Magic Software Enterprises Ltd (MGIC) 2006 Q4 法說會逐字稿

Welcome to the Magic Software fourth quarter 2006 results conference call. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded February 26, 2007. Before I turn the call over to Mr. David Assia, Chairman and acting CEO, I would like to remind everyone that statements contained in this conference call which are not historical facts contain forward-looking information with respect to plans, projections or future performance of the Company, the occurrence of which involves certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include dependence on economic and political conditions in Israel, the impact of competition, supply constraints, as well as certain other risks and uncertainties which are detailed in the Company's filings with the various securities authorities. If you have not received a copy of today's conference call, please call Gelbart Kahana at 1-866-704-6710, or 972-3-607-4717. I would now like to hand the call over to Mr. David Assia.

Ladies and gentlemen, good afternoon, good evening, good morning. Thank you very much for attending our conference call. I am very happy to have you online with us. I would like to tell you all that I am extremely happy with the results that we have now successfully been able to show. We have shown that the restructuring process, or the difficult restructuring process we went through in September and October, has now finally borne fruit.

Our total revenues in this quarter were just under $16.2 million, which is an 8% growth comparing to 2005, a 7% growth compared to the third quarter of 2006. The total -- we made money this quarter net of $30,000, which is negligible, but at least we made money. Hopefully we'll make money, far larger sums in the next quarter. We'll discuss that later.

We returned to profitability after very many quarters of losses, and we now have a net profit of 30,000, compared to a net loss of 3.53 million in the third quarter of 2006, and a net loss of 1.99 million, or 2 million, in the comparable quarter of 2005.

In the fourth quarter of 2006, if you exclude a onetime restructuring charge of 269,000, we basically netted $22,000 in the quarter in terms of the operating profit. This is all compared to a net loss excluding the restructuring charge of 1.41 million in the third quarter of 2006 and a net loss of 1.99 million in the comparable quarter of 2005.

During the fourth quarter, we also sold the assets of one of our smaller subsidiaries called CarPro, which enabled us to have a onetime gain of $278,000. We sold the intellectual property and the customers of that company. That subsidiary unfortunately was losing money lately. But in this sale to our Benelux distributor, we have a onetime gain of $278,000.

[What are] the operational highlights of the quarter, some of which were released in other press releases during the quarter which I would like to mention which I think are very important.

We had a major deal which we signed with FMRP of Cambridge, Ontario, Canada, Farm Mutual Reinsurance Plan, a $2.5 million sale of licenses and services to a very large-scale insurance company in Canada. We since then have signed other smaller deals with them. The project is on plan. The licenses are being installed. The customer is currently very happy with what is being done there, and has also introduced us to potential new customers in the insurance area in Canada. And what is important to say -- this is also an iSeries customer, which is one of our focus markets in our business.

We introduced during the quarter some very important products. First of all, we added two new editions of eDeveloper, aimed at different markets. The whole idea between these two new editions of eDeveloper is in order to enable other markets to be attracted to our products. Our full studio is a relatively high-priced product. We have come out with an express version, a low-cost version of the Magic product to enable smaller software houses, smaller mom-and-pop shops to have an affordable, high-end development product. So it's basically [semi-seating]; it's not the [seating] version, but it's a version that enables an affordable product for low-scale, small-sized applications. It basically replaces what we used to have in the past, which was called the Magic Desktop product, which was discontinued.

In addition, we came up with a discovery product. We have had hundreds of downloads of our versions from our Web shop. We opened a Web shop, as you can see, on our Web site, which enables one to download our products. Hopefully we will do some investments in what we call search engine optimization. We will do some Internet advertising and enable more customers to download our products and create awareness for our product range. So we now have three editions of eDeveloper 10 available for our customers.

In addition we introduced iBOLT JDE Connect, which is an iBOLT version specially tailored for the J.D. Edwards market, which is mostly an AS/400/System i market. We're there. We have a special, I would say, business offering, in which we believe we can create a nice new customer base in the world of both ASI [BMS] 400, and in the world of iBOLT in this marketplace. We believe that we will eventually convince Oracle J.D. Edwards division to sign up with us, exactly like we have done in the past with IBM and with SAP.

We have new research reports naming Magic as a strong performer. Analyst Forrester Research Group has put us up in their chart as a very strong performer, next to other major big names in the industry that you may know.

In addition, at the major SAP kickoff this year, we were awarded the SAP Quality Excellence Award. We are now known throughout the SAP Business One community as a major vendor of products. We have currently over 184 channel partners in the SAP community. We hope to reach the 300 partner number by the end of 2007. We are working very hard and diligently to make sure we reach these numbers. What we're also doing is we are making sure that these partners start operating an ongoing business based on SAP Business One, and on iBOLT, and we already have about two dozen, or over 25, such partners, which have already developed more than three projects each with the help of iBOLT. So what we are trying to convince these and the other partners to do is to automatically introduce iBOLT in every single SAP Business One deal that they do.

We currently are -- I don't know whether you've seen some of the announcements of SAP lately. They have announced that they want to reach over 150,000 customers for SAP by year 2012, out of which more than half are supposed to come from the SAP Business One. Hopefully, we will be able to grow and piggyback on this market. In addition, we will be adding shortly two new products for SAP Business One, which -- for SAP and for SAP Business One, which should enlarge our market presence in that market.

Prior to discussing the financial numbers -- I'll ask Ziv to do that in a few minutes -- I would like to mention one or two additional things, which we believe have been significant this quarter.

We are continuing to target the System i platform, which is the IBM major minicomputer. They have two major platforms there, which are the AIX/6000 platform and the S400 System i platform. We are continuing to penetrate that platform, and we are being quite successful in attaining new customers within that community.

Now I will ask Ziv to go through some of the numbers in a little bit more detail (technical difficulty) over the conference call to your questions.

Good morning and good evening to everybody. As you have all seen, Magic has returned to profitability in the fourth quarter of 2006. We had a net profit of $30,000 in the quarter, including the remaining restructuring charges, or $299,000 excluding the restructuring charges.

Speaking about operating profit, we had an operating profit of $22,000, excluding the restructuring charges. Including the restructuring charges, we had an operational loss of $247,000, approximately $0.25 million.

Our operating expenses for the quarter excluding restructuring charges were $16.1 million, compared to $16.6 million in the previous quarter and 16.7 million in the comparable 2005 quarter. In the fourth quarter of 2006, however, revenues were higher than the revenues in the previous quarter, in the comparable 2005 quarter, by between $1.1 million and $1.2 million. We expect our expenses to go further down in the first quarter of 2007.

We have [put to] ourselves a very clear role or mission, reducing our expenses and increasing our profitability. We are making sure continuously that these targets are being fully met. In terms of cash and cash flows, talking of which I include our investments in marketable securities, our [gross] cash has increased during the fourth quarter by approximately $650,000. The net cash, which means the cash minus the short-term loans, has increased by about $0.5 million. We are also putting great emphasis on collection and DSO, and have seen very nice results in these areas during the last quarter. Our AR, account receivable, has decreased during the fourth quarter by approximately $700,000, or approximately $2.25 million over the whole year 2006. Our DSO, days sales outstanding, is continuously going down as well, and is now at its record low of 63 days. This is being compared to 70 days -- 72 days at the end of the previous quarter, and 81 days in the end of 2005.

This is it from my side. We will now open the conference call for your questions. Thank you very much for being with us this morning.

(OPERATOR INSTRUCTIONS). Marc Silk, C. Silk & Sons.

Yes, David. It looks like you're making some nice progress with IBM and SAP. Could you comment on Oracle, your potential there, and what the future holds regarding Oracle?

You know we have the agreement with SAP, we have the agreement with IBM on the Series i. Oracle have -- you know they acquired PeopleSoft, which had acquired J.D. Edwards a little bit prior to that. And that market of J.D. Edwards on the System i or AS/400 has no integration tools.

Oracle did announce a few -- about a year ago that they would come out with a product called Fusion, which will be available probably at the end of this year. That product currently does not work well for the J.D. Edwards customers who are still on the System i AS/400 machines. Therefore, we believe that we have a good offering to enable them to maintain these customers, enable them to integrate their legacy information systems on the AS/400s [throughout] the world. So we have developed a connectivity for that.

By the way, FMRP will be using this connector of ours. In fact, this is where we saw the possibility of enlarging our business, our iBOLT business, in that marketplace. And hopefully we will be able to have some type of agreement with Oracle. Although long-term, I think, they intend to solve that situation with Fusion, or by migrating the customer base from System i to open standard.

Thank you. Good luck in 2007.

Charles Silk, C. Silk & sons.

I don't know if (indiscernible) pretty good, I'm (indiscernible) right now. But one (indiscernible). What is the Japanese eDeveloper sales in the fourth quarter?

The Japanese eDeveloper sales in the fourth quarter -- let me. Just a second; I'll take a look at the numbers. They did quite well. You know they launched Version 10 in the Japanese market the second week of December. And the major thrust of Version 10 in Japan is on Q1, this quarter right now. And the total sales, let's see, were $1.6 million.

So that was in the fourth quarter, right?

The fourth quarter. (multiple speakers) it was about 30% higher than in Q3. It was in anticipation of Version 10, and people stalled their purchases in Q3, and then the purchases came through in Q4.

So the thing is [it will spike more] in the first quarter of this year?

Hopefully, yes.

Well, you're two-thirds of the way through the quarter, (indiscernible) indication there. The question is (indiscernible) talking about the marketing. There's just several things that have come out that indicate that the good, strong marketing can take advantage of them (indiscernible) the Farm Mutual deal, the [SAP] and IBM relationship, the J.D. Edwards relationship, Forrester's report, the three levels of eDeveloper all seem to be right for letting the world know what's going on. And basically, when you go with the CIO, they're looking either to save money or make money on your software. And I guess they can do it with both the iBOLT and the eDeveloper.

Right. We think we have a fantastic value proposition for CIOs, fantastic value proposition for software houses with both our platforms. And we believe that we need to make the market know that this is the case. Hopefully our Web shop will help us now with the downloading of our discovery versions and of our express version. And hopefully we will enlarge our user base, which has had some attrition to it in the last two, three years.

On Hermes, what was the revenue in the last quarter, and where do you look in the future of it?

Hermes last year unfortunately did not do well. However, they secured some major interesting contracts. We cannot officially announce any major success there yet, but we're working very hard to make sure that we'll close something very interesting this quarter.

Have you any other large projects similar to (technical difficulty)

We have not as big, but we have some other interesting projects that we will be, hopefully, announcing soon for Q1. As you can see, I'm being cautiously optimistic. I don't want to overpromise anything until I see the money in the bank.

I didn't hear some of the response because I have a bad connection.

I said I am cautiously optimistic. I am very optimistic that we're going to do very well this quarter. We have some very nice deals in the pipeline. Unfortunately, without customers' consent, we cannot announce any major deals, and we're trying to get some customer consents on major deals we're currently working on.

Good. So (indiscernible) guidance for the first quarter or the year?

We have -- for the first quarter, we're just saying that we will hopefully do well and make a nice margin on our sales. Our cost structure, due to the restructuring, has gone down dramatically. And therefore, we believe that we will be able to show a very nice profit in the first quarter.

In addition, our subsidiary -- our subsidiaries, our application subsidiaries are also making a very good advance. AOD is making -- is very successful in making a lot of money. Hermes is in the black again, and is hopefully signing up very large-scale and very good projects. CoreTech as a subsidiary is making money, making a nice net margin on its sales. All our divisions are currently making money. We have no losing division as of now. All our business units are successful. So, hopefully we will be able to show a very nice growth in both revenues and, mostly, in profits in the first quarter, and following, of course, the whole year.

I was -- the transmission has been terrible. I missed the first half of this last question, answer. Could you repeat it?

What I'm trying to say is that we're optimistic, and hopefully we will make nice margins this quarter. Our breakeven point is much lower due to the major restructuring charges we went through. We have -- we cut into the bone with our restructuring charges. We have not hurt our revenue-generating machine. We think that we can operate, I would say, as a mean and lean machine and grow our revenues and be successful. All our operating units, all our business units are now profitable. We will be signing some very nice contracts, hopefully, in the U.S., in terms of eDeveloper and iBOLT. We are hopefully going to sign some very nice contracts with Hermes, and with our other subsidiaries also.

I'll pass it on. There's been a lot of interference. But I'll listen to who else is on. Thank you.

[Randy Culp], private investor.

Are you planning on combining iBOLT and eDeveloper into a single suite?

We will eventually put them in a single suite and brand it as one brand. We are currently in internal negotiations, or discussions -- not negotiations -- discussions to see the best way to do it. You know that the larger competitors -- or the larger players, let's put it this way, not competitors, such as IBM or BEA, have suites of products. The Gartner Group presents us in their analyst reports as a suite vendor and an application platform suite, APS they call it. They put us in their charts there. And they expect us to show an offering, which includes a full application, development, integration, deployment, Web and [transerver] suite. So we are contemplating merging the branding. Within that branding, the products will of course stay as separate products under one suite.

I know during the past year you announced that iBOLT and eDeveloper would be separate divisions, but then you reversed that decision. Is this because you want to bring the two products together?

There are a few ideas behind that. We did divide -- we did separate them in two divisions. I think that was the correct decision at the time. The point was that we wanted our branches to focus on bringing iBOLT business also. And by dividing into two separate divisions and having separate quota-carrying people was effective. Now we will eventually try to merge the branding of both products, although there will be different focuses in different branches for the different types of salespeople. But we think that this was the only way we could save money and be as efficient as we were before, was by combining the divisions, by eventually re-branding everything under one suite. And we think it's more effective, because when a salesperson comes into a large bank or a large system integrator, they can provide the whole suite, and they don't have to be necessarily focused only on one product.

Are you seeing iBOLT bring any new eDeveloper sales?

Very few right now. But first of all, it's stopping any attrition that we've had from some major vendors. Major customers that have been contemplating or possibly leaving eDeveloper for Java, Java suites or .net suites have taken the decision to remain with eDeveloper because they saw that Magic come up with synergistic add-on products, such as iBOLT, which enables them to integrate their existing Magic applications and existing legacy applications into their core infrastructure. So I think iBOLT has brought a lot of important standing within these customers, has shown these customers that we're a very important technology player, and has enabled them to stay with eDeveloper.

Regarding bringing new eDeveloper customers, I strongly believe that we'll be able to do so in the near future, because many of the mom-and-pop developers, for instance, or distributors for SAP Business One are small developers who will look at iBOLT. Hopefully we'll have some major customers buying our R/3 connectors for iBOLT or JDE, customers who will see the value proposition we have on their System i machines, and will eventually also buy eDeveloper for those machines.

Also, you're currently working on a new Web Client as kind of an upgrade to the Browser Client technology. Are you anticipating that the new Web Client will be more accepted than Browser Client?

We are, hopefully, during Q3 -- between Q3 and Q4 we will come out with our new Rich Client. It's not expected to be an upgrade from the Browser Client; it's going to be a new separate module. We haven't yet decided whether it's going to be separately sold or not. It will be definitely a very strong, powerful product for Web-based developers. What else do you want to know?

Is it going to be kind of geared towards HTML Merge, where you can use it for client Web sites, or, I should say, open sites, open shopping sites? Or is it more for Intranet systems?

I'm going to ask Avikam, our VP, R&D, who is here with us, to answer this question in more detail.

I will try not to get into too much of the details. But in general, this is a Java-based module (technical difficulty) will enable (indiscernible) as a remote client, as a remote Rich Client; basically will allow to run applications in Intranet environments on any platform, including Linux (technical difficulty), Macintosh, etcetera. Basically it will open up the possibilities for mobile clients as well (technical difficulty)

I guess, being a Rich Client is definitely the direction to go in. I'm wondering, because Browser Client wasn't really used the way it should have been -- it's a wonderful product -- I'm wondering if you have a marketing strategy to get the word out on this Rich Client.

Most of the Rich Client, the idea is -- at the end is to replace the Windows Client totally. Because the whole idea is to create a Client which will be able to work on any platform, and by that will eliminate the need of having the current Windows Client, and use only that as the Client technology.

That would definitely be a selling point. One other question, and then I'll let somebody else have the question. Are you in the process of developing a partner network for J.D. Edwards, just like you did for Business One?

Yes, we're in the midst of doing so. We already have four partners signed up in the U.S., and we're currently working diligently there in order to sign up more partners. Glenn Johnson, our VP of Marketing in the U.S. branch, is also involved right now in signing up new JDE partners.

And how big is this market compared to Business One? Is it a much bigger market to go after, or is it comparable?

It's a higher-end market. It's higher-cost or higher-priced products. A product there will cost between $25,000 to $100,000, but there are altogether in the U.S. 6500 potential customers for that product. Whilst with SAP Business One, right now SAP has 30,000-something customers, and they intend to grow that market to 150,000 customers by 2012. So the JDE market, in terms of total value, should be as big in the short-term. But in the long-term, it's a smaller marketplace.

Are you just concentrating on the United States right now for JDE Connect? Are you not going outside the United States?

Only the U.S. at present.

Plans for the future?

We will go to other countries in the future. J.D. Edwards is mostly based in the U.S.; most of their customers are in the U.S. But we will eventually also grow into other markets.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Mr. Assia, would you like to make a concluding statement?

Yes. Thank you very much for joining us. I am very pleased to have been able to show you that the work we did during the last year has eventually and finally borne some fruit. Hopefully we will be able to bring much better results in Q1 of this year, and hopefully we'll show nice profitability in this quarter and we will be able to release information regarding some interesting deals we're currently working on. Hopefully we'll sign them up. Thank you very much for joining us and giving us your confidence. Goodnight.

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