B.O.S. Better Online Solutions Ltd. (BOSC) Q2 2023 Earnings Call Transcript

B.O.S. Better Online Solutions Ltd. (NASDAQ:BOSC) Q2 2023 Earnings Call Transcript August 22, 2023 9:00 AM ET

Company Participants

Eyal Cohen - CEO

Ziv Dekel - Chairman

Conference Call Participants

Todd Felte - Advisory Group Equity Services

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BOS conference call. All participants are at present in listen-only mode. As a reminder, this conference call is being recorded and will be available on the BOS website as of tomorrow.

Before I turn the call over to Mr. Cohen, I would like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks and product and technology development and the effect of the company's accounting policies as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities.

I would now like to turn the call over to Mr. Eyal Cohen, CEO.

Eyal Cohen

Thank you. Thank you for joining our call today. On the call with me today is Mr. Ziv Dekel, Chairman, and Moshe Zelter, CFO. I'm excited to launch our new conference call for March through Zoom, which is live with the management presentation.

The result of the first half of the year '23 were above our expectation. Compared to the first half of '22, revenues grew by 11%, EBITDA by 56% and the net income by 168%, and the EPS by 144%. In three years' perspective, our performance has been improved very consistently. Compared to year '20, our last 12 months revenue grew by 31% to $44 million.

Our EBITDA increased by 342% to $3.1 million, a net loss of $1 million in year '20, turned into income of $2.5 million in the last 12 months ended June. Our balance sheet has significantly strengthened over those year -- those years. Our shareholders' equity increased from $12 million at the end of '20, year '20 to $18 million in June '23. Our bank loans remain roughly the same around $2 million.

The business trends that impacted our business results in the first half of this year were intense demand from the Israeli defense market that has -- have positively affected the growth of our Supply Chain division. Those demands are attributed to the military conflict in Europe and in the Middle East. Those demands will probably continue to support our Supply Chain division growth in this year.

Our Robotics division is transitioning toward the Israeli defense market. And currently, most of our project in process are attributed to one of the major defense companies in Israel. There are signs of slowdown in the Israeli civil market, which negatively impacting -- impacted the RFID division revenues in the second quarter of this year.

Our growth strategy is based on both organic growth and M&A. The key elements of our organic growth plan are strengthening our competitiveness by adding more brands to our existing offering, developing new markets by expanding our offering with complementary technologies, keeping the high market presence through trade shows and digital market.

At this stage, I want to turn the call to Mr. Ziv Dekel, our Chairman, who will elaborate on our M&A strategy. Thank you.

Ziv Dekel

Thank you, Eyal, and good morning and afternoon to everybody. The second dimension of our growth planning is, as Eyal mentioned, the M&A strategy. Within this framework, the typical profile of the target acquisition is of five criteria. The first criteria will be that the company -- the acquisition company has a strong competitive position with last three years of profitable results track record. The second one, the second criteria, is that in terms of the company's business model, it will be of a significant high portion of recurrent revenues and not current. Market dynamics should reflect an attractive market conditions, such as growth, level of innovation, fundamentally high margins and so on and so forth. The fourth and fifth elements are of -- one will be the size of the target company, of which we -- it would be -- it would exceed $5 million of our new revenues. And our planned investment is up to $5 million with target equity share of around 51%. Thus, we are also hedging our forward-looking risk.

To define the scope of our search, we first need to categorize process, our business goal as it will be the basis for leveraging hard, soft and high-level synergies. This element is very important due to comparing or keeping our risk profile [intangibles] (ph). RFIDs are traditional hard-core business, automation comes next, supply chain and high above is the improved technologies of innovation process representing the highest the broadest scope of our capabilities, know-how and fine expertise. This slide is described our BOS' specific scope of M&A in which we are going to focus. The scope is defined by the deviation of BOS' around business -- amongst our scope of business and scope of clients. Our strategy is to include targets around our core business.

Also, we will look for targets in the -- adjacent to the core, and it may be that we will find some opportunities in the higher -- in the next core area. These targets will require -- are required to be very, very attractive. We run a structured process which comprises of six phases. I will now take you along of each phase now that you could be all aligned. The first phase is engage with an agent. This is done. We are currently engaging with two or three agents that are doing the search, intensive and comprehensive search for us along the criteria that we -- that I elaborated further. The second phase is defining the scope of M&A. We're doing it currently together. Third phase is to have -- to acquire a list of target companies. Phase four and the most attractive one, we will do meetings. And then, of course, due diligence and raising the equity. Sixth phase also is, of course, the closing phase.

At looking in broader view, I trust old BOS' team led by Eyal to win this challenging -- this very challenging process actually and in the broader perspective, actually of the overall to run and manage the overall company strategy and operational plan. Thank you all for your attention.

I will now hand over back the presentation to Eyal.

Question-and-Answer Session

A - Eyal Cohen

Thank you, Ziv. At this time, we will begin the Q&A session. If you have a question, please unmute and present yourself. Usually, Todd asks a question. I see that...

Todd Felte

Hey, guys. Can you hear me?

Eyal Cohen

Yes. We are glad to hear you to see you, Todd.

Todd Felte

Congratulations on another great quarter. I was a little surprised that the revenues were that high given the devaluation of the shekel. Can you talk a little bit how that has affected you? I know a lot of your contracts are done in US dollars, but I thought it would have more of an effect on your revenue.

Eyal Cohen

Okay. Actually, the -- most of our revenues are quoted in dollar, and the effect of the devaluation of the NIS, again, the US dollar is mainly on our operational expenses on one side. And on the other side, in another direction, effect on our financial expenses. When there is a devaluation, our operational expenses decrease, but our financial expenses increase. For the -- from the financial report aspect, the strong dollar is good for the performance because of the effect on the operational expenses, which has a higher effect than the effect on the financial expenses. But on the long term, I think that the devaluation of the NIS causing to a inflation, then after we have to upgrade and to update our employees' payroll.

Todd Felte

Okay. That’s helpful. I was also wondering if you could comment on some of your growth. I know a lot is coming from the Israeli defense industry. In the last couple of years, you've had some new business with countries like Saudi Arabia and also moving into some new verticals, I think retail and clothing lines, can you kind of talk about the growth and where this is coming from?

Eyal Cohen

Okay. The growth in the -- we are working in two segments. One, the Defense segment which is mainly come from the supply chain, and the recently also the Robotics division did a transition to the defense market. And this market is growing by the sales to the Israeli players. We are not selling directly to the client of the Israeli manufacturers. We are selling to the Israeli manufacturer, to their subcontractor out around the world. And in the recent years, they are growing demands. And all this industry is growing very fast and consistently. So we have a very strong leg in this segment.

In the Civil segment, we have -- it's the main business of the RFID division. And in the recent period, there were huge investments in logistics center -- centers, and this pushed the growth of this division. And as I mentioned, in the recent quarter, in the second quarter of this year, we faced a sign of a slowdown. We hope it's temporarily, but we are doing a lot of actions to strengthen our market -- competitiveness position in the market and to expand our product offering in order to continue the growth of this division.

Todd Felte

Okay. Thanks. I’ll hop back in the queue. Congratulation to you and your team on an outstanding quarter.

Eyal Cohen

Thank you, Todd.

Ziv Dekel

Thank you very much. Any other questions?

Eyal Cohen

Any other question?

Unidentified Analyst

Hi, I am [indiscernible] How are you?

Eyal Cohen

Hi, [indiscernible]. Good to see you.

Unidentified Analyst

Thank you. Long time no see.

Eyal Cohen

Yeah. You had [her] (ph) in the last time that we talked.

Unidentified Analyst

Yeah. Time is doing the job. Eyal, I wanted to ask you about the Intelligent Robotics division. I see that in the second quarter, you were around breakeven. Do you see another improving in the second half, let's say, to be a little bit profitable or what's the near future that you see for this division? And also, I wanted to ask about the RFID division, which in the first quarter was much better than the second quarter, as you said. But do you see it stabilizing? Or do you think it won't be profitable in the near future? Or it will be stabilized on small net income more or less, what do you see?

Eyal Cohen

Okay. Thank you, [indiscernible]. First, regarding the Robotics division, it's -- today, it's a small division. It had a lot of business risk because of its automation and its project. So we minimized the risk, and we reduced significantly the size of this division. But still, it's very important unit to be in the group because it had a great offer to our customers in the industrial segment and in the logistics segment, and we are in transitioning to our -- to the Defense segment now, and it's going very well. But still, it's a project -- it's a company with -- that works on projects with a high risk. And our plan is that this division will be profitable.

We reached to a breakeven point, and we hope, and we work very hard that it will continue to be so in the next quarter and in -- then after in the fourth quarter to be -- to generate profits. As much as we will extend the penetration to the defense market, I believe the ability to generate significant profits from this division will increase because without the customers, the negotiation in this industry is a little bit easier. They have a lot of budget. They are very rich. It's different than the civil industry that has a very -- have very, very tight budget and a lot of competitions. We have license to work with the defense industry, and we opened a vendor there, so it's advantage.

Regarding the RFID division, it has a direct link to the Israeli GDP. The Israeli economy is growing well. So it's growing. If it's not growing well, so it's not growing. And currently, the civil market in Israel is in a standby, and we feel it -- we see it in the investment in the logistics centers, in the amount -- in the number of logistic centers that opened. But we hope that it's temporarily, and you will see the continuing growth in the Israeli civil market. But still, in this situation, we are working very hard to strengthen our competitive position advantage and to expand our offering to continue to grow. I don't see a risk of this division to turn into loss.

Unidentified Analyst

Yeah, okay.

Eyal Cohen

I don't see such a scenario.

Unidentified Analyst

Great. Thank you, Eyal.

Eyal Cohen

Thank you. Any further questions? Okay. So thank you for being with us today and looking forward to meet you again on BOS third quarter call. Thank you again.

Ziv Dekel

Thank you, everybody.