Magic Software Enterprises Ltd (MGIC) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Third Quarter 2006 Results Conference Call. (Operator Instructions.) As a reminder, this conference is being recorded November 9, 2006. I would like to turn the call over now to [Ms. Nava Ladene] of [Gavakehana Investor Relations]. Nava?

Thank you, Mike. Good morning and good afternoon to all of you. Thank you for joining us today. We are here to discuss Magic Software's Third Quarter 2006 Results. With me 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 open the call to the question and answer session. A copy of the press release can be found on the Investor Relations section of the Company's website at www.magicsoftware.com.

Before starting, I would like to remind everyone that the 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 anticipated sales, an economic downturn, 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 [indiscernible-accented] filing under the Securities and Exchange Act of 1934, as amended, for further information.

David, would you like to begin?

Thank you very much. Ladies and gentlemen, thank you very much for joining us today, morning or evening, wherever you are. I am happy to announce the results. Unfortunately, not as good as we had expected. We have had major changes during the quarter and the beginning of the following quarter, which I will detail in a couple of minutes.

So first of all, I would like to discuss the operational highlights of the Company this last quarter, as described in our press release. During this quarter, we took very drastic and bold decisions for our worldwide, company-wide cost reduction, merging of operations, improvement of operational efficiencies, and major headcount reductions. This has been a major effort for us.

We let go lots of people all over the world, specifically here in HQ. We announced this about two weeks ago, and this has created very large restructuring costs, as you will see in our numbers of $2.1 million this quarter - one-time restructuring costs. And as opposed to the press release, which we released two weeks ago, since we had taken all of these decisions last quarter and made most of the changes already at the beginning of last quarter--of Q3, I mean. So we have provided for all of this restructuring cost in Q3, and therefore, do not anticipate additional restructuring costs in Q4.

During the quarter, we--I mean, we think that these restructuring costs--restructuring moves have been very effective. We hope they will have minimal impact on the ongoing operations of the Company. We hope that we will be able to successfully continue our business and continue with our thrust of our products, which I'll elaborate on in a few minutes, although we have had this great reduction in the workforce.

We think that the measures will have effect partially in Q4 and mostly already in Q1. So we believe that this will lead the Company to operational profit, very possibly already in Q4. But we are very, very confident that this will happen definitely in Q1 of next year because we have lowered the threshold--or let's put it this way--the overhead--total overhead expenses of the Company to be in line with our current revenues, or forecasted revenues.

So to more of the financial details, our revenue increased by 2% to 15.1 million versus 14.8 million in Q3. Our gross profit decreased by 6% to 7.8 million, compared to 8.3 in Q3. And the net loss decreased by 13% to 1.4 million, excluding the one-time restructuring charges of 2.1 million. So already, some of the cuts which we made at the beginning of Q3 had their effect take place in Q3. We made more cuts and more reorganization, have improved more of the efficiency of our branches, in Q3 and in Q4, and thus, these restructuring charges.

I will not go into much of the detail of the financials. This we can do later in the answers and questions, as you may wish. In terms of the nine months, the total revenues reached 45.5 million, a decrease of 1% from the same revenues of last year - 46 million of last year. On the licenses, we had a decrease of 7%. The application revenue reached 4.7 million with a 25% decrease compared to the same last year.

The good news is that maintenance and support revenue was 11.2 million, a 2% increase versus last year, which means that our customers are happy with the new versions we're coming out with. They're continuing to pay up for maintenance, and they are continuing to be loyal customers for Magic. In general, the third quarter, Europe accounted for 36% of total revenue, North America and the rest of the world for 38%, and Japan, 15%, and rest of the world, 11%.

Regarding our strategy for the future, we are continuing with our thrust regarding iBOLT and eDeveloper. The launch of eDeveloper at the very end of last quarter has been very successful. Analysts have given us very high marks for the product. We even won a very nice award recently, which can be detailed later by Avigdor Luttinger, our VP Marketing here. The--nevertheless, our iBOLT sales have been lower than our original expectations and that forced us to make the restructuring steps that we took.

In terms of the iBOLT channel, which we are focusing on, it has grown quite successfully. We're very happy with the growth of the channel. Although we're not yet seeing the throughput through this channel that we had expected, we already have over 90 channel partners for the iBOLT program - for general iBOLT - another 150 iBOLT SE customers for the SAP community. In fact, we're exactly on track with our program for the SAP community. I think we're probably the best known VAR or ISV in the SAP business world. We have now just finished developing a new product for that world also, which will enable us to grow our sales even further in that world.

We are spending a lot of money in training and supporting the existing SAP channel. We in fact released a newsletter very recently specifically aimed at that channel. We will have a second release coming out in the next couple of days. Very favorably accepted by all this channel and we are waiting to see some of the results of this very expensive investment in Q4.

We have had in the last quarter a few accomplishments in the U.S. and the rest of world. We have [indiscernible-accented] account in [indiscernible-accented], which upgraded to Magic Version 10, Advantage Rent-A-Car in the U.S., which is a major Magic customer, bought iBOLT for their use, Genworth Financial. We will be also shortly talking about additional deals in the U.S. that have been successfully signed - slipped Q3, but signed in Q4.

In Europe, we have the major banking--a bank sign up with us. They don't want their name yet to be published. Very successful for us. A major worldwide known fashion retailer - doesn't want us yet to publish their name - has acquired iBOLT and eDeveloper. Both of the above will agree once the implementation application works successfully. That may take another six to eight months. But we're very confident that that's going to happen, since all our iBOLT and eDeveloper customers end up being very happy and successful customers.

In Israel, we also had some very successful implementations of sales or revenues this quarter, with a major insurance company, the Israeli Ministry of Construction Housing, the Tel Aviv Municipality. And we've entered back into the Israeli Defense Forces, which used to be a major customer of ours in the past, had moved to [indiscernible-accented], came back now in full force enabling us now to train their programming houses with Magic again. So we're back on track and this was one of the major bases of all [indiscernible-accented] in Israel at the time and now we're back there being a mainstream type of product.

One more item regarding Version 10. Version 10, as I mentioned, has been very well accepted worldwide. As I told you in our previous conference call, we had to finalize the Japanization of the version, and I'm glad to announce it's been finalized and we will be releasing this version in Japan the beginning of December.

In fact, last week of November starts the road show--full Japanese road show in all the cities where we have franchises. And we're sure that this will be a very successful launch also, although most of the fruit will be reaped in the first quarter of next year versus this year because December is the last month. And you know not everybody buys in the first month after release. So hopefully, we'll see most of the success of this launch in the first quarter of next year.

So thank you very much for being with us. And I will open up the call for any questions and answers. Thank you.

Thank you, sir. (Operator Instructions.) First question from Charles Silk of C. Silk and Sons. Go ahead.

Hi, David.

Hi, Charlie.

Hi. We're still a little disappointed, but I guess the write-off is done and basically reflected. But there was no posting on the Yahoo! message board of your report. It just doesn't come out. So we fortunately got the information from your Magic--from the Magic site. But this is the first time this has happened. It still hasn't come out as of this time. Could you indicate what's happening with IBM?

With IBM, we're moving along. We have--in fact, this week we had a very interesting meeting with a top executive who decided to come and visit us, visit the Holy Land. We have quite a strong relationship, specifically in the iSeries Division, as mentioned before. And as I also think I said in the last call, the people of the iSeries Division view us as a strategic partner for that line of products. Avigdor would like--I think he would like to elaborate on this question.

Okay.

Hi, Charlie.

Hi.

I'd like to add something which is significant. In Q3, IBM published a new flyer as part of its service-oriented architecture campaign, which highlights a common customer of ours. It's the largest exhibitor company in France, [indiscernible-accented]. And it's really a great document that pushes Magic's technology together with IBM iSeries as the foundation of building service-oriented architectures on IBM platforms. I think this is a very significant move in IBM's endorsement and recognition of our technology as part of their on-demand and renovation program, which is one of the most important efforts IBM runs today.

Is this document public or available? Is there any way of getting it?

In French.

I can send it to you. It's in French right now.

Are you going to translate it?

We are working with IBM on translating it officially and producing an English version.

Good. I would love to see it when it's released. Is there any revenue that has come from IBM in the last couple of quarters?

No direct revenue. It's all indirect through our partners and through our direct sales to IBM iSeries customers.

Are there any other items--well, how's CorTech doing? I saw where the consulting has gone up. Was that reflective of CorTech?

That's not specifically from CorTech. CorTech is doing very well as planned. Still doing over $2 million a quarter of business. It's making money, although not the margins that you would expect from a software house, but more the margin that you would expect from a services organization.

How about Answers On-Demand? How is that doing?

Answers On-Demand is doing fantastically well, exactly on track. Making very nice margins and, of course, helping us very nicely with the cash flow. They are very positive cash flow.

Okay. That's all I have right now.

Thank you, Charlie.

Thank you. Our next question is from Mark Silk of C. Silk and Sons.

Hi, David. How does the Microsoft Novell deal have any impact - positively or negatively - on Magic?

I don't think it has any impact whatsoever on Magic. That's--we're not involved on the side of operating systems. Maybe you want to add, Avigdor?

I think this is one of the moves that protects us from any influence there is our current focus on the iSeries, which one of the reasons we did this was to get away from Microsoft-related environments. And so, we have a pretty protected harbor to navigate in.

Okay. How does the new developments and formula benefit Magic, and more importantly, the Magic shareholders?

Well, we have a representative of the new shareholders here on our conference call. But I'll speak on their behalf unless they want to add. And that is, they've come here, they've participated in our Board Meeting today. They have--they went--they came to our employee group meetings, especially after the RIF. They presented their commitments to the Company, to its future, and claimed that they are--they have made this investment also for--a major reason of their investment was the jewel they found within the formula group, which is Magic, and they would like to see Magic flourish for the long term.

So these were very comforting statements, and we hope they will put their money where their mouth is.

I'd like to see that happen also. David, can you speculate on what you think your year-over-year revenue growth is going to be in 2007 from '06?

I would not like to put any expectation in right now. We are busy preparing our budgets for next year. We have a worldwide management meeting taking place at the end of November and we will have this discussion. But we think that what we can--we believe is that the cuts we have made will bring us back definitely to profitability immediately in the first quarter, if not before. And we hope that within that framework we will also succeed to grow.

As I mentioned previously, our SAP agreement is being strengthened. We have more partners. The partners are becoming more productive. And I think we will start seeing the benefits of our investments already in the Q4 and at the beginning of next year.

Thank you, David.

(Operator Instructions.) There are no further questions at this time, Mr. Assia.

Okay. So thank you very much, everybody, for being on our call. And we are confident, as I mentioned before, that we will start showing very positive results very shortly. The cuts have been difficult, but have been needed. And the operational efficiencies we have succeeded to reach will have an impact very shortly and we will see both profitability and growth within the near future. So thank you very much for being with us on the call.

Thank you. This concludes the Magic Software Third Quarter 2006 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.