Magic Software Enterprises Ltd (MGIC) 2004 Q4 法說會逐字稿

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  • Operator

  • Thank you for standing by, welcome to the Magic Software's fourth quarter and year end 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 February 16, 2005. I would now like to turn over the call to Mr. Kenny Green of Gelbat Kahana Investor Relations. Please go ahead.

  • Kenny Green - IR

  • Thank you. Good morning, good afternoon and good evening to all of you. Thank you for joining us today. We are here to discuss Magic Software's fourth quarter and full year 2004 results. With us today Mr. Menachem Hasfari, CEO of Magic Software and his team. By now you should have all received a copy of the press release which was issued earlier today and can also been found in the Investor Relations section of the Company's Web site 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 in economic downturns, changes in the competitive marketplace and all 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?

  • Menachem Hasfari - CEO

  • Hello everybody. I'm glad to welcome you all to Magic's 2004 fourth quarter and full year financial results conference call. With me I have here today David Assia, Magic's Chairman, Hilel Kremer our CFO, Gil Trotino, Vice President for Marketing, Avikam Perry, Magic's Vice President for R&D, and (indiscernible) head of (indiscernible) SAP program. Online with us from the various locations are Regev Yativ, Managing Director of Europe, Oren Inbar, Director of North America and Avigdor Luttinger, head of Magic's iBOLT program.

  • The financial results of the fourth quarter of 2004 that we had released earlier today mark I believe Magic's return to track and the full recovery from the glitch we have experienced in the previous quarter. As you can see our sales performance in each one of our four productlines being software licenses applications, maintenance and support income, as well as professional services, had strong growth from the third quarter of 2004. Compared to the previous quarter total revenue grew 13 percent while net income jumped 129 percent.

  • Comparing fiscal 2004 to 2003, sales grew only by 3 percent but net income again grew 33 percent. Our iBOLT performance throughout 2004 was satisfactory achieving a total of $5 million in sales in its first full year of activity. I believe it to be quite an achievement when you consider the fact that we had released a new product, something that Magic has not done in many years into a highly competitive market, all financed by our own internal resources and without dropping the ball on profit increase from 2003.

  • IBOLT is definitely becoming Magic's growth engine that is aiming at double revenues in 2005 in an effort to provide us with the overall growth we target. Our iBOLT deals are getting bigger; customers we sell to are more significant and our profitability is increasing. I would like now to leave the financial figures for a moment and we can come back to them in your discussion with the CFO and discuss with you our strategy going forward in 2005 and beyond.

  • In analyzing Magic business, we should look at three different business lines. eDeveloper, second being iBOLT and the third being the four verticals, AOD in Florida, CoreTech in Pennsylvania, Kapa (ph) in Israel and Hermes (ph) in the UK. Each of these three business lines is different in nature. They differ in size, in target audiences they approach, in market potential, in growth, in market dynamics, in sales cycles and in profitability.

  • The first business unit, eDeveloper. eDeveloper is aiming at the application development tool market, a market that is growing for everybody at the fairly modest base if at all. eDeveloper revenue comprised of licenses, maintenance and support income and professional services represented 75 percent of Magic's total revenue in 2003 when we still didn't have iBOLT. It went down to 65 percent in 2004, and is budgeted at being 68 percent of total revenue in 2005. eDeveloper is however aiming in 2005 at the one digit growth rate in accordance with the rest of the application development tool industry. These changes in eDeveloper's part of total revenue are compensated by the much factor growth rates of iBOLT. Of the total investments we have made to our 2004 in sales, marketing, business development and R&D combined, eDeveloper received 62 percent of investments and 52 in 2005, while iBOLT received 21 percent last year and is increasing to 35 percent of total investments in this year.

  • Our total investment in sales, marketing and R&D in 2005 is planned at almost $32 million. Approximately $8 million increase over actual 2004. Of these $32 million, one quarter, 25 percent will go to R&D and the rest 75 percent to sales, marketing, significantly increased business development. I want to make one thing perfectly clear so there will be no mistake. eDeveloper is not being neglected. It is still Magic's solid and robust business line. It receives the larger part of our resources, and it is providing most of Magic's earnings. eDeveloper is aimed for growth in 2005, and we are now working on the new groundbreaking version of eDeveloper 2 that will be released later this year, and we believe will herald the new dimension in composite application development tools.

  • Our second business line, iBOLT which like I said is being regarded differently is new, highly dynamic and aimed at much faster growth in a highly competitive marketplace. We plan for more than doubling iBOLT sales in 2005 as part of the three-year plan of Magic that will equal iBOLT and eDeveloper revenues in the year 2007.

  • In 2005 over $10 million, 35 percent of our total investment in sales marketing business development and R&D will be directed towards iBOLT. Compared to 3 million R&D dollars that we will invest in eDeveloper R&D, iBOLT R&D will be at 2 million. The iBOLT strategy, the long-term strategy calls for collaboration with application vendors like SAP that we will provide them on an ongoing basis with integration platforms that will fit their application offerings, with system integrators that are utilizing iBOLT as the preferred integration technology and with major end users.

  • With the release in March of this year the revolutionary iBOLT version 2.5 I believe we will be much better positioned to compete effectively in the integration and VPN (ph) the business process management markets. Our iBOLT Corporation with SAP that we have announced in November 2004 concerning the Business One platform is progressing. We have completed the first installation in Texas in the record time of three days in collaboration with SAP's local facilities. And the local apartment (ph) community is now in full swing in the USA and in many countries in Europe as well as in Israel and Japan. And all that after four months only.

  • Magic's staff is party to numerous SAP Business One partner conferences, and we follow the opportunities that arise in these meetings closely. The partnership with SAP is significant strategically because it is an example of the kind of collaboration we develop with world known application vendors, an effort that has really changed the way we develop product, support product and market it. We strongly believe that iBOLT success will be dependent on our ability to introduce the product to major players in the IT industry as the missing link that will be seamlessly embedded into their product in an opportunity which I believe is a win-win situation for both parties.

  • The third business line, our vertical company is a different story. The four companies have generated 27 percent of our total revenue in 2004, and they are planned to grow by a combined we believe $3 million in 2005 mainly in the highly profitable AAOD and Hermes. Fifteen percent of Magic's total investment in sales, marketing and R&D in 2005 will be directed to those four vertical companies compared to fifty percent, 50 in eDeveloper and 35 percent for iBOLT.

  • Our long-term strategy calls for Magic to re-concentrate its core business on tools, both for the rapid application development area and for integration, eDeveloper and iBOLT. A gradual process that will get us higher gross and net margins. Vertical companies will stay with us only if they are either profitable or synergetic to our core business. A significant move towards increasing the synergy between Magic's core business and the vertical companies is now in progress. In CoreTech, when it is involved in iBOLT sales activity in the USA to the longtime customers in the pharmaceutical and banking industry.

  • CoreTech has actually started to serve as Magic's safe and support post in the East Coast in addition to their traditional responsibilities. Hermes, our wholly-owned company in the UK that deals in Magic based eCargo applications is progressing fast. The fastest of all four vertical companies. Major airports and major cargo handlers all over the world are now among the happy customers and more are to join in 2005. Magic is aiming at growth in 2005 with better products, better strategy, better sales forces and improved business development capacities.

  • I truly hope to bring you good news about growth and profitability as we go forward. This concludes my presentation today. Thank you for your patience. The team here, my colleagues and I, will begin to take your questions now. Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS) Charles Silk of C. Silk & Sons.

  • Charles Silk - Analyst

  • The growth is starting to go again. I have some observations and a few questions. David called me on about January 5th and said he was coming to Boston on January 19th and would like to meet me for dinner. He indicated that he would also be in Miami to make a presentation at the SAP Conference on January 11th. I told him I would be in Florida in the week of January 11th and I would really like to meet with him and I met with David and his other Magic people at lunch on a Tuesday. I sat right next to Nina Clark of IFCO Houston, the financial analyst systems analysts and asked her about her relationship with Magic. She said a SAP business wire (ph) partner introduced her to Magic iBOLT and she was responsible to integrate disparity (ph) in her technology, the databases and applications, and trying to be aware of Magic she looked forward to months of development and costs and had 8 projects to be implemented. She said using Magic iBOLT and eDeveloper they did the implementation in less than three days. After lunch Magic presented a purse (ph) (indiscernible) and there were 20 to 30 SAP VARs were in the presentation room. David gave an overview of Magic and its capabilities, Avigdor talked about iBOLT and Nina Clark gave an excellent narration of her experience and implementation which was done, and the incredible speed and cost reduction. It was all done in less than three days. And she said Friday I just generally, I left everything was under control and I came to Miami to make the presentation. The Magic people handed out a 14-page white paper and David gave me the slide presentation he was showing to analysts that he visited. I read them once again and intensely impressed with the benefits of iBOLT and eDeveloper. I have been there and have done things and I had a service deal in the Boston area and developed complex custom business application using second third generation mainframes. It took weeks and months to conceptualize, analyze, code, compile, test, debug and implement and I know what it takes to development. Too bad that Magic wasn't there at that time. I have some questions and I will defer to it and let somebody else get into the conversation.

  • Operator

  • Joe Vittick (ph) of Menapolin (ph) Oracle Advisors.

  • Joe Vittick - Analyst

  • Nice quarter. One question. A couple questions actually. You guys posted a fairly large number in your financial income and I was just wondering where that's from on your line item.

  • Unidentified Company Representative

  • Part of our offsets are in Europe and as the euro went up during the quarter from 1.3 at the end of September to 1.36 to the dollar at the end of Q4 we had a financial gain from the raise of the euro against the dollar.

  • Joe Vittick - Analyst

  • So that is strictly a currency fluctuation? Non-cash?

  • Unidentified Speaker

  • To translate to cash once we collect the amounts, and.

  • Joe Vittick - Analyst

  • Okay. Another question is have you guys -- right now it appears that nobody in the street is following your company. Is that true or are you -- is there anybody out there that is actually getting to --.

  • Menachem Hasfari - CEO

  • As Charlie mentioned a few minutes ago we have been meeting analysts and we have been told by these analyst, hopefully some of them are listening to this conversation, that they would look at the company carefully for a couple of quarters, and if everything goes as we tell them, then they may very possibly follow the company and do some research. But we are discussing, we're talking to a few of them.

  • Joe Vittick - Analyst

  • Okay. And now do you guys report backlog at all in terms of contracts signed for iBOLT?

  • Menachem Hasfari - CEO

  • Can you repeat the question please?

  • Joe Vittick - Analyst

  • Do you guys report any number with regard to backlog?

  • Unidentified Company Representative

  • We generally, once we have a deal, then we report the deal, and we also recognize the revenue. What we have is the pipeline and we have a pipeline that is growing for iBOLT and iBOLT this quarter grew compared to last quarter in terms of revenues that we have recognized in the quarter, and we expect iBOLT to continue and grow, also growing in 2005 as Menachem mentioned.

  • Menachem Hasfari - CEO

  • (indiscernible) would you like to speak about the backlog of iBOLT deals in the United States?

  • Avigdor Luttinger - Head of iBOLT

  • We have a sort of pipeline of deals in progress but I don't think anything specific that I can add to what has already been said.

  • Joe Vittick - Analyst

  • I guess its request for proposals really is what I am looking for, if there has been any trend recently, uptrend in what is going on out there in the corporate world.

  • Avigdor Luttinger - Head of iBOLT

  • Most definitely is first of all we're seeing an increase among our installed base which is a good indication to start with, that they are interested in this new technology to enhance what they already have with Magic so far. And again if you look at the results of iBOLT and I will speak for the U.S. comparing to last year for example we grew by almost 300 percent from 2003 to 2004. So most definitely, yes.

  • Joe Vittick - Analyst

  • Great. I appreciate it. Thanks very much. That's all I have.

  • Operator

  • Randy Cole, a private investor.

  • Randy Cole - Private Investor

  • Thanks for taking my call. I was doing a little math from your introduction, and I just want to clarify something. In 2007 when you say that iBOLT will equal eDeveloper sales, if eDeveloper is doing 65 percent right now or it did in 2004, does that mean that iBOLT will be doing about 42 million in 2007? Am I looking at that wrong because I am not -- you have maintenance in there and things like that?

  • Unidentified Company Representative

  • You forget the verticals. In 2007 we still have verticals that go into the plan, but iBOLT and eDeveloper sales will be equal. I cannot give you the numbers that we have in the plan, but remember that we have three product business lines, eDeveloper, iBOLT and verticals (inaudible). So eDeveloper is going down as a percentage of total revenue but is increasing in net dollar terms.

  • Randy Cole - Private Investor

  • Okay. That did seem kind of high. Anyway, you also stated that iBOLT 2.5 is revolutionary. Can you kind of tell me why you think it is revolutionary?

  • Unidentified Company Representative

  • The right person here to answer this (technical difficulty) R&D.

  • Unidentified Company Representative

  • Well, I think it really takes to the limit the ability of the integration architect to achieve I would say 60 to 80 percent of the project work by using the modeling environment without having to go into the developer (indiscernible). That is actually what we saw in the projects we are implementing these days. And the quickness and the ability to come with this project to a live environment is part of the ability of the architect to get into the job and finish most of it just by the modeling environment.

  • Randy Cole - Private Investor

  • Okay. Changing the subject a little bit, how does the sales cycle work in the United States when a SAP customer buys Business One, how are they made aware of iBOLT?

  • Unidentified Company Representative

  • This is Elan speaking. Basically we have, we are dealing with that with two-pronged approach. First of all the SAP management in the USA are pushing us very hard through the channels. They are helping us to allocate projects. And secondly we are approaching the partners directly through Web enough (ph) through training, assessing which one is just an application partner or implementer size wise and which one we can actually find business to do with. That part is quite easy because SAP is really behind us. They feel with us they will be able to be much quicker in the market in terms of implementing. Shai Agassi, the third in line in their SAP management actually challenged everybody that SAP implementation will happen in one day. I think he exaggerated a little bit but definitely he is realizing that with iBOLT he will be able to be positioned as close to what he wishes to have.

  • Randy Cole - Private Investor

  • Does every Business One customer, are they, I guess I am kind of wondering -- okay, they go out, they buy Business One and then how does iBOLT come into play? Is that always brought to their attention, or you hope that will always be brought to their attention in the future?

  • Unidentified Company Representative

  • First of all, SAP Business One management made them aware of it. We would like by the end of the road it will be such an agreement that it will be sold directly by SAP Business One. But at this stage we are selling directly to the partners, and I hope I answered your question.

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • I would like with your permission Randy to add something. This is Oren from the U.S. We have created a support team in the U.S. to support Business One as a separate activity altogether. They have a full-time SE that is available to go and see and help them with any kind of technical needs they might have. We have an office coordinator that is basically making sure that once the Business One partner has been or has joined the circle that he gets all the information necessary from the Company regarding just about everything that Magic does as a company, and particularly what we do with iBOLT. We then also have a general manager that is assigned to handle the SB One audience and collectively this -- and this is of course -- these are dedicated people -- this is of course over and above the rest of the people in the company who deal with other customers and will treat every SAP Business One potential partner as a new opportunity. But we are going to basically go aggressively after these guys, we have already identified the U.S. list, and we are approaching them as I said aggressively and offering them exactly what it is that was included between SAP Business One management and MSE.

  • Randy Cole - Private Investor

  • How does eDeveloper relate to the special iBOLT version for SAP? If a Business One customer buys a single user version of iBOLT, do they get the client/server version of eDeveloper?

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • (indiscernible) version 2.5 is that basically I think it is the ultimate solution that any partner who wish to use it, he can actually choose whether to use eDeveloper or any other language, and that is part of the unique solution we are offering. So we are not pushing eDeveloper as part of the iBOLT solution. The partner can decide which way they want to go.

  • Randy Cole - Private Investor

  • I didn't quite understand that. So they are not getting eDeveloper with iBOLT originally, or?

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • Not necessarily, they can actually choose which, as (indiscernible) mentioned before in order to develop today an integration solution 65 percent is actually done on an upper language. It is basically a visual type of a thing, drag-and-drop and others so only when he needs to get into some type of coding, adding other application he will need to go into some type of a language. And every partner can choose the language he wishes.

  • Randy Cole - Private Investor

  • They would have to buy eDeveloper at that point?

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • If they decided they want to do it in eDeveloper it can be eDeveloper.

  • Randy Cole - Private Investor

  • Okay. And then the iBOLT vertical market application introduced to the financial sector, is that being pushed right now in the United States?

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • We are still in the process -- this is Oren again -- we still in the process of trying to identify exactly how we are going to go about it. If one verticalized in the U.S. as you can imagine is a huge task. And our approach at the moment is to identify various partners that we already have from the eDeveloper side together with new iBOLT partners and trying to leverage the opportunity for the financial words (ph) through them. For example, we have a new partner called Emphasis (ph) which are located in the New York area. It is quite a large (indiscernible), they specialize in the banking industry and solutions to the banking industry and we have at the moment three opportunities that we are working with them which one of them could become sort of like if you wish a model for approaching the business financial community in a very verticalized approach. But this is still early days to say much more than what I said now.

  • Menachem Hasfari - CEO

  • We are much more active in verticalizing iBOLT in Europe than in the United States so maybe I will ask (indiscernible) the managing director of Europe to comment on that.

  • Regev Yativ - VP and MD Europe

  • This is Regev Yativ from Europe. We have started basically trying not to give too many details of activities around the finance and banking or the financial sector in Germany in coordination with UK. And we have also started the same activity, different activity on the vertical of retail and logistics in France. Basically we have so far identified a team of experts lead by top industry names in Germany to professors well-known in the insurance and finance market. And they are helping us to design the material and also to take it to the market, we think the right people and the right influences in the market or in the vertical market in France, we are going to pursue the retail market in coordination and cooperation with Tohmatsu (ph) of what used to be Deloitte & Touche. And take it to the market. So far we have done three launch events for, especially for vertical customers and prospects and all three events were very successful.

  • Randy Cole - Private Investor

  • It just sounds like you have so much potential in so many different areas. I am wondering if the agreement with FIMI is going to help. Are they going to help you finance some of these ventures that we're talking about?

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • The agreement with FIMI will have no effect on the Company. The agreement with FIMI is with a Formula group and not with Magic. However, we have full support of them on the Formula Board and with the Formula members for everything management is doing. We have a very clear strategy, very clear plan. We have an aggressive budget for 2005, which we hope we will meet. And I am sure FIMI has seen it, we made presentations to FIMI but they are not involved in our Board or in any of our decisions. However, just to add to that, for this year 2005 our plan is to grow, and we are trying to grow aggressively and without sacrificing too much of the profit. However, we will show increased profitability versus 2004 and grow simultaneously with the two major new product lines. One is the iBOLT version 2.5. The second one is eDeveloper 2 or the other way around in addition to growth in our vertical subsidiaries. And we believe that if we also simultaneously leverage our SAP agreements in all the countries in which we have already identified the SAP partners we can work with, then we will be successful in 2005. That is the aim.

  • Randy Cole - Private Investor

  • What type of presence does Business One have in Japan?

  • Unidentified Company Representative

  • This is really an interesting question, thank you for asking. Japan SAP Business One plans to launch in Japan starting by the end of Q1. There are going through a localization (ph) process; we are involved in that. And the moment they are going to be launching it full-scale in Japan we will be part of this program. At this stage they are looking for partners in Japan, but since we really have a very strong presence in Japan we will be ready with them from the word go.

  • Randy Cole - Private Investor

  • That sounds very promising.

  • Unidentified Company Representative

  • Yes, we believe so.

  • Randy Cole - Private Investor

  • I have to ask one more question. And that is regarding what Gardner said about SAP and the relationship with you, and they said that it is likely that SAP will find similar agreements in the future with other companies, but I am having trouble trying to think of anybody else out there that is kind of in your territory that is going to compete or who they could send sign an agreement with. I don't know if you want to talk about some potential there of them signing another agreement or (indiscernible) have their hands full with you guys right now.

  • Menachem Hasfari - CEO

  • Avigdor, would you like to relate to that please?

  • Avigdor Luttinger - Head of iBOLT

  • Yes. Certainly. I don't think that SAP can, given their position to announce a commitment to a single vendor like Magic. I fully agree with you that we don't see around and by we I mean all of us don't see around real other candidates. In the same token there has been also reference in some of the analyst reports to the geographical coverage. And as you and I have learned in this conference, we are actually active well beyond the U.S. territory with the full support and encouragement of SAP. So I think the facts on the ground are much more significant than what appears in print.

  • Operator

  • Barton Brass (ph), a private investor.

  • Barton Brass - Private Investor

  • Hello. First of all, I love to hear the name Visio mentioned because it should only happen to us what Visio when Microsoft bought them. (indiscernible) What I'm wondering is last year at this time we were talking about partnerships. Obviously small distributors and smaller partnerships, and quite obviously that didn't work, or if it worked, it didn't work to anybody's satisfaction. Now I am hearing SAP partnerships mentioned instead of just partnerships. I'm just wondering, are we -- the opposite of Randy's question is what I've been waiting to ask. Are we talking, or even thinking about any other people because, from my history with Magic we have great products, but we can't get them out there because we're a small company.

  • Menachem Hasfari - CEO

  • Let me answer that. The partnerships we are talking about, like I said, are with two kinds of potential partners. One is application vendors like SAP, and the other are system integrators like Accenture, KPMG, Cap Gemini, and so on. The business development you needed we have really increased significantly in 2005 starting two months ago. We work also on a local basis where, for instance, Magic France, we cooperate with the leading application vendor in certain fields and in parallel with worldwide players like SAP.

  • I don't know if you are aware of the agreement we have signed and announced with IDS Scheer, for instance, in Germany. IDS Scheer, you know Scheer, that gentleman is the S of SAP, one of the founders of SAP. And it is a Company dealing in technology of business process management, and we are cooperating with them now and pushing the combined market -- product to the market. So that is the direction that we have taken, and we have a list of worldwide -- world names application vendors, the (indiscernible)of SAP to work with now.

  • Barton Brass - Private Investor

  • Basically it's a year later with iBOLT and you feel we've learned from the last year and that this approach is much better?

  • Menachem Hasfari - CEO

  • We have learned a lot.

  • Barton Brass - Private Investor

  • I didn't ask that..

  • Menachem Hasfari - CEO

  • Maybe you would like to hear it from the mouth of the horse and let me ask Oren and (indiscernible), maybe he can tell us about what they have learned and experienced in the last year to implement this year.

  • Barton Brass - Private Investor

  • That's what I was wondering.

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • I think that the biggest difficulty that we had last year was first of all to find what kind of partners do we want to have on our side. Because just going wild in the U.S. after partners, there are thousands of those not necessarily everyone of those is a good candidate for what we want to do and what we want to achieve. So I think the selection process has become much more clear throughout last year and this year we are definitely much more focused on very specific kind of system integrators. And what we also realized during the year is that the support system between it and the office in order to support new partners that come on board was we basically thought getting another (indiscernible) on board is like treating one of our old major partners. This is definitely not the case. They need much more much nurturing, they need much more knowledge transfer activities. They need for example good marketing activities in order to generate some opportunities together and so on and so forth.

  • So this year as opposed to one person handling the general efforts last year, this year we have four people that are going to focus on doing exactly the same. But with a much more focused approach towards the audiences we want to acquire. And my feeling about it or my let's put it this way, my hope is that at the end of this year we will have approximately 5 to 7 good, strong, active partners and maybe another 15 or 20 smaller partners. But the rule of 80/20 will still apply. So we are being very careful as whom do you want to come on board because each one of those partners that we want to bring on board is going to require us to invest heavily in that partner, and that investment is going to be probably at no charge to the client, to the potential partner. So we just have to be careful on that (multiple speakers).

  • Barton Brass - Private Investor

  • So we are going after quality instead of quantity this year.

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • Absolutely. Absolutely.

  • Barton Brass - Private Investor

  • And the other thing is, in other words you have a new product that you really launched a year ago December, and last year was a tremendous learning curve because now you're dealing with different people?

  • Oren Inbar - VP, President, CEO of Magic, Inc.

  • Correct.

  • Barton Brass - Private Investor

  • Okay. One last (indiscernible) but the last question. Menachem the shares keep somehow keep creeping up. Now we are 32.4 million shares outstanding. We were 30.5 last year. The outstanding shares.

  • Menachem Hasfari - CEO

  • At this time I believe we are 31 million and 200,000, something like that, but --.

  • Barton Brass - Private Investor

  • Diluted 32,4.

  • Menachem Hasfari - CEO

  • Can we explain the increasing number of shares?

  • Unidentified Company Representative

  • (inaudible) of options, and.

  • Menachem Hasfari - CEO

  • Close to one million by the way.

  • Barton Brass - Private Investor

  • Yes, but dilution shows 32.4. What I am wondering is that going to keep increasing? That's what I am wondering.

  • Menachem Hasfari - CEO

  • Let me assure you this will not happen right now because if you consider that one of the reasons for the increased number of shares is employees exercising their options with the current price of the stock, I believe all of them will not do it because their exercise prices are a bit higher than that.

  • Hilel Kremer - CFO, VP

  • Let me also (indiscernible) available 2.5 million (indiscernible)outstanding options. Options as you know becoming to the diluted calculations according to the price of the share at the times when we announced the results. So when the share -- if the share goes up again and again, then we will see larger numbers going into the diluted number. And if you go down, you will see lower number of shares diluted.

  • Barton Brass - Private Investor

  • Because I haven't seen lower share diluted in the last two or three years. Menachem, one last question, the R&D went down almost $1 million last year, was the because you didn't need it for iBOLT as much, or was it --

  • Menachem Hasfari - CEO

  • What you see is net R&D after capitalization that we made. And it might vary from quarter to quarter or year to year.

  • Barton Brass - Private Investor

  • Cause it was down almost 25 percent last year.

  • Menachem Hasfari - CEO

  • Yes.

  • Barton Brass - Private Investor

  • Okay. Thank you.

  • Operator

  • Stephen Silk of C. Silk & Sons.

  • Stephen Silk - Analyst

  • You mentioned that you don't disclose backlog and discuss pipeline instead. My question is along the lines of your sales cycles and how you define the pipeline if you can give us some idea of -- if you took a look at your what you consider in your pipeline, how close is the percentage of deals to becoming revenue?

  • Menachem Hasfari - CEO

  • Stephen, the question is how we build the pipeline and how we manage it, is that the question?

  • Stephen Silk - Analyst

  • Yes, and I'm also asking what is the sales cycle timeframes when you get in the door? Pipeline sometimes turns into no sales, and other times obviously, so I would like an idea of when you get in and you successfully sell your product how long does it take to generate revenue typically?

  • Menachem Hasfari - CEO

  • I will ask Regev the managing director of Europe to answer that.

  • Regev Yativ - VP and MD Europe

  • First of all without getting into the whole forecasting and pipeline methodology, I would say that basically we are creating from various marketing activities and also sales activities, we are creating you can refer to it as a big funnel. Through this funnel we take all these leads, or all these prospects -- we usually call them suspects through a series of qualification criterias. Some of them as you rightfully mentioned don't actually cross these criteria, and we take them out. And we try to focus on something between 30 to 35, 40 percent out of the total funnel which actually becomes a lead or a pipeline item. We basically analyze the potential, check if there is a budget available, check what is the timeline possible to close the deal, etc.

  • After we've made some more -- after several more meetings and etc., we actually reach a point where we understand the pain of the problem. We get into a proof of concept stage in a lot of these cases, and in cases where all the circumstances are right like the proof of concept was successful, budget allocated, timeframe is okay, management has the buy in, etc. we actually move the deal to the forecast and from there it is closed. Usually, not always, but usually it is closed. Now in terms of timeline, from the moment a deal is hitting the pipeline I would say that it is -- because it varies -- we closed the iBOLT deals for example in three weeks because the need was there and the proof of concept was not necessary etc. etc. But generally speaking you are talking about between 3 to 6,7 months. Also depending upon the scope of the deal, the type of the customer, the procedures internally that the customer has to go through in order to get the deal approved, the type of projects or if it is just a few license deal or a complex project deal etc. etc. So I hope it is a very wide question -- I hope I managed to give you some feel of what we are actually doing.

  • Stephen Silk - Analyst

  • That was helpful. I was just wondering within the pipeline is there a lot towards the end of the funnel, or is it at this point just really weeding out a large number at this point?

  • Regev Yativ - VP and MD Europe

  • No, no, no. Of course the fact that first of all we are closing deals quarterly regularly, and it is not in any way just a funnel. We are, what I am saying is that basically the whole creation of pipeline starts with this funnel and gradually we are moving these deals towards closing. Our aim is actually to increase and increase gradually this funnel, but first target is of course closing, and this is what we are focusing on. And we clearly see that it is closing and it is coming out quite nicely.

  • Stephen Silk - Analyst

  • That's great which leads to my next question, of the 17 million, how much revenue came from new clients?

  • Menachem Hasfari - CEO

  • I can say that most of the iBOLT customers are new so this --.

  • Unidentified Company Representative

  • Almost all of them.

  • Menachem Hasfari - CEO

  • So about 1.4 million this quarter.

  • Regev Yativ - VP and MD Europe

  • I agree with that when it comes to Europe, I agree with that.

  • Stephen Silk - Analyst

  • On new client installations, do these often grow as small projects that if they are implemented successfully have potential to grow into much larger projects?

  • Regev Yativ - VP and MD Europe

  • Normally yes. Normally we see that customers sometimes jump in with one server. There is one deals for example Uniq in the UK that has already grown, its one of the first deals we've signed and a very nice deal. That started with a single installation of a full iBOLT server and has already developed to three installations and a lot of PS around it etc. etc. So yes, we are counting on it.

  • Unidentified Company Representative

  • Just if I may add, getting a second order from an existing customer is usually harder than getting the first order from a new customer. And our sales force is compensated accordingly.

  • Stephen Silk - Analyst

  • But it sounds like you are very satisfied with the product that you have and the people that are asking questions are touting (ph) your product so that if you can show it that is the best way to get recurring revenue from existing customers. The last question I guess is more subjective since you don't give guidance. You had said on the last quarter that it was an aberration and not going to be a trend. You have proven this quarter that that quarter was past. What in your mind would be a disappointing quarter coming up, and were would you really like to see your revenue for this quarter?

  • Menachem Hasfari - CEO

  • I can tell you one thing that the fourth quarter is most significant for the quarters that we seek in the third quarter.

  • Stephen Silk - Analyst

  • Okay, so you don't want to say perhaps --

  • Hilel Kremer - CFO, VP

  • We don't give guidance, David (indiscernible) talk about plans and we have budgets to grow but at this moment we will not give specific guidance on the year and Q1.

  • Stephen Silk - Analyst

  • Okay. I accept that. Thank you very much.

  • Operator

  • Walter Abrams, a private investor.

  • Walter Abrams - Private Investor

  • I'm wondering iBOLT applications, how many of them are involved in legacy, and how many are involved in new developments?

  • Menachem Hasfari - CEO

  • I can say that most of the iBOLT installations to now are involved with a legacy integration. One way or another. More intensively was the installations that involved with the database and the messaging queue to existing legacy systems. I think that is the essence of iBOLT to allow this kind of integration to happen.

  • Unidentified Company Representative

  • Usually integration is done with legacy.

  • Walter Abrams - Private Investor

  • Right. What about in the case of the SAP you're putting in a whole new environment.

  • Unidentified Company Representative

  • With SAP we can see that part of the iBOLT in SAP is to allow legacy integration into the SAP Business One environment. And in both ways from SAP Business One to the legacy and vice versa.

  • Unidentified Company Representative

  • You see usually an ERP system like SAP and SAP Business One is implementing truly a new system site but while doing that they have to integrate and interface with a lot of legacy data bases, and that is exactly the point where iBOLT comes in.

  • Walter Abrams - Private Investor

  • I can see that, what about the area of PLM, product lifetime management? Is that part of SAP, or is that yet another market? Since it comes from the engineering side?

  • Menachem Hasfari - CEO

  • The PLM is something we are currently working on for the next major (indiscernible) developer actually as the part of the life cycle management.

  • Walter Abrams - Private Investor

  • That is good, that is a really important area. I guess that's the only questions that I had. Thank you.

  • Operator

  • A follow-up question from Charles Silk of C. Silk & Sons.

  • Charles Silk - Analyst

  • Most of my questions have been answered but one that you just touched on about acquiring a new customer and then in other divisions it becomes tougher. Specifically, IP the one from Texas that I mentioned to and alluded to, this is a multibillion dollar company with 170 worldwide locations. Will Magic tools be used in other parts of the Company, and what revenue do you think (indiscernible) possibly from just this one Company can be generated?

  • Unidentified Company Representative

  • That is an interesting question. This is Elan. While we were implementing the first project with SAP Business One, the people that were around they were saying, hey, we actually have a whole new integration project detail analysis and everything ready. And now we are talking about the second phase of this project. So definitely the whole idea behind SAP Business One is get into organization that will see the capability of iBOLT and open it for more integration and more threads and more licenses. So that is the whole essence behind the partnership with SAP Business One.

  • Charles Silk - Analyst

  • This seemed to be from what talking to (indiscernible) this was just a very fast acceptance of your product and was done in incredible time. It would seem to me that you would want to use this information to address the whole IT society because you've got something that nobody else really has and has done as rapidly. I think it is pretty exciting, and --.

  • Menachem Hasfari - CEO

  • I'm excited, as well.

  • Charles Silk - Analyst

  • I think David is excited as well, too.

  • David Assia - Executive Chairman

  • Our mission is to make the market excited and actually accept, make them accept really the revolutionary that was made by Vicom (ph) and his team in version 2.5. So we hope to make 2005 in (indiscernible) time.

  • Charles Silk - Analyst

  • Pretty good. One of the things in this whole environment of acquisition are companies buying Internet technology, there's only two things that really are important to them. Can you increase sales or can you cut costs and basically you can do both of them. Thank you.

  • David Assia - Executive Chairman

  • Thank you very much.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Menachem Hasfari - CEO

  • So with no further questions I would like to turn the microphone to David Assia, the Chairman for closing statements.

  • David Assia - Executive Chairman

  • So to conclude what has been said until now we are very optimistic regarding 2005. We have a very aggressive growth plan. As I mentioned previously, we will try to leverage on the SAP agreement. We will try to strengthen that agreement in additional countries beyond the USA. We will try to close new strategic relationships. The launch of the two new products, eDeveloper 2 and iBOLT 2.5 are going to help us accelerate the growth, and to really conclude, I would like to say that the Board is behind the management in this whole plan, and hopefully we will succeed to attain all our goals. And thank you very much for attending this conference call.

  • Operator

  • Thank you. This concludes Magic Software's fourth quarter and year end 2004 results conference call. Thank you for your participation. You may go ahead and disconnect.