Mti Wireless Edge (LSE:MWE) — Results for the six month period ended 30 June 2020

0:03 Good morning ladies and gentlemen and welcome to the MTI WIRELESS EDGE LTD results presentation for the six months ended 06/30/2020. Throughout this presentation investors will in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated on the right hand corner of your screen. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish those responses where appropriate to do so. These will be available via your Investor Me company dashboard. I'd also like to remind you that the

0:34 presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Moni Borovitz, CEO of MTI WIRELESS EDGE LTD. Moni, good morning. Good morning, everybody, and thank you for joining us today. I will, of course, discuss the first half of twenty twenty result, but also use this opportunity to present the company for any new investors. So let's begin. The company was established fifty years ago by my parents, meaning that we are running this company for quite some long time. We are a long term investor looking for long term growth in both revenues and profitability.

1:21 As you can see, we have a fairly large stake in the company still today. So we have a lot of interest, slight investor in the company. And I'm happy to say that we have two good institutional holdings from The UK, Maitland and Herald, having about 10% together in the company. When we came to AIM in 2006, we said that real companies that make real money distribute dividends. Since then, we paid each and every year beside one year, I think it was 2009 when we decided to skip. We paid over $10,000,000 in dividend. It's not a real 10 policy of the Board, but we do pay each and every year. At the beginning of last year, we decided to try and help the liquidity in the share and announced a buyback program in which we buy the shares, we don't delist them, we put them in treasury and sell them as blocks into the market.

2:22 I think it went very well and therefore we continue with this private program. So what do we do? We're a company that is focusing on wireless communication. We have three different areas of activities. The first one is the antenna. This is the business that we came with today. It represents today about 30% of our revenues. What we do in the antennas is we manufacture and develop antennas for both military and commercial use. Military is about 30% of the business and the commercial is about 70%. We bought about five years ago a company in the machine to machine work, which represents today 40 of our business.

3:11 And here we manage wirelessly water management solution. We are the sole distributor of this hardware by Motorola. We use their hardware and we bring our software as the IP to manage those controllers. The third segment of the business is Distribution and Professional Services, which again represent about 30% of our revenue. And here we represent about 40 companies in the RF and microwave field from all over the world selling their technology in Israel. Now one should understand Israel is a small country, but it is considered as a high-tech nation. And the main reason is that all the giants of the world, whether it's from the East to the West, Intel or Hawi, Ericsson or Nokia, all of them have huge development centers in Israel.

4:03 And our job here is to make sure that we can design win the peace part of the companies that we represent in Israel into the solution that they develop. Once we did so, we will get rewarded on sale in everywhere in the world that they do so.

4:24 So we had a nice growth in revenue over the last four point five years and even better growth in profitability. Our long term model is showing that on any additional dollar of revenue that we generate, we should earn 15% to 20% operation margin. And the main reason is that our gross margin is in the mid-30s and will remain so. And the only thing that will grow in line with revenue is sales and marketing that is somewhere between 1315% of revenue. It was a little bit different this year because of COVID-nineteen. As you can see, the revenue growth is a little slower than what we usually do, but the profit growth is much higher because of a lot of cost saving that we had because of the COVID-nineteen.

5:16 So if we look at the first half result and compare it to our strategic goals, you can see that we met all of our goals. Revenue continued to grow, even though a little bit slower. We have a strong order book and a nice pipeline of opportunities. We announced quite a lot of big order wins during the first half of this year. Operating profit went up very sharp, mainly because of saving in sales and marketing efforts. As you know, most of the countries went into lockdown due to COVID, we're able to operate very smoothly, and had a lot of cost saving. Our business, we usually are able to convert the profits into cash flow from operation.

6:03 You can see that we did so also in the first half of this year, and we significantly increased our cash position. We feel quite comfortable with the current situation that we have. And we know that we are still having a lot of cost saving in the second half of the year as no shows or exhibition have resumed. Travel is still very limited, if any. So we feel quite comfortable to meet the market expectation on profits in the coming year. I'll now go into more detail about the business and the potential. I'll start with the antenna business. As I mentioned, it represent today about 30% of our revenues. The first market in the antenna is the five gs backhaul, which is the biggest growth engine for us going forward.

6:52 When we're talking about the backhaul market in the cellular, we're talking about the communication between one tower to the other. When we're talking with our handset, we talk with the tower and then the tower takes the call and make it from a tower to a tower until the switchboard. This is the new market for MTI. It's a very big market, a legacy market and the five gs represents a new opportunity for us and I'll discuss about it later. LTE and TV white space our broadband communication into fixed premises homes and offices, it represent about 40% of our antenna business. And this have actually grew in the last six months due to COVID-nineteen as people demanded more communication remotely, and then you would see it will continue.

7:43 RFID, Radio Frequency Identification, represent about 20% of our antenna business. And this is mainly in toll roads, where you go with your car, you have a chip in the car and you get the bill at the end of the month or for baggage tracking in airports. As you can assume, we had a little activity in this area due to COVID-nineteen. Military, as I said, it represents about 30% of the antenna business. We sell to the Smiths and Cobhams of the world system houses. We sell from airborne, naval, ground and submarine application antennas. We manufacture our antenna mostly in India. And when I say manufacturing, it's mostly final assembly and testing.

8:31 In order to meet the quality assurance. We are very well known for our quality. And I will come back to our facility in India later on. In the machine to machine business, as I mentioned, we bought it five years ago. Since we bought it, it grew 65% in revenue. It's not only attributed to us this growth, it's also part of the global climate change. As we all know, water is becoming a very critical resource. And if at the beginning, most of the activity was in desert countries, we now see the demand everywhere in the world. The nice thing about this business that it also has a recurring revenue model, about 20% of our revenue from this segment is recurring revenue from both software licensing and service that we provide.

9:25 The distribution and professional services is a nice business as I mentioned. We are today the largest one in Israel in the area of RF and micro communication. It means that usually when a new engineer starts to develop a solution, he would approach us because he knows that we can give him the full solution. We made a lot of design wins and I remind design win is when we are able to put the chip of our vendor into the solution during the past few years. And usually it takes two to three years until such design win is recognized as revenue because it takes time for the customer to finish his development and go into full production. In the last year, we have started to see the design wins and the revenue coming from them from the ones that we did two and three years ago, and we continue to do so very aggressively.

10:21 We opened a similar company in Russia several years ago and it is starting to show the fruits now. At the beginning of this year, we announced a fairly large contract in Russia for this kind of a solution And I believe that in the second half of the year and next year, we will start to see the fruits of it. So let's discuss the key growth engines of the company. As I mentioned, five gs backhaul is one of our key growth areas. As we all understand today, five gs is all about consuming more data. We all consume much more data using our phone and of course now with COVID from home. And the major issue for the cellular provider is capacity. They need to be able to supply the capacity.

11:09 And here is where MTI came to the

11:11 solution. Just to give you an example of how the data is increasing the demand, this is a report that Ericsson just issued two months ago about the growth in demand due to COVID-nineteen. As you can see, it's all over the board. The data consumption is increasing. I believe that this is going to be the new normality as many offices will keep off working remotely from home and school also would be a remote schooling. So what is our advantage in the five gs backhaul market? First of all, as of today, MTI is the only company that can provide both a dual band antenna solution and a flat antenna solution. You can see down at the picture down two pictures, two different type of antenna, the flat one is only 15 centimeter on 15 centimeter and the dual band antenna is an antenna that you can combine two radios and I'll explain.

12:10 What you see at the left picture is a dish antenna, it is 60 centimeter in diameter and you have two radio connected to it. One could be a lower band radio from a four gs and the second one would be a five gs higher band solution. When you go higher in band, you get a much bigger capacity, but you have less distance and you are more vulnerable to the environment. It means that it is less stable and even heavy rain or a crane that somebody is putting for building can reduce the reception of the antenna in the higher band. Therefore, the operators were looking for a dual band solution. It gives them a redundancy plan. So if the higher capacity solution is starting to struggle before because of the environmental stuff, the lower band would continue to work, you would have a lower capacity, but you have a redundancy.

13:05 And second, it allows you to grow the network as you need. You do not need to put all the five gs at one step, you can do it one step by the other. The second issue is that it is shorter distance and therefore they came with an idea of doing a strict level backhaul in an urban area. For this, you must have a flat antenna solution. If I told you that the EDGE antenna is 60 centimeter by diameter, the flat antenna is only 15 on 15. It's a much smaller solution and much thinner and you can put it on top of a lighting pole in the street. The idea that this will support the urban area in order to push the five gs backhaul and we are already engaging with those solutions.

13:57 The market for point to point or backhaul five gs solution is dominated by seven key radio manufacturer in the world. We are already engaged with four out of the seven and their market share is over 30%. So we are feeling very comfortable with our solution and our situation in this market. The second growth engine for the company is in the water management solution. As I said, the global climate change is showing us that we are letting off water and we are going to be in more severe situation going forward. MTI is offering solution in water distribution, water for agriculture and water for landscape irrigation for municipalities.

14:49 We announced several months ago, a renewal of a service contract with one of the largest municipalities in Israel. And in that announcement we also showed the benefits that they get out of the system. They claim that they have over 30% less use of water due to smart irrigation, and they save off over 50% of their entire resources to manage the irrigation. It includes also manpower savings and of course power. So in agriculture, this is much more critical. It's not only saving water and power, it's also gaining more profits. Because when you use smart irrigation in a certain given size of a field, you will get better corpse and more quality, more quantity, sorry.

15:43 And by that, you create higher revenue. I would now like to show you a short clip that will give you an idea of what we do in this market.

15:57 Picture a farm. Tens of thousands of acres of grain, wheat or corn. Imagine irrigating vast lands in which every plow, seed or plant must get the right amount of water. The modern era presents huge challenges for farmers requiring smart management of complex water supply systems over vast distant areas. Motech offers a comprehensive solution based on Motorola's IRINET system for managing complex irrigation systems. By monitoring through smart sensors and precise snapshots, the Motech system enables real time decision making so manageable in fact that you can manage your irrigation system, command thousands of valves in dozens of farms and tens of thousands of acres straight from your rocking chair on your front porch.

16:49 Motech's simple yet sophisticated solution is the perfect synergy between advanced water systems and the world of telecommunication. From planning, through installation, training, guidance, maintenance and continuous long term support. Motech's water systems are already active, managing hundreds of corporate and privately managed farms around the globe. Take control. Connect to Motech to monitor and control any type of crop for a better, more efficient and economical use of energy and water resources ultimately leading to superior yields. Okay, so let's discuss the strengths of Motech in the wireless irrigation solution.

17:42 First of all, as I mentioned, we are the sole distributor for Motorola's hardware. As you know, Motorola is very strong in

17:50 long distance communication. It give us a robust solution. And of course, it's a door opener when you're going to various countries around the world. Secondly, our solution is already proven and is working for many years in the field. It's conservative markets and it's fairly difficult to replace. I already discussed the software licensing and recurring revenue, which is a very strong part of the business. We have subsidiaries in many areas of the world as you can see, and we work with local value added resellers in other. If I can give you example of two markets that we now see developing, the first one would be China. We've been speaking about China for quite some time. We announced some fairly nice orders and agreements signed in the last year in China.

18:38 We did suffer in the first quarter of this year from COVID-nineteen in China as it was fairly close.

18:45 But since April, we start to see the recovery in China and we have a very good prospect in China. We signed several new agreements and we ship quite nicely to China this year. We just recently announced that we decided to buy our partner's part in Motek, China. And this is because we believe in the long term of the Chinese market for us. One should understand that in China, both agriculture and landscape is very familiar today. In agriculture, they need to grow as much food as they can. So they invest a lot in the technology in order to have more growth. And in landscape, the urban part of China is getting bigger and bigger, and they want to fight the pollution.

19:32 And they add a lot of green park into the market. So we see very, very nice growth coming out of China.

19:39 The second example is in France. In France, we have penetrated into the wine industry, wine yards industry with a unique solution. We had a distributor working in the agriculture market in France for many years, and he came about a year ago telling us that until then, the wine yards were not allowed to irrigate and they used water only from rains. Due to the global climate change and the warming, they decided that they need to start irrigating. And the way that the market is built, there are a lot thousands of farmers using water from several water conglomerates or water consortium. In order to allow the farmer to schedule the time and quantity of water that he needs to irrigate the field, we developed a new model within our software that allow him to book and schedule the

20:37 water, the timing and the quantity in advance. It gives benefits to everybody, the farmers knows when he will irrigate and the consortium can manage the capacity because he cannot give the water to everybody at the same time. So again, we're solving a different type of a capacity issue, not like the five gs. And everybody is enjoying this and get an accurate idea of how much water is used and of course, billing. It took us a while to develop the solution within the system. We announced it and released it at the beginning of this year. And we had a very nice reception to the system and we disclosed it a few months ago. If we'll talk about the third growth engine of the company, it's of course the consulting business, the distribution one. As I said, we have exclusive brands that we represent in Israel, as they are growing very nice in the market with a lot of design wins, We see it year over year.

21:37 Regarding the defense market, as you know, defense market is expanding. And if you look at the graph to the right, you will see that India has the third largest budget in defense spending. The Indian government when it buys from foreign companies solution required to then offset, meaning that any exporter that sells into India needs to spend 30% of the project in India in order to give the Indian more work and give them technology. Our facility in India, we were able to convert it into meet those requirements to be eligible as an offset company. We already were able to get some orders as part of this solution and we see it as a semi external growth engine to the company.

22:28 If I'll go back to the numbers, as I said, growth was a little slower in revenue due to COVID-nineteen, but the operating profit was way ahead of what we thought it would be due to the saving. We do see saving coming also in the second half of the year.

22:49 To give you a little bit about the resilience of the company and how strong we are positioned against crisis, it is very interesting to see the sales by the area of expertise and by region between 2019 and the first half of this year. As you can see, there is not a lot of change. All of our businesses grew at about the same pace. You see that also geography wise, not a lot of change. If looking long term, I believe that Israel will remain somewhere between 5060%. Don't forget the 30% of our businesses in the representation in Israel. And all the other markets will probably be splitted evenly. We do see some increase in China and Asia Pacific, and I believe that China is the fastest growing market for Motte going forward.

23:41 We have a quite solid balance sheet. As I mentioned at the beginning, we are a conservative family running the business for fifty years. And we always said that cash on the balance is something that you should have for rainy day. And we see now that companies that do have cash in the balance are better positioned in such rainy days. We have the cash in the balance for several reasons. First of all, is the conservative. Secondly, we will continue with the dividend payments and we will continue with the buyback plan. But more of that, we did several acquisition in the past years and we are always looking for more acquisitions. We are not looking to buy any startup or a turnaround business. We are looking for good businesses that we can add value to it or it can add value to us.

24:33 And by combining them with us, we can accelerate profits. We are always on a better safe than sorry mode when we're talking acquisition. People who heard me before know that I am always saying that I will not be shy to stand two years from now and say I did not find the right acquisition, because we check thoroughly and we are always better safe than still in these areas. Going back to the buyback program, as you can see in the last bullet, it knew the liquidity in the share jumped nearly five times in the first half of this year if we compare it to 2019. We believe that part of it is because of the buyback program that we have in place. We are very happy with this liquidity.

25:20 This is the main issue and the main reason for doing this buyback and we will continue.

25:27 If I may summarize, we have three growth engines from three different internal division of the company. All are looking very well, all are positioned very well even though the COVID-nineteen, it's the five gs backhaul, it's the water management and the distribution. On top of that, we have a semi external growth engine with the offset facility and we will pursue other acquisition. We keep the cash, as I mentioned, in order to support this. And I think that this is a good positioning to be in this moment. I would like to thank you all for spending your time and I'll be happy to answer any questions you may have. Molly, thank you very much for that presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. But just while the company take a few moments to review those investor questions submitted already, I'd like to remind you the recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard on the Investor Meet company platform.

26:32 Lastly, before I hand back to Moni, I'd like to remind you your feedback is important to the company. Immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order the company can better understand your views and expectations. Moni, before we look at the questions submitted during today's presentation, we have had a number of questions pre submitted by investors ahead of today's event. Perhaps I could just address these two, if that's okay? Yes, sure. Okay, let's start with the first one. What impact will there be of loss of four gs, five gs supply from China? Okay, if you remember, when I discussed our positioning in the five gs market, I said that there are seven large radio manufacturers that dominate this market. Huawei is of course one of them.

27:19 We work with four out of the remainder six, we are not working with Huawei. So if Huawei lose some market share, I guess that all the other will gain market share and it will play for our benefits. Thank you. Thank you very much. Right on to the next one. In terms of cost savings this year, do you believe some are sustainable into next year? To some extent, yes. We still do not know how COVID-nineteen will end. We are just about the second phase of it, unfortunately. But I think that everybody has now learned that there is a new normal life. I believe that there will be less flights, I think there will be less exhibitions.

28:06 So it's hard to say how big the savings will be, but they will be for sure. Thank you, thank you very much. You kind of touched on this a little bit in the presentation, but do you have any acquisitions in the pipeline and which areas would you look to make acquisitions in? Okay, we don't have anything in the pipeline because if we had, we should have disclosed it. But saying that I can say that I invest a lot of time looking in companies, looking at potential acquisitions. And as I said, it should be something that relates to wireless, something that we understand, something that we can add value to or it can add value to us.

28:52 And of course, as I mentioned, it will not be a startup, it will be a solid business that we can accelerate its profits. We're always looking for a profit enhancing acquisition, I would say. Fantastic. Thank you. And last pre submitted question, why do you believe MTI represents good value to investors? I think we have several nice growth engine within the company. I think we're quite solid. So you have solid, you have growth, we have the dividend payments. And I think that the fact that we are a global company and with different kind of, I would say of markets, give you some kind of diversity and make it even more solid because not everything will collapse at one and not everything will grow at once.

29:43 So we have this kind of a good diverse. Fantastic. Thanks, Moni. I know I haven't given you perhaps a great deal of time just to review some of the questions that have submitted today and thank you for answering those pre submitted ones. But perhaps I could hand back to you just to have a little scan through some of the questions. If I could ask you to read out the question and just give your answer, that'd be fantastic. Yes, sure. One of the question is, can you give details of any further orders received by Motte from China recently and whether you expect material growth this year? So yes, we did receive some nice order in China, I would say in the last two to three months. One of them is even looking into it's a first order that we see that can be a cooperation with the big company in the agriculture part in China.

30:36 We've already shipped part of it in the second quarter and part of it just in July. And we do see already a nice growth in China coming to us this year. Another question is actually two questions. One is in the first half of twenty twenty profitability came from cutting R and D and distribution costs. Is this cost reduction is sustainable or one off? And where will profitability come in second half, continued cost reduction or top line revenue growth? So I'll answer this first. First of all, it's not one off, as I said, I believe that in the second half for sure it will continue to occur.

31:23 But as I said, I don't think it's one off because I believe that also next year and in the coming years, we will learn to work a little bit differently. In terms of the profitability, I do we tend to have a better second half every year. I hope that this is the case here as well. I hope that COVID-nineteen is partially behind us and all the world will come to a new normality. And we are quite optimistic also on revenue growth. The second question was that the company has a cash of about $0.10 per share. How does it plan to use it? So I think I've answered it already, a dividend payment, generating more cash and looking for acquisitions. I'm scrolling down the share the question.

32:18 Okay, beyond the current Zvi division you operate in, are other areas you would consider moving into where your products have a particular benefits? So as I said, we see ourselves as expert in wireless communication. For example, the controllers that we now do are focusing on water management, but at the same time we manage in some areas of the world electricity, in sports parks, they use it both to irrigate the sport park and to operate the lighter, so we can develop into this area. And as I mentioned, regarding the acquisition that we look, it has to be wireless and it has to add value. So it's not necessarily, I would say, water management or antennas.

33:11 Will you be moving any services to the cloud? I'm not sure what do you mean by the question, but today some of the services that Motech offer are already out in the cloud and you and as an end user can manage your system from anywhere in the world. I'll go to some more question. China is a key territory of your water management business. So you see any new territories that you see you're expanding into? Yes, we always expand into new territories. In South America, we are working now in Peru and Chile. Again, it's a bit more difficult due to COVID to travel and be there, but we see those also as a nice market potential for us.

34:02 But as we all know, China is huge and China is now investing a lot in it. And we see it as the biggest growth market for Motive. I think I've covered all the questions. And there is one more question. So we have one more question that I would like to answer that I see here. When do you anticipate five gs orders increasing materially, this H2 or next year? It's very hard to say and it's very hard to say what's materially. We already see five gs coming, it's coming a bit faster than everybody anticipated because of COVID-nineteen. But one should remember that when they put the system, the network, they do it phase by phase, it takes time.

34:51 And I believe that next year would be a bigger jump. Thank you very much. Think I was just checking. Think you've actually addressed all the questions you can from investors. And thank you very much for that. And of course, the company will review all questions submitted by investors today and we'll publish those answered on Meet company platform. I know I think some of the attendees may be having localized sound issues, so apologies for that. Copy and a recording obviously will be on the platform. Moni, perhaps I could just ask you just to wrap up and then I will direct investors for feedback. Yes, thank you very much for joining us today. I think that we have a good story. We believe in the company. We have a large stake in it.

35:37 And wish you all the best and keep safe. Mone, thank you for updating investors today. Could I ask investors not to close the session as you'll be automatically redirected for the opportunity to provide feedback? If you've accessed the meeting via our website, the page will just appear in front of you. If you've accessed via the link in the email, you will need to log in and submit your feedback there. So on behalf of MTI WIRELESS EDGE, an investor meet company, we'd like to thank you for attending. We'll wait a couple of seconds for the feedback form to appear. Monty, thank you again for your presentation. Thank you very much. Thank you and have a good day. This concludes today's session.