Magic Software Enterprises Ltd (MGIC) 2003 Q4 法說會逐字稿

Welcome to the Magic Software fourth-quarter and year-end 2003 results conference call. (OPERATOR INSTRUCTIONS). With us on the line today is Mr. Menachem Hasfari, CEO. I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all content of this conference call.

Mr. Hasfari, would you like to begin?

Yes. Thank you very much. Hello everybody. Good morning and good afternoon or maybe even good evening, and welcome to Magic's fourth-quarter earnings release conference call.

This time I am addressing you from the Magic annual kickoff event that takes place this year in the Southern resort town of (inaudible). Over 400 Magic employees, premiere customers, business partners and IT leaders are attending a beautiful and as you can imagine a powerful event.

The kickoff summarizes our achievements in 2003 and presents to our employees and business partners our strategy and work plans for 2004. The kickoff is also used to intensely train our sales and marketing people. With me today are David Assia, Magic's Chairman; David Leichner, Vice President of Worldwide Marketing; Guy Bernstein, Magic's CFO; Avikam Perry, Vice President of R&D, and and we also have Regev Yativ, the Managing Director of Magic Europe and Oren Isbar, Managing Director of Magic USA and Magic's Corporate Secretary (inaudible).

Today is a great day. Today we announced the good results of our hard work, our focusing on Magic's core business, our success in turning around the company and our achievements. Total revenues for the fourth quarter were $17.3 million, an increase of 26 percent from $13.8 million for the fourth quarter of 2002 and a 10 percent increase from the $15.7 million we posted in the third quarter of 2003. Net profit for the fourth quarter of 2003 was $1.23 million compared with a net loss of 3.3 million in the fourth quarter of 2002, an increase of 51 percent from net profits of $813,000 for the third quarter of 2003.

Software licenses. Sales of software licenses for the quarter were at $6.36 million, a 10 quarter record, increased dramatically by 78 percent from the $3.58 million in the fourth quarter of 2002 and by 34 percent from 4.75 million in the third quarter of 2003. Included in the software license sales of the fourth quarter are sales of iBOLT licenses of $900,000 representing 14 percent of total license sales in the quarter.

Application sales were $2.25 million for the fourth quarter, up 80 percent -- 80 -- from $1.25 million for the fourth quarter of 2002 and up 32 percent from the 1.7 million in the third quarter of 2003. Revenues from consulting services at $5.8 million decreased 6 percent from 6.17 million in the fourth quarter of 2002 and decreased 10 percent from 6.46 million in the third quarter of 2003. This decrease in consulting service services was mainly affected by the decrease in revenues in our Philadelphia subsidiary, CoreTech. However, CoreTech is now profitable and increasing both revenues and profits at an increasing pace.

Revenues for maintenance and support at $2.85 million were up 3 percent from 2.77 million in the fourth quarter of the year and 2.76 million in the third quarter of the year. In the fourth quarter of 2003, Europe accounted for 42 percent of our total revenues, North America for 31 percent and the rest of the world, Asia-Pacific for 27 percent. Revenues from Europe grew in the quarter by 77 0 percent from the fourth quarter of 2002, grow 10 percent in the USA, while Magic Inc. grew at 39 percent. Japan has grown 5 percent from third to the fourth quarter of last year. For the full year of 2003, total revenues were $63.39 million, 6 percent up from revenues of 60 million in 2002. Net profit for the year was $3.07 million compared with a net loss of 5.66 in 2002. Software licensees for the year for 2003 were $19.7 million, an increase of 30 percent -- 30 -- from 15.1 million in 2002.

In the sales of software licenses in 2003 are included iBOLT licenses sales of close to $1.8 million or 9 percent of total license revenues that were made mainly in the second half of the year after the product was released to the market. Application sales for the year were $7.28 million compared to 7.36 in the year before. While consultancy services were $25.55 million, down 4 percent from previous year. Again the decrease of consulting services was affected mainly by the decrease in revenues in our Philadelphia subsidiary of CoreTech in the first half of the year. But this by no means is a trend and should not be regarded as such.

In 2003 Europe accounted for 39 percent of company revenues, North America for 33 and Asia-Pacific for 28. For the year, our European sales grew by 27 percent and Magic Inc. by in California by 29 percent. As a matter-of-fact, Magic Inc. has produced in 2003 historic record sales and profit figures since its exception of 10 years ago.

During the fourth quarter, our iBOLT sales have been increasing steadily, and we recruited many new business partners. Significant amounts have been and still are invested in training of our iBOLT sales and consulting personnel. Close to 20 professionals in sales and consulting were recruited in the fourth quarter, many of them from industry leaders in the field of integration like Web methods and highway and others.

The acknowledgment we have received recently from technology analysts regarding iBOLT has been remarkable, and you have all seen the report of the MetaGroup for instance established two weeks ago showing iBOLT and Magic and positioning them as a serious challenger in the field of integration.

Our outlook for 2004 is promising. The tables are now set for a revenue growth of approximately 20 percent, with iBOLT representing the majority of this growth. Actually iBOLT is planned to be Magic's growth engine, growing at an increasing pace while our traditional business of application development through the end developer will grow at a steady pace of 5 to 6, maybe 7 percent a year.

I believe Magic presents a unique combination of a solid business, our bread and butter of a well-established, traditional and enjoying an excellent track record and developer in the field of application development on one side and the embarking high potential new business of iBOLT in the field of integration, both EAI, Enterprise Application Integration, and BPM, Business Process Management.

Our strategy going forward is simple. Magic is focusing on the methods it knows best, the development and marketing of tools, eDeveloper and iBOLT along with the consulting services that accompany the technology. We are targeting the midsize market where we feel we can compete effectively without application development and integration (inaudible). IBOLT we feel carries with it clear advantages that will help us penetrate the market rapidly.

On one hand, low entry costs and low TCO, total cost of ownership, while on the other the quickest implementation of integration project and the most efficient connectivity to Legacy systems. IBOLT is now going for a (inaudible). In conjunction with our partners, we provide us with a vertical knowledge and expertise to make our integration offerings more attractive to our customers.

So like I said before, Magic is prepared prepared for growth and higher profitability. All positions are in place, our people are well-trained, our strategies in workplace is well established, and (inaudible) to execute according to plan.

I would like to thank our dedicated employees worldwide and our management and you, our shareholders and investors. I hope to continue to report to you in the near future about our good performance as we go forward in 2004. We now would be glad to take your questions.

(OPERATOR INSTRUCTIONS). Euna Vicering (ph).

Good afternoon, gentlemen. Would you care to discuss margins -- growth and operating please going forward?

Can you repeat the question please?

Would you care to discuss growth and operating margins going forward?

Like I said, we are targeting sales growth of about 20 percent. Operating margins and net margins will be according to that growth. We cannot give specific numbers.

Thank you very much.

Boden Brasfelderhead (ph).

Congratulations first of all. (inaudible) you said that the steady business, the consulting business and everything you grow 5 to 6 percent. How much do you think the iBOLT business should grow?

Not about the consulting business but our kind of traditional business (multiple speakers)

Your basic business?

Right, right.

What will iBOLT grow at; what rate?

IBOLT should grow significantly. I would say we are targeting for 2004 compared to 2003 growth of between 4 and 5 times of actual sales.

4 and 5 times? I know you cannot -- the 20 percent -- can you categorize the 20 percent as conservative or moderate, or can you categorize at least the 20 percent growth you're talking about?

I would say that at this point it looks achievable.

(inaudible) to me. It seems a little bit conservative from the deals that we're assigning. One other question please.

It is conservative.

One other question. A lot of the deals are coming from Europe. Do you see anything in the United States changing? Europe has become a big big part of the business. It was a third, a third, a third roughly two years ago a year ago. Can you talk about that a little bit?

Yes, I can. We are lucky to have with us Oren Inbar, the Managing Director of our American Operations, to address our more specific details. But in general, the United States is poised for growth in 2004. Definitely in our Magic Inc. subsidiary in Irvine, California, definitely in ALD (ph), our subsidiary in Fort Lauderdale, Florida, but also in CoreTech in Philadelphia. Steady growth.

Charles Silk.

Good morning; good afternoon. The growth is starting to accelerate, but I have a couple of questions. I listened to your release today, and there were twelve situations that you have announced. Could you tell what portion of those announcements have generated revenue in the last quarter? Or this is a ballpark?

Just looking through the list here. Actually all of these have generated some kind of revenue in the last quarter as a lot of them were projects that were signed over the course as we mentioned here. We either signed or closed during the last quarter. So these are either deals that were signed, let's say, the quarter before that were announced during this quarter, or they were new deals that were assigned during this quarter. The recognition would take place on an ongoing basis depending on the size of the project and the milestones of the project.

So what you would you say around 10 or 15 percent of them have revenue from going into the last quarter?

I would say most of them have revenue going into the last quarter. But as I said, it's broken down by the milestones of the projects itself. For instance, the CoreTech projects that we have announced are ongoing for at least for the next twelve or 18 months for instance.

I am just trying to get to how the revenues are going to be going forward based on the deals that you signed. I got a feel for it. It looks like that the growth is in there if not all of the contracts have only generated a small amount of revenue in the last quarter.

A ballpark figure is like 40 or 50 percent of those are recognized already in the 2003 numbers and maybe even 60 percent of them will be recognized -- like I said, for instance, the 2 gig CoreTech projects are ongoing for instance.

One other question. You had indicated in the Jerusalem Post that you were meeting with the SAP people. Can you explore a little more about what is going on with them?

I saw what the Jerusalem Post wrote; I know what I said. What I said was we are approached and we are approaching many applications in the field. One of them is SAP.

Okay. Thank you.

Mark Silk, Silk and Sons.

Good morning or afternoon, gentlemen. I see that we have been signing a lot of deals in the $100,000 to $500,000 level probably because they are quickly do close. Are you still focusing on some of these bigger contracts? I know the time horizon could be a year or so for you to close these, which can be a cumbersome process, but what is your strategy going forward? Are you looking at the both of these or focused on the smaller end?

In general, like I said before, without iBOLT especially, we are targeting the midsize market. The midsize market, when it comes to integration projects, are projects in the vicinity of $200,000 to $250,000 -- maybe $1500,000.

But one significant factor to note is why would other integration vendors take advantage of licenses if there are not 50 or 60 percent without (inaudible) 75 or 80 percent because of the quake installation and the low figure of services that compromised our typical integration project, which makes it more profitable by the way because gross margins are higher on licenses.

And also on the integration software with the iBOLT, it looks like that is where your acceleration in revenues is going to come from. Can you give me any anecdotes that prove this?

I would say the anecdote is basically in the pipeline that we have that is continually growing. The acceptance we are that getting both within our own customer base, the prospects that we are dealing with as well as the analysts that we are coming into. And, of course, I would mention very quickly the new partners that we are recruiting.

We have recruited 22 partners over the last 34 months. Those partners are opening up to us their customers bases. We are actively marketing and campaigning into their customer bases. So it's not only our pipeline that is growing, it's also their pipeline. The more that we recruit new partners -- if you're looking for an anecdote -- the more we recruit the new partners, the better. Or you can say the multiple of how many deals we are going to be bringing in.

Keep up the good growth and good luck.

This is Oren here from the U.S.. I would like to share with you a little story regarding the last question of how do we see growth for the future. We signed up back in August I think it was a partner in New Jersey US called Evesta (ph), an outfit of about 200 people in the U.S. and another 100 people in India.

And first of all, this is a new partner, somebody who was completely new to the Magic technology and to the Magic family. Within approximately a month and half, they were in negotiations with one of their clients, and in fact, iBOLT helped them close the deal. This is one of the leading cellular providers in the U.S.. I hope (inaudible) would be able to come up with the (inaudible).

The initial deal was for $170,000 if the project is up and running. The customer is extremely happy. They, in fact, have been planning and trying to find a solution for the problem with another technology. When not being able to do so, we provided a solution within three weeks.

So I think one of the significant things and this is tie-marked to one of the other questions that was asked before is, how do we see growth in the U.S.? It is definitely through new partners, middle size system integrators that are going to and the leaders, of course, as iBOLT -- that are going to take us to one new name account and secondly to hopefully significant size deals.

(OPERATOR INSTRUCTIONS). Boden Brasfelderhead.

In the last maybe six months ago on a conference call, you mentioned something about a pipeline for iBOLT. Would you care to comment on any dollar figure for the pipeline now?

The pipeline has healthy and big, but in talking about pipelines, usually like any other company, we attach rating to each one of the deals in the pipeline. So if I tell you that the pipeline right now is in the vicinity of $10 million, it will not tell you much because you have to multiply the amounts of each deal by the rating (inaudible) come out with the rated pipeline. But (inaudible) is the total pipeline right now.

The last time we spoke, whenever it was -- six months ago -- it was 8 million, so at least it gives me a reference. Thank you.

But many of those deals got a much higher rating.

I understand. No, no. I just wanted to make sure that if you were going to talk about pipelines, there was some figure.

Joe Bedek (ph), Melina (ph) Capital Group.

This is Joe Bedek. I guess I have a couple of questions. The first question is, who can you see as your primary competitors out there in the marketplace for the iBOLT? The second question would be is, do you guys foresee any investment firms covering you, or are they covering you now?

Let me answer the second question first and then the David Leichner will answer the first one about the competition. We have just finished a very intensive roadshow by two teams. One in New York and Boston and one in London, Paris and Geneva I believe it was. It is probably close to 50 -- 50 -- meetings that we had with analysts and fund managers and people in the financial community. In some of the cases, they were kind of understanding of our expectations or plans to the beginning of analyst coverage soon. So we will see what develops out of that.

Just one remark. Nobody has asked us so far, but since it was published in some of the papers here in Israel today, let me comment on the private placement that was mentioned there about Magic. Would you like to comment on that?

During the roadshow and afterwards we have been approached by quite a few people that take care of either underwritings or private investments. We are studying the marker. We have not taken any decisions. We are not inclined to take any decisions in the very near future, but we're taking a very serious look at these proposals.

Proposals to issue stock?

To issue stock, yes. We have no intention right now, but we're looking at the proposals. The market is hot. People are looking to invest, and there are quite a few proposals on the table. But we are not right now inclined to take any of these proposals.

As for the issue of competition, some of the companies we have been running into are Sonic (ph), which is (technical difficulty) product software. In fact, we displaced Biztalk (ph) out of a couple of shops, the integration tool for Microsoft. What is interesting there is that if it is a heterogeneous environment and we have multiple platforms, then Microsoft tends not to play with Biztalk there.

We also ran up against other, you could say, system integrators that come in with various products. And if it is a company that is, let's say, bridging between the midsize or the large end, large size customer, then it could be somebody like WebMethods (ph) or even Tenco (ph) or one of the top end players that are targeting the high-end of the market.

But remember that the reason we said we are targeting the midsize market is because we feel we have a window of opportunity. We feel that way. The industry analysts that we have spoken to feel that way because the companies targeting the high-end have not yet moved downstream, and there really are not that many players in the midsize market.

I appreciate it. Thanks very much. It was a very great quarter.

Thank You.There are no further questions at this time. Before I ask Mr. Hasfari to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in two hours. In the U.S., please call 1-877-332-1104. In the UK, please call 0-800-917-4256. In Israel, please call 03-9255-902. Internationally please call 9-723-925-5902. Mr. Hasfari?

So we would like to conclude by saying goodbye to everybody from the beautiful town of (inaudible) here in Israel and from the Medic 2004 kickoff. Like I said, we are prepared and the tables are set for growth and profitability. We feel good about 2004. Thank you very much.

Thank you. This completes Magic Software's fourth-quarter and year-end 2003 results conference call. Thank you for your participation. You may go ahead and disconnect.