Magic Software Enterprises Ltd (MGIC) 2004 Q1 法說會逐字稿

Ladies and gentlemen, than you for standing by. Welcome to the Magic Software first-quarter 2004 earnings release conference call. At this time, all participants are in listen-only mode. Later we will have a question and answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Menachem Hasfari, Chief Executive Officer.

Good evening or good morning everybody wherever you are and welcome to Magic's first-quarter earnings conference call. I have with me here today (indiscernible) , Magic's Chairman; David Leichner, Vice President of Marketing; Hilel Kremer, Magic's new CFO and the Company's Secretary.

This has been a good quarter. Compared to the same quarter of last year sales grew by 9 percent but more important, sales of licenses grew 34 percent representing 33 percent of total sales during the quarter compared to only 27 percent of licenses out total sales in the first quarter of 2003. The increasing license sales affected the growth in net profit of $718,000 over 2.5 times the 272,000 of net profit of last year's first quarter.

Net cash from operation jumped 200 percent from the previous quarter to $1.75 million in the first quarter this year. Sales in Europe represented 42 percent of total revenues in the quarter, compared to 34 percent in last year's quarter. Europe is growing showing a quarterly growth of 32 percent in dollar terms year-over-year. In this regard, I would like to mention a large deal we concluded in the quarter with Baktil (ph) China, China's largest cargo handler which who is partially owned by Lufthansa. For Magic's Hermes e-Cargo solution, the total bill is $600,000; half of it was delivered and recognized in the first quarter. Hermes is progressing and becoming a popular solution in the worldwide cargo industry and additional billings are expected soon. In fact, (technical difficulty) represented 18 percent of total revenues in the quarter growing in dollar terms by 20 percent from the first-quarter of last year.

Magic (indiscernible) is doing exceptionally well with sales of close to $3 million to the quarter at a steady growth rate. The recovery of the Japanese economy and the release of new localized products have contributed to the turnaround we are experiencing in Magic Japan. We have now completed the localization to Japanese of the iBOLT platform and the product will be launched in Tokyo on May 25, in the presence of Japan's IT industry. Sales will commence immediately after.

The United States represented 30 percent of the quarter's total revenue. All of our three business units in the United States, Magic Inc. in California; AAO (ph) in Florida and CoreTech in Philadelphia are doing well and they have all met their quarterly targets. As we have announced during the quarter Magic has increased its holdings in AALD (ph) to 84 percent in order to make the Company's ownership structure easier for mergers and acquisition activities that are now underway and will hopefully materialize in the future.

AALD (ph) to date is the leading U.S. player in the CCRC, continuing care with our communities industry and we hope to factor this leadership position by mergers and acquisitions with other market players. CoreTech in Philadelphia is showing profit and growing at a steady pace. Half of CoreTech's revenues come from the pharmaceutical industry mainly from Johnson & Johnson, Wyeth and Merck; while the other half comes from a variety of customers the largest being the U.S. Customs, Merrill Lynch and the Hay Group, a company dealing with human resource services.

Now let's talk about iBOLT. Sales of iBOLT for the quarter have grown 40 percent over the fourth quarter of last year. The product is now well accepted and the average deal size has gotten bigger. Version 2 of the iBOLT platform will be released in July and it will include major new functionality making Magic and iBOLT the fully BPM, business process management player in the integration market. During the quarter we have taken iBOLT to the recovering telecom market with deals of for instance, $330,000 with Vodafone, Europe's largest cell operator for (indiscernible) to service their corporate clients, a deal that was mediated by Cap German (ph) who recommended iBOLT platform to Vodafone.

A deal with Nextel in the United States for a second deal in the last six months of integration with their undux (ph) billing system for a total of both these for $150,000. And eDeveloper, with the telecom world was concluded with NoVergence in the United States, a provider of VoIP, PBX's for $200,000. Additional examples of iBOLT deals in the quarter were Greece (ph) , with France's largest network of (indiscernible) shops for $100,000; the municipality of San Francisco; Super Club, the Caribbean Resort Company took away the SAP VoIP system with their website. SBIA (ph) in Connecticut, America's largest statewide business organization with 10,000 member companies. These are just a few of the significant iBOLT deals during the quarter.

As we have reported our iBOLT partner strategy started to show positive results when 18 new iBOLT business partners had been recruited and fully trained during the quarter. Some of them are system integrators and solution partners that we work with us in implementing iBOLT projects; and some are integration vendors that will help us sell technology to their clientele.

In June we are renewing our business with the financial community in the United States. Roadshows are now in the planning. Magic is now following its sound business plan. It is focused around its core business, its technology is making roadways into the IT markets and its financial management is solid. Our outlook for the rest of a year is positive. Looking forward I believe Magic is growing, aiming at increased revenues and earnings.

This concludes my presentation and my colleagues and I will be glad to take your questions now.

(OPERATOR INSTRUCTIONS) Charles Silk (ph) with S. C. Silk and Sons (ph) .

Progress is being made. A couple of questions. One with AAOD, how is it consolidated? When did the consolidation start; was it in last, this quarter or will it be in the quarter going forward?

The consolidation was in the first quarter.

The first-quarter. How much was the sales that were incorporated? How did it compare with the prior quarter when you have 63 percent, now you can show all of these sales and all of the sales and all the earnings, is that correct?

This is (inaudible) . I am looking forward to walk with you guys in the future as well. We see the line of minority interest in income of subsidiary and going down, this is where we have seen the 63 percent in the past and the minority interest then was 37 percent. Now the minority interest is going down to 26 percent as we have now control of 84, and the rest was fully consolidated in the past and it is consolidated now, so the bottom line is improving by a lower amount in the minority interest in income subsidiaries.

All of the revenue has been in the past -- you are on a consistent basis with the reporting of the revenue of AAOD? Great.

All of the revenue was consolidated in the past because we had more than 50 percent. The difference after the additional shares that we have purchased is that now the minority interest is smaller and therefore the profits that AAOD makes, a larger part of them is staying to the bottom line.

On CoreTech, how many consultants do you have on hand and what portion are trained in eDeveloper and iBOLT?

We have close to 70 external consultants in CoreTech, 70, and about 8 or 9 on our payroll. CoreTech has now started to call for a with Magic (indiscernible) in absorbing the iBOLT technology and as a matter of fact they are involved already the second-quarter in a project with Washington State. They're working together now.

How is the one in San Francisco moving ahead? Have you generated some more revenue this quarter?

Yes, we did. This quarter I believe with the municipality of San Francisco, $45,000. We have an ongoing agreement with them which generates about $0.5 million a year.

So it is going to accelerate as we go forward.

Are there any other court systems in the United States that are interested in what you're doing there?

Excuse me?

Are there any other court systems in the United doing -- what you are doing -- are interested in what you are doing in San Francisco?

There is Charlotte County which is a customer that we had several years back which now they are actually now upgrading into the new systems that we are a working on in San Francisco. They are very similar types of systems.

Also the State of Washington.

Okay. That is all of the questions I have now, thank you.

Randy Cole (ph) , a private investor.

Are you issuing guidance for quarter 2 at all? In terms of -- ?

We are not used to giving any guidance and Menachem mentioned in his speech that we are looking to continuing growth both in revenue and income compared to the same quarter last year but that is all we are going to say at this moment.

After your June Roadshow, if somebody initiates coverage on Magic, are you planning on issuing guidance at that point?

One of the targets of those Roadshows is to start engaging analyst coverage for the Company. I guess once it starts, we will give some indications of (inaudible) .

Are we still on target for the 20 percent growth this year?

We will be presenting at the SBR (ph) conference in New York on June 2. So that is part of the initial launch of our roadshows.

Okay. Let me approach the question from a different point. Last year in quarter 1, the earnings were representative of about 10 percent of your total earnings for the year. Is that to be expected this year also?

Your question is net earnings for (indiscernible) .

Yes. That is kind of a roundabout way to go about it, yes.

I guess that mathematically if we keep the percentage among profits in the first quarter for the year, that shows $7 million. But you (inaudible) .

I will lay off that subject and move on to something else. iBOLT sales in Japan, that is going to start apparently at the end of this month? Do you already have some orders for that or would the orders just commence immediately when you --?

We do. We do. We have already have orders to the tune of $200,000. Just understand that Magic Japan has a very strong body of business partners and Magic solution providers that totals about 700 companies, the finest names in the Japanese industry. We have found that about 10 of them are capable and eligible in becoming iBOLT partners in the market of integration. Those are the partners that -- Magic partners that we started to work with already and we hope to see results in the third quarter.

Okay. Your total iBOLT sales out of the licensing revenue is about 1.5 million, is that correct for this quarter?

About, yes. Just a correction; it is one million for the licenses and about half a million for the services.

Okay. And do you have a breakdown of where the majority of those sales are coming from? Are they mostly coming from Europe?

Europe, right. I would say about 75 percent came from Europe.

Okay. And just another general question about answers-on-demand. How much revenue are you seeing per quarter from answers-on-demand?

From AAOD? Let me see, close to 1.8, 1.9 something like that. Let me see. Yes, 1.7.

1.7 million a quarter?

Yes, each quarter.

How much of that is profit?

It is about 200,000.

Okay, great. The last conference call we talked about developing a partnership with SAP (ph). Has there been any progress made on that?

Yes, we are progressing very well and the target for discussions is SAP business 1 (ph), the ERP system that started as the mid-market. We are progressing very well. We are working with their business partners now both in the United States and in Europe.

Are you actually doing work for SAP right now?

We are kind of crystallizing the exact technical difference in order to come up with a solution so we can development in the future.

Okay.

We hope to present this in the SAP Partner Conference in July in Budapest, Hungary.

Okay. The e-cargo solution that we have do we own that or is that owned by one of our partners?

It is owned -- its kind of owned by our partners (indiscernible) .

Okay. There was a rumor going around about a really large e-cargo sale in Europe. Is that true? Is there any validity behind that if you know what I am talking about?

I know exactly what you were talking about and at this moment I cannot make any comment.

Okay. As far as the e-Cargo system in general, do you plan on treating that perhaps like AOD where you might spin-off a business and have an independent?

That is exactly the idea. We have had some nice deals with the e-solution with Menzes (ph), with Iceland Air (ph) and now with Doctel (ph); we are going to have several more in the next two quarters. If our plans are succeeding, this might become a standard of the worldwide cargo industry then we would spin it off. Because you have to understand this is not in the core business of Magic. Magic's core business is the tools for integration and for development. Still it is a very good business that sprang off from our technology and the way we treat it is exactly like we did with AAOD.

Okay. I took a look at eDeveloper 2; you demonstrated it last October out in the States. Has there been any progress toward the release date on that?

Of course. We believe the beginning of 2005 and it will be a revolutionary product. As you can imagine and if you have been listening to the initial technical presentation that we have made, this is going to be a revolution.

I have seen it and I completely agree with you. The XML portion of it is truly amazing.

We are working now full force for the release for the first quarter of next year.

Super. That is it for me. Keep up the good work and thank you very much.

(indiscernible) from IBM, retired.

I assure you I am only influencing this investment of my own funds. My question is about the iBOLT target market and what your early experience is. I'd like to understand a little bit of are you having to sell application integration to the management teams in that target market or are you finding a large proportion of a market that understand the benefit of application integration and are ready to go and pretty much all you have to do is make them aware of iBOLT's capabilities and move forward?

The second question is I understand that with iBOLT, the appeal to Magic and its shareholders is the licensing revenue and the recurring nature of that. I was just wondering what your presentation is to the business partners? How do you recruit them and what do they get out of becoming a Magic partner for iBOLT? Thanks very much.

First of all, the answer to your first question is it is mixed. The integration market is such that there is some companies that know exactly what they want to do and there are other companies that have no idea what they want to do.

Is it a 50-50? Is it characterized by the larger customers are struggling to integrate their applications and they are ready to go and the smaller ones --?

The larger customers tend to understand better what they're looking for and they also tend to have more complex environments. The smaller customers you need to hand-hold them more through the process.

Okay. If you were going to make a business call on me as a business partner, what would be the key points that you would make? I know I could put some people -- if I got people on the bench that are capable, I can get them trained and generate some hourly billing. Are there other benefits to a partner?

Yes, there are plenty of benefits. First of all it enables them to play in an area where they were generally not able to play previously because they are targeting mid-tiered, and you can say the lower part of the high-end market where otherwise they might have been outpriced because of the affordability of the solution. As well as the fact that they can then integrate platforms that may otherwise wouldn't have been able to in such a rapid way, meaning taking into account the UNIX world, the I-Series (ph) world and being able to link into Linux and all the different databases and applications that are out there. A lot of these companies would have been geared towards one technology or one type of environment and here we are able to bridge between the .net, JAVA, across UNIX, I-Series and so on.

Do you require them to become also an eDeveloper participant and is it a bundle or can they just do iBOLT?

What we generally do is we work with them on the initial projects and then they are able to pick up the knowledge that they need to do the follow-up projects.

Okay. Thank you very much, great quarter and I would like to see the progress continue.

Daniel Schmidt (ph) , private investor.

Just inquiring a bit on your maintenance strategy. Please elaborate on your maintenance pricing strategy in terms of charging for support services and enhancement fees? For example, what percentage would you charge on license fees if you had a typical deal? And I know in the past I believe you charged only for new version licenses rather than enhancements? However, your maintenance revenue continues to look a bit sluggish compared to your growth in licenses and it is fairly low for the size and age of your Company. My question basically is how do you plan to change this if at all?

I will tell you we have already implemented a much more aggressive maintenance program where the salespeople when they go in and they sell a deal now, part of that deal and part of the invoicing includes the maintenance and it only comes off if and only if there is a real pushback on that. I think that is one of the ways going forward of seeing a lot more revenues out of maintenance. But as far as the strategy itself, the strategy itself is to continue to provide the upgrade and migration path that Magic has always provided to its customers and giving them the service needed to encourage them to sign up for the maintenance. That is the most important thing is to give them the added value to sign up. And that is something we have been working very hard on. We have people in place now specifically working on the issue of promoting maintenance within the install base.

You don't require a company to be on maintenance in order to give them upgrades?

Like I said, it now it is part of the policy to have them on maintenance in order to get the upgrades; there is no question.

One of my concerns going into the future is the stockprice being very volatile because of a very low maintenance base. Obviously, the risk increases and then the value goes down because of that. I myself work for a software company, so I am quite familiar with how those things (multiple speakers) .

There is no question that that's definitely an important part of the strategy is to get the recurring revenue coming in so we have the visibility going into the quarter and that is something that we are working constantly to improve.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Mark Silk (ph) with C. Silk and Sons.

On Monday you mentioned there were 18 new iBOLT partners. Have any of these lead to revenue up to this point?

I guess one or two of them have generated revenue already in the first quarter. You have to understand that it takes about a period of three to six month before those new partners can generate sales for us. What we are seeing now are sales growth by partners from the improvement of the fourth quarter of last year. For instance, the deals in Nextel were brought by Avexta (ph) which is a partner we had recruited in the fourth quarter of last year. The deal with Vodafone was bought by (indiscernible) which was recruited last year.

Okay. On your relationship with IBM, how is that progressing with them taking you around with the iBOLT scenario and also what percentage of revenues has IBM accounted for this past quarter?

As you might have seen on the press release we put out about a month ago, a month and a half ago, IBM is very much still working with us. We are doing joint webs, joint mailings, joint campaigns. In fact, they made the statement that we as an ISV have been succeeding in bringing in some of the -- quantity-wise some of the most or largest amount of leads that they have been getting together with their ISVs. So I expect this will continue and that they will continue to work closely with us on the iBOLT side.

As far as percentage of revenues for this quarter, could you break that down with IBM?

We don't really have that here broken down. A lot of these leads are right now in the pipeline in the forecasted pipeline and are being work done. I guess in the coming months we will have better visibility on that.

One thing I was unclear of; you said you signed a deal and PAC Bell in Lufthansa and you said there might be more to come within this quarter, or just within the next few quarters?

This quarter.

And lastly, Menachem, just to call you on this, you did mention in the last conference call you were looking for 20 percent growth. I couldn't hear your answer previously but can you just comment on that because you really put yourself out there obviously you showed 8 percent growth although you are going in the right direction; I just want you to maybe follow up on that comment.

I am still looking at it.

You're still looking at it?

It is still the target.

Okay, thank you and good luck gentlemen.

Charles Silk with S. C. Silk and Sons.

Mark posed my question and you gave me the answer. I'm all set with that one now.

There are no further question at this time. Please continue.

Thanks everybody for being with us on this conference call. Like I said, we are optimistic looking forward and again I hope to meet you in conference calls. Thank you very much.

Ladies and gentlemen, this conference will be available for replay after 8:30 P.M. today through Midnight on Wednesday, May 26th of 2004. You may access the AT&T Teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code, 730254. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 730254. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.