Magic Software Enterprises Ltd (MGIC) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software's first-quarter 2006 results conference call. All participants are at present in 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 18, 2006. I would now like to turn over the call to Mr. Kenny Green of Gelbart Kahana Investor Relations. Mr. Green, you may begin.

Thank you. Good morning and good afternoon to all of you. Thank you for joining us today. We are here to discuss Magic Software first-quarter 2006 results. Leading 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 open the call to the question-and-answer session. You should have all received a copy of the press release a few minutes ago. It can also be found in the investor relations section of the Company's web site at www.magicsoftware.com.

Before starting I would like to remind everyone 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, an economic turndown, changes in the competitive marketplace, changes in 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.

David, would you like to begin please?

Yes. Good morning, good evening to whoever is on the line. Thank you for joining our conference call. I'm very happy to announce the results of the first quarter of 2006 which seemed to have moved back to the better. Our first-quarter results indicate the reversal in the trend of our software sales with an incremental increase of our software sales which is Magic and iBOLT compared to the previous quarter. Our total revenue for the quarter was $15.27 million, a very small increase from the fourth quarter and a very small increase from the first quarter last year, with a much healthier mix of sales.

The total software sales for the quarter were just under $5 million, an increase of 30% versus the fourth quarter of 2005 and approximately the same level of the first quarter of 2005. Application sales in the first quarter were at $1.41 million, a decrease of 30% from the $2 million in the fourth quarter and 36% from $2.21 million in the first quarter of 2005. The net loss for the quarter amounted to $169,000, approximately just under $0.01 per share compared with a net loss of just under $2 million or $0.06 a share in the fourth quarter of 2005 and a net income of $163,000, or $0.01 per share in the first quarter of 2005.

We see this as a major turnaround of the Company. We decreased our expenses substantially throughout the Company, successfully retained the same level of sales and have seen a very large increase in sales of iBOLT in this quarter, hopefully sustainable and hopefully a good sign for the rest of the year. We have also this quarter a mix all our iBOLT revenue and partner recruitment targets.

To remind you we said that we would like to recruit 200 Business One partners and year 2006. This is a very ambitious goal we have put on ourselves. We believe that we will be close to that number. We ended the first quarter with just under 120 partners and we expect to end this quarter with probably just under 140. So we think we are at an increased rate of growth in the number of partners we are recruiting in the SAP world. We are also adhering to the revenue budgets for iBOLT. We had budgeted for this quarter $1.9 million in iBOLT; we surpassed $2 million in iBOLT, part of that through the SAP partner channel, part of it through our direct sales and part of it through our indirect other iBOLT channels. So from that perspective we are quite happy.

eDeveloper sales also increased versus last quarter. We had a very good quarter in Japan. Just so that we don't get carried away, the Japanese first quarter is the last fiscal quarter in Japan so it is normally a strong quarter. However, it was better than our expectations. The contribution we made from our Japanese branch was a few hundred thousand dollars above our expectations so we are very happy with what happened there also.

Totally the sales in the first quarter were 35% in Europe, North America 33%, and Japan 20%. The rest of the world accounted for 12% of the revenues. In addition, a couple of interesting things that happened this quarter. First of all as some of you already know, we analyze our business, we separated today between eDeveloper and iBOLT and we separate the whole business between the core business which is eDeveloper and iBOLT and the subsidiaries. So in terms of the nonapplications business, we did better than budgeted, better-than-expected on all fronts, both on eDeveloper and iBOLT. Unfortunately on the side of applications we did far worse than we had expected and we lost on the application side about $300,000 which was unexpected. Had we also met our budgets on the application side we would have had probably been profitable this quarter.

Other interesting highlights of the quarter, we started a controlled release of Version 10 of the product. We're having 40 software houses come to Israel partially financed by ourselves to convert the Version 9 applications to Version 10. We will be releasing the version for general availability by the end of June this year, i.e., next month. And we hope that will boost eDeveloper sales again.

As I mentioned before we recruited quite a number of partners to our SAP program this quarter. Another interesting highlight we are acquired 16%, the remaining 16% held by an external shareholder of our application business company, AOD, advanced answers on demand, and now we control 100% of that Company which is very profitable. Out of our four application companies it is by far the most profitable, has a very nice close to 20% EBITDA; extremely successful company increasing its market share and adding a lot of cash generation to our own business.

In the last month of the quarter we decided I mean we have decided this a long ago but we successfully sold the IP rights to our eContact, our call center management application to a company that has called itself eContact which we will be helping. Which helps of course our revenue line to a certain extent although part of the deal included some shares in the company we sold it to. In addition to that, we have had quite a few companies that have adopted iBOLT as their main integration platform for the companies.

We have also found a couple of new interesting deals with eDeveloper. As some of you may know, most our eDeveloper business is ongoing business with a current customer base. And in the last two years we have had difficulty in increasing the number of new customers for eDeveloper. Something in that trend has changed and may be due to the fact that we're coming out with eDeveloper 10 or due to the fact that the new worldwide marketing acronyms being preached by all the big analysts, which is SOA, which is oriented architecture, service oriented architecture, is now part of our new product. And people understand that we may possibly lead the world in SOA platforms. This is one of the directions we are taking. So the joint technology of both eDeveloper and iBOLT both together comprise of a SOA platforms, which includes development, deployment, integration and portal technologies, all of these combined may enable us to grow as being a major contender or a major leader in the SOA or composite application platforms as other people call it.

We've had good reviews from analysts. We currently have some people in San Francisco meeting with analysts. We participated in many very many shows including CeBIT in Germany, practically all the SAP business one shows which took place in the world. We participated in two three IBM shows in Italy, in Rochester and have become a major -- I would say a major presenter in all the iSeries programs and iSeries shows in the world. We were also included in the IBM systems i5 tools innovation CD so every i5 system that is shipped today includes a CD of our product.

To summarize we think or we hope we're on the verge of a turnaround. We're hopeful or cautiously optimistic and we have many challenges still ahead of us in Q2. We are not yet absolutely confident that we have gone through all the hurdles although we will do our best to do so this quarter also. But we believe that we are on the right trend and as I mentioned in my previous conversations with you, our aim is to try and achieve around between 8 to $10 million in iBOLT sales this year. If we're successful in doing that, which will portray at least a 60, 70% growth in iBOLT for the year versus 2005, then we will have successfully met the goals we have put in front of us.

Prior to passing on the conversation to a questions and answers session I would like to ask Ziv to add a few details on the financial elements of this quarter please.

Thank you, David. On top of what David mentioned before, we have taken during the last past few months certain measures in order to reduce the level of our expenses. This is being reflected in our profit and lost report as our sales and marketing, general and administrative expenses for the quarter at $7.3 million have reduced 10%, [by 7], 11% from the $8.1 million in the previous quarter and $8.2 million in Q3 '05 respectively.

In the bottom line we are showing a net loss of $169,000 for the quarter compared with a loss of nearly $2 million in the previous quarter. And around $1.6 million in the third quarter of 2005. This represents a substantial improvement and a drastic turnaround. We are doing our utmost to keep this momentum.

In terms of our cash flows this was a very good quarter for us with a net increase of nearly $400,000 U.S. dollars. This is despite the $1.9 million investment made in the last month of the quarter in order to become the sole shareholder of our successful subsidiary, Answers on Demand in Florida U.S. If I disregarded this investment, our cash flows for the quarter were more than $2 million positive. It is true that due to seasonality our first quarter is usually strong. However, this quarter is substantially better than the comparable 2005 quarter.

To conclude with, in the last month we have taken some measures that have brought us back on track and we are cautiously optimistic regarding the coming quarters. Thank you.

Thank you very much and we will be very happy to answer any questions that any of you may have.

Thank you, sir. (OPERATOR INSTRUCTIONS) Charles Silk of C. Silk & Sons.

Hi, David. Good morning. You are on the right track. A few things. On this week's BusinessWeek there was an article called SAP Dangles a Big Fat Contract. And then there was a paragraph that SAP will also push to win smaller customers. Many of the current customers are large enterprises now it has two product suites aimed at companies with fewer than 1000 employees. To win them over the company has built up a distribution channel and deliver products that are easier to install and use. What are the implications of what SAP is doing in this area on Magic?

Well, this is exactly the market we are going after. SAP has announced that they want to increase the number of customers they have from around 26,000, which they had at the end of 2005, to 150,000 customers by the end of 2010 which is a major increase in the number of customers. We have agreed with them that we will be their partner for the growth in the low, the SMB market which is these small and medium business market. Now they anticipate that they have already a major market share of the large Fortune 1000, Fortune 2000 companies. However, they have a very small market share of the smaller and medium-sized companies. When I say SMB market, the definition of the SMB market are companies that have up to 1000 employees or around up to 500 or $1 billion in revenues. That is the general number or definition of that market. And they have a very small percentage of that market at present. They plan to penetrate it with the help of Business One and a preconfigured version of their large systems. And we are a major partner in enabling them to enter that market with iBOLT. So hopefully if they are successful, we will be successful there also.

Could you give an example? You've already got some partners already and some of them are implementing this stuff. Can you give us some examples of the successes of iBOLT with the partners, the SAP partners, how they have been doing?

Yes. Well, you know, they also have a major challenge because they are competing with Microsoft companies at the low end. Microsoft acquired Great Plains a couple of years ago and Navision in Europe which are major competitors in the small business market. So they are competing with them there. In most markets there is normally already a leader in accounting and back-office systems. So they are competing all over the place. They have a very good product. It is being converted to multiple languages all over the world. And they are growing there. They currently have something like 800 partners in that world. We hope to have one quarter of that partner base reselling iBOLT for us together with their Business One systems.

I came back from Japan just a few weeks ago and I met two of the larger SAP Business One partners in Japan who integrate Business One for large global Japanese companies that have branches worldwide and they integrate the big SAP at headquarters and all the branch companies, foreign branch companies all have Business One. And in order to integrate these products they need a product like iBOLT and they are using iBOLT. Those partners are selling one iBOLT to each new customer, they are selling Business One to which is exactly the model we would love to have although it is a little bit optimistic to think that that is going to happen.

What are the partners who were implementing it now, what kind of success are they having outside of Japan?

We only have I think under 10 partners in Japan and we already have around 120 worldwide so they are all over. In fact, I think we've met practically every single U.S. partner for Business One until now. There are a few hundred. I think we've recruited just under 30 already in the U.S. So it is moving ahead all over, Europe, Australia, South Africa, Japan, everywhere, even China now.

Going into to develop the eDeveloper 10, what portion of your universe is under a maintenance agreement and what portion are not and have a potential of picking up Version 10 and having and they having to pay for the upgrade?

If I divide the world into three in terms of eDeveloper in the European marketplace most of our customers are under maintenance; $14 million a year of our revenue comes from maintenance. And anybody in Europe paying their full maintenance receives upgrades for free. So we don't expect much upgrade business there.

In Japan, maintenance is not an acceptable practice at all on PC products. So people pay for support but every time a new version comes out they have to pay for it. So we expect the Version 10 once it is translated into Japanese, which will probably be the last quarter of this year and the first quarter of next year, will substantially increase or boost our sales in that market. And to remind you the Japanese market in the first quarter was 20% of our total revenue. We have about 800 partners using Magic day in, day out in the Japanese market. I would say 300 serious ones for a total of 800. I believe that coming out with Version 10 will substantially increase our sales and revenues in that market.

In the U.S., it is a different model. But in the U.S. too we will see some upgrade business from companies that have paid their maintenance. It is somewhere a mix between the Japanese and the European model in terms of what you receive for free and a maintenance program.

Are you getting any interest from people who have not used Magic before looking at Version 10 to implement Version 10?

Yes, but very little. To be frank with you we have done no marketing in that direction as of yet. I personally strongly believe that there is going to be a lot of synergy between our SAP partners or other partners in iBOLT and eDeveloper and eventually a lot of the partners buying our iBOLT product will also buy eDeveloper. How much money will we be able to spend in order to remarket eDeveloper as a leading SOA platform is yet to be analyzed and seen because I don't think we currently have the financial muscle in order to do a real serious big marketing splash for Version 10 worldwide. We have budgets to do major conferences and product launches in Q3 or the beginning of Q4 for V10. And I hope then we will make a big noise out of it.

I'll open up to another person. Thank you.

(OPERATOR INSTRUCTIONS) Randy Kolb.

Hi, David. I noticed in the [Cohen] research report there is a new product called eDeveloper [Xpress].

Yes.

I was wondering what are going to be the main differences between eDeveloper Xpress and the desktop version of eDeveloper?

If Avigdor is on the line from California, I'll ask him to answer that question.

Okay. The main idea behind eDeveloper Xpress is to address on one hand the very low end of our existing market which are specifically companies who are developing software and wanting to sell at [server] type pricing. And this is where obviously there might have been some competition with the desktop version. What we've done is limit in various ways the functionality and the ability to reuse applications developed with Xpress on [multi-performing] platforms as well as limit the database gateways actually Xpress comes only with a Gateway to (inaudible).

All in all we've done a thorough analysis to see where we can add value not interfering with our current business and the version reflects this. The other target for Xpress either the feeding version for new users who would be attracted to it given that composite application features that we are coming out with Version 10. And it is going to be marketed with a very comprehensive package of additional materials targeted to new users and (inaudible).

How do you plan on to market to eDeveloper Xpress to a mass audience since basically that has been the biggest problem with Magic from day one?

Right. We are doing this in two ways. We are currently developing a new section in our website which is destined to operate as a self service operation with all the resources including the ability to acquire these versions and support being delivered from the website. And at the same time we're looking at a number of significant campaigns mostly web campaigns as well as into to the educational markets distributing CDs and stuff like that to promote the access to that version. We are obviously also -- and this is what I'm doing now -- running road shows with analysts and media to prep them for the release, Xpress would be released in Q3.

Okay. Regarding CDs shipped with the i5 series, have you guys been able to gauge any type of success from this marketing effort up to this point?

Well, we don't have yet the statistics but this is something we -- actually it is very recent we started this promotion at the [common] in Minneapolis last month. So it is really only starting to run in the market.

So just too soon right now?

Yes.

Regarding eDeveloper 2, when are we going to see orders (technical difficulty) in the pipeline? Are these going to start to happen in Q2 or are we going to have to wait until Q3 for actual orders to start coming in?

This is David again. There will be a few orders in Q2. I think the majority of orders will come in in Q3 and Q4.

Okay. And one last question. Regarding the contract extension with the Israeli government, how much is this potentially worth?

We used to have two, three years ago, we used to get a few hundred thousand dollars a year from the government. How much did we do last year, Ziv?

Half a million I think.

Around $.5 million. We believe until now the Israeli government has not used or acquired iBOLT at all. So all that money was basically eDeveloper, mostly run times and enterprise servers; some project work, some consulting work but most of it was licenses of deployment versions and enterprise versions for eDeveloper. Now that we have this agreement on iBOLT also we believe that they will acquire product, iBOLT products also. In fact one of the ministries has had already for sometime iBOLT portal for their website and the Internet and enterprise information portal. And we believe that we will be able to possibly sell a few more of those. And of course additional integration projects.

Okay. And I guess one last question. Each conference call has been talking about the progress in China. Are we still on course in China?

Yes, we are still doing all right in China. If you remember we signed a five-year -- it was a three-year contract -- five-year, sorry five-year contract for Japan for iBOLT -- sorry for iBOLT in China. And we are receiving the revenue as expected or as signed in the contract. The projects are also progressing very nicely. We have a major tobacco chain with over 1000 outlets which is already using iBOLT. It's going live any day now for a major large-scale project. We have something like another six or seven major integration projects currently being developed. And all of course with iBOLT. Some of them in initial stages, some of them in very advanced stages. So I think it is all going exactly as planned.

Okay. Well, best of luck and thanks for answering my questions.

You're welcome.

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

I would like to thank you all for joining our conference call. I hope that we will be successful in turning the boat around and continuing the initial signs of success that we have had Q1. We are cautiously optimistic, as one should say. I know that in this quarter we have a lot of hurdles in front of us. We hope to be able to challenge them well. We are quite confident for the rest of the year. And as you see, we are just on the point of a breakeven so if we have the growth as we hope we have, we will be profitable or initially profitable in Q2. Plan to be more profitable in Q3 and Q4. But we believe that we just on the corner of a turnaround.

So we are happy with the results of the first quarter and we will do our best to be successful also in the next upcoming quarters. Thank you very much and goodbye.

Thank you. This concludes Magic Software's first-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.