Magic Software Enterprises Ltd (MGIC) 2004 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to Magic Software’s second quarter 2004 results conference call. All participants are as present in a listen only mode. Following management’s formal presentation, instructions will be given for the question and answer session. As a reminder this conference is being recorded August 5, 2004. I would like to turn over the call to Mr. Kenny Green of Joseph Harner [ph] Investor Relations, please go ahead sir.

Thank you, Good morning and good afternoon to all of you. Thank you for joining us today. We are here to discuss Magic Software’s second quarter 2004 results. With us today from management is Mr. Menachem Hasfari, CEO of Magic Software.

By now you should have all received a copy of the press release, which was issued earlier this morning. It can also be found in the Investor Relations section of the company’s website at www.magicsoftware.com. Before starting I would like to remind everyone that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Such risks and uncertainties include but are not limited to, a reduction in anticipated sales and economic downturns, changes in the competitive market place and our customer requirements and ability to perform customer contracts at anticipated cost levels and other factors that genuinely affect the companies business. Please refer to the company’s current SEC filings under the Securities and Exchange Act of 1934 and amended for further information. Menachem, would you like to begin please.

Thank you very much. Good morning or good evening everybody and welcome to our second quarter earnings conference call. This has been a good quarter. Although sales have not grown much from the first quarter of the year net income has improved 27%. Compared to the same quarter of last year sales grew 9% but more importantly sales of licenses, our most profitable line of business grew 21%.

In the first half of 2004 license sales grew 27% from last year. The increase in licenses in the first half year of $2.3m is mainly due to our new iBOLT integration platform and we will discuss iBOLT in more detail later in this conversation.

Income from maintenance and support contract, another one of our business lines, grew by 15% in the quarter from last year and by 12% in the first half year. Growth from the first quarter of 2004 is 10% and all these growths is reflecting our accelerated efforts to bring back old customers and improving our maintenance schemes to make them fit more customer’s needs.

Operating income grew 18% from the same quarter of 2003 and 77% for the first 6 months of the year. Net income in the quarter grew by 22% from the second quarter of 2003 and 27% from the first quarter of 2004. More impressive is growth of 59% of net profit in the first half of 2004.

We have done well in all other parameters of our activities. Our cash situation is solid. The DSO has come down in the quarter. Net cash from operations has reached $1.5m. Accounts receivable has been reduced in the quarter by $1m (inaudible) and connections have been improving significantly. Now as we take you for a world tour about our entities. Europe has delivered the best quarter and the best first half year in its history. Europe accounted for 42% of total revenue of Magic in the quarter, increasing its sales in the first 6 months by 21% from last year and its profits by 41% compared to the first 6 months of 2003. North America represented 32% of total revenue in the quarter.

Magic Inc our subsidiary in Urban California has delivered its best quarterly sales ever, growing itself from the first quarter of the year by 26% and its profit by 83%. The positive developments in Magic Inc during the quarter were various Magic major customers that have extended their contract with us for professional services and licenses. Some of those names are mentioned in the release we have made today. Our entity in King of Prussia Pennsylvania Coretech(ph) is doing well, growing in sales and being profitable. Most of Coretech’s business is done with the giant pharmaceutical companies in the East coast with Johnson & Johnson leading representing 38% of their income and Wyatt 26%. US customs contributed another 13% to Coretech’s revenue and Merrill Lynch 5%. The encouraging development with Coretech is their increasing involvement in Magic project and the last example is a joint project for the state of Washington where joint teams from Magic Inc and Coretech are working together using Magic technology.

AAOD. Unfortunately AAOD’s CEO Byrus Kapilo [ph] died on July 12th after a long fight with cancer. He was one of the four original founders of AAOD and contributed significantly to the success of the company. Efforts to appoint a new CEO are now in progress. AAOD has delivered another good quarter growing sales in the first half of the year by 28% over last year. In being profitable: AAOD is profitable performing at an operating margin at 12-13%. Our strategy for AAOD is to expand it through both organic and external growth to a level that will make in within the next two years the largest players in the American CCRC, that is the Continued Care Retirement Community industry. Lately we have increased our holdings in AAOD and we now own 84% of it.

Japan. Magic’s largest single entity generated 17% of Magic’s total revenue in both the quarters and the first half year and grew in the first half of the year its sales by 24% and its profit by 58%. Magic Japan has launched the localized version of iBOLT in May 2004 and we expect them to take advantage of the huge community of over 700 business partners to show significant sales performance in iBOLT as they are doing in e- developer.

(Inaudible) our e-cargo solution in the UK is progressing fast. Its sales took climbs in Asia, Europe and Africa in the first half of the year, have reached close to $900,000 with a profit margin of 52%. The rest of 2004 also looks promising for (inaudible).

Now let’s talk about iBOLT. Sales of iBOLT in 2004 have already passed $2 ½ m and the outlook for the rest of the year looks promising. iBOLT deals are getting bigger in size and new clients that have never been exposed to Magic are joining iBOLT. During the quarter 27 new iBOLT business partners have been recruited bringing the total number of iBOLT business partners to 45. Our iBOLT strategy is to build a strong and effective partner community to reach within 12 -18 months a level where most of our sales will be generated by business partners.

Just to show you the effectiveness of working with a serious partner, the first quarter major iBOLT deal with Vodaphone was brought to us by Kepp Gemeni [ph], one of our business partners. Version two of iBOLT will be released next month putting on the integration market a ground-breaking product that we believe is superior in its functionality to every existing integration platform.

We will be looking ahead our iBOLT program we’ll describe later, in more depth, the revolutionary message of version two of iBOLT. A new initiative that we have launched lately is the verticalization of iBOLT and this needs a little explanation. Unlike e-developer that is a generic application development technology that is the same to all verticals, iBOLT is more of a business solution that responds to the specific business needs of each vertical differently. Since many of our branches focus on certain verticals like finance and insurance in Germany logistics and cargo in the UK and retail in Magic France, we have decided to accelerate our efforts in these special verticals developing local expertise and work closely with a business partner to approach each such vertical with different iBOLT templates. In light of iBOLT’s easy to adapt and open approach we strongly believe that the new verticalization effort will provide us with the proper edge over the competition. We believe that our strategy and business model for iBOLT is sound and that it will produce the planned results. In case you have not noted Magic is succeeding in doing the impossible, developing and launching a new product line into one of the most competitive markets, business integration, while at the same time growing its profits without dropping the ball on its traditional technology e-developer, even growing it.

We continue to strengthen our relationship with the analyst community in the United States and elsewhere. One road show has been conducted during July in New York and Boston and another is planned for August. Continuous meetings with analysts are taking place in Israel as well. We have replaced our vice president for marketing and our CFO, both new appointments Gil Trotino VP of marketing and Hilel Kremer the CFO, are able and experienced and they have both already taken full charge of their domains functioning to my fullest satisfaction.

To conclude we feel that our business model is solid. Our technology is making broadways into the IT market and our financial management is sound. Our outlook for the rest of the year is positive. Looking forward I believe Magic is growing aiming at increased revenues and earnings. I would now like to ask Avikam Perry to speak to you about the new version of iBOLT and the situation in the integration market, thank you for listening. Avikam Perry please.

Good day to all. Thank you for the opportunity of exposing what we are doing in iBOLT in a bit more detail and I would like to use one of the opinion makers in the market to illustrate where we are coming from and where we are going to. About two months ago, early June, we received an inquiry from (inaudible) research about a new market domain they have identified, which is called application platform suites and their definition for that was that users usually buy an application platform suite to build a composite application or to have a consistent platform for multiple projects. That means new applications, existing applications and integration of applications. And then they proceeded to arguments that in fact they see that Magic and iBOLT qualify to fit into this type of new market space because we have e-developer that provides custom programming of reusable businesses. We have the iBOLT portal that provides multi-channel user experience we have the iBOLT server that provides access to existing application and business rules and therefore would we agree to take part in this market evaluation. I think having such continuous request coming from leading market opinion makers is a very refreshing and encouraging evolution and in fact the quadrant, the report was published mid-July and we figure they’re in a pretty good place. So what does this mean? It means that iBOLT and Magic are being increasingly recognized as leaders and major actors in this market space and maybe more importantly it is the whole scope of Magic technology that is now seen as leading and as modern. It is not as if we have to shed away our investment in eDeveloper and come with a brand new product. With these new market views, it is actually everything we have been doing for the last 20 years that suddenly receives new value and recognition and differentiates us as one of the market leaders.

And how did we come to this? Let us look at the differences between iBOLT version one and version two. What was version one all about? Before going to version one, we have looked at our customer base and understood that we had it all to come and compete into this growth market. So we talked to our customers, we talked to some analysts, and we put together a new package that reflects what is necessary and what we can do in this market. A year later we have accumulated experience from what customers, who used it came back to us with what works and what they would like to see, very importantly we have learned lessons from customers or prospects who examined the product and said that this was not fitting for them and this is what they would have like to see. And we have increased our R&D learning curve to be able to leverage even more the technology that we have already. And version two is really transforming into this, into a deliverable product and it is being perceived today by all our customers, who have previewed it, as a real ground breaking version.

What does this mean? It means for instance that we have totally leveraged the later standards in X&L (ph) to enable people to use the technology without any specific or colored programming experience, whether it is knowing to develop in JAVA or knowing to develop in C or eDeveloper, all these are becoming abstracted by the extensive use of X&L (ph) to configure components and to develop integration projects.

We have brought many features that before require programming into a user interface level, that enables business analysts to transform best practices into business processes that can be implemented using iBOLT. And we did all these without increasing the price of the product or the price or the price of implementation. On the contrary, still further reducing the time that is requires to implement this technology. And that is very seriously seen and considered by the market whether it is the analyst community, the partners or the end users and I think that the results that we see in the market reflect this.

Going into further descriptions would require me to go deeper into a technical level…

I don’t think --

And I would rather leave additional stuff to questions.

Thank you very much Avikam. We would be glad to take your questions now and with me today here are the following people. David Assia, the founder and chairman of Magic, Avikam Perry, Vice President of R&D, Gil Trotino, President of Marketing and the CFO Hilel Kremer and Amit Birk, our legal counsel. So please shoot. We are here.

Thank you sir, ladies and gentlemen, at this time we will being the question and answer session, if you have a question, please press the star followed by the one on your touch tone phone. If you wish to decline form the polling process, please press the star followed by 2. Your questions will be polled in the order that they are received. One moment please. Our next question comes from Burton Bears [ph]. Please go ahead sir. Actually the first question. Burton?

Sorry, my name is a little bit wrong. Barton Brad. Hi Menachem. Hi David

Hi Barton, how are you?

Fine thank you and you?

Fine.

This first quarter, the first quarter of this year Menachem and the second quarter of this year Menachem are very close, sales wise, and the number you gave and all the things that you spoke about were very high percentages 30s, 40s, 50s, a lot of encouraging news, going forward, but we have had iBOLT for four or five quarters I am thinking?

Practically I would say three quarters.

Let’s say three quarters,

Less than a year…

Less than a year and the number shave been steadily increasing every quarter, especially the earnings per share….

Umm…

Actually the earnings per share have been increasing dramatically. And now we are looking at -- how would an investor be encouraged by the sequential in terms of sales, because I see sequentials as being flat.

First of all I want to believe that the third quarter will be better than the second quarter of this year. Number two, you have to understand that we have launched iBOLT in order to add to our sales in eDeveloper. When we saw that E-developer – actually the whole application development market is growing for everybody at about 4% or 5%, we wanted to move to an area which is more dynamic and growing much quicker.

iBOLT is a new product that was introduced just three quarters ago, it required not only huge investments in our R&D marketing and sales, but only also significant change of the mindset of other people from selling technology like I had pointed out earlier…

Just before?

… selling solutions. And all that, all the huge investments of millions of dollars that we have made, did not affect the growth of net income or profit of the company, had we not launched iBOLT we could have shown profits that are four times bigger.

So it is investing for the future, is what you are talking about?

Exactly that is exactly what you actually see in our numbers. The investment that we are making …

There are two ways, you will agree there are two ways to look at the numbers?

Exactly

O.k. I just wanted you tell me that the reason you are investing…(multiple speakers) you expect it – in other words, you would not be –if the second quarter, if the third quarter sequentials were the same as the first or the second, you would not be happy?

And you know I will give you just one example. As we speak we have 23 full time R&D personnel working on the next version of iBOLT. Hadn’t we gone into iBOLT, those people would not have been here today, and you can imagine the cost per quarter of those 22 people, not to mention marketing and sales and advertising…

Without the marketing the GNA was up and obviously? Ok. Menachem on the partners that we’ve signed up…you signed up I think it was 18 partners left this quarter and 27 partners this quarter (Multiple Speakers). Have you started…I know you mentioned the Vodaphone deal

Yes.

But that previously, have you seen from these 18 – you said, you used the word serious partners?

Yes

Ok, so in other words, 45, of the 45 we signed up how many would say are serious?

First of all I want you all to know and this is something that Garblar [ph] even mentions and everybody else, the time frame or the time that elapses from the time you recruit or engage a new partner to the time you start seeing revenues from him, is between a minimum of six to nine months into…

Gestation?

Stop okay? And then of the 46 partners that we have, 16 are in Europe and 7 are in the United States and 6 are in Japan. In Japan we have approached in the last three months all 700 partners and hand picked from them the 6 that we believe can carry sales of iBOLT effectively. And some of them are really serious names in the industry. And we should see a lot generated in iBOLT, or as they call jBOLT— the Japanese iBOLT and those partners I just you to know that about 40% of all licenses that Magic sales are sold in Japan and I hope they’ll do the same with (inaudible) licenses requirements.

Do you expect the third quarter to be significantly better than the first or second quarter sequentially?

What’s significantly?

Okay, and now – I mean you would not be happy with first or second quarter sequentially?

No, no, no, no, we are not here to –

That’s what –

Copy previous quarters.

I wanted to make sure – okay – cause it looks very close. David – David can I ask you a question?

Yes, I’m here

Hi David. You were at – you did a dog and pony show in New York in July?

Yes that’s right.

Okay, and are you telling the people something that we are not hearing today, I mean this is the second - third dog and pony show in the last year right?

Right. I’m telling –

And Menachem’s coming back in August for another one?

That’s right.

So the stock declined from $8 down to $3.50.

Yeah – so you’re telling me that doing this dog and pony show has dropped the price from 8.70 to 3.50 ?

No, I didn’t think of that, that’s your – I didn’t think of that.

You know – you know

But some other people have told me that.

You know Barton, it’s Menachem just to intervene for a moment. We’ve had some reports – a reporter asked me today is the company sick, because the stock has dropped 30% in last two months. I said, I don’t know what effect the stock market, I can assure that it’s not the company that’s – it’s probably the stock got sick.

I wasn’t blaming David.

The company is very healthy.

What I was going to ask you David is what are you telling them, that’s what I was going to ask.

Well I’m telling them exactly what we’re saying over here. We’ve said that we’re aiming at increasing the EPS and as you see we’re increasing it and hopefully we’ll increase it in the – I’m not sure about the third quarter, but we’ll increase it better in the fourth quarter. We’re also looking at a general target of between six to ten million this year in IBOLT, this is what we’re showing in our projections and we’re showing our graphs that IBOLT should be 10% - between 10% to 12% of our business this year and we’re working very had to attain these numbers, this is what we’ve presenting at all our presentations.

So you’re giving them an estimate on IBOLT sales which is 10%, so that’ll give – if you work that, that gives you roughly what you’re looking for revenues for the year also.

Well I don’t really want to talk on – to say what our total projections, but we’re trying to grow by 20% this year versus last year, this is our aim - this is our internal goal.

So that’s the minimum?

We’re all trying very hard to attain that number and so we’re – we have very nice pipelines, very healthy pipelines and we’re going to try and do it.

And the last question. And you said that you expected the increase between third and fourth being more significant than the increase between second and third is that correct?

Yes.

Thank you very much.

Thank you Bart.

Thank you. And there are any additional questions, please press the star followed by the 1 on your touch tone phone, if you wish to call off your request please press the star followed by 2. One moment please. Our next question comes from Randy Co please go ahead.

How you doing today?

Hi Randy.

Well Bart kind of stole my thunder on some of the questions but, when you do go to the dog and pony shows or when you talk to the investment firms and the analysts, what is – what’s your main purpose of doing that?

We are interested in having some of the funds enter into buying our stock too, and not only having private investors. And the hope is that we’ll have some of the hedge funds both in Europe and in the U.S. and the other types of funds follow the stock and acquire it when its 3.75 or 3.80 or whatever, which we – which I personally find cheap and I think it’s a good idea if they invested in our stock and we’re trying to – but I think that’s the main reason. In addition, we’ve been talking to various analyst because the funds are telling us that they expect us to have analyst coverage of the stock and these analysts that we’ve been meeting are saying they would follow-up a couple of quarters before they issue any reports. So the purpose is to have them get to know us and then eventually cover our stock.

Okay. The first time you’ve went around at the start of the year when the stock price was around 8 and now, you know, its down in the 3s, you find it a lot easier to talk to these people about investing in Magic because the stock is much cheaper or is it harder because they’re looking at it as a stock on a downward trend instead of an upward trend.

No, I think its much easier when – in January both Menachem and Gill and I went with David Lysner [ph] to Europe. Everybody told us why you come to visit us when the stock is at its historical peak for the last three years, yes. Why do you come and visit us now, it’s – you should come when – you should have come to visit us a couple of months ago. So I think the idea to go and visit funds now or investors now is great because we can tell them we’re not coming to them at the peak, the profitability is still growing, the revenues are growing, we have a fantastic growth engine and now is the time to enter the stock. If we come to them when the stock is at ten then they won’t be happy, so I think this is a good time.

Okay. Off to a different topic, what do – last conference call we talked about your relationship with Sachs, has that grown and matured, have you done anything additionally with them since we talked the last time?

I believe Avikam can answer to that.

The answer is yes.

Good, it’s a good answer

I think we expect to do some announcements in the very near future.

Okay. So you really want to just wait until you do those announcements, you don’t really want reveal anything more at this time?

We want to make sure that what we say will be coordinated with staff and this takes time.

About IBOLT, and the new version 2 that’s coming out, where does this fit in the market? I guess I’m trying to understand. Is it going to be sold at the same price, basically, you know, $60,000, in that range? And is your main competition going to be Microsoft from the low end and IBM from the high end.

Probably yes. That seems to be the current price range for people – the former market leaders, trying to get down to there even if they have lots of difficulties and Microsoft cannot really go below this and unless they do middleweight projects.

But when you there going through the sales process, is cost a major factor or is it more or less what the product can do and its performance?

Well let me just before this call, I had a conference with person responsible for EAI [ph] at MetaGroup [ph] in Vanilla Hill [ph] and she was telling me - we were discussing the opportunity of changing our tag line from affordable EAI to something else, because we feel EAI is kind of obsolete and its not really reflecting the breath of what we’re doing, and she told us I’m not sure I would like to do that, because its true that hype moved over to the BTM thing, but people are buying now EAI and many of those mid-size companies that shied away from doing EAI in the past because of the high cost etc, say now, well finally people are really have of a much more vendors to sell it, the price has come down, we don’t need to spend so much money on additional consulting company to come put it in. So people are really starting to buy those EAI systems much more, and – so in this respect I think we are in a very good position – in a mainstream position today to deliver at the right price a very rich functionality and a product that is recognized by the whole community.

Just so I kind of understand this better, how does IBOLT compare to something like Web Methods that’s out there, because you know I want their stock performance and how well they are doing, if they’re moving lots and lots of money and it seems they go after bigger customers than what we go after?

Well I have an intimate knowledge with Web Methods as I have been dealing with this before taking on iBOLT and the problem is really structural. It’s I believe that functionally technology wise we have a product that is today superior to Web Methods. Web Methods and similar companies have thrived on a cream market of the 90s and created a organization structure that is very expensive, sales are for people who are used to sell very high ticket to project but only a few per year. And it’s very difficult to change this and what Web Methods did afterwards go on a shopping spree to complement its technology and this is also very expensive to integrate we see the same thing with Vitrea.

We’ve done just a few weeks ago, we’ve completed a very thorough analysis of this stock to see how we were fairing against Bis Tec [ph]2004. And the conclusion maybe Avikam could say a couple of words on this is extremely in our favor. So we feel that where we are missing today eventually some impact is in the marketing investment that we’re doing because it’s certain that we’re spending much less resources on branding and on awareness on all these competitors. But we’re coming up pretty nicely even with our modest operation and the technology speaks for itself.

Would there be any possibility of a merger or a major alliance between someone like that? Or Web Methods Webcom.? I don’t see how it will fit you know because we look totally different as eDeveloper and across the line everything looks like its bad… But they do have a market penetration and they do have the brand out there.

We’re looking at the number of opportunities in this direction and we’re watching out very intensely to identify opportunities that would benefit us both from the customer base point of view and a sales force point of view.

One last question and that gets back to the investment firms and the analysts, if somebody would give Magic coverage does that mean they would start issuing guidances our projections?

Well you know nowadays companies tend not to give guidance for more than one quarter because of all these different new types of laws. But yes we would probably then have to give guidance at least for a quarter and in any case no analyst would cover you unless you have a clear visibility or they believe you have visibility and your forecast for guidance for the following quarter are met. So for this reason I think we would need to do so the moment some of these analyst decide they want to start covering you.

Okay well thank you very much for your time.

Sure.

Thank you our next question comes from Charles Silk of C. Silk & Son, please go ahead.

Hi good morning looks like you’re going really in the right direction. Randy took the question of the relationship between you and say Web Methods what about Vitrea (ph). That’s a stock that’s really available to take and has a lot of cash and how do they stack up with Magic. Could you give any insight on that?

This is Avikam. I actually examined the opportunity with Vitrea pretty closely and I must say that on the face of it, it looks excellent. On the other hand some down side that make it look not very compelling for us to go in there. On one hand Vitrea is a very complete and rich product and in terms of technology many of the customers are pretty happy with it. On the other hand they have been on the down side for pretty long time now and there was a strong personnel drain that left in the company (inaudible) people.

So when you come to look at what it is for us to take a financially neutral acquisition because in between the price it would cost and what we would get let’s say wouldn’t cost too much, we would still be left with the need to maintain the technology, (inaudible) technology for iBOLT in the short term which means maintaining an R&D team which is barely paid for. Not gain much in terms of the sales force because the star people have already left and we’ve interviewed some in the past. And so it’s mostly taking up a burden with not much future perspective.

Maybe I can comment about Vitrea. We are watching them very closely. Like Avikam said with hardly $14m of revenues in the quarter they have lost close to $7m. The cash that they had make them a tough cookie for an acquisition despite -- in addition to the fact that these are two conflicting technologies, ours than Vitrea’s so we are not sure if they are of interest to us.

How does it conflict with you and your working ahead with iBOLT and you’re really going to be advancing it. How is their technology compared to what you’re putting forward out there?

Hilel I think will talk about the comparison of the functionality comparison -- but when you want to acquire a company like Vitrea you go for the installed base for that customers. So what do you do you go to them and you ask them to replace it with iBOLT. This of course is that might yield and require much more effort than in selling our own product. As to functionality Hilel may be you can say something.

Yes. Menachem. Vitrea is an interesting example in functionality because they are one of the richest functionality products in the market. And we’re using them quite a lot in – to gain endorsement because we compare very well with them. They are totally competitive to what we’re offering so it’s not as if we would gain some synergy from acquiring the technology. They are doing just what we’re doing in a different way. We believe we’re doing it better, so we wouldn’t be able to profit a lot from what they have technology-wise

But to answer your question Vitrea is definitely on our radar screens for months now.

Thank you.

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 2 hours. In the US please call 1-866-500-4953. In Israel please call 0-392-559-46. Internationally call 972-392-559-46. Mr. Hasfari.

At this point, this is Kenny Green. Hi I just want to mention you can also access the call on the web from the link at Magic’s web site www.magicsoftware.com . Menachem would you like to finish?

First of all thank you all for listening in and for your continuous support. Like we said on the disclaimer that Kenny has read to you at the beginning of the conference call, we are looking and we believe we’ll have a third quarter better in both sales and profits than the second quarter and we’ll definitely continue to work hard to achieve those goals. Thank you very much.

Thank you this concludes Magic Software’s Second Quarter 2004 Results Conference Call. Thank you for participation, you may go ahead and disconnect.