Magic Software Enterprises Ltd (MGIC) 2003 Q2 法說會逐字稿

Welcome to the Magic Software second-quarter 2003 earnings release. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will be given at that time. (CALLER INSTRUCTIONS). As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Menachem Hasfari.

Thank you very much. Hello, everybody. Good morning or good evening, wherever you might be for this call. I am really glad to welcome you all to Magic's second earnings conference call. I have with me here today David Assia, Magic's Chairman and Founder; Avikam Perry, Vice President of R&D, Guy Bernstein, Magic's CFO and VP of Finance. And on the line with us from London is David Leichner, Magic's Vice President for Worldwide Marketing.

We will deliver today definitely a powerful quarter that keeps the momentum from the first quarter of the year. Our net income in the second quarter is the highest in the last 11 quarters. And we hope to keep the same momentum for quarters to come. Despite continued freeze in the IT markets everywhere, we have kept our level of sales from the first quarter, but have increased profits significantly. Improvement has been made in many aspects of our activity.

Growth in operating margins are higher, revenues from sales of licenses are the highest in the last seven quarters, and our professional services were in the quarter at a consolidated gross margin of 40 percent. Europe, which accounted for 40 percent of our total revenues, has performed beautifully, increasing its sales from the first quarter by more than $1 million. Magic, Inc., in Irvine, California has delivered the quarter and the first half year, which are the best ever since its inception. CoreTech in the United States, I am happy to announce, is stable and profitable.

As a single entity, Japan was the largest revenue generator in the quarter, with 14 percent of total revenues, followed by France, Magic, Inc., and CoreTech, with 11 percent each. The four largest branches of Magic in Europe, France, Germany, the UK and Holland, accounted for 35 percent of total revenues in the quarter.

We have good news in the technology area, as well. The newly released version of 9.4 eDeveloper is making solid roadways into the Magic community of developers, and is valued by many as Magic's best version ever, contributing undoubtedly to the high level of license sales in the quarter. Our new iBOLT Integration Suite is progressing as planned. During the quarter, we have already made the first iBOLT sales to the municipality of San Francisco and to software houses in Europe.

Our iBOLT partner community is growing steadily, and iBOLT is now part of business integration and business process management research by leading analysts. The new partnership we have launched with iWay, the world's leading supplier of integration interface and connectivity technology that we have announced last month, opens for iBOLT and Magic a world of opportunities. The seamless combination of iWay's technology with iBOLT has now opened iBOLT to virtually any existing enterprise system and industry format, an openness that will, we believe, help Magic Drive the penetration of iBOLT in the market of business integration. The interesting and most encouraging fact to note about iBOLT is that it opens for Magic many doors that have been shut for us in the past. The mere fact that iBOLT brings to the EDI (ph) and business process management markets an affordable solution that is based on the proven and solid technology of eDeveloper gives us an edge that is appreciated by potential customers everywhere.

The iBOLT Suite has been demo'd to hundreds of customers, partners and analysts worldwide, and the general reaction was that iBOLT can and should make a difference in the integration business process management markets. iBOLT integration projects are now under various levels of negotiations with many customers, and we hope to be able shortly to announce more things (ph). Our cooperation with IBM has deepened, and we have just launched a campaign to promote the iBOLT Integration Suite on IBM's iSeries platforms. The campaign includes joint presentations of Magic and IBM personnel in various countries, as well as mail campaigns, joint seminars and Webinars. We are now planning to renew our relationship with Wall Street, and are planning a series of roadshows and analysts' meetings, both in the United States and Europe. We feel that with the new strategic direction we have taken, and with the improvement in our earnings, we have a good story to tell.

As you have seen, this was another good quarter, and all that is left is to continue the hard work of so many people in the Company, hoping that the following quarters will be as successful. This concludes my presentation, as I believe you have so many questions, and I hope truly to be able to bring you good news in the very near future, and will be glad to take your questions now, please.

Charles Silk, C. Silk & Sons.

A while back, I noticed on the message boards that you had an interview with an Israeli publication, and said that at that time -- I think it was about five or six weeks ago -- that you had 6.5 million of sales in the pipeline. Could you tell me how many of those have closed, and what the pipeline looks like right now, dollar-wise?

The iBOLT pipeline has grown to close to $8 million, 1.5 of them in the United States and the rest in Europe and Israel. But you have to -- I guess you know what the pipeline is? That's a collection of deals that are under various degrees of treatment and negotiation. Some of them are rated very high, some of them are low, as those are deals that the customers have been just approached. I cannot give you a forecast on numbers of sales of iBOLT, but like I said, we had sales of 0.25 million in the second quarter, and we are definitely seeing an increase of sales in the quarters to come.

Now, there was an article in Barron's this week, a short article; it's on page 11. I'm sure you haven't read it. It talks about EAI and ETL -- EAI being the enterprise applications and ETL as being extract, transform and load. And it indicates that some of the deals with people who are providing EAI are webMethods, Tipco, Vetria, Sebold (ph), and it mentions that ETL is a lot less expensive. And I guess it was a person by the name of Rob Tholmeyer (ph) out of New Hampshire who gave this guy information. I'm just wondering where Magic fits in the with this, in the EAI or are they in the middle of the two?

I will let Mr. Perry, our VP of R&D, answer that, please.

Well, most of the competitors in the EAI market are providing ETL. And I think what makes us unique in this area is that we are bringing a bit more than that, maybe much more than that. We are providing the business process management capabilities because we're coming from application development. Now, we made the agreement with iWay that will provide us what all the others have, in terms of transformation and connectivity, in addition to what we're bringing out of iBOLT as part of the platform we provide. But I think our uniqueness in the business process management, and not just limit ourselves into the EAI or the transformation only.

David Honniker (ph), a private investor.

Actually, that's not 100 percent correct; I am not yet an investor, but hope to be sometime in the future. But I have been monitoring the progress of Magic Software, and I just want to complement Mr. Hasfari and his co-workers on an excellent job of bringing the company to profitability. So congratulations, and that was all I had to say.

William Swanson, B-Sharp Consulting (ph).

I am a private investor and a developer. I started off with using Magic version 7, and I was really impressed by the development tool. But one of the things I've found has sort of hurt the market a little bit was trying to get started with Magic, because it was taking quite a bit of expense to get started with it. And now, I see that you can run online, which I have already started doing; I had a very good conversation with one of your customer service reps today. And I'm curious about the marketing plan that you have to the companies with the iBOLT, just because I know one thing that is a real problem nowadays is everyone is extremely busy using what they have, and they really don't want to look at a product unless they can really see a change in profitability, or return on their investment. So I would like to find it what kind of plans do you have to get around this hurdle.

David, would you like to answer that?

Actually, what we're doing is we're putting together some very specific and targeted focused campaigns exactly addressing the whole idea of total cost of ownership and return on investment, and they will kick off, in fact, in a couple of weeks. This is in addition to the ongoing campaigns we're doing. We're starting a very significant series of Webinars to open up the iBOLT product, and the actual title of this Webinar series is Best Practices in Business Process Integration, where we will be focusing exactly on these issues of return on investment and total cost of ownership. And you will be hearing more announcements about that over the next week or two. We're doing this in conjunction with both IBM and also eBizQ, which is one of the leading portals for EAI, and also in conjunction with EAI Magazine. So we're working with some of the leading organizations -- marketing organizations in the industry to really push this message forward.

Joe Vittich (ph), Manahaupin (ph) Capital.

I just had a question with regard to the U.S. market, what you guys see happening here -- is it stable as she goes, or could you just make some comments there?

Yes. Actually, our activity in the U.S. market is divided into three areas or centers. One is the Magic, Inc. range in Irvine, California. The other one is CoreTech in Philadelphia, King of Prussia, Pennsylvania. And the third one is AOD, Answers on Demand, our company in Fort Lauderdale. And like I said, Magic, Inc. has delivered the best quarter and half-year ever, and they see a steady increase, both in licenses and in professional services and projects that they are doing -- for instance, for the municipality of San Francisco, for the Fritz company, for the state of Washington and so on. And they will keep doing fine for the rest of the year.

Like I said, CoreTech has now been recovered from the problems we had last year; it's now profitable, and business is steadily growing. And it will grow with the industry. They have like 70 external consultants that are providing infrastructure services to companies. Half of the business comes from the pharmaceutical industry, half of the business from the banking industry. And they are doing fine. AOD in Florida is growing at a double-digit pace every year, or the six months, actually, in the adult care industry, and are doing very well. So this quarter and this half-year was very good for us in the United States. We hope to keep the momentum for the rest of the year.

Mark Silk, C. Silk & Sons.

What percentage of your revenue this quarter was from IBM? And in that revenue, can you break it down as a percentage? How much of it was iBOLT, eDeveloper, et cetera?

I will let David and maybe Avikam answer about the IBM thing, but our income from the eDeveloper tool, both development kits and runtimes, along with the maintenance and support contracts that go with it, was about 45 percent in the first half of the year, professional services, another 44 percent and applications, 11 percent. iBOLT, like I said, in the third quarter -- in the second quarter, about $250,000 to $280,000, because we've just started. Any comment about the IBM business?

I would say, as an estimate, I don't think we have the breakdown of the actual numbers. But I know that we have done the estimates in the past, and they have ranged between 20 and 30 percent, depending on the quarter. That's revenue that would come in from iSeries, pSeries and xSeries type of installations.

With Formula owning 54 percent, approximately, of your stock, what scares me as an investor is what is stopping Formula from either taking you guys private or buying you out for a minimal premium once you guys are about to turn the corner, which it looks like you are doing right now?

I would like to ask David Assia, our Chairman, to answer that.

Well, you know, in order to take us private, at these rates, one would have to raise quite a bit of capital. And I don't think that it's Formula's intent right now in doing so. In fact, they have been buying quite a lot of shares in the last couple of months, as you can see, because they thought that the valuation of the Company was extremely low, which, after the dividend distribution even went down even further. So they wanted to show they have confidence in the Company. They still do, and the way they operate is that they hold major shareholdings in quite a few publicly-traded companies such as Sapiens, Crystal and others. And I don't see them trying to take any of the companies private at this point in time.

You said raising capital might be an issue. But just, say, at even $3 a share, with 17 million shares out there left, that's $51 million, and I know they have in excess of 100 million. But the question is -- so there is really nothing to stop them, but you just hope that that's not the case?

I don't believe that that's the case. That's not how they operate. They have done so in the past only in cases where the companies were really very seriously undervalued, and not the other way around. So I don't see that would be the case right now.

And regarding the roadshows, because you really don't have very much analyst coverage right now, can you tell us who you're going to be seeing?

We don't know yet. It's in the planning.

Randy Cole (ph), private investor.

One of your partners, Pervasive Software, announced an exhibition today in the integrations market. I'm wondering, are you going to be competing against them in the integration market now, or are they kind of doing something different?

Did you say Pervasive?

Yes. They bought Data Junction. I don't know if you're familiar with them. They were a private company.

We have not seen have not seen that, but -- I don't know. I don't believe they have a fully-fledged Integration Suite, but we will see. We haven't seen that.

And then the $8 million in the pipeline -- what would be the average sale?

The average deal?

Yes.

Around $100,000 on the average -- 110.

You have quite a bit, then, out there -- a lot of leads?

Yes.

At this time, then, I am showing no further questions in queue. And to this point, no one else has queued up with any questions. Gentlemen, if you would like to go ahead with any closing comments?

Yes. The only comment was that, like I said in the beginning, we have done well this quarter. We have done well in the first quarter, and we just hope to keep the momentum and bring you good news for the rest of the year. Thank you very much.

Thank you. And, ladies and gentlemen, this conference will be available for replay starting today, Monday, at 10.30 PM Israel time. It will be available through the 25th of August at midnight Israel time. You may access the AT&T Executive Playback service by dialing 1-800-475-6701 for us in the United States or Canada, or 320-365-3844 from outside the United States or Canada, and then enter the access code of 693-619. That does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.