Replies to post #667 on Elbit Vision Systems Ltd. (fka EVSNF)

[Ponch73]

Fish,

I think that you're right, to a degree. While EVSNF technically generates revenues from the sale of hardware products, some of its competitive advantage appears to reside in its software expertise (which includes writing the software to run on the vision system products as well as programming the hardware to run the software efficiently). But I'd characterize the competitive advantage more broadly by classifying it as "knowhow."

I believe that EVSNF's products are made primarily with off-the-shelf components (IBar, in particular). I believe that it is the low cost producer in its space, and I believe that its ability to stay ahead of competitors centers around continuous innovation.

Like you, I like that EVSNF is predominantly focused on the textile space. It represents a specific niche that the company knows well, and has both struggled and persevered in addressing over an extended period of time. As a result, I think it enjoys a lead in that niche and, accordingly, sees an interesting runway in front of it. There are obviously no guarantees here, but the longer-term opportunity (to replace the manual inspectors of its customers with vision systems) appears promising to me (although, in the spirit of full disclosure, my judgment is far from infallible). Here's my elevator pitch:

1. The value proposition of EVSNF's products are clear to me -- (1) improving yields and reducing raw material waste and (2) replacing labor costs associated with manual inspectors.

2. The business appears to be very attractive -- high cash returns on invested capital (although those returns are a bit overstated because the company doesn't yet pay taxes), and trades at what appears to be a very reasonable price (if one assumes the veracity of the publicly-reported financial statements).

3. Management seems aligned with shareholders by having skin in the game, appearing not to be greedy (despite effectively controlling the board), and demonstrating a 6-year track record of success and credibility turning around the company, albeit with some setbacks (e.g., 2013, missed iBar guidance in 2015).

Cheers.

[rado]

I would say that the software is the most important part the system, but also that you can't divorce the software from the hardware. To build a solution like they have would, I would imagine, require experimentation with different cameras, experimentation with different lighting levels. Perhaps integrating the output of multiple cameras, having cameras at different angles, with varying levels of light shielding, and perhaps integrating the output of different lighting sensors. So it isn't as though you could just hire some software developers to go build a similar system. You might also need hardware - mechanical and electrical engineers. The experimentation with various hardware, I would imagine, would require a big time and money effort to get right in order to build a similar product. The CEO has said in conference calls that he believes it would cost a competitor $20-30 million to build a textile inspection. Which is not a huge number, but it is the current value of the company. I think that competitors are surely watching, but to be attracted to the space there would need to be more money in it for them. Hopefully Elbit will make alot of money and bring on the competition. The CEO has said that they have developed a very complex vision system for dealing with textiles, and that their vision system could be used for many other vision fields, but that it would be difficult for other vision system providers to create something that can do textiles because it is more complicated.