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

Good afternoon, ladies and gentlemen, and welcome to the MTI 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 publish responses where it's appropriate to do so on the Investor Meet Company platform. Before we begin, as usual, we would like to submit the following poll. And if you give that 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 afternoon, sir.

Good afternoon, Jake, and good afternoon, everybody, and thank you for joining the result presentation. I'll start by giving a brief reminder about the markets that we play in and what pushes our company. The biggest division is a wireless controller for water management. As we all know, water scarcity and the global warming are pushing the need to manage water more efficiently, and this is what we do. Our second activity is in the antenna business. We focus today on commercial antenna business for 5G backhaul. We all consume much more data on our mobile and computers and the network has capacity issue at the backbone of the network, and this is where we come in. And the third segment of the business is the defense business, where we do both antenna for military use. And in our special consulting and distribution business, we are focused on the defense business. As you all are aware, defense budgets are increasing all over the world, and we start to feel it and see it in our business. If I will address the implication of the recent conflict in the last 18 months in our region in the Middle East, I can see that we now see the need to restock equipment as most of the equipment was used. So we see large order for restocking. We also see a trend, usually, when we compete in the military antenna business, we compete with division within the defense companies. So if I take, for instance, Raytheon or Cobham, they have their own antenna division and we compete with them on a military antenna basis. What we have experienced in the last year is the defense company in Israel, some of them do have their own antenna divisions have started to require us to produce for them the antenna, giving us the production file and we did the production. The reason is that they were overload with work and they wanted to release some of the capacity. We were, of course, very happy to start with that. We already received several orders from several different system houses. And right now, we are in bidding of several more quotation. I believe that this is a one-way ticket. I think that once they see the capability and they are happy with our production, they will leave it with us, and this will generate another source of revenue for us. In the water management business, we are responsible for irrigating most of the agriculture field in the southern part of Israel. As you know, it was hardly damaged in the attack. A lot of equipment was either destroyed or stalled, and we need to replace it. Only now it is more safer to get there and replace the units. So we expect some nice orders from this area as well. Last but not least, in our distribution business, we have a division that is doing a 24/7 support for our government, installing different type of communication systems. As you can imagine, most of the communication system were hit during the war, both in the South and the northern part of Israel. We just started to fix some of them, and there is a lot of work going forward. If I focus about '24 and see what was the key events in the business. So I think that overall, the results were very resilient. We were able to maintain the revenue in a very difficult environment and continue to focus on the earnings per share and generating the cash. The defense business is growing very fast, as I explained. And this is the main reason for the big backlog that we have reported so far. And I can say also that the number of opportunities ahead of us that we already quoted is significantly larger than in the past. In the water management business, we introduced some new solution. Some of them are ours, and I will elaborate about it later on. And in the 5G backhaul, we started to see some ramp-up. We doubled our revenue in this segment in '24, and we are very happy with the way it continues. Also with our automatic beam steering antenna solution, and I remind that in this case, what we do is we rotate the feed of the antenna in order to reestablish the link if it loses, we see some nice progress, and I will elaborate it. So focusing on the water management business. Just as a reminder, we are a master distributor of Motorola. We sell their controllers worldwide. Most of the IP is coming from the software on our side. And at the end of the day, the idea is to save water. In this area, we also have a recurring revenue model that is coming from service and maintenance that we give to municipalities in the places where we have our own subsidiaries, mainly in Israel, Australia and South Africa. And if I focus about the key advances that we did in 2024 is, first of all, that the increased pricing of the service to municipalities that I have spoken about in the past kicked in. We already see that the revenue from service is 25% of Mottech's business. It should continue and grow because some of the pricing increase were incremental year-on-year. So we should expect more growth in '25. Another very nice vertical market that we entered into is what we call management of fountains. There is one city in Israel that had over 40 fountains each managed locally, and they wanted a full control solution. So we offered them an end-to-end encrypted solution against for cyber safety. The reason that they need is that it's considered as a public pool in Israel because they want to maintain the level of the freshwater. Israel is a hot country. Many times the kids are getting into the fountains. And we completed the project in '24. We engaged at the end of '24 with another city in Israel, and we are now in process of implementing it. And there is a third city that we are now in the final discussion about receiving another solution to be offered. The nice thing about it is the following year, the second year after installation, they go also into service and maintenance agreement. So it will contribute to the service and maintenance. And it's a fairly nice amount. It's tens of thousands of dollars for each municipality for the service. And I believe that after we can do 3, 4 or 5 systems in Israel, we can take it elsewhere in the world wherever we operate. In 2024, selling of equipment in Israel was a bit slow given the circumstances, and it's understandable. But also in Europe, especially in Italy, we had a slow year. We have a lot of bids in Italy. It was only delays, nothing that we have lost, and we expect this to recover in the near-term future. As you can see in the picture, you can see the new controller that we have launched. This is our controller. It is a low-level entry type of controller that allow us to go to the small farms and offer our solution into the farmers in the lower end. And then when they grow up and increase the demand, we can use the Motorola one. We see that as an important step in increasing the technology that Mottech offer and the entire offering for the customers. Going into the antenna business, the start of 2024 for us. So first of all, we had an excellent year, 16% growth in revenue and 56% growth in operational profit. We do antenna for both military and commercial use. In military, we do everything from airborne, whether manned or unmanned, all the way down to submarine antennas, and we do it with different technologies. It can be communication, jamming, anti-jamming, beam forming and other solutions. In commercial, we play in 3 markets. The most important one right now for us is the 5G backhaul, but we have 2 legacy ones. One is the fixed broadband access, which is connecting homes and offices in the Internet. And the second one is RFID, radio frequency identification. If I focus on the 2 growth engine of the company, the military antenna and the 5G. So first of all, it was an excellent year for the 5G, doubling the revenue, and it became the biggest commercial part of the antenna. We are very well positioned working with all key OEMs in the market. Our ABS automatic beam steering antenna solution moved from trials with the customer to trial with the end customers with the cellular provider. And the first response that we see is that they are very happy with the solution. So we just now need to wait and see when they start full deployment. If you remember, we mentioned it quite some time that we have a manufacturing facility in India since 2008. This gave us a big opportunity in the Indian market for 5G backhaul, which is now pushing very strongly and was the key part of the growth of the 5G in 2024. We are very well positioned there. We have very good relation with both the radio manufacturer and some of the cellular operator, and we see good business, although it is still very sporadic. So orders come and then they disappear for a few months and then come again. On the military side of the business, we have seen a very nice increase already in '23, and it continued in '24. It is because of the increase of defense budget and the higher level of technology that we offer to the customer. I mentioned about the build-to-print, the build, the production that we do for the antenna division of the defense companies. And we also are doing quite well in the international markets, mostly in Europe, where we sell to different defense companies in Europe. In Israel, as I said, we see a lot of demand right now. We got a very significant order in '24. It was about $2 million for production, and we were happy with it. And then immediately in the beginning of '25, we received an order for the same product for another $4 million. So it shows that this is part of a very advanced system that has a demand, and we are very happy with the progress here. Moving to the distribution and special consulting services. I would say that we had a mixed year. In the traditional part of distribution where we buy and sell components into the Israeli market, everything was as expected, and the business was doing well. I remind you that here, we are the biggest one in Israel and have the biggest offering to the customers. And on the operation with PSK, we had some problems. Again, PSK is offering 2 kind of services. One is the 24/7 support for our government, which is doing well and will continue to do well as there is a lot of work. Where we did suffer is in the shelter buildup, as you can see the picture to the right. We had a miscalculation on one of the projects that was very harmful. And at the same time, some of the projects that we expected were delayed or canceled because of the war. What we decided to do is that in August, we changed a little bit the business model. We laid off about 25% of the employees in this area of PSK, and we will work more on consulting basis, subcontractors in order to give us the flexibility. I can say that currently, the backlog that PSK has for this year is larger than the revenue we had in '24. We have some very interesting quotes on shelter buildups outside in the market that we are expecting to receive really any day or in the next coming weeks. And as the number of quotation is fairly large, I'm quite confident that we will win at least some of them. At the end of the day, MTI is focused on innovation. We are not trying to compete on the last sense, but we are trying to bring added value. You can see on the right, the list of the added value that we just brought to the market in the last few years. Some of it is patented technologies. But -- and I think that our unique position is that we are not only using the in-house R&D, but we also get support from the principal we represent, whether it's Motorola in the water irrigation business or other in the distribution business. And we are also getting paid for some of the R&D from the customer, but we always try to keep the IP to ourselves. So we are very strong in offering new technologies. Regarding ESG, I think that this year is the best time to focus on our employees and what we did for them. As you can imagine, the environment in Israel was very tough. Nevertheless, we were able to nearly double the time invested in education, learning and giving them more capabilities. It starts with [ Eghan ], who is going to be the next General Manager of the Antenna division. He was sent to strategic management course in the Tel Aviv University, going all the way down to all of the technician that did a lot of hours of technical studies in order to make the company more professional. M&A, as you can imagine, in the first 9 months of the year, we did nothing to even look at M&As. We were only focused on stabilizing the business. But at the same time, when we saw that Mottech in China is not operating well and it's just bleeding more and more, we decided to cut off and we closed the company. All the costs were already occurred in 2024. Since September, we returned to look for a few M&A possibilities. I always say that it will be on a better safe than sorry mode. We look thoroughly. We check a lot. We are not jumping into acquisition. And the key criteria is that it's going to be a profit-enhancing acquisition. And once we have something that is mature enough, we will, of course, announce. If we go back a little bit to the numbers and what we have did, so I have spoken about the double of the revenue in 2024 in the 5G backhaul. Defense is about 42% of the entire revenue, which is more or less the same as last year. We had a strong performance with all divisions being profitable, even though we had some loss in PSK, which is part of the distribution division. We have a very loyal customer base, as you can see on the left. People like to work with us for a very long period of time. And the business is very diversified, both between the different markets that we play, but also globally. If you look at the global pie, you can see that Asia rose a little bit. It's because of the business in India right now. And if you take Israel, Israel, about 1/3 from what we do there is an indirect export. At the end, we are always focused on the earnings per share growth. And as you can see, we continue to grow it. If we look at the financials, it looks like more or less a flat year. But I think that digging into the numbers, you can see some encouragement. I will start with the antenna business. As I said, the business model is working. Our long-term business model is that on any incremental dollar of revenue, we should expect 20% operational profit. So we showed it in the antennas that we grew revenue by 16% and operational profit grew by 56% -- if I look at Mottech, Mottech had very good results. The gross margin has improved. The main reason is the increase in services. And also the operational profit came to a record high, and this is again due to the growth in the operational -- in the gross margin, sorry. Where we did have the problem is the PSK and without it, the results would have looked much better. The company for a long time is focused on shareholders' return. My family owns about 1/3 of the company, so we have interest aligned with shareholders. We have the buyback program in place. We used most of the money in the fund so far, and we own in the buyback about 2.3 million shares. We continue with the dividend policy. We believe that good businesses that generate cash should pay dividends. So we increased it again by 6% this year, and this will be paid in April. So if I may summarize, I think that the business has a very strong positioning. We have 3 good internal growth engine. It's the defense budgets, it's the demand for 5G antenna and the need to manage water more efficiently. We enter '25 with a very strong position with a big backlog, much bigger than last year, over $25 million of backlog for '25 and a little more for '26. But also the pipeline of opportunities that we see ahead of us is much bigger. We will continue to search for acquisition, but as I mentioned, in a better safe than sorry mode, and we have a strong balance sheet to help us do it. With this, I'll be happy to start and answer any questions you may have.

Perfect. Moni, if I may just jump back in there. [Operator Instructions] I'd 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, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But Moni, at this point, if I may just hand back to you just to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great.

Okay, sure. The first question was how extensively is Mottech being market worldwide. So I think we are pretty well positioned. We have our own subsidiaries in South Africa, Australia and Canada. We have a marketing office in the U.S. that is operating via 13 different value-added resellers that focus on selling our products. We have a guy in Italy that's responsible for the Italian market, and we have in many other countries, value-added resellers that we support them and they support the local market. There is no limitation to how much marketing you can put on the table, but I think that we are positioned quite well. Second question is what rate of withholding tax will be applied to the dividend paid to U.K. shareholders in April '25. I assume that it will be somewhere between 20% to 23%. It's really a difficult calculation that is based on where we put the profit from, and we will finalize it in the next few days. And the next question is, how much do you spend on R&D in total? How much is paid for by the customer? So this is really varies from a year-to-year and a project to a project. But I would say, first of all, that we expense all the R&D. We don't capitalize any R&D that we invest. And on top of that, I think that there is probably about between $0.5 million to $1.5 million every year that is being paid by the customer for different projects we do. I have another question. You mentioned a healthy order backlog driven by increased government defense spending. Can you provide more details on the size and visibility of this order? Yes. So as I mentioned, and we mentioned it also in the RNS, -- the order backlog at the moment is above $25 million for this year and with some more left for next year. And we see a lot of opportunities, much bigger number. But again, these are not our contract yet, and we will win some, we will lose some. But overall, we see a very good prospects ahead of us. I think that we have answered all the questions.

Absolutely. Moni, if I may just jump back in there. Thank you very much indeed for addressing all of those questions that came in this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. But Moni, perhaps before really now just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Yes. Thank you, everyone, for joining the call today. We are in a good position, I believe, for 2025 onwards. And we have a very good internal growth engine, and I hope that we materialize it.

Perfect. Moni, that's great. And thank you once again for updating investors this afternoon. 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 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 will be greatly valued by the company. On behalf of the management team of MTI Wireless Edge Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.