M.T.I Wireless Edge Ltd. (MWE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the M.T.I Wireless Edge Limited Full Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so on the Investor Meet company platform. And before we begin, I would like to submit the following poll. And if you could give back your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CEO, Moni Borovitz. Moni, good morning, sir.

Good morning, Jake. Thank you, and thank you, everybody, for joining the call today discussing our '23 year results. I will start with a small reminder about the markets that we operate in and are the growth engine for our future. Our largest division is in wireless water management solution. I'm sure we are all aware about the scarcity around the world coming with the global warming. So there is no doubt in my mind that system like ours will be needed more and more in coming years. The second activity we operate in is antennas for the backhaul of cellular market, the high-capacity part of it, as we all consume more data and use the phone more and more, the backbone needs the capacity to support this. And this here is the second operation of our business. The third one is in the defense market. As you all are aware, since 2 years ago, when the world between Russia and Ukraine started, European countries decided to increase the budget on defense. And we now start to see more and more work coming towards us. We usually work with the Smiths and Cobham of the world, the system houses, both locally in Israel and outside of Israel, and via [ them, sell ] our solutions. Macroeconomics have changed in the last year. We see high inflation and high interest rates. I think we are very well positioned to deal with it. First of all, because we have almost a debt-free balance sheet. We have no financial debt, and we have actually quite a lot of cash. And secondly, because most of our solutions are based on innovation, we're able to pass most of the cost increases into the prices of the customers. I'm sure we are all aware, on October 7, terror attack here in Israel. And what we see is that such events usually take minutes or hours, and then they are done. In our case, we are already 5 months after the attack, and we still have 134 hostages. And this means that the country still did not start the recovery process that is so needed in order to return to normal life. If I look in the micro about M.T.I itself, we have 2 employees that lost the parent that day that they were killed under the attack. We have another 5 employees that were hiding for hours with their family for very long hours -- in shelters until they were safely secured. And then we have another 10 employees that were recruited, called up for military service immediately. Some of them released just in recent days. So overall, the manpower in Israel reduced by about 20% throughout the last quarter. Nevertheless, I'm very proud about the other employees that showed a lot of solidarity and took themselves more work and were able to generate what we did. In our international subsidiaries, they felt nothing because logistics was quite flowing in and out of this Israel. And all of them are working outside of Israel. So this continued very well. At the same time, the attack had massive destruction within Israel, both in commercial areas and in military areas and, of course, also communication towers. So immediately, we were asked to support and help refurbish, reinstall. And now we need to restore and rebuild some of the systems. So we got a significant orders, and we see ahead of us, quite large business opportunities. In Mottech, our irrigation solutions, we irrigate most of the agriculture around Gaza, the Israeli part, of course, many of the controllers were either cannibalized or stolen. So we immediately helped them put some kind of a ad hoc solution in order to continue and irrigate. And now we see more orders coming into it. So if I look at 2024 and a little bit further down the road, we know that we need to be ready for longer military service by our people, and we are already up to it. We know the defense budget, both here in Israel, but also internationally are increasing. So we will have more opportunities in this area. And we know that we will have a lot of destruction to do here in Israel, both in the North and in the South, both in agriculture and in landscape irrigation due to the attack. If I look at 2023, overall for me, it's a very strong result. We were more or less flat revenue-wise, part of it because of the strengthening of the shekel against -- the dollar against the shekel, but we were able to improve margins, and this was very important for us. So we ended up with a PBT 12% over last year and earnings per share 9% growth year-on-year. At the same time, we continue to generate cash as we usually do, and we have a net cash of $8.1 million at the end of the year. Business-wide, defense business grew not related to the conflict here that started only in the last quarter. But this was due to successful penetration to system houses, as I mentioned, both here in Israel and international and the defense budget of growing. In the water management solution, we see more and more demand coming from many countries in Europe as everybody sees and understand the scarcity. And in 2023 was the first year that we even installed the system in Sweden. Talking about 5G. We are based in India, as everybody knows in manufacturing. And in order to compete in the Indian market, which is supposed to be very big, you have to be local to compete price-wise. I'm happy to say that we are very well positioned, 1 of 2 other competitors that we have in this market was disqualified by at least 1 cellular operators because of the quality of the product. And I can say that our product is considered to be the best in terms of its operational activity. The second part of the backhaul and cellular solution that we are developing is what we call the ABS antenna, the automatic beam steering antenna solution, which allows the antenna to move a little bit, actually the feed of the antenna in order to compensate the link budgets and to compensate in terms of the mass movement due to changes in temperature or wind load. And we completed the development of the product, and we are now taking it into production. We have at least 2 Tier 1 customers, OEMs that are very excited about the solution. A little bit more info about each of the divisions. So in the wireless irrigation business, we are working with collaboration for many years with Motorola. Most of the hardware is coming from Motorola, but we had somehow were by ourselves. And of course, our key IP here is the software that manages those controllers. We work all around the globe. And this business has a very nice chunk of business coming from recurring revenue from the service and maintenance that we do. It's about 20% of the business, and it continues to grow. The bottom line of this business is that we save water quite a lot if you use the systems. If I focus on the progress on 2023. So first of all, we were able to complete what we started towards the end of 2022 and increase the service, renew and increase the prices of the service agreement in the municipalities in Israel. Some of the increased pricing would continue onwards in the next few years as it was scaling up prices. We announced about a year ago about a new niche market that we opened, which is fountain control and management. I'm happy to say that we just now completed the first project. It contains over 40 fountains in one municipalities in Israel, and we give them end-to-end encrypted solution to manage the fountains remotely. At least here in Israel, it is very important because they treat the fountain, the public pools -- in some instance, it keeps get into the fountains. And therefore, you need to measure and manage everything. I can say that it's a nice project. We already showed it to several other potential customers in Israel. And we are quite confident that we do at least 1 or more 2 projects like this here in Israel, and then we will take it elsewhere in the world. It is also a recurring revenue generator because after the [ first year ] of warranty, the municipalities immediately request that you will service and maintain. We continue to have very good business in Italy and in France. I remind you that in France, we are working mostly in the vineyard market. We are selling the software into water consortium. And then the controllers themselves into the firms who are using those to get the allocation of water. So we penetrated more water consulting and see good demand for that. And in Italy, with the water distribution, agriculture and landscape irrigation, we won several new customers there, and we are very excited about the potential in Italy going forward. We added 2 new types of products to our solution. One of them is Internet of Things sensors that was so much required. It allows to connect our system and get more information and let monitor remotely. And we launched the autopilot, the sensor that fills the level of the water at the roots into the landscape market. It was fairly used mainly in agriculture. We found that there is a nice market for that in the landscape irrigation. We did some trials in 2023. They were very successful. And in 2024, we will take it more robust to the markets. Moving into our antenna business. I remind you that we do antenna for both commercial and military use. In military, we do everything from airborne to submarine, where our key strengths is conformal antennas that are actually sitting as part of the body of the vehicle that it is on. And in the commercial market, which is the larger part of the antenna business, we do antennas for fixed broadband wireless access. We do antennas for RFID radio frequency identification, mainly in asset management and toll roads. We are still waiting for the airport application to move forward. And this means that on the tag on the suitcase, you will have an RFID tag, and we are doing the RFID readers. And then if suitcase gets closed, you're immediately being notified, where did it close. And the key market for us in the commercial is, of course, the 5G backhaul. The 5G backhaul market for us is made out of 6 key customers, which are the leading OEMs in the market. It used to be 7, but 1 was acquired by the other. We are working with them, and we are very proud in the positioning in the market. I spoke about the ABS antenna solution, and we are expecting this year to see some more progress there. The second type of solution that we bring is the multiband or dual-band antenna that gives you an automatic redundancy if the higher capacity is not operating well enough. And we think we have a very robust solution, and we see the market starting to develop. One of the biggest market is, as I mentioned, in India, and we are very well positioned to enjoy that as well. Moving into the military antenna market. We had a very successful year in 2023, one of the biggest we had in revenue. And this was based mainly on several new customers that we gained in the last 2 years. It was system houses coming mainly from Europe, North America and one more in Israel. We see a lot of opportunities ahead of us, really large number of opportunities. Regarding the Israeli defense budget, which is about to increase dramatically, we already know that there are some projects that are being planned, where we are the sole source for those solutions. So we are expecting this to increase as well. Our third division is the distribution and special consulting services, where we have here the distribution of RF components that we are the largest one in Israel, representing over 40 companies bringing their solutions to the Israeli market. I remind you that it's not only directly in Israel because Israel is a hub for development for many of the wireless companies in the world. And once we do the design win, we get rewarded when it [ sells ] worldwide. We also offered tethered balloon. You can see at the bottom right, the picture. We hope -- we help selling those systems into the market. We represent [ tick ] on the balloon manufacturer, and we many times teach the end customer how to manage those systems, both in Israel and outside of Israel. The last part of the business is PSK that we acquired 2 years ago. PSK is doing only defense work and has a lot on the table at the moment. We immediately after the attack got a lot of requests for immediate support and a lot of help to be done with our government. At the same time, PSA has the business of shelter building and integration solutions. Unfortunately, we had two projects that were not calculated good enough and the customer was too difficult so we have written a loss to announce about it in the first 6 months results. And I think that the learning curve that we had to pay, we paid. We have a few more projects that are looking much more successful, and we are very optimistic about the future of this business. As mentioned before, M.T.I is very much focused on innovation. We think that this is where is the added value that we bring to the market. We invest quite a lot by wire internal funds into R&D, some with grants that we get from the authority of innovation here in Israel. We expense everything. We don't capitalize it into the P&L. And we used a lot of collaboration, either with the principle that we represent or Motorola in the irrigation business or third parties in order to be innovative solution because this helps you in time of inflation. Regarding the sustainability, we continue to focus on the same 6 metrics that we found before that we have the biggest impact. I am very proud to say that even though it was a difficult year in Israel, and it is still difficult. We were able to invest a lot in the education of our technician and engineer. At the same time, we are very proud that 30% of our employees are from the third age. I think they have a lot [indiscernible] a lot of contribution to the company and vice versa. Where I think we should in working on improve is the number of women working for us. We are always looking for M&As. It is true that since October, we did not really focus on that. We were focusing more on stabilizing the company and making sure the operation continues. I think that we are ready now to look again at acquisition. I believe there would be better opportunities at the moment due to the macroeconomics. But at the same time, we will stick to our always guidance that we are on a [ better sales ] and store mode, and we will do only profit enhancing acquisitions. Back to the figures a little bit. So defense increased this year, it was 37% last year, and this year, it ended at 44% of our revenue. All the divisions are making money and profitable. I think that the diversity is very important. Sometimes this market is up and the other -- and is down. It is true vertical and geographically. We continue to have very loyal customer base. As you can see at the bottom of the left. And we are always focused on growing the earnings per share, as you can see at the bottom of the right. Regarding our global reach, we had a slight change. Americas were a little down and Europe up. And Israel remain more or less the same, and it's important to say again that at least 1/3 from what we sell in Israel is ending in direct export. So our revenue was flat, as I mentioned, but the profits were bigger and better. We had an impairment of goodwill that affected the operating profit. It was relating to the PSK acquisition where we decided to reject the goodwill. Other than that, we had a much better operating profit. And at the end of the day, the EPS and the profit before tax were very nicely. We have a very strong shareholder base, including my family, our partner, the Beer family, and of course, Premier Miton and Herald, who are a long-time investor in the companies. We, as always, continue with the dividend policy and increase the dividend again. And this time, we decided also to go on a stronger buyback program. We extended the buyback from GBP 200,000 to GBP 700 million. So we added about GBP 0.5 million to the program. So if I may summarize, I think it was a good year in a challenging -- very challenging environment. I think that we have very good growth engine. It's a defense budget going everywhere in the world. It's the scarcity of water and the need for data consumption in cellular market. We are positioned very well with strong balance sheet. And we will continue to look for M&As on a better stage than [ store mode ]. And I think that the key is that we started the 2024 very strong with lots of orders in the backlog and lots of pipeline of opportunities. I thank you for your time, and I'll be happy to take any questions.

Moni, that's great. Thank you very much indeed for your presentation this morning.[Operator Instructions] But just while the company takes a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Moni, as you can see there in the Q&A tab, we have received a number of questions that were both presubmitted ahead of today's event as well as those that have made their way through during your presentation this morning as well. So firstly, thank you to all of those on the call for taking the time to submit their questions and money, if I may, sir, hand back to you to read out those questions and give your responses where it's appropriate to do so. And I'll pick up from you at the end.

Yes. Thank you, Jake. So the first question is what effect will the Israeli have on the business, I believe that it was meant to be the Israeli conflict. I think it was pretty much covered in the presentation. We are working fine and operating well. The second question is, please explain to what extent the current shareholder value has been and will be diluted by the execution of the auction to directors and associated parties. So first of all, I think that it's very important to have an incentive program for management. And I think that one of the most successful one is the one that is putting together the interest of the shareholders and the management. And this is option if they are above the market price. We have not done it for a long time, and we decided to do that this year. And I think that if the manager are able to exercise the option at some point, it means that the value of the share is up, and it's in line with shareholder expectations. The third question is, will you have an opportunity to buy the remaining 49% of PSK? Yes, the agreement that we have with the owners of PSK is that we can force them to sell us and they can force us to buy them. There is a mechanism. I think we elaborated it about how it would work. It will come effective only based on the result of '25 and '26. So it can start only in '27. And this is why we have also the contingent liability on our balance sheet. The next question is can you run through sale processes for water management business and what can be done to grow this? And is this revenue repeating annually or more one-off sets? Yes. So first of all, it depends if we are selling to a new customer or an existing customer. To a new customer, we need to have some kind of boots on the ground. It can be us by our subsidiaries around the world. And we have a few or it can be by a value-added reseller that is already trained in the system. It's not an easy system that it's a plug-and-play and you forget. You need to operate it. You need to know what you do. And we, in many cases, help the end customer to plan how to put those controllers in order for that to be the most efficient way. If it's an existing customer, he just buys one more unit and add it to the system, that it's fairly easy and he knows it. We have value-added to resellers all around the globe in every continent where we do not have our subsidiaries. We have the people, and we train them to able to sell. In the areas where we have our own subsidiary, we focus on recurring revenue, and I mentioned the 20% of the entire wireless irrigation business is recurring revenue. This is coming mainly today from Israel, Australia and South Africa, and we are looking to extend it elsewhere. There is a question with the buyback in share, is share cancellation and possibility. At the moment, we are buying it for treasury. I think that we will hold it for quite some time. I think it's -- it's a good opportunity for the company to use its cash and not only distributed but taking for the longer period of time. Next question is signing with the expansion of the buyback. How are you looking to balance the capital structure of the business versus future growth since inactive and liquidity in the shares. So first of all, the buyback is supposed to help liquidity because we are not canceling the shares, we will bring them back to the market at appropriate time. And I think that over the years, we've shown that we know how to manage the balance of the capital structure. We have a very strong working capital. We usually generate cash out of the profits. And the reason that we don't cancel the share immediately is that if we need, we can sell the shares and get the cash back at some point of time. There is a question, how is the business growing in China as the Chinese economy seems to be experiencing difficulties at the moment. So first, we have a very minimal business in China. It's really a low percentage of our business. It's mostly in the wireless irrigation business. I agree that it was slow in the last several years. I think that we also need to improve some things in the product in order to meet the Chinese requirement, and we are working on that. But I'm not the best expert to say anything about the Chinese economy because we are -- it's not a big market for us. I think we have covered all.

Moni, absolutely. Thank you very much indeed for being so generous of your time then addressing all of those questions that came in from investors. And of course, if there are any further questions that do you come through, we'll make these available to you immediately after the presentation has ended, just for you to review, to then add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the platform. But Moni, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, and that would be great.

Yes. Thank you, everybody, for joining the call today. We are very much excited on 2024. I think we have very good growth engine. I anticipate to meet you all again in the future.

Moni, that's great. Thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it's greatly valued by the company. On behalf of the management team of M.T.I Wireless Edge Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.