Magic Software Enterprises Ltd (MGIC) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software fourth-quarter 2005 results conference call. (Operator Instructions). As a reminder, this conference is being recorded February 16, 2006.

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

Thank you, Barry. Good morning and good afternoon to all of you. Thank you for joining us today. We're here to discuss Magic Software's fourth-quarter and full-year 2005 results.

Being on the call today is Mr. David Assia, acting CEO and Chairman of Magic Software. With him is the rest of Magic's management team. David will start with a brief summary of the quarter, and then we will then turn the call to the Q&A 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 in this call that this call contains forward-looking statements made pursuant to the Safe Harbor provision 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 their anticipated sales and the economic downturn, changes in the competitive marketplace, changes in capital 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.

David, would you like to begin please?

Thank you. Good morning, good evening for everybody, who is on the line. Thank you for joining us. I'm happy to be able to announce the results for the year. Unfortunately, our results have been a terrible blow for us. These results are terrible for the Company. Hopefully, 2006 will be much better, and I will go into more detail on what we're doing so that will happen.

So the revenues for the year were just under $61 million, a decrease of 6% from the $65 million in the previous year. What however is an alarming sign is the decrease of 12% in revenues from Q4 '04 to Q4 '05 from $17 million to $15 million. The Company thus lost during the whole year $4.2 million from its operations and $1.6 million from the fourth quarter.

The net loss for the year was 4.6 million versus 1.9 for the quarter. Our license sales also dropped 18% for the quarter, which is what was quite alarming. However, we have some optimistic news, which we will discuss a little later.

The application sales grew by 12% from 7.4 million in 2004 to 8.3 in 2005. This stems mostly from the application companies from HERMES Logistics, which is the airport cargo-handling software; from CarPro, our car-leasing software based on Magic; and from AOD, our community retired centers in Florida, which also grew very nicely this year.

The maintenance revenues grew by 14% from 12.5 million to 14.3 million, which is a very good sign. Because this means that a lot of companies are continuing to believe in our technology, continuing to use our software and hopefully will continue to base their applications on our technologies in the future. Our professional services revenues declined by 13% from 24 million to 21 million, which is by the way in line with the strategic decisions of the Company. This is a decrease in revenues, but we were never very good at our professional services. It's not our main business; it's not our core business. Therefore, there was a drop. We're concentrating on trying to increase our license revenues, both at iBOLT and with eDeveloper.

From a qualitative point of view and not numbers, a quantitative point of view, we are continuing with our strategic thrust to increase our strategic alliances with our partners, mainly so far with SAP Business One. By the end of January, we have already signed up over 95 partners; out of which about just under 50 have already gone through training. And out of which half of those, i.e., about 25 are already developing their first projects.

We already have dozens of reference sites with these customers, and we're very happy with this progress. We have put the target of 200 SAP Business One to be recruited by the end of this year, hopefully with at least 150 developing their first projects with our products in that arena.

In addition, we have about 60 additional iBOLT partners worldwide. Half of which are already developing their first projects with us, some of them developing large-scale projects versus the SAP Business One projects, which are usually a 5 to $10,000 license from Magic, versus a large-scale project, which could be a 50 to $100,000 license from Magic.

In addition, in this quarter, we had some recognition from Gartner -- additional recognition from Gartner that put us in the Magic quadrant as a visionary in the integrated services environment, which is the future trend of the world. All the analysts are talking about this, so we have a chance to become a leader in that new wave.

In addition to that, SAP gave us a prize at the latest conference, which took place in San Antonio a few weeks ago, in which we received the partner innovation prize for being the most innovative technology partner within the small and medium business of SAP.

So we've had a very, very difficult quarter. We're making a major turnaround. We have had to write off one-time costs of about $400,000 -- $342,000 to be exact in this process. We are reorganizing -- or we're in the process of reorganizing the Company into two divisions, an eDeveloper division and an iBOLT division. The reason behind that is to have more focused sales, more successful focused and positioning for each product. Although at the end of the day, there is a common goal for both. We're concentrating on increasing our license sales sequentially and also quarterly. This is the major thrust of the business, the major strategy, doing it with an indirect sales model. That's why we are spending so much money, and we're moving so rapidly to increase the number of partners that will work with us.

As I mentioned, we have the SAP partners, which is about 100 partners right now, and about 50 partners, which are non-SAP partners. All hopefully will be using our products to develop their applications. We will eventually have a recurring business model with them, exactly as we have with Magic eDeveloper.

The building of these two divisions will also make sure that our cash cow is not neglected, something we did very badly in the last 2 years. We're now investing heavily again in increasing our eDeveloper channel, increasing our exposure with eDeveloper. We will be launching eDeveloper Version 10 at the end of this quarter. We will be starting up a ramp-up during Q2 and finally launching the product line to the public at large at the end of the second quarter. If I wasn't very clear, I would like to repeat this. We will be launching the version -- the full version at the end of the second quarter, and we will be launching what we call a testing version for the close family of Magic developers at the end of the first quarter. So hopefully, we will see a revenue of this product already in the third quarter, and hopefully sales of eDeveloper will grow again.

We haven't launched a new product of eDeveloper for now 4 years; it's about time. I think our customers are waiting for it; although, we have had dozens of smaller versions come out since then. We are on Version 9.4 Service Pack -- I don't know -- 5, 6, 7 or 8. We've come up with very many small versions. We haven't come up with a substantial major version for some time. I would say it's revolutionary.

We showed it in our conference, which we had in Paris in November to existing customers and to new potential customers. Other people have told us this is the most potentially successful product Magic has ever come out with. In any case, I don't want to come up with grandiose statements of that kind. But I want to say that we're going to spend more money on eDeveloper this year in proportion to the previous years because this has been a cash cow for us. We've had a major decline in the last quarter in the sales of eDeveloper, and we need to stop that. This new version of course, which has been in the cooking, in the oven, for the past 2 years will hopefully help us do that. And this will be exceptionally substantial in the Japanese market in which we rely totally on license sales for eDeveloper and having neglected this product for the last 2 years has hurt us in that respect.

So, we will continue spending a lot of money on iBOLT. I would say we're still investing about $6 million net a year in iBOLT. The Magic eDeveloper operations are basically covering the costs of this development, including the losses which we have unfortunately seen. The iBOLT growth has been disappointing -- has not been as rapid as we would have liked it to be. Instead of reaching $10 million in sales in iBOLT during the year, we reached less than half. Hopefully, we will reach the $10 million mark in 2006, and this is what we're trying to build on.

A little bit about some customers, which have been successful with us during the year or have signed with us in the last quarter. We signed a few nice deals with some financial institutions. A major global financial institution in Europe signed a deal with us worth more than $250,000. A leading major German bank signed a major iBOLT project with us during the last quarter. In the U.S., we sold iBOLT enterprise service to two major companies in the financial services and life insurance industry. Our subsidiary in Pennsylvania, Coretech, signed a renewal agreement worth $2.5 million with a major pharmaceutical company. So, we have had some good news too amongst all this bad news, which I have told you about.

In addition to that, we have had quite a few of our partners -- long-term partners, long-term customers, which are continuing to buy significant license -- licenses for us, both for eDeveloper and for iBOLT, such as METI in France, Sage in Switzerland and others -- and Vadim in North America; although, that specific deal will only be recognized in January. But we have some major customers, who have been working with us for a long time who have continued -- shown us an endorsement of our technology and have bought significant licenses in the last quarter.

So, to summarize everything I have said so far, we're very, very disappointed with the results of the quarter. We are more -- we're cautionally optimistic with Q1. Our license sales dropped. Our total revenues dropped. Therefore, we reached a negative net income number. However, we hope that we will slowly turn back into profitability during this year. We're not going to turn back into profitability only in the last quarters. But hopefully, we will already see results in the second quarter and even possibly in the first quarter.

As I said, the growth of iBOLT has been slower than expected. Although we're signing some very nice contracts and we are signing up dozens of partners -- over 34 partners in the last quarter for SAP Business One -- it takes quite a while for such a partner to ramp up its business, start reselling our products within their applications or within their services. But we are already starting to see what I call fax sales of additional products of iBOLT's coming in through the fax or what we call repetitive sales because of this strategy that we have taken.

Basically, I've gone through most of the points, which I wanted to cover. I would suggest that Ziv maybe goes through one or two additional items regarding the balance sheet, cash flow, etc.

Yes, so I would like to add a few comments. Our cash flows this quarter were positive. We had positive cash flows of about US$400,000 this quarter as opposed to the net loss that David mentioned before and literally had seen a very significant improvement in our DSO, which is days sales outstanding, which is a very major factor for us, something that we're monitoring actually on a weekly basis. So, in this respect, we have seen some good news this quarter as well.

We are ending this year 2005 with cash and cash equivalents that are similar, even slightly higher than what we have had in the end of 2004. So, in this respect, talking about the balance sheet and the cash flows, we have said a very nice quarter. Unfortunately, the P&L of course as David mentioned before was dramatically not in proportion with what we have seen in this effect. Other than that, I do not have too much to add, so probably we can move on to the Q&A.

Okay, we will open the call to the question-and-answer session. Operator?

(Operator Instructions). Mark Silk, C. Silk & Sons.

You know the iBOLT, it wasn't going as quick as we anticipated. But it looks like it's going in the right direction. So my question is regarding the eDeveloper that is coming out, the Version 10. You said you're going to start really promoting this, and you know the fact that this is "revolutionary" and the problem with Magic has always been that you've got fantastic products but you got to get the word out there. And I'm looking that you probably have about $10 million in cash net.

When you say you're putting money into this, as a shareholder who has a long-term outlook on Magic, would you be putting significant money in this? We know we're talking 1 or $2 million, whereas if you get this promotion out there, this could really ramp up your revenues in late 2006 and 2007, which is going to obviously impact the price of your stock.

I'll ask Avigdor to talk for a few seconds very shortly about what the marketing activities to launch the version are going to be. In terms of financials, we will be investing quite substantial sums. Our total marketing budget is quite high, and I think we will be investing at least that amount of money in the overall marketing and sales budget for eDeveloper.

As I said, we're going to be investing a larger proportion of our marketing money into eDeveloper than we have done before because we think we made a mistake by neglecting this in the past. And specifically now, with this new version, this is critically important. But, Avigdor, would you like to add on that?

Yes, what we're doing with eDeveloper 10 is on one hand trying to address past issues that we had when launching new versions in terms of quality and readiness for market. We've actually had a very long beta testing between May 2005 and the end of March this year, which ensures that we're coming out with the first release 10.0 end of March with a much higher quality than we ever did.

And on top of that in order to ensure initial conditions of customers with full support, we have decided to do a controlled release, in which we have a selected group of about 30 to 40 customers who would be provided with a new version, with a very close support and handholding, making sure they move into production and any issue they encounter would be fixed almost on the fly. This is a first investment I would say, not so much in marketing as in creating references for the next phase. We will be bringing those customers to Israel for a week of intensive training and migration support. That would bring us to the end of Q2, at which point we would release version 10.1, which would be available to all the customers.

Now, at that point, we expect to be usually where we were in past releases, about 1 year, 1.5 year into the release. So we expect to accelerate very strongly the acceptance of the new version by our community. Beyond that, we have decided to target new customer acquisitions for the eDeveloper 10 technology within the iSeries market and this for a number of reasons.

On one hand, it is clear that in past years, we were trying to compete with mainstream development technologies, such as Java or Visual Basic, and we were not able to acquire many new customers. With the emergence of the whole service-oriented paradigm and composite applications, which is extremely fitting with our technology even as it was 15 and 20 years ago, not to speak about the new ones, we are able to position ourselves in a new competitive position that is not suffering from established competitors. Everybody is new in this arena. In particular, we are virtually the only vendors, who are native in iSeries and whose development paradigm is very close to what the iSeries community feels.

In line with our decision to focus our activities and not try to sprinkle in 360 degrees, we decided to find one soft spot -- sweet spot for us, which we believe is the iSeries. We will be directing most of our effort in new customer acquisition into this market. First, two actions in this respect, conferences -- iSeries conferences held in Sorrento, Italy and Rochester, U.S., where we are present with quite a strong presence and preparations in terms of marketing.

Well, it sounds like you have learned from your mistakes and you have a nice long-term outlook. And it's going to be very exciting to see what's going to happen going forward. So, good luck.

[Randy Cove], private investor.

I guess the follow-up question about the direction towards the iSeries on eDeveloper 2 is, what do you bring to the market that's unique compared to the competitors in the iSeries market?

In the past, when we launched Magic 20 years ago I would say, we already laid the grounds for what today is the hottest technology, and I'm not talking about Magic but in general what the market expects. And in today's terminology, it is called metadata-driven development, a rule-based development and hiding complexity. In fact, we've been doing this as I said since our inception. This paradigm was not widely accepted in the market, so we remained a niche company.

In the last couple of years, people realized with the advent of service-rendered architectures that traditional development is not satisfactory and a metadata-driven paradigm is required. So we're coming today to the market with probably the most experience in delivering development environments with these features. In addition, the work we have been doing with eDeveloper 10 went to strengthen this because one of the main elements in eDeveloper 10 is a fundamental rewrite of the engine to work directly with XML structures rather than with our proprietary internal format.

This has been very clearly recognized by opinion makers in the market, both Forrester and Gartner. This is what propelled us into that visionary quadrant for instance of Gartner's. So we believe that today, we have a unique offering in terms of reliability, robustness and experience in the market as well as innovation.

Focusing on the iSeries also with eDeveloper, do you see a comparable sales model as the one you are using with iBOLT and SAP, maybe perhaps forming a partnership agreement or I should say a further partnership agreement with IBM?

We're trying to do that, even though IBM does not operate in the same manner or model as SAP does because IBM is much more hardware/machine sales-oriented than solution-oriented. This being said, we have engaged in reopening or reviewing with IBM how we can go much deeper into their customer base. And we're currently in discussions opening up also channels through their own sales organization.

So is the money allocated towards eDeveloper this year? Is it being allocated to develop the partnership network with iSeries customers?

Yes. Part of the budget is to do so. In fact, we have channel managers in each one of the geographies now whose purpose is to find mostly iBOLT partners but also eDeveloper partners in general. We are setting up apart from the two divisions, which I discussed earlier and both in our press release, we're putting up two additional competent centers here. One is for the iSeries marketplace. We're searching to recruit people, who will own the responsibility for this competence center, both for the iSeries market and for what we call the iBOLT portal markets.

So I would say both products are close both to the eDeveloper customers and iBOLT customers. But we've decided to have two products sections or departments or competent centers to take care of these markets, and we're definitely investing in those.

One last question regarding this new eDeveloper strategy. Has there been any indication that this new strategy can work?

We brought in consultants from outside, who have done this for other companies, both internationally and in Israel -- larger companies than we are. They did it also in companies about our size, who wanted to grow. One of these companies, which I know very well, grew very nicely from our size and they are close to $100 million in sales by dividing the company into an organizational structure or matrix-based structure by products. So, we're doing the same after we did this analysis, and that convinced this will increase the sales of our products.

(multiple speakers) I would like to add in parlor what we have done is run a survey into about 150 customers and prospects worldwide with whom we discussed the forthcoming positioning of eDeveloper, and that's very positive confirmations that that is what they were looking for indeed.

I would like to ask one last question, and then I will let somebody else ask some questions. Why do you think you're going to return to profitability in Q2 if eDeveloper really won't be bringing in revenue until Q3?

Because first of all, we have a huge pipeline for iBOLT, which we hope will become concrete sales and we have quite a nice pipeline of existing eDeveloper products. But eDeveloper is not only based on future Version 10 sales but also on ongoing customer and software houses that use the products. We have recurring revenue coming there, and we believe that we will be able to see that coming from that market.

(Operator Instructions). Charles Silk, C. Silk & Sons.

A couple of questions. What about how successful you are now working with the Business One with SAP? What about the challenge to going in and having iBOLT in the enterprise aspect of SAP?

You are just on spot. We had discussions with SAP in December. Avigdor is close to you right now, somewhere in a SAP meeting -- in a close-up SAP meeting we can't give details of. But we are discussing trying to move up the value chain and being a major tactical integration suite or composite application platform around the SAP higher level business. But, it's still a long way away from being final.

How much more difficult it is to get into the enterprise I mean in a technical basis than it is the Business One?

It's an investment of development probably of a couple of people in the R&D department.

Okay (multiple speakers)

For a quarter or two.

The other thing is that you are putting more money into the sales effort in iBOLT. What about the cash? Do you have enough cash? Do you think you can carry it through?

Yes, we have enough cash to carry this through; we have enough cash for the year. Hopefully, when the stock price goes up again, I won't make the same mistake I made 2 years ago and that was we had an offer to make a pipe I think when the stock was at 8 or $9 -- 8.70 and I came especially to the States to do it, and we ended up not doing that pipe. So we could have had 30, $40 million in the till, but we will do that next time.

What about the Answers On Demand? How is that going?

They are doing fantastically well. They finished the year with $8.6 million in revenues with $2.3 million EBITDA, which is absolutely fantastic. They expect to grow about 15% this year both in their revenues and in their EBITDA. So it's very nice business.

But how about on HERMES, what's happening there? I know there was a lot of potential promise for Lufthansa. Is anything happening there?

Unfortunately, HERMES is not doing as well as we had expected. We have -- our customers are still waiting and not signing up contracts, including the names you mentioned. In the meantime, some competitors have grown and are starting to eat our lunch at the low end. So we've lost some smaller deals because of these new competitors in low end. In the high end of the market, we have no competitors and hopefully we will get some good deals there this year.

Are you going to do anymore application development like you've done for the autos and the Answers On Demand using your software and your capabilities?

No. We don't believe we can be diversified in so many different directions in different businesses. We are spread too thin in too many geographies on too many products. And we need to try and concentrate, and we would like to concentrate more on our core business, which is iBOLT and eDeveloper.

I look forward to a bright future and we're still with you.

Randy Cove.

Just one additional question. In Q3, we talked about the progress in China with the agreement that we made in China around the time period of Q3. I'm wondering what you can report in Q4 for the progress we're making in China.

We had revenues, some nice revenues in Q4 from China. Our first project went -- I don't know whether it's actually live or it's going live but it was finalized. We have three ongoing additional projects right now -- large-scale projects, which are in the process of being developed, and one very major governmental project hopefully to be started in Q2. This is amongst others, but there are three specific ones which are in the midst of being developed and one major one which is currently being architected. And hopefully end of this quarter, beginning of next quarter, they will start developing.

So, we have some good prospects in the Chinese market. We have a major serious system integrator and as we described regarding the agreement, there is a very specific schedule in this agreement, which is combined of course with project development. But, there is a special schedule in which the system integrator has committed to buying a certain amount of product per quarter for the next 5 years based on of course these projects, which are developing, and we are exactly on schedule with them right now.

That's good news. On the other hand, Japan, how can we explain the dramatic decline in Q4 in Japan sales?

There are a couple of reasons for the decline in Japan. Some of them stemmed from an error this Company made 3 years ago in which when Version 9 came out, we launched it too early in the Japanese market. The products didn't adhere to the Japanese quality assurance standards, and quite a few software houses that had based their products fully and totally on Magic left us at the time. The results we could only see now because those software houses are continuing to develop and use Magic for their existing customer base but move to start developing some of their new projects with new tools.

So this a problem. However, we have made quite a few organizational changes in our Japanese branch. We have recruited a very high-level marketing group into the branch. We will be announcing Version 10 in the Japanese market in Q3, launching it in Q4. We strongly believe that we will come up with high revenues -- license revenues for Version 10 in the Japanese markets in the second half of this year.

In addition, the fact that we never came out with a new version for the last 4 years in the Japanese market unfortunately created a problem for us. It has taught us a lesson now. We've been told very seriously that we should come up with a major version, either once every 2 years or once every 2.5 years and not wait for doing this once every 4 years. This is very important for our Japanese customers, and they felt that we had neglected eDeveloper to a certain extent. Since this is such a very important pillar of our business, we're going back there now and going to relaunch Magic as a whole and of course Version 10.

That sounds very good. Do you plan on remaining as CEO for the remainder of the year?

I was hoping that question wouldn't come up. Right now, I am committed to the Company. I have no specific plans. I'm working -- you know I am a big share (indiscernible). I'm the second-largest shareholder unless Charlie has bought more shares lately. And I intend to continue working to make sure this Company turns back to probability. Once it goes back to probability, we will decide what we do.

(Operator Instructions). Charles Silk.

Just one further question. What's happening in India? Are you doing anything? Or is it going to be successful?

Yes, we're doing two things in India. First of all, we still have our R&D center, which is doing very well. We've got 100 people directly reporting -- I mean not all of them directly but 100 people in our R&D center in India reporting to our VP R&D. And we have a small sales office, which is recruiting new partners both for eDeveloper, iBOLT and Business One. We have some major partners, which are working with us like IBM India, HP India and Wipro, a major Indian system integrator.

So we're doing quite well there, but again, that's in -- I always we're doing very well in relation to what you do in India; it is in rupees. So, we sell the same product for $1000; in India, it sells for 1000 rupees, which is a 50th. So it's $1 equals 50 rupees. I'm exaggerating somewhat, but that's the relation. So, altogether in India, we're doing maybe US$1 million worth of business, but it's considered quite nice business there.

But it's basically you are really getting a lot of R&D out of this I would think.

Right.

It looks promising and just keep going.

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

So thank you very much to our shareholders who are supporting us. Thank you very much to the analysts if there are any on the phone, which are listening to us. Hopefully, we will do better in 2006 than we did in 2005. I'm very sorry with the results of 2005. I think that our reorganization, our new product launches for this year, our new partners will help us turn back to probability and grow again. So thank you very much. Have a good day.

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