Magic Software Enterprises Ltd (MGIC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software's third-quarter 2004 results conference call. All participants are at 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 November 4th, 2004. I would like to turn over the call to Mr. Kenny Green of Gelbert Kahana Investor Relations. Would you like to begin?

Thank you. Good morning, and good afternoon to all of you. Thank you for joining us today. We're here to discuss Magic Software's third-quarter 2004 results. With us 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 Security Litigation 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, an economic downturn, changes in the competitive marketplace customer requirements, and inability to perform customer contracts at anticipated cost levels, and other factors that generally affect the Company's business. Please refer to the Company's current SEC filings under the Securities and Exchange Act of 1934, as amended, for further information. Menachem, would you like to begin, please?

Yes, thank you. Good evening or good afternoon, and welcome to our third-quarter earnings conference call. With me today are David Assia, Magic's Executive Chairman, Hilel Kremer, our CFO, Gil Trotino, our VP of Marketing, Avikam Perry, VP of R&D, on the line from London, as we were looking ahead of our iBOLT program that we speak to later.

The third-quarter was a disappointment. We've disappointed ourselves and I know we have disappointed you. We had entered the quarter believing it will be at least equal in performance if not better than the second one. But as the quarter had neared its end, it became obvious that many deals that we expected would close in the quarter slipped to the fourth, due to last-minute delays and postponements on the part of some of our clients. Actually, we have not lost deals to competition, but rather to customers delaying legal conclude -- deal conclusions. Some of the delayed deals, you'll be happy to note, have been already closed in October. However, disciplinary spending has enabled us to maintain profitability, even in a disappointing quarter like the third. Our cash remained full stable and cash from operations in the quarter amounted to some $800,000.

Despite the reduction of revenue in the quarter, we have shown in the first three quarters of the year an increase of total revenue by 4 percent, License Sales grew 17 percent, maintenance contracts increased by 14 percent, and net income grew 29 percent. The positive trend that I find significant in the growth in income from Maintenance and Support, which reflects the loyalty of clients to Magic and their renewed trust in our technology and services year after year. The source of revenue from this activity increased by 70 percent from the third quarter of 2003 and by 5 percent from the previous quarter of 2004. iBOLT is moving forward. Our revenues for 2004, iBOLT's first year of sales, will be, we believe, between 5 and $6 million. We are now embarking on a plan to accelerate investments in iBOLT, mainly in sales, marketing and business development capabilities, that are supposed to increase 2005 sales significantly over 2004. Last month, we had released iBOLT's version 2, giving us a leading-edge over the competition. 25 new iBOLT business partners have been recruited during the quarter.

Our move of verticalization of iBOLT that we have discussed in the last earning release is taking shape. Magic France is soon to start to concentrate on the recal (ph) vertical, while Magic Germany and magic UK on the finance vertical, banking and insurance. Europe continues to be Magic's largest territory, accounting for 38 percent of sales with North America following with 34 and Japan, our largest single country entity with 18 percent.

Comparing the first three quarters in 2004 to 2003, Japan grew by 22 percent in dollar terms and Europe by 10 percent. In this quarter, all Magic business units and branches were (technical difficulty). ARIS, our eCargo entity in the UK, is developing at an increasing pace. Sales so far have exceeded $1.2 million with a net margin of 50 percent. We have lately won a deal for another airport in China in October, and more deals are planned to conclude in the near future. Hermes is aimed to become a standard, we believe, in the cargo industry.

As we had mentioned earlier in the earnings release, Magic's board has approved a repurchase of stock for up to $2 million. In the last two years, Magic has bought back over 300,000 shares. And the new initiative, we believe, reflects the board's belief in Magic's future and the opportunity that now exists in the stock market, especially after today.

We have made today another release about our relationship with SAP -- SAP. I will let Avigdor Luttinger, head of our iBOLT program, to explain to you the essentials of the deal and its significant benefits for Magic, but I would like to add a few words myself. The forged relationship with SAP reflects their recognition Magic's technology is receiving from a world IT leader, when it has been occasionally mistakenly viewed as proprietary and non-mainstream. The agreement has now been signed with SAP America and will, by mid-December, be expanded to include the rest of the world. It opens for Magic the vast worldwide apartment community of SAP Business One, a product SAP put much effort behind and we have much confidence in.

The relationship with SAP in the customized version of iBOLT for SAP users is also a step in Magic's overall strategy to introduce iBOLT technology to major application vendors. This strategy calls for the erection of a strong partner community and strategic partnerships in OEM and other platforms with key IT leaders. Effort in these directions are now in motion with other players as well. The SAP relationship has recently opened a whole area of opportunities for technology cooperation between SAP and Magic, opportunities that had been detected during the course of the work teams from both companies have done during the past eight months, and are being explored now.

In conclusion, before I pass the mike to Avigdor Luttinger, I want to say that I believe that despite a temporary delay in meeting our targets this quarter, Magic's business model is solid, its technology is making roadways into the IT markets, and our financial management is sound. Our outlook for the rest of the year is positive. Looking forward, Magic is aiming at increased revenues and earnings. Thank you all. And I would like now, Mr. Avigdor Luttinger, the Head of our iBOLT and SAP programs, to describe to you the essentials of the deal with SAP. Avigdor, please.

Good afternoon, everybody. Good morning. I would like to focus a little bit on the background and the rationale behind our work with SAP. One of the main objectives for us is to align ourselves and to forge strategic partnerships with market leaders which will give us the opportunity to access markets at a reduced price from Magic and where Magic can make a difference. The idea being to find the missing link inside a major platform player's product line, and be that Magic and (technical difficulty) in this missing link.

In fact, when you're looking at SAP as an organization, its main activity is about business applications, being a business applications platform. It has done so magnificently, I would say, with three product lines, and has ventured a few times into the SMB market in the past without much success until it came out with a new product which is SAP Business One. When we've been looking at market landscape of where we could fit in in the different major platform vendors, we found out that in fact, while most of the SAP business product line is well catered for and is increasingly fitting on a composite application platform, which is NetWeaver, SAP Business One was sitting there almost alone. And in fact, as you can see in the press release, we're talking about iBOLT, which is fitting very well with SAP Business One within the global SAP strategy, because iBOLT is providing this collaboration, business collaboration layer, that is standard in the other levels of the SAP product line.

In fact, this also fits very well with the directions and the experience that Magic has developed over the year. Starting from a rapid application development technology, doing an excursion in business applications, and then moving into business integration, we've been in the middle of the -- recognized by Gartner as a application platform suite for composite applications. And this has played very much into working together with SAP to position Magic as a business application platform for the SMB world, and combining efforts with the SAP Business One product offering.

For those of you who are not very much familiar with the SAP technology, in fact whereas most of the higher and product of My SAP and My SAP All-In-One, I primarily (indiscernible) and going towards Java technologies running on NetWeaver, Business One is primarily a Microsoft-oriented Visual Basic environment. Obviously, with the current evolution of Microsoft's business application activity, this creates some strain on the relationship and our ability to fill in the collaboration slot within this part of the product played very well into the strategies of both SAP and Magic. So, this is where we are going with our initiative. It's not about becoming a partner to sell Business One or looking at some opportunistic possibility here. In fact, we're looking at the much more important and significant collaboration. And I would like to draw your attention to a number of terms that appear in the press release.

And the press release, you can imagine, has gone under very minute scrutiny as far as what is written inside by both companies. We're talking about complementary. We're talking about fitting. We're talking about openness. We're talking about enhancements. We're talking about being part of an arsenal of SAP Business One technology. And we're talking about application development. And without wanting to go now to explain our strategy, I think they do it very well themselves, I would like you to read well in the lines and in between the lines of this, and understand what is the meaning of that.

Okay. Thank you very much, Avigdor. If we have more questions to the technical details of the deal and the technology, I'll ask you to answer them. I guess we'll be taking your questions now.

Okay. Thank you, sir. (Operator Instructions). Charles Silk of C. Silk.

Good morning. Good afternoon. And sort of a little disappointment. But looking forward, I think it still looks great. My question has to do deal with the stock purchase buy back. I was under the impression that you could only buy back stock from your retained earnings, and your retained earnings are negative. Has the law been changed? Or how are you going to accomplish this?

I would ask Mr. Kremer to answer that.

According to the Israeli Company law, we're allowed to repurchase shares once our returned earnings for the last two years are positive. And this is the case. We have more than $2 million of retained earnings the last four quarters, sorry eight quarters.

Well, that's very good. It seems like the relationship with SAP is really dynamic; and has it generated any revenue yet, or will it be? How soon will it be generating revenue?

We focus to start generating revenue from (technical difficulty) next year -- 2005.

Aright. I'll defer and maybe I'll have another question. Thank you.

Thank you. (Operator Instructions). We have a question from Randy Cole (ph). Please go ahead, sir.

Hello. Good afternoon. I have a question about the deals that were lost in Q3, and you said that many of them were closed in Q4. I'm wondering if you can put a value on that.

I cannot put a value on that, but we are talking -- the normal situation -- the regular suggestion with those deals is that we couldn't get the final approvals of CEOs or boards of companies that were hesitant to close deals, which by the way, is a phenomenon that we have heard in a conference in New York that CIBC had in the summer with over 20 CEOs of companies going on stage and telling the same stories of losing deals to undeciding customers who are delaying decisions. Some of those deals have been closed two or three weeks after the quarter closed. We are very careful in income recognition when it comes to our deals. This is why we put very strict measures on what we can recognize and what not.

Now, these deals lost, were they iBOLT deals, or were they Hermes deals? Or were they general eDeveloper deals? Or is it across the board?

Actually, all of them. Actually all of them. The Hermes deal that I just told you about, another airport in China was an example of such slippage. Fencing for some iBOLT deals, fencing for some eDeveloper deals, yes. (indiscernible) iBOLT, and especially in Europe, by the way.

Because it seemed to impact licensing sales the most. There's a fairly big drop-off in licensing revenue. But I would assume that there were -- you know, the revenue that you lost was good revenue, high profit revenue.

Exactly. Exactly. Which affected profit as well. Compared to last -- to the previous quarter, the difference in licenses is about $700,000, which is about four or five deals. Yes. And things we put in software sales, both iBOLT licenses and eDeveloper licenses, that took effect from both of them.

I know you are going to hate to do this, but I know last year you did a little over 17 million in Q4. And I know you probably don't want to put yourself out there after this quarter. But do you anticipate beating last year's Q4?

I can talk about anticipation and planning and budgeting and targeting. We are definitely aiming at performing better than last year -- always. I hope our plans will come true. That's the most I can say.

Okay. That's fair enough. As far as the SAP integration, and the press release today, the iBOLT system that you're selling with the SAP integration -- is that being sold at a lower price? Is that (multiple speakers) market?

Avigdor, can you give the financial details on those deals?

Yes, certainly. In fact, what we've done is we -- within the special edition of iBOLT for SAP, we've reduced the power of the server as well as the pricing of the server. So we made sure not to create a cannibalization or substitution situation. And the pricing was, in fact, collaborated together with SAP's partner community. We're looking at prices that start at about 1/4 of our standard SAP pricing and go down to significantly lower than that for very, very elementary functionality.

Okay. Do you kind of cripple the system a little bit, and then you would have to upgrade it to get all the benefits of iBOLT or -- (multiple speakers)

Well, not really. This is one of the powers of our licensing model, which is based on concurrent processes, makes it possible for us to limit the amount of concurrent processes that can be run through a server. And what we've done is essentially brought this down very significantly.

Business One, what does that usually go for? How much are they selling those systems for?

Well, a typical I would say entry-level sale is around the $30,000 for licenses. That's a ten-user system.

And trying to read between the lines a little bit on that press release, I was under the impression -- and you can confirm this or not -- but I was under the impression that we're selling a, or working on a Magic component that will be sold with SAP. Is that true or false?

It's two things. One, we've developed a adaptor that exposes all the Business One functionality through iBOLT, and opens up the Business One technology to do anything you want with it using the iBOLT power and graphic user interface. So you get actually both.

Okay. And is Business One the only SAP system you're currently working with? Or are you working with other SAP systems as well?

The agreement scope is about Business One. Obviously, iBOLT, the generic iBOLT version, interacts as well with a free My SAP. But this is not part of this agreement.

Okay. Thanks very much.

Thank you. Next we have a follow-up question from Charles Silk of C. Silk. Please go ahead.

Hi, Charlie.

I didn't go in. There was no follow-up question.

Okay, sorry. I'll move on to the next question is Uhli Lahamim (ph) of Visex (ph) Networks.

Well, very exciting news about SAP. If you -- from a revenue point of view, how would you rate the SAP agreement for 2005 compared to other agreements that you have?

We will not raise the dollar value of this agreement. The only thing I can say that we expect it to be significant within the iBOLT sales of next year.

Okay. Do you have any quantity or revenue number for the SAP Business One?

What do you mean?

How many SAP Business One's are being sold on a yearly basis?

Ah, that we know. Avigdor?

Well, the ambitions are pretty serious. We're talking about a few thousand systems year. And SAP's ambitions are to accelerate.

That's in the first year since the product was introduced. It's a pretty new product.

Okay. Thanks very much.

Thank you. There are no further questions at this time. Mr. Hasfari, any closing remarks?

The closing remark I would like to make is what I said earlier. This quarter was a disappointment, but it's not a trend, as far as we believe and as far as we plan. It's a hiccup. It's a glitch. It's temporary. We will do our best and we believe we will be able to do our best to amend it in the next quarter. Thank you very much. Mr. Hasfari, it may be too late, but we have another question.

Gladly, please.

Stanislav Komaraski (ph), please go ahead.

I noticed that you guys lately have -- you kind of don't want to give guidance. I understand that. But when do you think you will have the visibility to start giving guidance for the upcoming quarters?

I will have our executive chairman, Mr. Assia, answer that, please.

That's a very difficult question because had we given guidance for this quarter, we would have been in great trouble. And, although we believe we have quite good visibility, due to the fact that these are relatively new products to us, we decided not to yet take the risk of giving guidance. We're trying to check ourselves regarding execution and regarding visibility. And hopefully, by the second quarter of next year, we'll be able to start giving guidance. But this is a hope. And if we succeed to execute on our Q4 and Q1 plans, then we'll probably start giving guidance, but not before we're confident -- absolutely confident with our guidance figures.

Great. Okay. And are you guys still in contact with analysts?

Well, we haven't been since the Q3 results, but we'll definitely talk to them because we want to keep in touch with the analysts we've been meeting, even though we've disappointed ourselves and probably disappointed them too. But we want to keep in touch because it's very important to us that the analysts continue following us.

Okay great. Thank you very much.

Thank you. And sir, this time, we've got two more questions. A follow-on question from Randy Cole. Please go ahead.

I do have a follow-up question about iBOLT and IBM. Now that you're working with SAP, I'm kind of wondering about the iBOLT relationship with IBM, and whether there's something down the line that you could do with them that's kind of similar with SAP -- I'm with SAP.

Avigdor?

Well, that's interesting question because we've been discussing it with Forrester just a few days ago. And the answer is that it doesn't really affect what we're doing with IBM. There are some niches within the IBM business where we can -- we do good business with iBOLT. But as IBM is not really a beyond WebSphere -- there's no real niches in what we're doing or complementarities (ph). We don't see something significant in this direction.

Actually, our strategic target with the alliances with iBOLT are application vendors like SAP, like Siebel, like PeopleSoft, rather than companies like IBM, and like (indiscernible) that have a product that works with it, kind of competes with us with iBOLT. So on a strategic basis, I don't think it will work. On the local basis, on case-by-case, we are working with IBM's -- especially with the AS/400 community, which has been always our strong point.

Okay. Changing the subject just a little, I did want to hear a little bit more about Hermes. I know it has a lot of potential. And I just want to get your feeling about how much potential it might have, not only in Q4 but for 2005? Do you have any revenue forecast that Hermes could bring in in 2005?

I think there is something about Hermes. You might wonder what an application company is doing in Magic when our declared strategy is to spin off all those applications. In the medium and long-term, we're talking two to three years. The strategy is to bring such companies as AOD and CoreTech and Hermes now to a point that they will become attractive to the market and spin them off.

Hermes this year is scheduled to go over $2 million in revenues and they are very profitable, with plans for next year -- and I'm saying it with caution -- of at least doubling it. The beautiful thing about Hermes is that as it goes deeper and has more and more customers, it gets closer to a point to become a standard in that industry, which is really a closed circuit industry, where everybody knows everybody working with everybody. The big boost that company will get is from the deal that we've been discussing over the last year with Lufthansa, which is really a major, major leader in that industry and all over the world.

So the future for Hermes looks very bright. We'll develop the. We'll carry it on until the point that we can spin it off because it's really not in our core business. This company strategically is far too (indiscernible) on the development and marketing of tools -- application development tools, which is eDeveloper and business integration tools, which is iBOLT. I hope that satisfies your question.

It does. But just a follow-up on (indiscernible) since you brought that up. I know that there was a pretty large deal regarding Lufthansa, and I'm wondering if that's still in the cards for next year.

It's still in the cards. We've been planning -- we're dancing -- with Lufthansa for the last year or so. And due to some organizational changes that Lufthansa cargo is undergoing right now, the decision is being delayed and they are breaking it down to a separate site for us.

I'd like to add that the Shenzhen Airport in Shanghai is a 50 percent partnership between Lufthansa and the Shanghai government -- sorry, the Shanghai Airport. And the Shenzhen Airport that we've been talking about is also a 50 percent partnership between Lufthansa and the Shenzhen municipality. So basically what's happening is that these sites are basically, I would say, Lufthansa are guinea pig sites or test sites. And once they see that their subsidiaries are working successfully with the system, hopefully, their board will see that this is a much better system than their own internal system or other competitive systems. They're still trading (indiscernible) the best system out there, and we're proving it day in and day out with these deals.

Okay. Thank you very much.

Thank you. And another follow-on question from Charles Silk of C. Silk.

Okay. I have two more questions. Could you describe more what's happening down on Answers on Demand and how you ordered (ph) 85 percent of it right now. How profitable is it and what does it look like for the future?

AOD, like we've reported last time, has lost its founder and CEO, Barry Scutillo, who died in July. But the company is doing very well. Not only that, we have now recruited the senior vice president of sales. We are going to recruit, I believe in less than a month, a new CEO. Huge potential, good business, very profitable.

Are you going to be doing the same thing with that that you're going to do with Hermes?

Long-term, that's our aim -- to bring it to a point where we can either speed it up or take it public, because it's really becoming -- it's a very significant leading position in the CCLC -- the continued care industry in the United States -- technology for that industry.

Are they planning to make acquisitions in the company and --?

Definitely. Definitely. That company will grow both from organic growth and mergers and acquisitions.

Have any acquisitions been made in this past year or --?

We made one two years ago with AIM, a similar company in Wisconsin, and two others now on the block for discussions.

Could you go back and talk more about CoreTech -- how's that doing? Is it profitable? And are they being more oriented -- being trained to use iBOLT and eDeveloper?

Yes. First of all, CoreTech is doing financially very good -- goes deeper into the pharmaceutical -- both into the pharmaceutical area in their territory, which is Pennsylvania and New Jersey, which as you know, most of the leading pharmaceutical companies are leading there. And both in banking applications. They're making a net margin of 3 percent -- 3.5 percent on revenue, which is quite normal for companies in that line of business, which is placement of manpower. They have lately gone into iBOLT and we have started to use their teams. They have a very high level of professionality (ph) to use their teams in our project. And another development bit that we are starting to get as customers, people or companies who have been working with CoreTech for years. So it looks good.

Sounds good. Thank you.

Thank you. No further questions at this time Mr. Hasfari.

Thank you very much, everybody.

Thank you. This concludes the Magic Software's third-quarter 2004 results conference call. Thank you for your participation. You may go ahead and disconnect.