the fact that we have entered the crisis following a profitable 2019 with a strong cash position and no debt provide us with the confidence that Magal should endure the crisis and continue its growth in the years to time. And now I would like to hand the microphone over to Kobi to summarize the financial results. Kobi, please go ahead.

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [4]

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Thanks, Dror. Revenue for the full year of 2019 ended December 31, 2019, was $86.8 million or a 6.2% decline from the last year's record of $92.6 million. The decline was due to lower Turnkey Projects revenue, offset by growth in product sales. The geographic breakdown as a percentage of revenue for 2019 showed increased diversification. And to highlight this, I have included the comparison to 2018. Israel, 22% versus 15%; North America, 23% versus 26%; Latin America, 9% versus 28%; Europe, 22% versus 15%; Africa, 13% versus 8%; Asia and the rest of the world, 11% versus 8%.

The revenue breakdown between Magal Integrated Solutions Divisions and Senstar Products Division, which includes also video, were 40% for products and 60% for projects. Magal Integrated Solution Division's revenue declined 14% year-over-year and Senstar Products Division revenue increased by 9% year-over-year. I would like to point out that in 2018, Magal had a material returning customer in LatAm with a significant revenue stream. While in 2019, our revenue from projects has been more diverse. The full year gross margin in 2019 was 44.6% of revenue versus 43.5% last year. The change in the gross margin is a function of the revenue mix between the Magal Integrated Solutions Division and Senstar.

Our 2019 operational expenses were $32.7 million, a 10.5% reduction from the $36.5 million last year. I know that in 2018 we incurred 2 nonrecurring expense items. Last year, we -- there was a onetime impact of $1.3 million expense related to doubtful debt, a part of which was collected during 2019 as a part of a settlement reached with a customer. In addition, last year we incurred a $1 million expense related to the impairment of a goodwill balance from historical acquisition.

Operating income for 2019 was $6 million compared to $3.8 million in 2018. The increase in operating income was due to the impact of the none -- of a few nonrecurring expenses, as mentioned, as well as due to our improved operational efficiencies. Net income attributable to Magal shareholders in 2019 was $2.3 million or $0.07 per share versus net income of $2.9 million or $0.12 per share in 2018. The decline in 2019 net income was primarily due to $1.7 million of noncash financial expenses compared to financial income of $1.4 million in 2018. The expense is mainly due to the strong depreciation of the U.S. dollar against the new Israeli shekel in 2019, which affected the valuation of our USD-denominated monetary assets held in Israel.

In 2019, our EBITDA, which we feel is most representative measure of the performance and profitability for our business, was $8.1 million, up 17% compared with EBITDA of $7 million in 2018.

Now about the fourth quarter results. Revenue for the fourth quarter of 2019 was $23.8 million, a decline of 9% compared with the revenue of $26.1 million in the fourth quarter of 2018. The decline in the fourth quarter revenue was primarily due to the fulfillment of significant portions of the project in Latin America in the fourth quarter of the last year. The fourth quarter is our seasonally strongest quarter. In the fourth quarter of 2019, we reported our highest revenue for the year with a 7% increase sequentially. The geographic breakdown as a percentage of revenue for the fourth quarter was the following: Israel, 18% versus 14%; North America, 24% versus 22%; Latin America, 4% versus 28%, fourth quarter of 2018; Europe, 27% versus 17%; Africa, 12% versus 6%; Asia and the rest of the world, 16% versus 13%. The breakout between Magal's Integrated Solutions and Senstar's products revenue were 47% products and 53% projects.

Senstar Products Division revenue grew 14% year-over-year, while Magal Integration Solutions Division revenue declined 23% year-over-year. Fourth quarter blended gross margin was 48% of revenue versus 41% last year. In the fourth quarter of this year, the gross margin was particularly high due to the better margins delivered by our Integrated Solutions Division. Our operating expenses were $8.5 million, a 22.6% reduction from the prior year fourth quarter operating expenses of $11 million. The reduction in operating expenses is attributable primarily to the one-off expense items incurred in 2018, as previously explained. Operating income was $2.9 million compared to an operating loss of $435,000 in the fourth quarter of 2018.

Net income attributable to Magal shareholders in the quarter was $1.8 million or $0.05 per share versus a net loss of $100,000 or $0.01 per share in the fourth quarter of the last year. EBITDA for the fourth quarter was $3.4 million, an increase of 161% compared with EBITDA of $1.3 million in the fourth quarter of the last year. Cash, short-term deposits and restricted deposits as of December 31, 2019, were $51.6 million or $2.23 per share. Our working capital went up by close to $10 million by the end of 2019 in comparison to the end of the last year. A majority of this increase is driven by the high billing level in Q4 2019, a big portion of which has been collected and converted into cash during 2020. That concludes my remarks. We are happy to take your questions now. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Thurman Willis from Magal Security Systems.

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Thurman Willis, [2]

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I know you know I'm a long-term shareholder and own quite a few shares. Just want to make a couple of remarks. You had a great quarter, and you had a great year, and I congratulate you. Even though -- I'm sorry you're having to report on such a negative day in the market and under such dire circumstances. But looking at Magal, if we ex cash, you're trading at 18% of revenues, which is unheard of. If we ex cash and take the last 2 quarters, you're trading at a 2.5 PE. Again, that's 18% of revenues and a 2.5 PE. I know that we have talked for several years about acquisitions. My first question is, with the follow-up, I would hope that an acquisition would be accretive, number one. And can you please explain to me, with our stock trading at $2.80, why we would not put into place a 10% stock repurchase program? And then I have 1 follow-up, if you'll come back to me after those.

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Dror Sharon, Magal Security Systems Ltd. - CEO [3]

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Okay. So let me first discuss the -- answer you about the acquisitions, and Kobi will speak about the share. So we have a few targets in our pipeline that we are pursuing now. We are in close contact with them. Hopefully, we'll be able to close, in the next few months, at least one. But again, it depends on the situation around us. But a few weeks ago, I was more certain if it will happen. Now it depends what will be the situation in the market. But as it looks positive, we have a very solid pipeline of acquisitions. We are putting a lot of effort into it. And again hopefully, within the next few months, we'll be able to announce one M&A.

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Thurman Willis, [4]

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Are you saying it will be accretive?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [5]

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Yes. Basically, all the targets that Dror mentioned will be -- could be accretive. It's one of our, I would say, wish list criteria, of course. And as you know, we are selective on M&A targets because it's extremely important for us to execute M&A with strategic value and financial value to our shareholders. I would add that our general feelings now, when we are in -- probably just in the very beginning of the global crisis related to coronavirus is that, actually from certain perspective, us being a company with a strong balance sheet, with no financial debt, actually, it could -- at least this is our expectation and target, it should position us to be able to not just to navigate through this crisis -- and I'm talking about our ongoing organic operation, but also execute good M&A deals, meaning that we believe that good assets -- good strategic assets will be or should be potentially available on the market and will enable us to do what we intended to do, to materialize our growth plans, also inorganically for good or more reasonable prices than what we faced before. And also probably a larger variety of potential targets could be available on the market due to potential financial distress.

So just on the point of -- Dror mentioned, to the point of the stock purchase, this is definitely -- first of all, we are all disappointed, of course, of the performance of the stock. We totally understand your view on it and the view of the rest of the shareholders. It's really ridiculous that a company with such relative financial strength, healthy balance sheet, 2 consecutive years of around $90 million revenue generation, 2 consecutive years of $7 million to $8 million of positive EBITDA is traded on ridiculous multiples. Besides this frustration, we -- as a management, we do evaluate all the available options, and we say no to -- in the current situation, on one hand, we -- everything is open, including a potential program, as you mentioned. But on the other hand, we also need your support and long-term understanding that in light of the coronavirus crisis and such a high uncertainty into which we need to navigate a company with almost 500 employees and complex global operations, we also need to be very cautious with regards to what do we do with cash. It's very turbulent -- very much -- very turbulent time. Of course, we all understand. So all the options are on the table and are being evaluated, I would say, almost on a daily basis because we also evaluate what we face with regards to the corona disruption also on a daily basis because the developments are really daily. You just see this on the news. I hope this answers.

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Thurman Willis, [6]

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I had 1 follow-up, and really one more suggestion. I am happy to see that you hired Hayden and company, Brett Maas, as your IR firm. And I loved the announcement that you put out when you hired that firm to gain more exposure. I fully understand that with the present situation, you cannot travel the country and do a lot of IR until the uncertainty is complete. But I challenge you, once this is over, to allow Hayden and company to get you on the road, and I think we'll see a major difference in the stock price. And then lastly, I would encourage you not to go silent. And you had good revenues this quarter, even though they were down, but someone normally thinking would think that you didn't announce anything during the quarter. I would ask that you combine some of these orders and put out press releases as to the combination of some of these orders so that you keep the shareholders informed, especially during these uncertain times. So thank you for letting me make those suggestions. And I believe, even with the discount on the market in general, you're the most undervalued company that I watch out of about 100 stocks. You're probably the #1 most discounted company. So I know that, that will correct itself. And again, as soon as we can, I hope we can get out on the road.

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Operator [7]

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Our next question is coming from Sam Rebotsky from SER Asset Management.

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Sam Rebotsky, [8]

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Dror and Kobi, on this difficult day to report, the numbers seem an improvement, and you talk about making acquisitions that you expect to close. Is it in the $10 million to $20 million range? And presumably, going forward, the valuation, as Kobi has mentioned, should be -- you should see more things that are of better value. And what impact has this corona had on doing your business? And if it, say, takes a certain -- couple of months, what impact do you think this will have going forward on your sales, et cetera?

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Dror Sharon, Magal Security Systems Ltd. - CEO [9]

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So you're asking a few questions. The first, about different acquisitions. So yes, this is in the range up to -- revenues up to around $20 million and below. This, what we are now looking at. But again, it will depend how the situation will continue around the world with the coronavirus. Maybe we'll be able to -- if we'll find some other -- even high revenue company in a stress that we'll be able to leverage our cash that we have and for those kinds of opportunities. So this is from the acquisition side. The influence of the coronavirus is unknown. It's an unstable situation. Currently, as I mentioned and what -- in my earlier discussion is that, we are spreaded worldwide with many sales guys inside the countries, including technical supporting. So the guy can support and promote our sales in the countries even if the -- if he cannot fly between different territories. So Senstar is even in a better situation than the rest of the competitors. The question is if the customers of Senstar's and the end users are going to do some project in the coming month or so. From delivery point of view, the operation in Israel is working. It's also required by the Israel MOD, because we support them on a daily basis. And the same for the operation in Canada, is also working. And even if we'll have to shut it down for most of the people, the operation can continue to work. So again, it's unstable situation. We don't know what will be today -- later today or tomorrow and what kind of restrictions the different governments will put on us. But the fact that we are spreaded all over the world makes our life a little bit easier.

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Sam Rebotsky, [10]

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That's unique. And as far as your bidding on a lot of contracts in your backlog, say, was kept improving, what is your backlog now compared to the September quarter and the previous quarter? And are you bidding on a lot of jobs more than you had previously? Or what is the status of that?

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Dror Sharon, Magal Security Systems Ltd. - CEO [11]

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We are bidding more. We are now focusing on those 4 verticals, so we are bidding more and more accurate, understanding the customer's base better. Now we are bidding on a few nice and large projects, but I don't know what will be the outcome because it depends if the customers will continue those efforts or not. But yes, we are bidding on pretty large contracts today.

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Sam Rebotsky, [12]

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All right. Well, congratulation...

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Dror Sharon, Magal Security Systems Ltd. - CEO [13]

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Thank you. And the backlog, as mentioned earlier, is in the same level of the backlog we ended 2018, or started 2019. So we kept the backlog in the same level.

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Sam Rebotsky, [14]

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Well, that's good. And congratulation on your selection of Brett Maas and Hayden IR, and good luck. And hopefully, we have some improvement in the stock after everything on corona gets cured.

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [15]

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Thank you, Sam.

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Operator [16]

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Our next question is coming from Dan Weston from WestCap Management.

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Dan Weston, [17]

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Thanks for taking the questions guys, some of which have been answered. Just on the backlog, since we ended there, could you quantify that? I don't have the '18 ending year backlog. What was the actual figure?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [18]

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It was $60 million -- around $60 million.

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Dan Weston, [19]

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$60 million. And are you able to break that down between product and projects?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [20]

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No. We -- the majority -- the vast majority is, of course, projects since products are delivered -- the average delivery time of physical products vary between 2 to 3 months. And the software license portion is basically -- it's an immediate delivery because it's a license download. So naturally, the vast majority of the backlog is project related.

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Dan Weston, [21]

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Got it. And then -- thank you for that, Kobi. The recurring revenue as a percentage of total is what today?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [22]

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We believe it's in the area of 1/5.

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Dan Weston, [23]

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Got it. Are you seeing any growth in that recurring revenue portion of your business?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [24]

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We see a gradual growth there. It takes a bit longer than our internal target, but we're definitely going into this direction. We try, so we do see more maintenance and support contracts for our Symphony license products. And our goal is definitely to bundle our project offering with follow-up maintenance contracts. So it's growing, but not as fast as we wanted, but it's in the right direction.

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Dan Weston, [25]

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And I appreciate that. Let me just finish on that. The recurring revenue, what percentage of your recurring revenue is pure maintenance, software maintenance revenue?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [26]

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Software maintenance revenue is -- if you take -- for example, if you look at our software sales, so our average attach rate of maintenance and support contracts with the license is around 20% to 25%. One of the...yes?

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Dan Weston, [27]

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We can talk about that maybe off-line and dig in a little bit. But can you tell us what type of margins you're receiving right now on your recurring revenue stream?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [28]

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It's typically higher, generally higher than the regular sales.

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Dan Weston, [29]

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Would it be safe to assume maybe 70%, 75% or higher than that?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [30]

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So it depends, because we have 2 -- we have project division and product division, they differ significantly on the margin level, as you can see. So for each division, the product division gross margin is in -- typically in the area of 60% to 65%. So maintenance and support in that area would be a few margin points higher than that. The project average gross margin is around 35%. So the maintenance and support contracts -- project contracts would be to an extent higher than that level.

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Dan Weston, [31]

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Appreciate that color. You had a pretty big uptick in your receivables sequentially. I think you mentioned in your prepared commentary that you collected some of that cash. As we stand today, would it be reasonable to assume that your cash balance today is equal or higher than where it was in your end of Q3?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [32]

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Yes. As of today, it should be definitely higher. The majority of the...

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Dan Weston, [33]

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In your Q3?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [34]

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The Q3, sorry. Q3...

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Dan Weston, [35]

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You were about $55 million, I think, in Q3.

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [36]

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Okay. So we should be in that direction. The -- we build extra -- our AR, as you can see, grew significantly by the end of 2019 versus '18. The majority of this actually went to governmental sectors. So we do follow closely right now, especially in light of the coronavirus. But at the moment, we don't see any specific doubts.

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Dan Weston, [37]

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Very good. Dror, I want to talk a little bit about some of the contracts you announced or talked about on your third quarter call, one of which was a contract with a global online logistics provider in Europe. How is that contract shaping up? You were indicating that you might be able to leverage that into more of your distribution centers. Has there been any change to that outlook? Or have you received any more contracts from that particular customer?

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Dror Sharon, Magal Security Systems Ltd. - CEO [38]

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With these customers now, we are in a stage of deployment of the product and the semi solutions. And hopefully, once we are done with this, we'll be able to increase the number of sites we are securing. As I mentioned and what I said earlier, the logistics is a vertical we are focusing on. The online -- the logistics centers of the online providers are growing like crazy all the time. And as I said also, we are looking into increasing our offering based on our video management solution software, to give them a solution that managed the package's movement, not only security. We are using the same security cameras, but different analytic algorithms. We already did 1 project like this end of last year -- end of '19. And now we are pursuing a few others like this. So it is a major vertical. It's a growing market, very big market, and I think we can leverage our capabilities and, of course, increase the revenues from this vertical. But again, we are focusing on it. Part of the M&A that we are looking is also to acquire more technology in this area. So yes, it's a good one, and we are continuing to explore.

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Dan Weston, [39]

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Appreciate that. Last couple of quick ones. The acquisition targets that you're currently evaluating. Is it safe to say that those are all product-based potential acquisitions versus project based?

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Dror Sharon, Magal Security Systems Ltd. - CEO [40]

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The one that we are looking at now are -- first, they have both of the -- furthermore, 3 companies that we are looking at now, brings also technology into Magal. It's not a project. It's more a solution-based companies. But again, they have their own unique technology, either it's a software or hardware or combination of both.

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Dan Weston, [41]

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And then finally, since we're kind of couple of weeks away from end of your first quarter, without giving specific guidance, how has that been tracking so far for your first quarter? Would you think that your results for Q1 will be somewhat similar to what you reported in your Q4?

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [42]

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Dan, typically, actually seasonally, our fourth quarter is the strongest quarter, and the second half is also the stronger half. This is driven mainly by the weather. Eventually, both projects and also product sales are targeting system integrators that work outside in the field. So North America, Europe, there is much less digging during the winter time. So January, February are typically slower. And then the pace increases as we approach Q3 and Q4, also when the budgets get released. This is the typical situation. Of course, this year, in 2020, with the current situation, we are very, very cautious because the level of uncertainty is very high. So overall, it's still too early to know. But as a general expectation, our Q1, Q2 are typically slower quarters. But everything should be obviously analyzed as a part of the entire year. By the way, during our conversation, I just double-checked the cash balances. So to reply to your previous question and -- specifically, it's a yes, we basically are in a level of, cash position similar to the end of Q3. So basically, this is the reflection of the cash collections that we had from the Q4 billings.

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Operator [43]

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Our next question is coming from Stephen Hansel from Eclectic Investment Partners.

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Stephen Hansel, [44]

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A couple things. Many of them have been answered. And I certainly concur with the very first speaker regarding the value of the company and the discount it's trading at relative to what we would think of value, and we've been a top 10 shareholder for many years, though I haven't participated in the calls. I'm curious as to, first, Israel's attitude toward your being an M&A target, given that there are now Silicon Valley companies start-ups with significant funding who are aiming at your space. Could you comment on that?

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Dror Sharon, Magal Security Systems Ltd. - CEO [45]

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Again, I don't think I fully understood the question, but you're asking what is Israeli MOD related to our M&A? So -- or being acquired by a foreign company?

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Stephen Hansel, [46]

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Yes.

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Dror Sharon, Magal Security Systems Ltd. - CEO [47]

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I don't see any major issue. All of our products are -- we are not working under the MOD prescriptions or laws, other than Israeli law, and I don't see any major issue being owned by a foreign company. We checked in the past, we don't see any major issue recorded.

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Stephen Hansel, [48]

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On the question of buybacks, I understand that, that's difficult when you take a very illiquid stock and make it less liquid on the other hand, to the extent that you are in acquisition mode, you can reissue those shares. I do think it's a good idea for you to go on the road and to talk about the opportunities in these 4 verticals, vis-à-vis where you are now, the competitors, the market share and so forth. And I do appreciate, Brett, as the one-time I've called him, he answered his own phone immediately, and that is both rare and very welcome. Thank you, and I appreciate your progress.

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Operator [49]

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Our next question is coming from Ken Liddy from Oppenheimer.

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Kenneth Liddy, [50]

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Just to follow up some questions on your logistics. So I assume that you worked out in the fourth quarter. About how long did that take to execute to -- from start to finish?

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Dror Sharon, Magal Security Systems Ltd. - CEO [51]

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The project itself?

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Kenneth Liddy, [52]

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Yes.

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Dror Sharon, Magal Security Systems Ltd. - CEO [53]

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It vary between the project, but, let's say, between 3 to 6 months we can deploy it. If -- again, we have the -- all the tools are in-house if we need to do some specific developments on the algorithm, so it depends how complicated it, then it takes a little bit more time. Other than that, it's pretty straightforward to take us the same as we are doing any other project. Once we install the cameras and the software is implemented, so pretty fast. The only issue or something that can take us a longer time is the development of a specific algorithm, if the customer needs something unique that we don't have yet.

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Kenneth Liddy, [54]

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And how large of a facility did you protect in the fourth quarter?

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Dror Sharon, Magal Security Systems Ltd. - CEO [55]

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Excuse me?

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Kenneth Liddy, [56]

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How large of a facility -- how large was the warehouse?

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Dror Sharon, Magal Security Systems Ltd. - CEO [57]

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How large? It was something like -- again, we didn't do all of them yet. We got the PO, but it was between 1 to few kilometers perimeter. And the one that we did, also the installation of -- or incorporated our VMS solution was a little bit -- I don't remember how many square feet or square meter was it, was -- it's a major one in Europe. I cannot reveal. I'm sorry, I cannot reveal the names of those -- actually, a few customers that we are working with due to their -- they restricted us from saying their names.

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Kenneth Liddy, [58]

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Understood. Has the customers indicated that they're interested in pursuing more of these type of integrations of your products?

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Dror Sharon, Magal Security Systems Ltd. - CEO [59]

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Yes. Yes, they did.

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Kenneth Liddy, [60]

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And in a recent article interview, Dror, you talked about a goal of $150 million in revenue for -- over the next 2 years. Could you talk just a little bit about how you're going to achieve that goal?

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Dror Sharon, Magal Security Systems Ltd. - CEO [61]

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I didn't -- don't think I mentioned 2 years. But anyhow, it's something that we are looking at that will be based on organic growth and also some M&A that we have in the pipe. This is how we want to achieve it, by focusing on those 4 verticals and the M&As in those verticals.

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Operator [62]

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We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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Dror Sharon, Magal Security Systems Ltd. - CEO [63]

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Okay. Thank you. So again, on behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business. I hope that we all, personally and business-wise, find this crisis safe and continuing -- increasing the company value in the next months and years to come. Have a good day. Thank you.

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Operator [64]

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Thank you. And this concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

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Dror Sharon, Magal Security Systems Ltd. - CEO [65]

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Thank you.

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Yaacov Vinokur, Magal Security Systems Ltd. - CFO [66]

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Thank you very much.