Senstar Technologies Ltd. (NASDAQ:SNT) Q3 2023 Earnings Call Transcript

Senstar Technologies Ltd. (NASDAQ:SNT) Q3 2023 Earnings Call Transcript November 30, 2023

Operator: Greetings, and welcome to the Senstar Technologies Third 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, Brett Maas of Hayden IR. Thank you, sir. You may begin.

Brett Maas: Thank you. Welcome, and thank you for joining us today. I want to thank the management of Senstar Technologies for hosting today’s call. With us on the call today from the company are Fabien Haubert, Interim CEO; Tomer Hay, CFO; and Ms. Alicia Kelly, Vice President of Finance. Before we start, I’d like to point out that this conference call may contain objections and other forward-looking statements regarding future events or the company’s future performance. These statements are only projections, 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 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 senstartechnologies.com for the most directly comparable financial measures and related reconciliations. With that, I will now hand the call over to Senstar Technology’s CEO, Fabien Haubert. Fabien, please go ahead.

Fabien Haubert: Thank you, Brett. Thank you for joining the call today to review our third quarter financial results. Starting with an overview of the result this quarter, we booked revenue of $9 million underscoring our sustained strength in Europe and LatAm, which have been areas of investment over the past few years. This growth was tempered by the absence of one-off project in Canada and the U.S. completed in the third quarter of last year but did not repeat this year. Additionally, our revenue decline in the APAC region, primarily due to challenging economic conditions in China where gross profit was affected by the delivery of a lower-margin legacy project. We’re working to have our gross margin returning to more normalized levels in coming quarters.

Despite deepened revenue and gross margin in the quarter, we maintained positive operating income and positive EBITDA. Switching for performance per region. We continue to deliver strong growth in Europe, where revenue increased by over 20% year-over-year for the second quarter in a row. Thanks to our significant investments in the countries like Germany, France, Spain, Eastern Europe and the Netherlands. We are harvesting the fruits of their focus and taking market share. We believe we can continue to gain market share in Europe and anticipate that this large and productive region will be a steady growth engine for us over the next few years. As a percentage of revenue, the U.S. is our largest market. This year, we have experienced a recovery in the Correction business our largest vertical in the U.S. market.

Federal budget restriction and reallocation impacted this segment in the prior year. Year-to-date, revenue in the U.S. is up 8%. To further expand our market position, we have added a senior executive in the third quarter to continue rebuilding in this critical region and accelerate our market share gains in our verticals. The LatAm region was also a standout performer regionally, delivering 10% growth year-over-year. Year-to-date, this region has grown almost 20%. Looking at our home markets, Canada, Senstar remain well positioned. Last year, we had a one-off projects that closed in the third quarter, which did not reoccur this year with the same magnitude. Lastly, APAC has been a challenging market this year, primarily due to the weak Chinese economy.

The decline in this market year-to-date has been a headwind for our top line growth. Now let me turn to something I’m very excited about. We recently introduced our latest breakthrough, the Senstar multi-sensor intrusion detection system, a disruptive AI-powered center unit that seamlessly integrates five intrusion detection capabilities into a single powerful device. The multi-sensor offers unparalleled situational awareness, effectively neutralizing false alarms and a diversified standalone solution extends its potential application beyond the conventional perimeter intrusion detection use cases. The remarkable feature of our innovation lies in its ability to streamline multiple technologies into a single intelligent unit, simplifying intrusion detection installation and significantly enhancing overall performance.

The device is worth the occurrence of false alarms next to zero. Additionally, this innovative solution reduces the need of numerous sensors and camera installations. While this provides substantial advantages for our customers in reducing system complexity, it also benefits Senstar considerably. It will also decrease Senstar field costs related to installation, management and support. The mutli-sensor by encapsulating all these capabilities within a single unit will enable us to decrease our product portfolio range and realize improved operating scale. Furthermore, this product extends our strategic vision beyond our current bid market focus. Within the multi-sensor, we aim to penetrate broad markets by offering the product as a standalone unit.

These markets may persist critical security vulnerabilities but do not constitute critical infrastructure. Our investment in this project is already paying off since multi-sensor received the Platinum Award for the Best Intrusion Protection and Prevention Solution from American Security today’s Annual Astros Homeland Security 2023 awards. I’m excited to officially announce that we will unveil the multi-sensor ISC West in April ’24, followed by a full scale of launch later in the year. In summary, our solution protects essential assets and facilities crucial to the global economy. Each of our key verticals are benefiting from macro trends. As a result, our products are increasingly deployed in critical infrastructure, logistics, correction and energy sites worldwide.

Senstar remains committed to delivering product innovation, improving regional performance and driving growth in key verticals. 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 revenues for the third quarter of 2023 was $9 million, a decrease of 7.9% compared with revenues of $9.7 million in the third quarter of 2022. As Fabien discussed, the decrease was mainly due to a challenging comparison in Canada and in the U.S. due to one-off projects in the third quarter of last year that were not repeated this year and the continued weakness in China. Those declines were partially offset by growth in Europe and in Latin America. The geography breakdown as a percentage of revenues for the third quarter of 2023 compared to the year ago quarter is as follows: North America, 43% compared to 50%; Europe, 34% compared to 25%; APAC 16% compared to 19%; and Latin America, 7% compared to 6%.

The third quarter reported gross margin was 56.5% of revenues, down compared with 61.1% in the year ago quarter. The change was mainly due to the delivery of the lower-margin legacy projects. As Fabien discussed, we are working to have our gross margin returning to more normalized levels in the coming quarters. Our operating expenses were $4.9 million, up a modest 2.7% compared to $4.8 million in the prior year quarter. On a year-to-date basis, our operating expenses are essentially flat compared to the prior year period. Our operating income for the third quarter was $123,000 compared to $1.1 million in the year ago period. Financial expenses was $64,000 in the third quarter of this year compared to financial income of $212,000 in the third quarter of 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 operational entities in the group in accordance with GAAP. Our loss from continuing operation was $122,000 in the third quarter of 2023 compared to income from continuing operations of $1.2 million in the year ago quarter. The company’s EBITDA from continued operation for the third quarter was $322,000 compared to $1.5 million in the third quarter of last year. Net loss attributed to Senstar Technology shareholders in the third quarter was $122,000 or negative $0.01 per share compared to net income attributed to Senstar Technology shareholder of $1.3 million or $0.06 per share in the third quarter of last year.

The reported net income in the third quarter of last year includes net income of $66,000 from discontinued operation. Headed to Senstar operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses for the third quarter were approximately $0.6 million. Cash and cash equivalents and short-term bank deposits as of September 30, 2023, were $12.7 million or $0.55 per share. That concludes my prepared remarks. Operator, we would like to open the call to questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of [Mike Gissler] with AMX. Please proceed with your question.

Unidentified Analyst: Thank you. Good afternoon, gentlemen. Just regarding the redomiciling of the company from Israel to Canada. Is that – I assume it’s proceeding on time? And will that affect the corporate taxes going forward?

Tomer Hay: Yes. Thanks for the question. So it’s going according to schedule. It’s not – going forward, the operational is the same operational entities. So each legal entity has its own taxes. So we don’t see an ongoing impact.

Unidentified Analyst: Okay. Thank you very much. And just the second question. I was wondering how the backlog looks going forward the next three to 12 months?

Tomer Hay: So from past calls, we are not – this is not a data that we are giving regarding our backlog, but we can say that our backlog is stable and is okay.

Unidentified Analyst: Okay. Thank you very much. I’ll remain in the queue.

Tomer Hay: Thank you.

Operator: [Operator Instructions] Our next question comes from [Jeremy Levine] with [indiscernible]. Please proceed with your question.

Unidentified Analyst: I have two questions. How many years have you been in operation?

Fabien Haubert: The company has been 40 years. We had 42 years exactly.

Unidentified Analyst: How many years?

Fabien Haubert: 42.

Unidentified Analyst: 42 years, and your revenue for the quarter is $9 million?

Fabien Haubert: Yes, indeed.

Unidentified Analyst: Would you consider that to be an astonishingly tiny sales revenue for a company that’s been around that long?

Fabien Haubert: Sorry, I’m sorry, the sound connection…

Unidentified Analyst: [indiscernible] don’t you consider that to be an amazingly tiny revenue for a company that’s been in business for 40 years?

Fabien Haubert: We’re working hard to create some growth engine to make sure it is getting better.

Unidentified Analyst: I’ve asked all my questions.

Operator: Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Tomer Hay: So on behalf of Senstar management, I would like to thank you for your continued interest and long term support of our business, and 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.