Magic Software Enterprises Ltd (MGIC) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software second-quarter 2005 results conference call. All participants at the moment are in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded August 9, 2005. I would now like to turn over the call to Mr. Kenny Green of Gelbart Kahana, Investor Relations.

Thanks, Barry. Good morning and good afternoon to all of you. Thank you for joining us today. We're here to discuss Magic Software's second-quarter 2005 results. Leading the call today is Mr. Menachem Hasfari, CEO of Magic Software and with him is the rest of Magic's management team. Menachem will start with a brief summary of the quarter and then Hilel Kremer, CFO of Magic Software, will discuss the financial results for the second quarter. We will then open the call to the question-and-answer session.

By now you should have all received a copy of the press release which was issued earlier this morning. It can also be found in the Investor Relations section of the Company's website at www.MagicSoftware.com. Before starting, I would like to remind everyone that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results (technical difficulty).

Kenny. I think you may have put yourself into mute.

Sorry. Such risks and uncertainties include, but are not limited to, a reduction in anticipated sales and economic downturns, changes in the competitive marketplace, changes in customer requirements and the 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 future information. Menachem, would you like to begin please?

Thank you, Kenny. Hello, everybody and welcome to our second-quarter conference call. With me today are David Assia, the Chairman; Hilel Kremer, the CFO; Avikam Perry, Vice President of R&D and Avigdor Luttinger, Vice President of Marketing and on the line from Amsterdam in California, Regev Yativ, Manager of Magic Europe and Oren Inbar, Manager of Magic North America. This has been a bad quarter. Despite our expectations and plans, we were disappointed in especially the United States and Japan where last moment slippage of deals has deprived us of over $750,000. Part of these deals, of these lost deals, have already been achieved in July. We were also hurt by a weak euro and please know that 40% of our revenues comes from Europe.

Another negative impact was caused by a different mix of products in various provisions we've made to comply with stricter rules having to do with Sarbanes-Oxley compliance. This quarter also carries the burden of our strategic shift from direct to channel driven sales which was decided upon last year as the first phase of our three-year plan. This investment which started at the beginning of this year incurs increasing marketing costs and sometimes even a painful, cultural and operational change in our sales from direct to indirect impacting negatively our direct and short-term revenue.

The challenge buildup therefore is very effective and swift and we've already seen an increasing proportion of revenue coming from the channel. On the positive side, iBOLT is moving forward forcefully. Our iBOLT sales in the quarter are doubled than in the previous quarter going over $1.6 million. During the quarter, 19 new iBOLT partners have been recruited and trained and I hope we see the income they will generate for us in the very near future. Also developing in a satisfactory way is our relationship with SAP. Twenty-two new SAP Business One partners have been recruited during the quarter and Magic is now formally engaged with 5% of all SAP partners worldwide to carry the special iBOLT version we have developed.

I would also like to draw your attention to the increase in Maintenance and Support revenues that keeps growing by over 25% in the second consecutive quarter. Revenue from Maintenance and Support is important to us because it reflects the increased loyalty and retention of our installed base and the value they attribute to our technology.

As you have seen in the release the Company has made today, this will be the last time I'll be addressing you in the capacity of Magic's CEO. This is a long planned departure that I am making for personal reasons, nothing to do with my belief in Magic and its future. On the contrary. I believe that I leave behind a strong entity with able people, ample financial resources, a clear strategy and a solid foundation that will make it able to carry successfully the future growth plans of the Company. My 4.5 years in Magic were challenging and exhausting but also memorable and I will cherish them forever. I would like to take the opportunity and thank all of you Magic's shareholders and investors for your continued support of Magic and its management. I will now give the floor to Hilel Kremer, our CFO, to discuss with you the financial side of the quarter. After his session, please feel free to ask the team here whatever is on your mind. We will also have an address made by David Assia, our Chairman, later.

Thank you, Menachem. It is my pleasure to present the financial review for the second quarter. (indiscernible) for the second quarter of 2005 totaled $15.7 million compared to the $16.7 million recorded in the second quarter a year ago which represented a 6% decrease. Sales of software license at $4.4 million decreased 25% compared with the $5.5 million in the second quarter of 2004. Sales of applications were 1.9 million, a 6% decrease from $1.8 million in the second quarter of last year. Sales of Maintenance and Support increased 26% to $3.9 million from $3.1 million in the second quarter of 2004. Sales of consulting and other services were $5.5 million in this quarter compared to $6 million in the second quarter of 2004, a 13% decrease.

Europe accounted for 40% of total sales compared with 42 in the second quarter of last year. U.S. accounted for 32%, the same as the comparable quarter in 2004 and Japan accounted for 16% of the total sales compared with 17% last year. The rest of the world accounted for 12 compared to 9% last year. Gross profit was $9 million in the second quarter compared to $10.2 million in the second quarter of 2004. Operating expenses, including R&D, sales, marketing, and G&A, were $10 million in the second quarter, an 8% increase compared to $9.3 million in the second quarter of 2004.

The main reason to the increase in operating expenses is our higher investment in sales and marketing as well as in R&D in order to accelerate the iBOLT penetration into the market. Operating loss was $1 million in the second quarter of 2005 compared to an operating profit of $900,000 in the second quarter of 2004. Net loss for the quarter, for the second quarter, was 1.160 thousand dollars or $0.04 per share compared with a net profit of $914,000 or $0.03 per share in the comparable 2004 quarter. We have completed the quarter with cash in short-term marketable securities of approximately $14.1 million, an increase of $200,000 compared with the previous quarter. Free cash flow for the quarter was $315,000 while operating cash flow was $1.5 million.

I also will talk now about the first-half results. Sales for the first half of 2005 totaled roughly $1.2 million compared with $33.1 million in the first half of 2004 which is a 6% decrease. Sales of software license at $9.3 million is a decrease of 15% compared to $10.9 million in the second half -- in the first half of 2004. Sales of publications were $4.1 million, a 21% increase from $3.4 million in the first half of last year. Sales of Maintenance and Support increased 25% to $7.4 million from $5.9 million in the first half of 2004. Sales of consulting and other services were $10.4 million. This is the first-half year compared to $12.9 million in the first half of 2004, a 19% decrease.

Europe accounted for 41% of total sales in the first half compared with 42 in the first half of last year. USA, 32% compared to 31% in the first half of last year. Japan accounted for 18% of total sales in the first half year compared with 17% and the rest of the world accounted for 9% in this six months compared with 10% last year. Gross profit was $18.3 million in the first half of 2005 compared to $20.2 million in the first half of 2004. Operating expenses, including R&D, sales, marketing, and G&A, were $19.7 million in the first half of 2005, a 7% increase compared to $18.4 million in the first half of 2004. Operating loss was $1.4 million in the first half of 2005 compared to an operating profit of $1.8 million in the first half of 2004.

Net loss for 2005 first half was $997,000 or $0.03 per share compared with a net profit of $1.6 million or $0.05 per share in the comparable 2004 period. We have completed the first half of 2005 as I mentioned before with $14.1 million, an increase of $1.3 million compared with $12.8 million in the end of 2004. Operating cash flow for the first half of the year was $4.1 million while free cash flow for the first half of 2005 was $1.7 million. I will now pass to David Assia, the Chairman.

Good afternoon and good morning to everyone. We had unfortunately quite a bad quarter this year, although our iBOLT sales doubled versus Q1. So that is positive for iBOLT, not positive enough to turn the Company back to profitability. What I told the Company today and I'm telling the shareholders and I told the analysts and journalists is that I believe it is going to take at least another quarter until we return back to profitability which is expected in Q4 this year. iBOLT is growing, the pipeline is solid. We believe that iBOLT is gradually gaining momentum. Although we had deals slip at the end of last quarter, we strongly believe that our strategy is working correctly. We have had over 20 new sub Business One partners in this last quarter. Revenue is coming through these partners. We have some interesting strategic alliances with companies developing products which we are complementary to. We had successful alliance also with some other software companies where we become an OEMed connector to their products. So I think we are on the right track. Unfortunately, much slower than what we had originally expected but hopefully we will grow much more rapidly at the end of this year and the beginning of next year.

Today, you saw the announce of the resignation of Menachem who has decided to step down from the CEO position. As of today, I have retained all responsibilities and authority and I have established a committee at the Board which will start the recruitment process of a new CEO. So hopefully we will do that within the next couple of months. In the meantime, I will take all responsibility for everything here and Menachem has promised to help us do the transition as smoothly as possible. Thank you very much.

Operator, we will open the call for questions now.

Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question is from Jason Stamper of CBR.

I was just wondering if you foresee a stage at which the iBOLT revenues are outstripping your former kind of bread-and-butter application development revenues, and if and how soon you see that point happening?

Did you say do we think it is going to replace; is that what you said?

To be greater than.

Oh, that's a difficult question. You know, the total eDeveloper sales, if you include the maintenance, runtimes, and professional services around them, are about $40 million a year. iBOLT right now, including the maintenance and professional services, although it is a relatively small number, is $1.7 million per quarter. This year we'll do about $8 million. Now, although we had hoped that the growth of iBOLT would be faster this year, would reach around $12 million, right now we're expecting between 7 to 8 million. So the growth has been slower than expected, but we are convinced that growth will increase next year and, therefore, next year it should be hopefully around the $15 million mark, if not more. So it will probably take another two years before it overtakes eDeveloper.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Mr. Hasfari.

So again, I would like to conclude the meeting and again say goodbye to all of you. Again, thank you for your support to Magic and to the management of the Company. Thank you all.

Thank you very much.

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