Senstar Technologies Ltd. (NASDAQ:SNT) Q1 2023 Earnings Call Transcript June 6, 2023

Operator: Greetings and welcome to the Senstar Technologies First Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Rogers of Hayden IR, Investor Relations firm for Senstar Technologies. Thank you. You may begin.

Kim Rogers: Thank you, Kristen. I’d like to welcome everyone to the conference call and thank Senstar Technologies management for hosting today’s call. With us today are Mr. Fabien Haubert, Interim CEO of Senstar Technologies; and Mr. Tomer Hay, CFO. Before we start, I’d like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the company’s future performance. These statements are only predictions and Senstar cannot guarantee that they will, in fact, occur. Senstar does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and the competitive nature of the security systems industry, uncertainty regarding the duration and extent to which our future results of operations and overall financial performance may be impacted by the effects of the COVID-19 pandemic that are still unpredictable in some regions and could be significant 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 requirements. You can also refer to our website at www.senstartechnologies.com for the most directly comparable financial measures and related reconciliations. And with that, I’d now like to hand the call over to Fabien. Fabien, go ahead, please.

Fabien Haubert: Thank you, Kim. Good morning, everyone and thank you for joining today’s earnings call. I’m pleased to provide an update on our company’s performance and strategic direction. This is my first call in the role of Interim CEO and I am delighted to be speaking with you today. I want to begin by assuring our investors that as we move forward, we remain committed to our strategy building upon the foundation we have previously constructed to grow Senstar and expand on our solid position in the PIDS market. Our primary focus continues to expand operational capacity and grow our market share in our 4 key verticals and reach and expand our product offering and increase sales to existing customers. Starting with a look at the first quarter of 2023, revenue was in line with our expectation and reflects the seasonality of our business.

Gross margin for the first quarter was primarily impacted by product mix. The high-margin contract in Europe last year was not repeated this quarter. We invested in our sales and marketing as well as R&D, support to new product launches. One of our top objectives is to expand our market share within high-value verticals while maintaining strong gross margin. We have deliberately shifted our focused away from commoditized markets recognizing the importance of sustaining profitability and maximizing value for our customers. To further scale our business, we concentrate on the high-value vertical markets of energy, utilities, corrections and logistics. These markets seek high-value solutions and present attractive growth opportunities when Senstar already has an established presence and brand recognition.

We aim to expand our scope in this vertical by offering comprehensive solutions that leverage our sensors and information management focus. We’re targeting these verticals because they are characterized by significant appetite for complex security solutions and they provide incremental opportunities to sell adjacent solutions that can increase the customers’ lifetime value to us. An example is logistics where we provide PIDS solution and we’re developing adjacent solutions like our workflow engine. Another example is old field security where we secured the production of processing facilities and can offer additional solutions for pipeline protection based on our FiberPatrol solution. We take pride in our global footprint and our ability to understand the evolving needs of our customers.

We see ample room for market share improvement. Our steady growth and profitability demonstrate our ability to differentiate from commodity products in the market. In the first quarter, we achieved significant growth in the U.S. for the first time since the COVID-19 pandemic began. The U.S. and Europe typically represents over 70% of our total revenue. This quarter, the contribution from these 2 regions was about 80% due to the strong performance of the U.S. from growth in corrections, one of our target verticals. In Europe, we were awarded a strategic contract in Q1 in one of our best-performing vertical. We are advancing new business opportunities in the U.S. and Europe with the potential to scale our business in our targeted vertical. We also have opportunities in these verticals in other markets in the Americas, including Canada and Mexico.

On the product front, we continue to prioritize R&D investment. Product innovation, has been a key growth driver for Senstar. We’re actively developing next-generation sensors to drive innovation, evolving our video analytics and advanced vertical solution. Our next-generation sensors and solutions portfolio aligns directly with market demand. We are shifting our research and development efforts from customization to process-driven initiatives, allowing us to stay at the forefront of technological advancements. Our success is based on our ability to deliver innovative security and risk management solutions backed by deep industry knowledge and maintaining a leading edge for our comprehensive platform. Our platform is differentiated by its ability to take information from separate systems and transform it into actionable information presented in a unifying space on our sensor Symphony platform.

We use AI and the most up-to-date data visualization and video analytics to maximize the effectiveness of customer security systems. From a personnel standpoint, our objective is to achieve significant turnover growth in our 4 key verticals, representing a substantial portion of our overall turnover. To support this goal, we are fortifying our sales force to acquire new customers, further reinforcing our commitment to expanding our market presence. Now let’s turn our attention to the first quarter. Given that the first quarter is typically our seasonally weakest quarter of the year, we achieved results close to our Q1 expectations and on par with the previous year. Notably, we experienced strong growth in the United States driven primarily by the correction vertical.

EMEA and APAC regions were lower than Q1 2022 which is attributed to the successful completion of exceptional projects in Q1 2022. While our margins were in line with our plan, they were lower than the exceptional Q1 2022 margin figures. This is attributed mainly to the mix of solution deployed during the quarter. In conclusion, we’re confident in our strategic direction and the steps we’re taking to expand our market share and drive growth by focusing on high-value vertical markets, offering comprehensive vertical solutions and investing in research and development, we are positioning ourselves for success. We appreciate your ongoing support and look forward to updating you on our progress in the coming quarters. Now I will pass the call to our CFO, Tomer Hay.

Tomer, please go ahead and review the financial results.

Tomer Hay: Thank you, Fabien. Our reported revenues for the first quarter of 2023 was $6.4 million a decrease of 5% compared with reported revenues of $6.8 million in the first quarter of 2022. As Fabien mentioned, the decline was primarily due to the exceptional Q1 2022 project in EMEA and APAC region. The geography breakdown as a percentage of revenues for the first quarter of 2023, compared to the year ago quarter is as follows: North America, including LATAM, 62% compared to 45%; Europe, 31% compared to 38% and APAC 6% compared to 16% and others is 1% in both periods. First quarter reported gross margin was 55.7% of revenues compared to 65.8% last year. The decrease in gross margin was primarily due to a shift in the mix of products sold during the quarter.

Our reported operating expenses were $5.3 million, an increase of 3.6% from the prior year’s first quarter operating expenses of $5.1 million. The year ago — the year-over-year increase in operating expenses is due primarily to an increase in selling and marketing expenses compared to year ago quarter. Our reported operating loss for the first quarter was $1.7 million compared to an operating loss of $0.7 million in the year ago period. Financial income was $40,000 in the first quarter this year compared to financial expenses of $239,000 in the first quarter last year. This is mainly a noncash accounting effect we regularly report due to adjustments to the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operating entities in the group in accordance with GAAP.

Net loss attributed to Senstar Technology shareholders in the quarter was $1.9 million or $0.08 per share compared to a net loss of $1.1 million or $0.05 per share in the first quarter of last year. The company’s reported EBITDA for the first quarter of 2023 was negative $1.4 million compared to negative $0.3 million in the first quarter of last year. Cash and cash equivalents as of March 31, 2023, were $14.7 million or $0.64 per share. That concludes my remarks. Operator, we’d like to open the call to questions now.

Operator:

Fabien Haubert: On behalf of the management of Senstar, I would like to thank you for your continued interest and long-term support of our business. I look forward to updating you next quarter. Have a good day.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.