Magic Software Enterprises Ltd (MGIC) 2007 Q3 法說會逐字稿

Thank you and good morning to those of you in the United States and Canada. Good Afternoon to those of you in Europe, Israel and elsewhere. Welcome to Magic Software's Third Quarter 2007 Financial Results Conference Call, and thank you all for holding. All participates are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded today, November 8, 2007. Earlier today Magic Software issued its financial results for the third quarter of 2007. I trust that most of you have seen by now a copy of the press release. But if you have not, you may view it in the Investor Relations section of Magic Software's website at www.magicsofware.com.

On the call today are Eitan Naor, President and Chief Executive Officer and David Zigdon, Chief Financial Officer. Before we start, I'll like to refer you our Safe Harbor statement specifically I advise you some of the information we are providing during the conference call may contain forward-looking information with respect to plans, projections, or future performance of the Company, the occurrence of which involves several risks and uncertainties including but not limited to the Company's ability to successfully execute its growth plan, the ability to recognize revenue in future periods as anticipated, the unpredictability of the IT market, product and market acceptance risks, ability to complete development of new products, the impact of competitive pricing and offerings, fluctuation and quarterly and annual results of operation, commercialization and technological difficulties, risks related to operation in Israel, and other risks detailed in the Company's Annual Report on Form 20-F, and other filings with Securities and Exchange Commission.

Magic Software undertake no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of the release or to reflect the occurrence of unanticipated events. With that, I would like to turn the call over to Mr. Eitan Naor, President and CEO. Eitan?

Thank you, operator. Good morning and afternoon, everyone, and thank you for joining us today. We are please to report group financial results, record revenues for the quarter, giving us our fourth quarter of consecutive growth. To summarize our achievements in the quarter, total revenues were $17.6 million, a 17% increase over Q3 2006. Net profit on GAAP basis was $0.8 million compared to $3.5 million net loss in Q3 2006. Cash and cash equivalents, including short-term marketable securities reached $16.4 million at September 30, 2007.

During the next minutes, I would like to give you more details about the quarter and discuss the market trends that are driving our growth. Then I will pass the call over to David Zigdon, our newly appointed CFO, to go over the financial results and open the line for your questions.

We have focused strongly on developing our key markets, including our existing customer and partner base, our SAP alliance, and the IBM System i market segment. We see growing momentum in each of these areas and I'll give you details on each in the remainder of the call. Along our overall sales, we see a variety of financial indicators and high points.

First, we experience growth in sales for the quarter in Europe especially in France, the UK, Hungary, the Netherlands and Germany. Second, we experienced growth in our maintenance and support revenues an indication that we are succeeding in our efforts to improve our service and focused to existing customer. A growing number of our customers are signing maintenance contracts. This is a direct results of a special program that we have invested in together with the increased attentions that we are giving to our existing customers. For example, the total customer check program that we carried out in the UK was a big success. We were also very pleased by the decision of a key governmental South African customer to sign up for a new compressive service-driven agreement. In addition, we are seeing a rise in a number of cross sales to existing customers as well as an increase in the number of customers that are upgrading to eDeveloper V10.

We continue to expand our SAP partner base. In fact we have added more than new 10 new partners in the US alone. We've had a particular success with mid market sales of the iBOLT Special Edition to SAP R/3 ERP's customers, a process that is being lead by our partners with our assistance. This is a solution which was just launched a quarter ago and I am pleased to be able to report good progress.

During the third quarter we completed several successful new deployments alongside the Sheba Medical Center that we noted before. One of them is for a leading financial institution in Germany which is using the iBOLT's Special Edition to extend an integration project, enabling to run on an SAP R/3 ERP platform. Another is we have Magic UK in Japan. They have now completed the first international installation of iBOLT Special Edition with SAP R/3 ERP, for a Japanese headquartered company including its subsidiaries across Europe. The third major win was with a US headquarter manufacturing Company that will use iBOLT Special Edition in subsidiaries across Europe to integrate and synchronize intercompany trading and master data management systems.

We've also received certification in Japan for the iBOLT for SAP product. This is a significant addition to the international certifications we have already received and reinforces our commitment to the Japanese market, it also expands SAP's level of cooperation with us. On this front, we have established a strong relationship with Living System Integrated in Japan and are receiving their endorsement for the Magic offering. This is part of our strategy to work closely with market makers and opinion leaders in Japan. We expect to see the fruits of these relationships in 2008.

In the IBM System i space, we have seen progress. We have been successfully leveraging our JD Edwards connect efforts with iBOLT which has left a promising new wins of JD Edwards' customers and partners. We are pleased to report of a new possible win who moved to Magic from a key competitor specialized in the system IS400. They now view Magic as a strategic partner, have adopted our entire technology portfolio and are already using it for imposing projects. We believe this new relationship offers us a lot of future potential. In addition, we've been recognized as an IBM optimized advanced partner for SOA, an accomplishment which further strengthened our relationship with IBM.

Looking at the market, we have identified a very positive trend, a trend that has been validated by leading industry analysts. You might recall the [QuickTech] report that first December 2004 that stated among other things that SAP starts the trend with Magic Software. That integration issues already evident in large enterprises would become important for organizations of all sizes. This trend has now materialized into market reality, according to the industry research the top short term software priorities for about 60% of the mid-sized enterprises that is those with 100 to 1000 employees is improving application integration.

Many organizations who are implementing ERP, CRM and other enterprise application, realize that they are disconnecting from other applications within the organization and are looking to integrate them with each other. This is true for on-premise ERP users and even truer of for users of SAS, Software as a Service applications like SalesForce.com We are very well positioned to take advantage of that evolution and the insight acquired from our SAP alliance is being used in the elaboration of our 2008 annual operation plan. In parallel we believe that the strong reputation we have achieved as a valued SAP partner will help us to forge alliances with key market players.

I would like to say -- also to say a few words about the global market outlook and trends in particular about one of the most hyped buzzwords in IT, service-oriented architecture or SOA. Although Gartner first coined the concept in 1994, it has taken more than a decade to make it practical. I want to highlight SOA since we are just at the beginning of a new phase. SOA represents a great mainstream opportunity for Magic. In recent years SOA options has grown dramatically across vertical industries, geographies, and parts of organizations. However, the challenges have become more apparent in new software product that disappointed in terms reliability, performance and productivity. The good news is that organizations have begun to utilize SOA and to adopt the relevant enabling technologies. Along with the failure, there have been big successes, and no major flaws have been discovered in the concept. The major system integrators have put SOA as a center of their strategies and large internet platforms such as Amazon, eBay Google and SalesForce.com having great SOA as a key maker.

Gartner expects SOA to become the architectural foundation for virtually all new business critical applications. And according to Gartner the overlapping roles of different platforms will force companies to adopt more than one integration product. Companies using (inaudible) application, legacy systems or customized applications, [albeit] heterogeneous application servers, we need to buy integration center extraordinary infrastructure, optimize the support of heterogeneous application service.

We are well positioned to benefit from this trend. Our products are an excellent fit for the means. In fact along side large software competitors like IBM, Microsoft, Oracle, SAP modules, Magic has gained a distinctive position and industry recognition as the SOA enabler for midsize enterprise. This year we've seen position by both Forrester and Gartner as the global vendors of SOA enabling software.

As to our offering, our products are already there, the fact that our products have been positioned by Gartner in its Visionary's Quadrant and by Forrester as a strong performance in its way on integration center in BPM positions are product as a match for the SOA environment. In fact our recent projects with JD Edwards, SAP and SalesForce.com acting all SOA enabling in nature. We are now examining the number of business cases that will leverage the SOA opportunity on the various tracks. OEM sales to ISVs, SOA enabling for legacy system, integration templates for popular enterprise applications and others.

I would like to share with you the case study that illustrates the feat of Magic's offering in our target markets for midsize enterprises, seeking improved operations and agility by leveraging SOA and BPM and OEM partners once we enriched their offering by embedding Magic's offerings. The case study also demonstrates the scalability potential of Magic through partnerships. A leading French telecom service provider provides voice and data services using the infrastructure of the two largest French Telco's Orange and [Fijipen]. The Company was founded in 2001 and currently operates eight agencies in France as well as in Amsterdam in London. One of our OEM partners named W4 Global developed for them a solution consisting of a top level human workflow with underlying automated processes that leak into the infrastructures provided IT via a SOA layer in order to provide instant consolidation and management of the required resources.

The backend systems are quite varied ranging from content management systems to port to legacy applications. The fist phase of the implementation was done in 45 days specification to deployment. It improved their SLA, it induced human work loads required for customer by resorting to human integration only for initiation and exception handling. This resulted in a compelling ROI for the customer. The second phase is taking place as we speak, further alternating the process in extending its growth. This example shows our offering is extremely valuable for the SOA environment.

To conclude, I would like to provide some insight into the short and mid-term focus. In the last quarter, we have completed the changes in our corporate senior management team. We are now operating with a strong, new, cohesive team that is very focused on execution of our plan and on improving our growth and profitability.

As our CFO, we are pleased to have added David Zigdon, a seasoned executive that brings us years of experience as a Chief Financial Officer at Radcom and Power Paper. [Ameer] has joined us as General Manager for international sales. Ameer has 20 years of Senior Executive Sales Management experience in leading enterprise software companies including with M Docks, IBM and others.

Arita Mattsoff has joined us as our new VP Global Marketing. Arita has held various senior marketing position and brings us significant international marketing experience from previous positions with Finjan, Paradigm Geophysical, and [inaudible].

We are currently in the midst of building our annual operational plan for next year, which clearly defined business models for assuring healthy, profitable, and growing business for Magic. Our focus is on the business areas that show the most potential and where we have demonstrate success. I strongly believe that Magic's products and solutions offer an excellence seats for a number of high potential markets. And as our primary challenge to date is to improve our execution and operational capabilities.

I am very much confident in the ability of our new management team to achieve our goal and to build a strong 2008 and beyond. In parallel we have initiated a process to build our strategy for 2009 and onward which we code named Goldmine. This processing holds our key executives worldwide and is expected to conclude during the second quarter of 2008. We are looking at a three-year horizon building a plan designed to shape our evolution and strategy for 2009 and onwards.

I would like to conclude with informing you of the appointment of Guy Bernstein to replace David Assia as the Chairman of the Board. It is this opportunity for me to thank David Assia for the role he has played in Magic's history and business achievements. During his tenure as CEO and Chairman of the Board, Magic has seen growth and become one of the main providers of business integration and development technology globally. I am excited to work with Guy and the management team to lead the Company to success. As a Board member and previously the Chief Financial Officer of Magic, Guy brings in-depth knowledge of the Company and the markets.

With that I will turn over the call to our new CFO, David Zigdon. I would like to take this opportunity and welcome David on board, who has joined us three weeks ago. After the financials, we will be available for your questions. David?

Thank you, Eitan, and hello, everyone. I am very excited to have joined Magic three weeks ago and looking-forward to work with you. I will now provide you with a summary of our financial results. You can find the results in more detail in the press release issued earlier today.

Revenue for the third quarter was $17.6 million, up 5% from the previous quarter and 17% compared with the third quarter of 2006. On geographical basis, North America accounted for about 44% of our sales; 35% our sales were from Europe, 11% from Japan, and 10% from the rest of the world.

On a GAAP basis, growth margin for the quarter was $9.7 million, 55% from our quota revenue, slightly higher from the previous quarter that was 54%, an improvement from the third quarter of 2006 which was 52%. Operating income for the third quarter was $1.1 million, up 10% compared with $1 million from the second quarter of 2007, a significant improvement compared to $3.6 million operating loss recorded in the third quarter of 2006.

On the GAAP basis, net income was $0.8 million or $0.02 per share. In the second quarter this year, net income was $0.8 million or $0.03 per share and we lost $0.11 per share in the third quarter of last year.

We have also included non-GAAP financial measurement, which we believe also useful information and insight to our business. They are not in accordance with GAAP measurement and we do not give them as an alternative for GAAP measurement. These non-GAAP measurements exclude amortization of purchase in terms of an assets, in process it from sales and development capitalization, and equity based compensation expenses. As non-GAAP, operating income for the third quarter was $1.3 million, up 44% compared with $0.9 million in the second quarter of 2007 and operating loss of $3 million for the third quarter of 2006. On a non-GAAP basis, net income rose $0.9 million or $0.03 per share. This compares to a non-GAAP income of $0.7 million or $0.02 per share in the second quarter of 2007 and in the third quarter of last year for non-GAAP basis we lost $0.09 per share.

Results for the nine months period. Revenues for the nine months of 2007 were $50.8 million, a 12% increase compare to $45.5 million in the first nine months of 2006. On a geographical basis in the first nine months of 2007 North American accounted for about 42% of our sales, 36% of our sales were from Europe, 13% from Japan and 9% from the rest of the world.

Gross profit for the period of on a GAAP basis were $27.5 million, presented 54% from the total revenue compared to $54.4 million in the first nine months of 2006 which represents 53%.

On the GAAP -- from the US GAAP basis operating income for the nine-month period reached $3.2 million compared to an operating loss of $5.2 million in the first nine months of 2006. Net profit for the period on a GAAP basis was $2.6 million or $0.08 per share compared to net loss of $5 million or $0.16 per share in the first nine months of 2006.

On a non-GAAP basis operating income for the first nine months of 2007 was $3.3 million compared to non-GAAP operating loss of $4.9 million in the nine months of 2006. Net income on non-GAAP basis for the nine-month period was $2.8 million or $0.09 per share compared to non-GAAP net loss of $4.7 million or $0.15 per share for the first nine months of 2006.

Turning to the balance sheet, cash and marketable security were $16.4 million at the end of the quarter, down slightly from $17 million at the end of second quarter and up by $3.4 million from the end of 2006.

Now we would be happy to take your questions. Operator?

Thank you, David. Ladies and gentlemen, at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question is from Charles Silk of C. Silk and Sons. Please go ahead, sir.

Hi Eitan, looks good, the conference call is very, very promising, I hope we can move forward fast. I have several questions, one was how do the three subsidiaries do, were they contrib -- how do they contribute and how profitable have they been?

Sorry Charlie, I missed the last part; the line was not good.

Okay. The three subsidiaries; the Answers on Demand, Hermes and [CoreTech]; how did they do this last quarter?

They did indeed well according to internal plans, so they continue to grow and continue to contribute to the Company's stability.

Are they all profitable?

Two of them except of the Hermes one.

Alright. Let's see, how -- let's see, how is the beta test on the Rich Client going?

We haven't got their feedback yet, we are just -- actually launched the beta program about two weeks ago and in last week of October, and is going to run for about two to three months and assuming I would have some feedback for the next quarter's call.

Okay. On the Penn State University Grant, that was actually pretty exciting and how is it working out? How will they find that on a [learned] basis?

As you've seen from the press release in fact, we signed the agreement initializing the program, putting iBOLT into their curriculum. We haven't had any feedbacks yet this will take at least a semester or two. But this is very encouraging because we definitely want to grow a generation of high skilled educated people that use iBOLT when they study. And we definitely show to those guys when they go to corporate on their job -- to get their job they will use our iBOLT result. So we don't have feedbacks at this stage but it will continue.

Presuming any other collage or education grants?

Yes, that should be in US as well, but not only in US and we've did some work on that in Europe, in UK and France and once we are able to sign a similar agreement we will obviously announce it.

Okay. How was the -- just a question on the Canadian insurance company as [Inaudible question - background noise]?

Yes, right. Actually it went into production very successful, is now with in its second phase -- very successful product, very happy customer.

And on going revenue from them, are you going be adding more usage?

We hope so.

Okay. How about KLM, how is that going?

On track as well.

Okay. Is there any chance of getting another airline and cargo?

We do have some views on the pipeline, having said that we are very cautious on taking on deals, making sure that we comply with our commitments with the current projects that we have. Turning that company into profitability and once that's stable and once we have the infrastructure in place; we would feel more comfortable on taking some new business.

I have the result of the -- the healthcare company in Israel that was using the iBOLT special. How many additional iBOLT the special for SAP, in mySAP? You mentioned a few there.

Right.

But how is that going.

Right, and a fact we just about the quarter and a half ago kind of initiated I wouldn't say launch because we haven't officially launched the product but we initiated some sales it was successful in two or three other cases. As I mentioned in Germany and in some other places and then we expect to get more sense of that, but the thing here is really to get the right partners to embrace that specific special vision. It's not the same partner community that we are using, the 200 plus partners that we are using for [inaudible] so we are working on establishing partnerships as well there.

And the JD Edwards is that leading into possibilities with other parts or divisions at Oracle?

At this stage we are -- well, I would say; thus far as we are not approaching Oracle on that except for some technology systems we get from Oracle. We are mainly addressing the end customer base and some partners that specialize in the JD environment. So at this stage I cannot give you any insights to any - further impact with Oracle.

And then IBM has that started to generate revenue?

Yeah, it has been generating revenue for quarters. I mean we do a lot work in system i environment.

Well, it looks like we are on the right direction and looking forward to our next quarter or -- are you going to put out some news release as we -- as the quarter goes on?

Yeah sure, we have some in the backlog, we are waiting customer approvals for them, once we get customer approvals we will do that.

Okay. Thank you.

Thank you, Charles.

Thank you. (OPERATOR INSTRUCTIONS) There are no further questions at this time. A replay of the call will be available on Magic's website www.magicsoftware.com approximately four hours after this call.

Mr. Naor would you like to make any concluding statement?

Yes, sir. Thank you all for joining us. We look forward to speaking with you again next quarter.

Thank you for your participation.