B.O.S. Better Online Solutions Ltd. (BOSC) Q3 FY2025 Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the BOS conference call. [Operator Instructions] 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. Mr. Cohen, please go ahead.

Good morning, and thank you for making the time to meet with us today. Joining me is Mr. Moshe Zeltzer, our Chief Financial Officer. BOS integrate cutting-edge technologies to streamline and enhance supply chain operation. We delivered strong growth in the first 9 months of this year. Revenue grew year-over-year by 28% to $38 million, continuing our record performance this year. We are strategically expanding overseas by partnering with international subcontractors of our Israeli defense clients. These markets are relatively untapped by BOS and represent potential growth for BOS. We see India as a major target market because it is a global hub for wire and connector assembly, where we have a competitive advantage. Through this approach, our international revenues grew by 24% year-over-year, demonstrating the growth potential in international market. Our net income grew year-over-year by 54% to $2.8 million, while our revenues grew by 28%, showing our ability to convert revenue into bottom line results plus profit leverage as we scale the operating base of the business. We have demonstrated consistent profitability with steady net income growth, achieving a compound annual growth rate of 51% from year '21 through the year 2025. These results underscore the strength of our defense focused strategy, reflecting years of deliberate investment in product diversification and operational excellence that position us to capitalize on the defense sector's robust growth trajectory. Given our strong execution and stable backlog exceeding $24 million, we are raising our full year 2025 financial guidance. We now expect to meet the high end of our previous guidance range of $45 million to $48 million in revenue and $2.6 million to $3.1 million in net income. There are several tailwinds that have accelerated our growth momentum, and we believe will support our long-term organic growth. First, as you know, the global increase in defense budgets. Second, replenishment and expansion of Israeli Defense forces inventory and equipment and vehicles. Third, the potential stabilization and improving geopolitical conditions in the Middle East, which is a pivotal tailwind for the growth of the Israeli civil market and will positively impact the growth of our RFID division. These drivers support our continued organic growth in conjunction with our outbound sales efforts. We continue to look for opportunities to enhance our organic growth with strategic actions that fit our business and diligent pricing parameters. Through the combination of this effort, we intend to grow BOS over the coming years. With that overview, I will turn the call over to Moshe Zeltzer, our CFO, to discuss our financial position. Please, Moshe.

Thank you, Eyal. Our financial foundation has never been stronger. Cash and equivalents grown to $7.3 million, up from $3.6 million at year-end. Our shareholders' equity amount to $25 million, which account for 66% of our balance sheet. We have positive working capital of $18 million and $1.1 million in long-term loans secured by real estate we are using for our own operation. This strong balance sheet gives us the flexibility to capitalize on opportunities as they arise, supporting organic growth and strategic acquisitions. Our valuation offers attractive upside compared to Russell 2000 Index multiples, price-to-earning ratio Russell 2000 at 20 versus BOS at 11, price-to-book ratio Russell 2000 at 2.2 versus BOS at 1.7. Thank you for your time and attention. We are happy to take your questions.

This is Scott White at [ CIMCO ] Capital. Great quarter. Terrific quarter. I have a few questions and if it's okay, I'd like to ask them one at a time. In the press release, you highlighted that you're excited about your expanding opportunities with new and existing customers. Can you highlight a couple that you're particularly enthusiastic about and specifically new customers?

Yes. The main customer that we are joining to our portfolio are mainly overseas clients, mainly from India. And I can tell you that in the recent week, there was a huge dedication here from -- in Israel from India, including ministers from India, and we were happy to meet with many, many companies from India and those are the major clients that we are joining our group.

Okay. When would you expect revenues to hit the bottom line to impact your P&L.

What do you mean?

When do you expect revenues from this new Indian customer to impact your P&L?

Yes, it already impacted the year -- these 9 months, we already see the growth in revenues from international market by 24% as compared to the comparable period last year, and this has mainly come from the Indian market. And it's a process. And gradually, we are taking -- we are increasing our market share in this territory.

Okay. Second question, can you expand on the loss in the RFID division and exactly what you mean by logistics center slowdown in Israel?

Yes. The RFID division engaged mainly in the civil market, not in the defense market segment. This segment had a very challenging time in the recent 2 years because of the conflict in the Middle East. And it has adversely affected the business. And in the recent 2 quarters, we also saw the effect of the U.S. dollar devalued against the Israeli shekel that also adversely affected the business. But in the fourth quarter, because of some measure we took operationally and in the business model as well, and the change in the environment in Israel, especially in the geopolitical environment, we see a rebound in the demand, and we are optimistic about returning back to profit in the fourth quarter.

Okay. Great. And then that was my next question. Can you expand on the currency impact? And how much, can you quantify, the effect it had on your P&L? And do you hedge? And if not, are you going to start hedging?

Yes. So the U.S. dollar devaluated against the Israeli shekel by about 11% in the 6 months ended the September 30 this year, actually the second and the third quarter. And since most of our operational expenses are denominated in shekels, while our revenues are primarily in dollars, this currency movement created approximately $0.5 million in additional cost pressure on operating income during this period or roughly about $0.25 million per quarter. So as I mentioned before, we are proactively addressing this headwind through strategic sales price adjustment initiated in the fourth quarter and operational efficiency improvements. And regarding the hedging, we are hedging the balance sheet exposure and for every hedging, each hedging has a limitation period. And we don't believe that it's temporary exchange rate. I think it will all be for the long term. So any kind of hedging on the dollar is temporary. And we are trying to find a solution for the long term and because of that, we are in the process of a sales price adjustment and operational efficiency improvements.

Okay. One more question, and then I'll jump back in the queue. One of the potential concerns on your P&L and continued growth is the impact of the end of the war in Gaza. Can you address this? And how should we think about the end of the war and its impact?

I think there are 2 coins -- 2 sides of the coin. On one side, we are in the Defense segment. The Supply Chain division, the biggest division in BOS 90% of its business is in the defense. And its customers are the major client in Israel. So there is a direct impact of the tension. On the other hand, we have the RFID division, which is in the civil market. The civil market doesn't benefit from the war. But because the biggest -- we have the big exposure to the defense because of that, we are growing in the top line and in the bottom line.

Historically, have you grown faster on the defense side in a time of war or time of peace?

Over the years, the growth -- the main growth came from the supply chain because even in time of peace, those 3 clients are the biggest exporter in Israel. And they're growing year-by-year. And also, the defense budget of Israel is growing year-by-year even before the war. So I'm not sure about the number, but I think the average growth rate of the defense market in Israel along the years were about 7%. So it's growing. In sometimes, in some period in a sharp way, like in the recent 2 years, about 17% each year or more, and in normal years, about 10%.

Congratulations on another great quarter. I see that you have a $7.3 million in cash and I assume that amount is rising in the current quarter. You've talked about M&A possibilities. Will you have to use raise equity? Or will you be able to use cash for any M&A activity?

Todd, nice to meet you again. Yes, our cash position was strong at the end of the third quarter with over $7 million and 0 bank debt. That's continued to grow in the fourth quarter. So for M&A, we are targeting profitable Israeli defense sector companies with complementary products serving our major clients and the subcontractors. So with acquisition targets of up to $10 million and bank financing typically available for approximately 50% because it's a profitable company, 50% of the purchase price, we can execute this transaction using our existing cash on hand without requiring equity raising while maintaining sufficient working capital for operation and organic growth.

That's great. Also, can you kind of give us some clarity on the amount of the percentage of your defense business, which is in Israel and the amount that's in internationally and how that -- how you expect that to change. I've seen a lot of contracts from India and Europe, and I was hoping you could kind of quantify that for us.

Yes. As we saw in the chart like in the 9 months, out of the $38 million, $3.6 million were sales overseas related to the supply chain, related to the defense. And we are taking measure to -- and we allocate resources to increase this number by being active with active approach, especially in India and they may be even to change our approach in how to operate the sales in India, and we see a lot of potential in this market. So I believe that this number of $3.6 million that reflects 24% increase in sales overseas will continue. We will see this trend continue in the fourth quarter and in year '26 as well.

Okay. I know you had talked about opening up kind of a branch office in India. I assume that's where a lot of the expansion is going to be? And is there any update to that office you're going to open over there?

Yes. We are checking various options on how to make it in the most efficient way. We are taking very conservative measures how to allocate our financial resources overseas and how to do it in a very lean way. And I believe that in next year, we will see the actual results of our plan.

Okay. Congratulations again on a great quarter.

Thank you, Todd.

My name is Igor. This is my second call. Congratulations on a strong quarter. So my question is, Israel is expensive, everything in Israel is expensive in your operations and now it's getting more expensive with stronger shekel. Now that you're more -- becoming more and more of an international company with international sales, any thoughts of spreading the cost and moving some of the operations outside of Israel, given that it's so expensive to do anything in Israel?

It's a good idea, but -- maybe it's a good idea. We need to think about it. Actually, we don't -- I don't see any -- which units we can operate overseas. But one of the options, as I mentioned to Todd is to instead of doing the sales to India from Israel to do the sale to India from India. So this is the first example how we can reduce our cost, but the main approach to do sales in India were not to save cost, but to increase sales, but we can get both of the things together. But it's a good idea. I need to be honest. I need to think about it, and I will keep you updated in the next call.

My other question is, so I know that the last years were sort of overshadowed by the Gaza war and Gaza people will refer to this. Historically, like if you take many, many years, the company is a bit of a cyclical company. So some periods of time, there's more demand, sometimes a little bit less demand. How do you intend to make a company a little bit less cyclical and more like a sustainable growth? Like what is your strategy like what do you see the company like 5 years down the road?

I think by going overseas to increase our sales overseas, as you saw in the number like out of $38 million, just $3.6 million are international sales. So if you increase it, we can reduce the cycling. And growing by acquisition and adding more -- increasing the portfolio, our offering. And by that, we can eliminate the exposure that you mentioned. But the structure of BOS is that we have the Supply Chain in the defense, and we have the RFID in the civil and we have the Robotic in between. So we are already spread. But I have to be honest with you, we are in the defense for many years, more than 10 years, and it's all the time growing. I don't remember a cycle of a slowdown in this segment. I'm sure that in 3 or 4 years, the demand will come back to normal after the situation in the Middle East and in Europe. But I believe it's the best segment to attach to.

Okay. And my last question about the potential for M&A. So obviously, you put $4.5 million at the market option now, and you have plenty of cash, you don't [ let ] for any cash. So do you have -- are you looking at any specific opportunities right now? Or you just put it just in case? Like what is your thought about M&A for the next year or 2 years?

I hope that in next year, we will close on M&A. This is a working plan. And my plan is to close one. And I hope that every 2 years, we will be able to close on M&A. And by that, with the organic growth to reach to the $100 million, this is a target. But those are our plans, and we are working to -- according to those plans.

Just curious, I understand it might be opportunistic, but why don't you look to borrow to do an M&A and potentially looking at the equity component, given that your stock is not particularly high. So that would be maybe a little bit suboptimal versus borrowing from a bank given that you're a pretty solid company with good cash flow and earnings.

I didn't understand your...

So it looks like you put -- potentially for M&A, you have an option of $4.5 million equity. So obviously, I don't know now what the opportunity, M&A opportunity is going to look like. But I would hope that your first intent would be to borrow money from the bank to do an M&A versus issuing equity given that your equity is relatively low given your valuation. So how you think about it?

As I mentioned to Todd, we -- in case of [ green ] acquisition, even of $10 million , which is a frame of investment that we are targeting, assuming 50% by bank loans because it will be a profitable target company. So for the rest, the $5 million, absolutely, we can -- we don't need to issue more stock. We have it on the hands. Yes, we have $7.5 million as of the end of September, and the cash continues to grow. And so I don't see any need to raise the equity to consume M&A.

So you just have -- just in case a big opportunity comes up that you have a $4.5 million offering at the market.

We see it. We have tools like every public company should have like the shelf perspective that we have, and we haven't used for 4 years. Like the ATM that we have, and we haven't used since the day it was filed. And that unused credit line that we have in the bank are not used. So we have all the facilities which we have. And -- but actually, in order to consume $10 million M&A, we don't need to raise -- to use any BOS tool except for the unused credit lines, bank credit lines.

How much do you have available credit as of now, approximately?

Sorry?

How much credit do you have unused as of now?

$1 million for the real estate.

No, unused. Unused -- we have unused for ongoing use, not for the acquisition. We are...

Oh, I see, okay. So that's capital, I understand.

It's something like $1.5 million to $2 million unused credit line for revolving credit for organic growth. But when you already check with the banks in case of model of acquisition, a profitable company. And I believe we can get 50% financing from the bank to -- for the acquisition.

From an Investor Relations perspective, have you finalized your dates as to when you're going to come to the U.S. to meet investors?

Yes. I think it will be April next year. In between, I will participate in the virtual summit, we will announce on it and I will continue to do ongoing one-on-one weekly meetings with the potential investors. Scott?

Yes, I got it.

Any follow-up question?

No, no follow-up. I'm good. I'd like to meet you when you come to the U.S. for sure.

Yes. We will meet in April. So thank you, again, for your participation. And if you need more details or would like to follow up, please feel free to reach out to us. Thank you.

Thank you. Bye-bye.