MTI Wireless Edge Ltd

LSE:MWE

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the MTO Wireless Edge investor presentation. [Operator Instructions] The company may not be in position to answer every question it sees during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so.

Before we begin, I'd like to make following poll. And I'd now like to hand over to Moni Borovitz, CEO from MTI Wireless. Good morning.

[Moshe Borovitz, executive]

Good morning. Thank you, Zack, and good morning, everybody, for joining us on this call today. In today's presentation, I assume people already know about us, and I will try to focus mainly on the Q1 results and public situation. Just as a brief reminder, and we are a technology company, providing communication, wireless, radio frequency and microwave solutions. We operate via 3 division: water controllers for water management, antennas and distribution, and special consulting services in the RF and microwave field.

We had a good 2021 year with strong revenue and profit growth and generated a good cash flow. Our customer base is fairly long term as you can see, most of our customers -- or most of the revenues generated from customers that have been working with us for over 10 years. And the new ones are coming from new solutions that we bring to the market, the new geographical expansion. We work globally. You can see that half of our revenue is generated from Israel, but half of this is going as an indirect export.

As a short reminder of what we do in the wireless controllers for water management, we provide wireless solution based mostly on the Motorola hardware. And we bring the software that manages those controllers. This is our IP. And in this segment of the business, we have a recurring revenue model based on the software licensing, cell base and maintenance. It is about 20% of this segment's revenue. And we work mainly with large municipalities for landscape or large agricultural firms for managing their fields.

In the Antenna business, we do both military and commercial. Military is about 30% of our business. And in commercial, we focus today mainly on 5G backward solution that I will elaborate more later on. And in the distribution and special consulting services, we represent about 40 companies from overseas, bringing their technology into the Israeli market. We work in the Israeli market mainly in the high tech and defense business, and we do the designing of the components into their solution.

If we look at the macro level of where we also and where the world is headed, I think we are positioned very well. And no doubt that the water scarcity in global warming is an issue. Everybody manages water. I must admit that if you look at those 3 pictures, if we added the fourth one, Lake Oroville this year, it would look a little bit better. They had heavy rains. But still, we all understand that the water consumption and water scarcity is a big issue. And threats and on defense budget, I think that it is very clear right now, unfortunately, to everybody about the world that this is something that's increasing and we are involved in it.

And last, but not least, is the demand for cellular vehicle capacity is big. They have a big issue with capacity as we all use more and more wireless solutions.

And jumping to the Q1 results to discuss more about what we achieved in the first quarter of this year. First of all, we had a good start for the year, with good revenue growth, double digit, following all the way down to the EBITDA and earnings per share. In the cash generation, we made a good cash generation. We usually convert 80% to 100% of the EBIT into cash flow from operation, and this was the case in the quarter as well.

The EBIT margin, we had a slight decrease caused out of 3 factors. One of them is the mix of products that we sold. Second is the increased cost and inflation. We are able to mitigate it to some extent and we will see the benefit of this mitigation in the near future because we were able to increase some of the prices to our customers. And the third factor is the acquisition or the transaction of PSK. As part of this transaction, we got in their balance sheet, accounting wise, intangible assets that we need to depreciate over time.

It is a little bit more dramatic this year. I would say, more moderate from next year onwards. And this is why you see that although the EBIT margin was slightly down, the EBITDA profit is much higher year-on-year. And due to the integration of PSK within the distribution and consulting business, the diverse of the business changed a little bit and this division became a big one, a bigger part of our business. I can say that the integration is going fairly well. We moved their head office into our head offices. So some cost saving will come and will continue. And it gives us a better control, and we see a good pipeline of opportunities with descale.

Discussing the Antenna business and progress in the first quarter. I will start with the dual-band antenna solution that we sell. We see very good demand for the products. But unfortunately, our customers suffer from the supply chain problem. They have problems receiving the microchips that they need for the radio. And of course, with the long lockdown in China, they could not deliver or manufacture the radios. And therefore, they asked us also to hold on shipments. So we have good orders, but not enough shipments in the quarter in this area, but I'm sure that this will be resolved.

On the antenna beam steering solution that we developed, we made a very big progress in this year. First of all, we are happy to say that the solution is valid and working, and we are shipping the samples to the first customer that wanted them. And we see a lot of excitement and requirement from both existing dual-band antennas that we have at customers and from new customers that did not work with us, looking to work with us. So we are fairly sure that will lead in this area at the moment. And we have good excitement from Tier 1 customers that are looking to work with us.

On the military antenna business, we see a lot of opportunities. Some of them are very big. But unfortunately, the order cycle is slower. So we had a lower revenue level in the antenna military business in this quarter. This was actually the main effect on the antenna segment. But we are quite positive with the large opportunities that we see, that we will recap and grow as we wanted to grow.

In terms of the wireless controller business, as you can see to the left, a very solid quarter, continue to grow the business, continue to make profits. I can say that in this quarter and the second quarter, we expect to start selling our [indiscernible] solution, the real time of the [indiscernible] database irrigation solution on the collaboration that we had with Viridix we announced, and we see a lot of excitement about this as well.

In the distribution and consulting, it was an exceptional quarter. Very high growth in both revenues and profits. Some of it relates to the legacy part of the business and some relates of course to the PSK acquisition. We are very happy with this performance. And it is important to remind you that the cash balance reduced quite dramatically in the quarter. But this was due to the payment of the dividend, the transaction with PSK, and of course, the exit from Russia.

I remind you that we have an office in Russia. Due to the circumstances, we decided to leave it and we sold it. At the time when we announced the results for the full year, we said that there is a large cash balance in this company against accounts payable as prepayment from vendors. So both are not consolidated anymore. And therefore, we see the reduction.

Our strategy has not changed. We continue to look to grow revenue on value-added solutions, whether it's the aggregation in the water business or the new antenna like the automatic beam steering antenna. We will expand margins by both doing the work we need to do on costs and on prices to customers. I'm truly sure that we can continue with our business model, that the growth should fall dramatically into the operation margin. I remind you that we have approximately 30% gross margin across all the divisions. And we expect that on the marginal revenue of dollar, we should see 15% to 20% operational profit.

We continue to search for external growth as well, and we are strongly believer in that. But as I always mentioned, it's on a better safe than sorry mode. It means that we will not jump into a transaction unless we know or believe that we are north of 100%, how to manage it a day after. And of course, we will continue to maximize the cash and the benefits of our shareholders.

Talking about shareholders. So we have a solid shareholder base, including my family, of course, and with the support of Premier Miton on inherent investment for many years, we feel comfortable with the good solid shareholder base. Everybody enjoys the dividend. So this is something that will continue. And we will continue with the buyback program. As you are probably aware, we extended it in last March until the end of March 2023. And we maximized the value under it for GBP 200,000. It was GBP 150,000 before because we see the importance of supporting the liquidity and then the ability to get more and more institutional investors into the company.

So I'll try to summarize. I think we have a good proposition going forward. We had a good start for 2022. We feel our internal growth engine in a good position. I think that the diversity of the business has proven itself dramatically in this quarter. We see good progress in the 5G business antenna business, still not in the revenue level, and we can support it and maintain the good relation with the customers with the other division of the business. And we will, of course, continue to work towards more M&As, and again, on a better state than sorry.

So I would like to thank you for attending the call and be happy to take any questions now.

[Operator]

[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 investor dashboard.

Moni, as you can see, we received a number of pre-submitted questions from investors. And I wanted to start off the Q&A session with these.

The first one reads as follows. To what extent has the Russian/Ukraine situation impacted the business?

[Moshe Borovitz, executive]

Okay. So as I mentioned, we have an office in Russia and we decided to leave it. So it, of course, impacted the business. But as you can see, overall, it was not too significant to our business. I think that the defense business will increase globally as part of it, and we for sure will enjoy part of it.

[Operator]

The next one reads as follows. Are your contracts generally in USD? And how does currency swings affect your results?

[Moshe Borovitz, executive]

Okay. So most of our business is in dollars, of course. But as we work throughout the world with subsidiaries, they work with local currencies. I think that the major impact on us is the relation between the U.S. dollar and the Israeli shekel where we pay most of the salaries. Right now, it's in our favor. If you remember in the last quarter of last year, it went against us. This year, in the second quarter, we will start to see a big increase in the dollar against the shekel and will support our business.

[Operator]

The next one relates to drones and reads as follows. Do you use drone technology?

[Moshe Borovitz, executive]

We do not use drone technology, but we do some antennas for military drones, if this was the question. We are very strong in unmanned aircraft antennas for unmanned aircraft for military use.

[Operator]

The next one reads as follows. The risk of food shortage must make your agricultural offering more attractive. Have you approached the big grain companies [ AG Cargill ] to see if you can encourage the grain suppliers to use your technology?

[Moshe Borovitz, executive]

Okay. So we sell mostly indirect via our distributor or via our subsidiaries around the world to the farmers themselves. I think that those big companies that you mentioned are doing some kind of a partnership with the farmers and buy from them the grains, the cobs. So we are involved not directly with those companies, but we are very much involved in the agriculture market and in the demand for agriculture. As I've just mentioned, we are bringing now a new solution for the agriculture market with the Viridix viridix sense soil that will give an autonomic real-time database irrigation.

[Operator]

The next one reads follows. Do you anticipate further sales of the new water fountain management application this year? What do you believe the global potential for this product might be? And will it material to group sales over the next year or 2? Who are the Mottech's competitors in the area? And is -- the Mottech's own product IP, does it eliminate to Motorola?

[Moshe Borovitz, executive]

Okay. Lots of questions. One, we just started to implement the solution for the front end. It's the first, I would say, municipality in Israel that asked us to do so. So we need to learn how the project works, what's the benefits and only then we can really assess where else to go. This will be a step-by-step, and I believe that there is a big market for it. But we still don't know. We need to first get the first project, do it successfully, and then we know.

In terms of competitors for the wireless controllers, so there are a number of large American competitors like Rain Bird, Hunter and Toro. And there are local ones in each area that we play in. But overall, I think that we are a pretty good provider of a solution.

And as I mentioned before, our key competitive advantage is that we are the only one that can combine in one solution many communication solutions. So if you need a proprietary network, we have the controller, then we can go to cellular, go to IP connectivity and even satellite connectivity. And we can combine all of them in one solution that we offer for large agriculture firms usually. So this is, I think, our key competitive advantage.

[Operator]

That does now conclude the pre-submitted questions.

As you can see, we received a number of live questions throughout today's presentation, and thank you to all investors for submitting their questions. Can I please ask that you read out the questions and give a response where it's appropriate to do so, and I'll pick up from you at the end.

[Moshe Borovitz, executive]

Okay. Thank you. Mark asked, "I know that you look to grow and expand through a mix of organic and acquisition. Any in the near-term via M&A?"

So as I mentioned, we always look for growing by M&A as well. Once we have anything to announce, we will, of course, announce.

Simon asked, "Are you seeing any new technologies for market participants entering any of the markets you operate?"

Not really. I think that we are trying to lead the market. As I mentioned, we came first with the automatic beam steering antenna solution for the backhaul. And we came with the agronomic solution for the water management solution. And in the distribution, we work very closely with our customers in Israel, see their needs and go back to the principles that we represent to bringing new technology all the time. This is what I mean by growing revenue by innovation.

Any catalysts to look out for in the near term?

I think that we are growing quite nicely. We prefer to grow step-by-step and not by jumps. Of course, if the macro chip shortage will be solved, then if the COVID-19 lockdown in China is solved, it will push the antenna business. But right now, our main goal is to continue and support our customers. We have a very good customer base there. And once the market is ready, we will gain a lot out of it.

You have seen -- Roger asked, "You have seen to have agreed quite high price. But out of the rest of the PSK, an 8x EBITDA. Can you expand on the value that PSK brings?"

Okay. So I don't think that we have bought the PSK at a high price. I think it was the right price. They bring us a lot of ability to sell, I would say, a more complete solution in the defense business in Israel. We sell a lot of components on the distribution business into the customer. And with them, we can scale up and bring a full solution. They also have some recurring revenue level from services that we like and we know that it is doing good for us in the wireless irrigation business. So this will be the case here as well. And I think that overall, this business coming together will lead us to be in a better position in the Israeli market.

Malcolm asks, "What is the business weighting across each quarter? Is it changing? Or do you expect it to change as you grow?"

In real terms, I don't understand why and I don't see the reason for volatility between the quarters. But at the end of the day, every year, we see that the second quarter is good in wireless irrigation because people in the summer irrigate more and do more jobs. And usually, at the end of the year, we also had a good quarter because maybe defense budget are being used more. But overall, I don't see any reason that any quarter should be much better than the other. And as long as we grow from quarter-to-quarter. And to comparison ones, we are [indiscernible]

[Operator]

You have addressed all those questions you can from investors today. And of course, the company will review all questions submitted today and publish those responses on the [indiscernible] company platform.

But just before redirecting investors to provide you their feedback, which I know is particularly important to the company, can I please ask for a few closing comments?

[Moshe Borovitz, executive]

Yes. I want to thank everybody that show to the presentation today. I believe we're positioned very well. It is true that we are going through challenging supply chain time, but our diversification is proving very, very strong, and I strongly believe in what we do and hope to continue and grow the business as it is growing.

[Operator]

Moni, thank you for updating investors today. Can I please ask the investors not to close this session as you'll now be automatically redirected to provide your feedback in order that management team can better understand your views and expectations.

This will only take a few minutes to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team at MTI Wireless Edge, we'd like to thank you for attending today's presentation, and good morning to you all.