Magic Software Enterprises Ltd (MGIC) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Third 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 November 10, 2005.

I would now like to turn over the call to Mr. Kenny Green of Gelbart Kahana, Investor Relations. Mr. Green you may begin.

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 third quarter 2005 results.

Leading the call today is Mr. David Assia, Acting CEO, Chairman, and Founder of Magic Software. With him is the rest of Magic's management team. David will start with a brief summary of the 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 to differ materially from those expressed or implied. Such risks and uncertainties include, but are not limited to, a reduction in anticipated sales and economic downturns, changes in the competitive 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.

David, would you like to begin please?

Ladies and gentlemen good evening and good morning to you wherever you are. That you for joining our call I have the pleasure of announcing the third quarter results of Magic. Our revenues reached $14.77 million, 2% decrease for the quarter from the previous quarter last year.

License sales for the quarter reached $3.8 million, a 19% decrease from the $4.7 million from the same quarter in 2004.

In terms of the gross profit for this quarter, we have reached $8.3 million, a decrease of 11% compared to the $9.3 million recorded in the comparable quarter 2004, and we have a net loss for the third quarter of $1.6 million which is $0.05 per share compared to the net profit of $746,000, or $0.02 per share in the third quarter of 2004.

If we look at the results of the first 3 quarters, total revenues for the first 9 months were $45.97, or $46 million a decrease of 5% from the $48 million achieved in the first 9 months of last year.

License sales reached $13.1 million, a decrease of 17% from the $15.7 million achieved in the same period last year.

Net loss for the first 9 months was $0.08 a share, or a total of $2.16 million for the first 9 months as compared to a profit of $2.377 million last year, or $0.08 a share for the first 9 months of 2004.

In total, the revenues of the third quarter of 2005, Europe accounted for 36% of the revenue, where North America, Japan and the rest of the world accounted for 35%, 17%, and 12% respectively. In the first 3 quarters of 2005, Europe accounted for 38% of total revenue, while North America, Japan and the rest of the world accounted for 33%, 18%, and 11% respectively.

This is a short summary of the financial results. If we want more details, they’re in the press release and the balance sheets and Hilel Kremer, our CFO will be able to answer those questions. I will try to address in more detail the business of the quarter.

Unfortunately, our license business decreased compared to last year. Traditionally the summer quarter is the weak quarter for us; however, there was still a decrease of 2% from the comparative quarter last year, which was disappointing to us. And if you look at the comparable 9 months, it was a decrease of a total of 5% which is also a major disappointment because we had expected iBOLT to grow at a faster rate and expected eDeveloper not to decline during the first 9 months of the year. Unfortunately, that was not the case, and we have taken some major measures to make sure that in the fourth quarter, we’ll do much better than we did until now.

We have emphasized in this quarter what I call profit [ph] building; we’re prioritizing dramatically and incentivizing our sales forces to build our channels because we don’t have enough feet on the street and we cannot do enough direct selling to show growth, and we strongly believe that the partnerships will enable us to grow faster in the future.

Where we have been extremely successful I would say, although you cannot see that from a financial point of view in the numbers as of yet, is we have successfully recruited altogether 91 iBOLT partners this year, out of which 61 SAP Business-1 partners. Now we have also defined internally very serious metrics for defining what the good partner is, what the partner that can bring us future business is, and we have one of those metrics is to make sure that those partners are trained.

We have 45 SAP Business-1 partners trained to already the ability to install iBOLT at their customer sites. We already have over 25 iBOLT customers, non-SAP-Business-1 partners trained in order to be able to install iBOLT at the customer sites, something which we think will be fruitful already in Q4 and even more in 2006.

We have also had a few very interesting deals this quarter; one of them you saw in the press release called Huadi Computer, and in fact we’ve met the people quite a few times, signed the agreement at the beginning of Q4. This is a very major Chinese system integrator, a 5-year agreement in which there is a commitment to acquire $3 million minimum of iBOLT products from Magic for their projects. We already started a proof of concept for the major project for them in China.

We also signed 2 major interesting deals in Germany, full-fledged iBOLT products for a major financial institution and for a major telecom provider in the German markets. So those have been very good deals for us. We are also signing at the beginning of the quarter with a very major building construction company, Pan-European for a major iBOLT project.

So from that perspective it looks as if business is growing although it has not resulted yet in actual bottom-line growth to the extent that we had wanted to see when we set off sell iBOLT at the beginning of this year. When we launched our new versions at the beginning of the year, we had expected faster growth and unfortunately it’s taking much longer to close sales than we had expected. Some deals have slipped from Q2 to Q3, from Q3 to Q4. We have now taken some serious steps to make sure that this is not going to happen any more and that we’ll be in a better situation to close sales at a faster speed than before.

One of the more interesting things that has happened to us also this quarter is the fact that Forrester has positioned us as a leading integration centric business process management provider, BPM Provider in their Eastern Trends 2006 Report alongside IBM, Microsoft, BA Systems, and Sun Microsystems. So this is a very important situation for us, which will enable us to close the business at a better rate in the future.

We also are going to have a major business conference in Paris next week. We have somewhere around 250 participants, business partners, customers, analysts who are coming tot his conference. Hopefully, this will help us propel for 2006 and even possibly help us close some sales for Q4 of this year.

So that was regarding the business; I would like to talk very shortly about some management changes also which are taking place over here right now. Hilel Kremer who is sitting here on my left, our CFO has decided to leave the Company as of December 1, and Zif [ph] Viel [ph] who was his right-hand person and sitting on my right will take over and assume all financial responsibilities. However, we will still search for a CFO where a CFO will be in charge of potential M&As business, Internal MIS, Internal Operations as much as the finances. However, we believe that Zif Viel with the 4 years he’s been the Corporate Controller of the Company has all the adequate resources capabilities of taking over these responsibilities.

In addition, during the quarter we recruited a very high-level person called Amit Ben-Zvi who was previously a COO of a smaller company and prior to that COO of a software company, an Israeli-traded software company. He did a very good job there and both of the companies he was there and he has joined now as a VP in charge of our IBOLT Program here with Magic. Hopefully he will help us make sure that iBOLT grows at a much faster rate that we’ve seen until now.

And as I mentioned, until now the growth of iBOLT has been relatively disappointing. If I can go through the numbers a little bit of iBOLT, this quarter we sold $1.1 million of iBOLT as opposed to $1.6 million in Q2. Although we have not expected Q3 to grow beyond Q2; however we have not expected some of the 3 or 4 major deals to slip to Q4 and therefore our iBOLT sales this quarter were quite disappointing, although we have had very good reference sites, very good success with iBOLT and very good new partners, we are internally very disappointed with these results. And hopefully in Q4 we will try to double that number; this is our aim.

In terms of other issues such as cash and DSO, I’ll ask Hilel to intervene, please.

Okay, our accounts receivables are at $16 million which is the lowest level of accounts receivable since Q4 2002. So it’s an improvement in an item in the balance sheet and our cash position right now is $13.3 million compared to about $12 million in the beginning of the year. Our year-to-date free cash flow is positive $500,000 and we don’t see any issue right now with cash or account receivables, so I have no other comments to say besides the DSO, days of sales outstanding has also been reduced, the DSO if you take out DAT [ph] and from the calculation is now at 91 days, which is also the lowest level since 2002.

So I would be very happy -- I think we’ve given you a general summary of the business and the financials and we’ll be happy to take any questions that you may have.

Thank you sir. [OPERATOR INSTRUCTIONS]. Randy Cole, Private Investor.

Hi David; thanks for taking my phone call. The strategy behind iBOLT has been the development of a partner network. When eDeveloper II is released in January, what will be the strategy to try to increase eDeveloper’s customer base?

Very good question; Regev, Avigdor and myself and a few other people within the Company have been strategizing on a major launch for eDeveloper II. We’ve had these discussions -- by the way, eDeveloper II is a public [inaudible] is out these days -- and we are strategizing on doing a very aggressive, intensive seating [ph] program because we feel that our customer base for eDeveloper II has been eroding since we have invested all of our marketing and sales effort in trying to propel iBOLT seeing that as our major growth engine, we felt that we have neglected eDeveloper to a large extent. And we’re going to come up within hopefully the 2 few weeks a serious marketing program or campaign which we will initially start some time at the very beginning of next year.

I guess a follow-up question to that is there a SAP-like partner out there which could do a better job of developing eDeveloper for you?

We haven’t yet looked for one; I’m sure there is, and I’m sure we need to look for one because as you see the SAP partner for iBOLT although has not been noticed yet in the numbers is definitely a strategy which we’re trying to implement, and I believe we’ll need to find a similar strategy with eDeveloper II.

So right now, I don’t know if you have a strategy right now, will it be more geared towards the partner network or is it going to be geared more towards direct selling like you have in the past?

As you know, when I was CEO until ’97 my only thoughts always were to work with partners. Now as acting CEO, I’m implementing a partner program strategy both for eDeveloper and iBOLT, and I hopefully believe that this strategy will pay off, but it takes a little time until this pays off.

I know that when you were the CEO back in the ‘90s the program that you had with the Great Plains and the Cullas [ph] of the world was a very good one and you probably could look at your base in the United States and a lot of people came from that. Is there something like that that you could attach to, maybe accounting programs or something like that?

We’re looking at different possibilities. We don’t have a specific idea yet, but we’re exploring to find some ideas. In fact, there’s another issue which I did not mentioned and that’s we’re looking at a possible positioning of eDeveloper 10 as a new platform for the composite application platform. According to the Gartner Group, we have all the ingredients required to fulfill the feature set of that platform, and that platform according to the Gartner Group is the future of integrated development environment, and they believe that we have exactly everything that’s required to lead that market. So we’re looking at that also, and obviously we’re going to start looking for partners who will be able to resell that product for us.

Okay, just a bit of a change of subject. I don’t have any objection to the current one, but are we still looking for a new CEO?

We’re still looking for a new CEO, although due to the results that you see, which we are very unhappy with I have decided to focus more about of my time to make sure we get a partner program running and we get our sales for Q4 executed and we’ll probably be working more on the search for the CEO at the very beginning of January.

Okay, on last question and then I’ll let somebody else ask some questions; on the financial statements there’s been a drop in consulting revenues, but there hasn’t been the same correspondent to the cost of revenues. The cost of revenues has basically stayed the same. Why has there been such an increase in consulting costs?

Between the 2 quarters, the main reason is the lower margin on those projects.

So does it cost more money to do consulting services for iBOLT? Is that the reason?

Well, we have a variety of places where we do consulting work, and the main company is actually CorTek in the U.S. They account for about $1.8 million out of the $5.2 million of revenue. And over their margin has been squeezed in the last year as well as the other projects throughout the world.

Okay fair enough. Thank you very much and good luck on the next quarter.

Charles Silk, C. Silk & Sons.

Hi Dave, it’s sort of a disappointment this quarter, but one of the things I was thinking about I remember we went to the SAP meeting with you and Lisa Clark made a great presentation of how successful her implementation of your software has been. Why aren’t you working on a plan to publicize all these success situations? That was remarkable success story; she got her stuff done faster than she anticipated and at much less cost. And we don’t see any of these success stories out there. I think that would be helpful. And I understand the privacy situation, people don’t want to give away their successes, but what are your thoughts on it?

I’m going to ask Avigdor, our VP of Marketing to answer that and maybe I’ll add to that afterwards. Avigdor?

Okay, we are currently experiencing tremendous in product implementation on a worldwide basis and in fact there is another major SAP event taking place early December in San Francisco where we will be one of the 3 main sponsors and visible partners. And we plan a joint press release for that event that would summarize some of the success stories that have been developing. Obviously, it’s always difficult to bring this up and make them public as you have stated, so it’s taking some time but I hope that in this publication we’ll have a series of case studies as well as mentions in the press release.

Do you think that you could incorporate some sort of advertising situation? You don’t see any advertising of Magic on any publications, but would you consider that? I know there’s a cost element in there but it could lead to more leads.

Well certainly this is a timely point. We are very intensively working on our marketing program and budget for next year, and we are going to substantially increase the marketing portion allocated to partner-related activities.

Okay, I hope to see some success in this quarter. Looking forward to it.

Thank you for your support.

Mark Silk, C. Silk & Sons.

David you said your iBOLT was $1.1 million this quarter?

Right.

What was it a year ago? I know you gave me the second quarter, but I wonder what the year ago was.

Last year?

Yeah, last year third quarter.

This year it was -- just a minute, we’ll look it up -- this year in Q1 was $812,000; Q2 was $1.6 million; and Q3 was $1.1 million. And last year, just a second around $1 million.

Thank you.

[OPERATOR INSTRUCTIONS]. Alanzer [ph] Cohen, Private Investor.

Thank you; 2 questions please; one about Q4, at this point in time do you think that Q4 will show losses too? And second question, could you please give us some [inaudible] on the Chinese deal? Thank you.

Okay regarding Q4, we are hopeful that we will not lose money in Q4. However, I must take caution and if we have the same slippage of deals as we had in Q3 we could be losing money again. Since we’re already over one month into the quarter, we strongly believe that we will be able to break even, although again we should take caution in that statement.

Regarding the Chinese deal, the Chinese deal is a very interesting one. We’ve been working on this deal for about a year ago I think I was in China and we signed up with a major firm to help us into the Chinese markets, and they -- a Company called Huadi -- and they helped us found the system integrator; we started about 4 or 5 months ago developing proof of concept for a major, major government contract they had received.

And we’ve been working on this proof of concept with them for a couple of months; closed it, I would say by the end of September we had closed the success of the proof of concept. We have been negotiating throughout the summer this contract with them, and basically they chose us amongst many products as their tool of preference for all the projects which they have. They have about over 500 people developing integration projects for governmental agencies in the Chinese market. This is a company who has major shareholders; HP, the Chinese aircraft industry is a shareholder and it’s been spun off and privatized so the CEO and owner owns I think, a quarter of the company.

And they’ve signed up what we call a minimum deal with us is that they have to buy during the 5 years on a quarterly basis a minimum amount of products, but it could be much larger than what was discussed. They believe it will be larger but then again, trying to be very realistic, let’s see the first project be successful, which is currently being implemented and then let’s see us get larger projects as they have in their pipeline and try and see if we’re successful with them. This could easily become our what [inaudible] was for us in the Japanese market.

When will we know?

I would say we could know if this first project is successful and then they get a second project up, the already have shown us 5 new projects which they have. If we are successful with them on these projects, I would say that between 6 to 9 months from now we could be confident that this deal could be a 5-year long term very successful deal or not. It’s a 5-year contract.

We’ve trained our people; we have quite a few people already trained in these projects, and you know this is like a major building project. I mean they claim they have some of the biggest -- we’re not allowed to go into details right now, but they have some of the biggest governmental projects in the Chinese market, which is a fast-growing market, and each one of these projects is a few hundred thousand dollars of iBOLT for us. And these are major, major, major projects which need to be implemented in hundreds of cities with thousands of users, so hopefully if this first project is successful I believe it will be, then we will get all the other 5 projects they have within a short period of time.

Charles Silk.

David on this thing in China you indicated that one of the people who have an interest in this is HP, and I would assume that that’s Hewlett-Packard. Does that give you an entry into Hewlett Packard to show more of what Magic can do for them?

Well right now haven’t leveraged that yet. We have talked to them, well not to HP, we’ve talked to our customer to try and able to go through them up the chain to HP. They have said they will introduce us possibly to HP people of the Asia Pacific Region, and then from there we’ll go further. But they -- what happens is in this case is that HP has an equity position in a company which they inherited from Digital Equipment Corporation. They didn’t actually invest into this company, and it’s normally not their policy to invest in companies but they inherited it when they acquired Digital Equipment Corporation.

So I don’t know to what extent they are actually involved in anything that’s done in the company, but we’re definitely going to try to do something.

Okay very good, thank you.

Randy Cole, Private Investor.

Hello again; just a question about the W4 partnership. How significant is this partnership? What kind of revenue streams can we expect if iBOLT is going to be licensed with the BTM suites?

W4 is a company that does about $6 million a year of business in the French market only. They have already had one successful deal with them, the major company in the world of clinical trials, and this project has been successful for both parties. A typical project with them is normally $100,000 or $120,000 joint license deal, which will normally be split between both companies. So we have 4 or 5 current such projects in the pipeline. We have told them we would like to try and close 3 this quarter. I don’t know whether that’s going to be feasible, but that’s what we’re looking at. And in fact, in our conference which will take place in Paris this week, they will also be presenting to our other branches and hopefully some of our other branches will be able to introduce them to customers and we’ll have this joint offering.

So it’s not -- it’s I would say a bilateral or bi-directional OEM deal, i.e. we go to a customer and then we sell their product or they go to their customer and they sell our product. So on average, I would say if it’s our customer we get a higher percentage of the deal; if it’s their customer they get a higher percentage of the deal, but it’s basically a joint offering in which we complement each other’s technologies.

So that $6 million of revenue a year that they make, are we part of every deal that they make now, or just some of the deals?

Currently just some of the deals but I would hope that it would eventually become all the deals.

Okay thank you very much.

Charles Silk.

David could you elaborate on what’s happening on Hermes and also on Answers-On-Demand? I understand they are successful but could you tell us a little more, elaborate some more on it?

Well Answers-On-Demand continues to do extremely well. They’re beating their budgets on a quarter-to-quarter basis. They’re doing an extremely good job, although they were hit very badly by Hurricane Wilma. And they had their rooftop go off, and they didn’t have water, they didn’t have electricity, they had to bring in generators, and I think some of the employees through the beginning of last week were showering in the offices because their own private houses had gone in the hurricane. But the company is doing very well. The 2 weeks they lost, they said they will recover. And they’re very profitable; they have fantastic EBITDA, which is extremely good for us.

In terms of Hermes, Hermes is working on some major deals. We cannot disclose anything right now. Hopefully some of these deals will close this quarter; in actual fact we had hoped that one of them would have closed in Q3. It did not happen; hopefully it will close in Q4 and then we’ll be able to announce it. But they will double their numbers from last year.

[OPERATOR INSTRUCTIONS].

There are no further questions at this time. Mr. Assia.

Thank you very much ladies and gentlemen for joining our call and for continuing to support us if you are and we hope that Q4 will be a much better quarter than Q3, and we’re really working hard, the whole team is working extremely hard so hopefully we will be successful. Thank you very much.

Thank you. This concludes Magic Software’s Third Quarter 2005 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.