Magic Software Enterprises Ltd (MGIC) 2005 Q1 法說會逐字稿

Welcome to the Magic Software's first-quarter 2005 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 May 10, 2005. I would like to turn over the call to Mr. Kenny Green of Gelbart Kahana Investor Relations. Mr. Greene you may begin.

Good morning and good afternoon to all of you. Thank you for joining us today; we are here to discuss Magic Software's first quarter 2005 results. With us from management today is Mr. Menachem Hasfari, CEO of Magic Software, David Assia, Chairman of Magic Software and Hilel Kremer, CFO of Magic Software. From England we have Regev Yativ, managing director of Europe; from the U.S. we have Oren Inbar, managing director of North America and in France we have Avigdor Luttinger, head of the iBOLT program.

By now you should have all received a copy of the press release which was issued earlier today. 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 by 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 Magic's sales, an economic downturn, hedges in the competitive environment, and an inability to perform customer contracts at (indiscernible) cost levels and other factors that generally effect the Company's business. Please refer to the Company's current FTC filings under the Securities and Exchange Act of 1934 as amended for further information.

Menachem, would you like to begin please?

Thank you Kenny. (indiscernible) It is my pleasure to present Magic financial review of the 2005 first-quarter results. Sales for the first quarter of 2005 was at $15.5 million compared with $16.5 million recorded in first quarter a year ago, a drop of 6%. Sales of Software license were $4.9 million in the first quarter of 2005, 11% less than the $5.5 million in the first quarter of 2004. Sales of Applications were $2.2 million, a 33% increase from $1.7 million in the first quarter of last year.

Sales of Maintenance and Support increased 27% to $3.5 million, from $2.8 million in the first quarter of last year. In addition sales of consulting and services in the quarter were $4.9 million, 25% less than 6.5 million and the first quarter of 2004. Europe accounted for 40% of total sales, compared with 41% in the first quarter of last year. The U.S. accounted for 30% of total sales compared to 29% last year, Japan accounted for 20% of total sales compared with 17% last year and rest of the world accounted for 10% compared with 13% last year.

Gross profit was $9.3 million in the first quarter of 2005, compared to 10.5 million in the first quarter and $10 million in the first quarter of 2004. Operating expenses including R&D, sales, marketing and G&A are 9.7 million in the first quarter of 2005, compared to $9.3 million in the first quarter and $9.4 million in the first quarter of 2004. A main reason in the increase of operating expenses is a result of the higher investment in R&D sales and marketing to accelerate ample product penetration.

Operating loss was $397,000 in the first quarter of 2005, compared to an operating profit of $592,000 in the first quarter of 2004. A main reason for the decline in operating profit was a combination of the declining revenue and the increase in iBOLT investment. In addition, with other income this quarter from our AAOD subsidiary of $1.2 million. Net income for the first quarter of 2005 was $163,000, or $0.01 per share on a diluted basis, compared with net income of $717,000 or $0.02 per share on diluted basis in the first quarter of 2004.

Company completed the quarter was cash and short-term cash investments of approximately $13.9 million, or $1.1 million more compared with the $12.8 million at the end of 2004. Free cash flow for the quarter was strong at $1.4 million.

I will now pass the call to Menachem Hasfari, Magic's CEO. Menachem, please.

Hello, everybody wherever you are and welcome to our first-quarter conference call. Let me start by saying that the results of the quarter have a bit disappointed us. The combination of slowing IT markets in some of the countries we do business in and slippage of some deals at the last moment into the second quarter have caused weaker than expected performance in the quarter. However I believe that the first quarter is in no way an indication of the trend of business for the rest of 2005, and I strongly believe we are now back on track.

I would like to draw your attention to two business lines that have increased their revenue significantly in the quarter. Application service did grow in the quarter by 33% over $500,000, mainly due to the excellent performance of AAOD and Hermes of which I will talk about later. The other business line is Maintenance and Support revenue that grew by 27%, and this is a reflection of the special efforts we have been making lately to increase customer loyalty and customer retention.

One of the criteria we are using to measure our ability to encourage our installed base to continue to do business with us and not to switch to the competition, is the revenue we get from maintenance and support contracts that customers renew on an annual basis. As you see this business line is growing constantly. We are moving forcefully ahead with our iBOLT program, the accelerated investments we are making in sales and marketing were one of the reasons for our low income in the quarter and the late, the foundation for effective competitiveness and accelerated growth in the future.

The average deal of iBOLT is growing in size and in many countries is now set at between 70 and $100,000 U.S. Later I will have our executives in Europe and North America to describe to you if you want an iBOLT activity in their respective territory. Our partner community is growing and we are investing significantly in its recruitment, prolification and support. We are convinced that Magic's success is dependent on its ability to attract, build and maintain effective business partner communities that will help us carry our business forward.

For instance, out of a total of $8 million of sales of iBOLT in the last six quarters only 43 to 45% were bought by our partners. We would like within the course of less than 2 years to double that percentage and to reach a point where more than 80% of our iBOLT deals will be generated by business partners. Our relationship with SAP is accelerating. In many countries we have been engaging SAP Business One partners and joint work with our iBOLT.

In January as we told you in the last conference calls we took part in SAPs annual partner summit in Florida, an event that sparked many deal opportunities that we are now working on. We are now also taking part in almost every SAP Business One partner conference worldwide and dozens of SAP Business One partners are now undergoing training in iBOLT and we expect to see more deals in the very near future. If you want we can go into details about our SAP activity later.

We have released iBOLT version 2.5 the best ever, that has already received enthusiastic welcome by industry analysts and potential customers. This is an advanced version that we've invested significantly in its functionality, ease-of-use, easy installation, user-friendliness, and I hope it will boost our ability to compete effectively in the market.

Now let's discuss our vertical companies as I promised AAOD and Hermes. AAOD has been doing superbly well, increasing revenue and profit as well as market share in the USA, CCRC market which stands for Continuing Care Retirement Communities. We have confidence in our ability to maintain an annual organic growth rate of 15%, a growth that could be even higher given the various M&A opportunities we are now looking into. AAOD is now examining carefully various ideas of expansion into related deals not only CCRCs, as well as expansion into foreign markets with its (technical difficulty) solution. An effort we believe will speed AAOD's growth.

Hermes our UK subsidiary that specializes in Magic-based solutions to the aviation cargo industry has been progressing rapidly. In the quarter two large deals were signed with top tier cargo handlers in Germany and a very healthy pipeline is now in place. We believe that Hermes which is now fully owned by Magic, is quickly on its way to becoming a major player in the IT aviation cargo industry. Our estimation is that Hermes can match AAOD's current revenue and profit levels within two years.

To conclude, I believe that despite the temporary delay in meeting our targets this quarter, Magic's business model is solid and our technology is making the right roadways into the IT market, and our financial position is sound. The Company's outlook for the rest of the year is positive, looking forward Magic is aiming at increased revenues and earnings. Thank you all. We will take your questions now.

(OPERATOR INSTRUCTIONS) Our first question is from Randy Faricks (ph) a private investor.

Good morning. Do you really think this quarter is not indicative of the future of Magic Software? Is the company buying back their stock? And if not, why not?

The company is buying back about 4000 -- the maximum allowed by SEC rules on a daily basis. Which comes out to about 90,000 shares in the first quarter; we bought 32,000 shares in Q4 of last year. Average price is between 3.2 and $3.3 per share.

(OPERATOR INSTRUCTIONS) (indiscernible) a private investor.

Mr. Hasfari, you have article couple of months ago in (indiscernible) saying that you expect to add that 2005 is going to be the year at Magic. Last year you said that you're going to grow 20% from quarter-to-quarter. Now you are saying we still going to grow nicely in 2005. So, I'm taking it that you are so positive that you are so off target. Can you explain it?

Saying that we are off target is what we call the wisdom of the after effect. I can assure you that when the year begins we are not only preparing our plans for the (indiscernible) resources to be successful, but we really mean it. But along the year we are fighting with competition, with local economies, with stubborn customers. And what you see at the end of the year is sometimes far from our intentions at the beginning of the year and let me assure you we are sincere. As I am sincere when I am telling you now that our full intention is to grow and succeed and present to you quarters that are much better than the one we presented now.

Does not answer your question, sir?

Thank you very much.

Renny Krub (ph) a private investor.

In the newspaper a while back they were talking about your potential Hitachi relationship. Can you expand on that or are you not able to?

I will tell you the little that I can. First of all we are talking Hitachi Software which is a subsidiary of the large Hitachi which is the manufacturer of mainframes. And it is a $2 billion company with 10,000 people. They are showing interest in cooperating with iBOLT in the Japanese market to offer combined solutions to the customers whereby Magic will provide the iBOLT technology and they will provide the staff for the performance of the project. Now even talks about making it a three-way cooperation with SAP Of Japan. I have met with them twice, with the COO of Hitachi Software and (indiscernible) our German (indiscernible) team as well as time, and there is another meeting scheduled to start laying down the infrastructure there as specific ideas Hitachi Corporation plays in the next couple of weeks. This is all I can say at this point.

One other question about Japan. Have there been any Business One solutions put in Japanese market at this point?

About Japan, first of all Japan has done superbly well in the quarter with sales of things over $3 million and profit before tax of close to $1 million, which I believe is impressive. We have been in touch and in serious discussions with SAP of Japan and all groundwork has been out laid to start talking to the partner community in order to go for joint projects like we do in other countries. You want to add something?

SAP Business One is actually just completed localizing their version into the Japanese market. It started a couple of months ago. They are recruiting partnership agreements right now. So for us it will be the right the correct time to launch iBOLT for SAP Business One in the next few months. Before that they actually didn't have the local solution yet.

Do we have a local solution in Europe at this point and are we cooperating with SAP to install Business One?

That is correct. In Europe they have a local version, we have a solution as well. And the same in South Africa, Australia, South America in some of the countries, for example Mexico, Brazil not yet. In China we have it as well. Thee only place we didn't launch a SAP Business One was in Japan because it takes a long time to localize the version.

Just changing the subject a little bit, recently you announced a deal with TAG. I'm wondering if there have been other deals in the financial sector for iBOLT?

Oren, would you like to comment on that?

(inaudible) the gentleman is asking if there are any other deals on this arena. In the U.S. in Q1 we had basically an enhancement of licenses that initially were sold in Q4 of last year to another one of our financial plants in (indiscernible) for iBOLT (indiscernible). We had another enhancement, we had another enhancement to one of our other part (indiscernible) for other financial customers whose name I cannot disclose at this time. But no new deals in the financial arena in the U.S. in Q1.

In Europe we had one deal in Germany which I am not allowed at this point to disclose the name of the customer. But it is a big holding company that holds one of the biggest (indiscernible) banks in Europe, that bought into iBOLT -- is a combined Dutch and German project that was assigned and practically executed in Q1.

In Holland we have a project that hopefully we will announce shortly. Actually we are going to be completing the project next week. In Israel it was announced that Visa Card launched with iBOLT; I'm hoping that next week we will announce one of the major banks in Israel sign the largest deal for iBOLT so far. So it seems that in financial markets we started making a mark with iBOLT. It is actually too difficult for this vertical market.

One last question, about the special edition of iBOLT that you developed for SAP, but then you also determined that you could promote this to other ISVs in addition to SAP. Have there been any -- are there any other possible deals going on out there for this?

We have currently a few prospects we are discussing with ISVs of varying sizes. And with whom we are negotiating similar models. We have determined that one of the important triggers for sales or integration today is the introduction of a new enterprise software. We are kind of shortcutting the market and addressing directly those enterprise vendors and talking with them about providing iBOLT as their integration backbone.

Can you give any names or is that confidential at this point.

It is usually confidential. But I hope we will have some announcements in the next quarter.

Thank you very much.

(OPERATOR INSTRUCTIONS) (indiscernible) of Ramco.

Hello, everybody can you hear me now? I was wondering can you elaborate about the other income Magic had in the first quarter from its subsidiary AAOD?

The other income was (indiscernible) as we have received. That is what I can elaborate at this point.

Okay, insurance claim that you received? Okay, thank you.

Burchen Brass (ph) a private investor.

Can you explain CoreTech to me please and what is happening with them?

CoreTech is the major part of this business is what they have been doing always.

Pharmaceuticals (indiscernible).

Excuse me.

I know, pharmaceuticals.

Pharmaceuticals projects with certain pharmaceutical companies. And lately a quarter of those they started to go into iBOLT -- as a matter of fact have two deals already.

Did they lose money last quarter?

Did they lost money last quarter?

Did they?

In Q1 yes they had breakeven minus. But Q2 we are having (inaudible) profitability.

Profitability with them is from quarter to quarter though isn't it?

Can you repeat the question?

Profitability from CoreTech is from quarter to quarter, it's not consistent, it's not --.

They have been breakeven platform (inaudible) last year each quarter was slightly (indiscernible) we mentioned all the time this is a 5% margin business and we mentioned in the past we are looking in the future possibly to sell it.

Do you Menachem, CoreTech fitting into Magic?

Excuse me?

Do you see them fitting Magic? I mean do you see them working with Magic? As a part of Magic?

Listen, it is not my ideal partner with synergy with full synergy to what we do. And as we said so many times and as I told to you -- we are trying to create a synergy between what they know how to do and what we need and this is in the field of iBOLT which is progressing nicely. Okay. But in the long run they do not belong in the Magic set up.

Okay.

Which is a different case by the way with AAOD.

Let's get to AAOD. AAOD the organic growth was always 5 to 6%, now you are calling 15%.

Last your it was 16%, last year it was 16% in sales.

So the organic growth from is -- I mean AAOD can do 15, 16% --

Organically they are growing 15% a year on the average. Yes. (multiple speakers)

Let's get to SAP. My understanding was that SAP originally was just America. Is that correct?

SAP formal agreement, the initial agreement was signed with SAP America. But then we moved to Europe and there is no SAP Europe, we went into separate agreement in each one of the countries. And we are right now very active in countries like you would be surprised -- not only Germany and the UK and France but also in Australia and in South Africa which amazingly enough SAP Business One has made very interesting and serious inroads in those markets.

David went to a conference in January and Charlie Silk waxed eloquently about this meeting in January. And it is May. I haven't seen or heard of one other SAP deal since January.

We do have three new SAP partners in the U.S.

Partners are not contracts, yes?

Partners are going to become contracts. I mean if you recall our strategy we declared very clearly is that we are going to work through partners as a whole, and SAP Business One is just another network of partners, a very strategic one but its another network of partners.

What is the incubation period for when you start with a partner to when you think you should realize deals?

Let me give you an answer in the following way, if a normal deal with an end-user that we start from afresh is anything between 6 months to 9, 12 months, we would like to see deals from partners and has been our experience last year got done by about 50% because we are entering usually into some work in progress, into some opportunities in progress. So I would like to say that towards the end of Q2 we should start seeing the first contracts with end users through SAP Business One partners. (multiple speakers) Because we already see the pipeline.

So if we have three partners now and let's say we got them in let's say May 1. Then it is reasonable to expect to see deals when? Third quarter, fourth quarter?

All the partners were signed somewhere between mid Q1 to the end of Q1. So between the end of Q2 to mid Q3 we should definitely see some deals coming through this SAP Business One partners, definitely.

So by third quarter we should have SAP deals?

Absolutely.

Okay. Menachem, Hermes in the UK, there hasn't been any deals in (indiscernible) at all but the business is going well, yes?

Very well, yes.

Okay, and you've got $13.9 million in cash now?

In Magic, yes, we do.

And the operating loss, the real loss for the quarter then was what, one million would you say?

I don't know.

Without the insurance deal from AAOD.

Operating profit without insurance is $397,000.

That is the loss?

Less than $400,000. That is the operating loss.

And last year was about a $600,000 profit?

590, yes.

So it's about a $900,000 swing?

Exactly.

And you are 5 weeks now into the second quarter.

Yes.

And you feel that this first quarter was not indicative of what the year will be?

That is exactly what I said.

Bye-bye, Menachem.

Thank you. There are no further questions at this time Mr. Hasfari.

Like I said in the beginning at the conclusion of my speech, I again say that this quarter though disappointing is in no way indicative to the trend that we see now for the rest of the year. And I do believe that our strength and our super technology will show itself in the results that will be showing you in quarters to come. Thank you very much.

This concludes Magic Software's first-quarter 2005 results conference call. Thank you for your participation. You may go ahead and disconnect.