Magic Software Enterprises Ltd (MGIC) 2008 Q1 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 first-quarter 2008 financial results conference call and thank you all for holding. All participants 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, May 21, 2008.

Earlier today, Magic Software issued its financial results for the first quarter of 2008. 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.magicsoftware.com.

On the call today are Guy Bernstein, Active Chairman and David Zigdon, Chief Financial Officer of Magic Software. Before we start, I would like to refer you to our Safe Harbor statement. Specifically, I advise you that 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 involve 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 in quarterly and annual results of operations, commercialization and technological difficulties, risks related to our operation in Israel and other risks detailed in the Company's annual report on Form 20-F and other filings with the Securities and Exchange Commission.

Magic Software undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. With that, I would like to turn the call over to Mr. Guy Bernstein, Active Chairman. Guy?

Thank you, Jonathan. Good morning and afternoon, everyone and thank you for joining us today. The first quarter beginning to what we believe will be another year of progress for Magic Software. Our revenue for the quarter was $15.1 million, which is up 9% compared to the first quarter of 2007. Our gross margin for the quarter was 55% compared to 51% in the first quarter of 2007 and we posted a small net profit, giving us our sixth consecutive quarter of profitability.

Our results for the quarter were dominated by two events [care of] AAOD subsidiary, which contributed nearly $17 million in cash to our balance sheet and the departure of Eitan Naor, our President and CEO for the past year.

We continued to make good progress on all fronts. During the next few minutes, I would like to give you more details on our activities and target markets. Then I will pass the call over to David Zigdon, our CFO, to go over the financial results and open the lines for your questions.

One of our main focuses of the quarter was our application platform activities. In February, we published our intention to release a new product, designed to position our eDeveloper technology at the forefront of the application platform market. We made a pre-release version available in Japan and have been very pleased by the response. As a result, we plan to make the product available worldwide in June. You can read more details on this in the press release that we just published.

This is a significant step for Magic. Our product offers many unique advantages. First, it is the market's first application platform that can support multiple deployment style simultaneously, delivering client/server and Web [one-style] applications, as well as Web [too] Rich Internet Applications. In addition, our product is the only one that allows development of the client and server side of applications at the same time, enabling a much [simpler] development with a single product.

A few other Rich Internet Application Platforms that are available today require separate development efforts and skills for the client side and the server side of the application. This is not just a technical feature. It has significant and substantial financial and operational implications for application providers and is a key reason for the early adoption of this platform in Japan.

We have also made sure that the new platform provides full compatibility for current applications running on our eDeveloper Version 10 platform. This will allow our existing customers to easily migrate their client/server applications to Rich Internet and to take advantage of the superior functionality and cost reductions made possible by our flexible development (inaudible). In addition, the final version of the product, which is planned to be released at the end of this year, will provide full software as a service capability in support for mobile clients.

I would like to expand a bit on the thinking behind this product and its implication. It reflects our conviction that cloud computing -- that is Web technology -- is totally transforming our industry and markets, creating exciting new opportunities. At this early stage, the cards have begun to be reshuffled. We believe that a key success factor will be application content. This is a very challenging objective because there is practically no migration path from existing Visual Basic, Java or [Ceszhou]-based application to platforms such as [Flex].

This means that everything must be redeveloped from scratch. It would be a significant effort in terms both of development and budget for ISVs to continue supporting its installed based while redeveloping its application portfolio in a totally new platform and partner. That is where the entire Magic Software ecosystem has a rare opportunity to capitalize on its existing application assets and on this market [niche] for application content. We are currently the only business application community that can deliver Software-as-a-Service business application by migrating their existing application to our new platform.

To take full advantage, we are now working on new partnerships with application hosters and Software-as-a-Service providers preparing the ground for our ISV community. At the same time, we have started informing leading NSPs of these opportunities. The extended ecosystem we envisage will include large hosters who would provide the infrastructure and support, Magic Software who would provide the software platform and Magic solution providers who would provide the content. Our management team is working diligently on plans and actions, which would transform our leadership in the area of technology and latent content into business leadership (inaudible).

On the integration business side, we continue to pursue the ecosystem-centered strategy and channel development. This strategy consists of the identification of the leading enterprise application vendors whose solution can be enriched and reaching mindshare with the vendors on the usefulness of iBOLT in that context. After that, we will tailor a special edition of iBOLT for that solution, which [processes samples] for popular enrichment.

Finally, we did replace -- we will put in motion a targeted partner program and marketing campaign aimed at creating a joint subecosystem. We believe that this focused effort targeting attractive markets with the support of the principal power behind the ecosystem will provide us with a much higher use for our marketing and sales efforts that would be possible through operations in the open, i.e. in the generic market.

Our most significant recent effort according to this model was Salesforce.com ecosystem. In January, we began actively prospecting within the Salesforce.com partner community and participated in several events. We prepared our large event, which took place two weeks ago during Salesforce.com's main European event, Dreamforce Europe, which took place in London. From our perspective, this has been one of the most successful trade events that we have experienced in recent years.

With a balanced mix of enterprises seeking business integration solutions, partners interested in joining with us to deliver such solutions. We build upon experience we gain from our SAP and J.D. Edwards project gaining within two days the visibility and position of one of Salesforce.com's top global partners and solution (inaudible). Our team is now busy qualifying leads and engaging partnerships.

In January -- in summary, we are now focused in completing our longer-term strategy and I feel confident with Magic and trust that we have the right people and technologies to achieve our goals. With that, I will stop and turn the call over to our CFO, David Zigdon, to go over the financials. Then we will both be available for your questions. David?

Thank you, Guy. I would like to finish off the call with a short overview of our financial results. I will be referring only to the results according to the US GAAP. In the press release, we have also included non-GAAP financial measurement, which we believe offers additional insight into our business.

Revenues for the quarter were $15.1 million, up 9% compared to the first quarter of 2007. On a geographical basis, North America accounted about 34% of our sales, 38% of our sales were from Europe, 18% from Japan and 10% from the rest of the world. Gross margin for the quarter was 55% -- sorry -- up from 51% in the first quarter of 2007.

Our operating expenses for the quarter were $8.4 million compared to $6.6 million in the first quarter of 2007. This reflects increased sales and marketing activities together with a one-time expense related to the departure of our previous CEO, Eitan Naor.

With stronger revenue and improved gross margin, we were able to minimize our operating loss for the quarter despite the one-time expense and deliver a $52,000 net profit. With the expense behind us and continued growth in our revenues, we expect to deliver an improved bottom line in the quarters ahead.

Turning to the balance sheet, as of the end of the quarter, our cash short-term bank debt was (inaudible) and marketable securities totaled $32 million and almost zero in short-term bank credit. This strong balance reflects the contribution of approximately $4 million from operations and the rest from AAOD. You can see the strong positive effect that the AAOD transaction had on the Company.

In addition, we have recorded deferred revenues totaling $8 million. These reflect our maintenance support agreement that will be recognized in 2008. So that is it for the quarter.

Taken as a whole, the Company is in solid financial position and adds resources it needs to carry out its plans for growth. Thanks for your ongoing support and for participating in this conference call. With that, we will open the line for your questions. Operator?

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

Good morning and thank you for taking my call. You still don't break out the revenue from the core business and it is very difficult to find out with your other divisions how they are doing and really what is happening with what I am concentrating on as far as the growth in the iBOLT and the growth in eDeveloper. Isn't there any way that we could separate that so that there is some transparency about how well the core business is doing?

We will consider it in the future and in general, most of the growth in this quarter came from the core business.

Could you give us an idea of how much of the total revenue was the core business?

I told you at this point in time, we will not disclose this information. We consider to disclose this information in the next quarter.

Okay. Now, Guy, that you are in charge here, could you talk about what Formula's plans for Magic are? It is hard to get any view from what the majority shareholder is looking for. Last year, Formula had spun off BluePhoenix and it was very successful for their shareholders. Could you talk about Formula's view of Magic?

Sure. Basically, Formula is looking to enlarge the companies underneath Formula. Meaning we definitely see that -- we definitely prefer that the companies we hold will have the critical mass, especially if they are traded on NASDAQ. And we look for the right opportunities for both Magic and Sapiens. On Matrix, meaning it had the right [size]. It's a big company.

Having said all that, still if we will see that we get a decent price, at least the way we see it, it is a holding company. If we get the right price for Magic, I cannot guarantee that we will not sell.

Well, I only ask -- I am wondering does Formula owning a majority position in Magic hold Magic back in the sense that it is difficult for other people to make large investments in a company that is controlled by somebody else. We will leave that as a comment.

The uses of cash. Now that we are building up a nice base, I really hate to see the Company pay a dividend at this point and more use it for increased sales and marketing or R&D as needed. Again, that is somewhat in the control of what Formula wants to do. So could you talk about your thoughts on the $32 million?

Yes, I can tell you right now we are not talking about a dividend distribution. Although, short term, it would probably make the best value for Magic investments, but it is not on the table right now. We will definitely prefer to find the right acquisition for Magic and use the money.

Great. I would strongly disagree that paying a dividend would be in the best use of the shareholders.

By the way, you have a company that has traded at like $50 million, that is holding $32 million plus in cash, having its own property for approximately, I don't know, $6 million, $7 million. Meaning all in all, you have an enterprise value of $10 million for a company that sells $60 million and is making profits.

Right. I would agree it is undervalued. That goes to my previous question, whether it is perhaps the concentration of ownership that is perhaps holding it back. How long do you think that we will be able to see any meaningful revenue from the software or service or your trying to get into Salesforce?

It is hard to say at the moment because we just started with Salesforce. We have a lot of excitement around it, but at the end of the day, we need to translate it into revenues and it takes time because Salesforce is kind of the leader in the Software-as-a-Service market. I believe we will see much earlier revenues from the Rich client version because there, first of all, we are targeting the community and for them, it goes without saying to transform the applications from client/server to Web applications.

Would you have a goal say of getting revenue in the Software-as-an-Application by the end of the year?

I believe we will see something -- I hope we will see something more significant from Salesforce.com.

Okay. And in that model, that is somewhat of a recurring revenue model, a lease type of situation.

Yes, of course.

Okay. Thank you very much for taking my call.

Charles Silk, C. Silk & Sons.

Hi, Guy. I have a lot of questions here. The last 10 months, it seems like we have had a complete black-out of information of what is going on. Before 10 months ago, the last announcement of a recent deal was KLM and before that was Farm Mutual. They were very successful and they are ongoing successful, but there has been nothing released in either the quarterly reports or news releases since David has left. We would have five or six or seven new clients that they would talk about and to me, it seems to the universe out there who may be interested in Magic say there is nothing happening. Why is this pullback of information, especially to the stockholders? Now Formula owns 53%. It seems like they are buying the stock back and they are not letting the other 47% of the stockholders get any information. It is a void and it is unfair to stockholders.

First of all, let me tell you something regarding the last 10 months. As you know, Magic is an independent company. Although it has a major shareholder, it has its own Board and its own managers and it runs independently. Therefore, the decision whether to make announcements or not was made by the management. Okay?

Second, the reason why Formula is buying shares is just because we think that Magic is way undervalued.

Okay, shall I go on?

And this is on the Formula side, but it is something very subjective.

Okay. There was an article in the Wall Street Journal last March 10 that was written by a professor out of SMU by the name of Dr. Basu and the article talks about -- and I don't know if you have read it or found it -- but it says how to tap an IT's hidden potential. I read the article and it says this is exactly what Magic can do and some of the things they say -- most of the information technology money is going for waste.

Now I called Dr. Basu to tell them about the article and he was appreciative and I said have you ever heard of Magic? No, never heard of anything about it. And it fits in and it complements this article what Art Pennington has been doing, has been doing successfully over the years and now he is going back into the business, showing people how you can save money or make money and that is the whole mantra of software. Now how are you reacting to the world of what you have got? You have got great software and it is getting better and better, but the world doesn't even know about it. Can you answer -- what?

I fully agree with you.

So what is Magic going to be doing in the promotion and the marketing, etc? Can you elaborate what is going on so people will know what is going on with this? It is great software.

I can tell you that the main thing that we intend to work right now with is on the long-term strategy of Magic. This company needs to decide on a clear strategy, okay, and after we have that, we can position ourselves in the open world.

Well, you're doing that to some degree from your websites, which are great. You have improved over substantially. It lays out all the products you have, with SAP and the different deal things that you are making. I don't know about how the small business -- what are -- the SAP small business and then you go in and you are now starting to be able to provide them for [RS3] and other things. What is happening in that area? Is that a dead area? I think there is more dealers that you have got or partners and what is that generating? Is that a dead end or what?

No, it is not a dead end. I can tell you that for the SAP Business One, Magic has recorded a lot of partners. For the R/3, we get different, different opinions from different areas in the world because, in some places, SAP controls this market with NetWeaver and therefore partners for R/3 are not willing to work with any other vendor and in other areas, we get positive signs. It means that they would like to see what we have, okay? So it's still not clear.

To go back to the J.D. Edwards, I understand there was a conference there and it was very successful for Magic? How is that evolving?

Currently, they pick the leads. They have a few in the forecast. As you know, J.D. Edwards is mainly successful in the US and therefore, the US branch is the one that is working on J.D. Edwards.

Okay, what about the IBM and the relationship with their i Systems. What is happening there with the IBM i Systems?

With the i Systems? We continue to work mainly in Germany, Holland and France. Most of the projects are on i Series.

There was an announcement put out by Salesforce about them going into London, etc. and they mentioned about the platform as a service and I noticed in your website, you are talking about going into -- let's see the Platform-as-a-Service. Now is that going to be any conflict with what you are doing with them on iBOLT?

No, apparently not.

So there is no conflict in there?

Two different types of servers.

The only thing is it's really a disappointment that the stock is selling at such a low price. There is no following in the investment community, there is no following in institutional ownership and there just seems to be a complete lack of interest, especially in the United States, about Magic. It is just languishing here and the only way that I can see that it happens is increasing the revenue and increasing the bottom line. What is your reaction to my feeling about that?

First of all, we agree on that. Second, I can at least tell you that we will do our best in order to better communicate with our shareholders from now on.

There has been a lack of communication for the last 10 months and it is really unfair for the existing holders. We have loyal holders and want to see things happen. That is all I have for now.

Marc Silk, C. Silk & Sons.

Hi, Guy. Thanks for taking my call. Way back when you were CFO of the Company, I know you are kind of back in the fold now, it is just frustrating when basically the only ones on the conference call are the Silk family and then Randy and maybe a few private investors. So as a chairman of a corporation and the CEO and what have you, sometimes I think it is -- increasing shareholder value is obviously one of your main priorities. So here is my thought process.

Last year, you had a fantastic year and your stock was $2.90 back in February of '07 and now it has dropped 30% after having a fantastic year in my opinion and nothing is happening and I talk to institutional investors and they just can't touch this stock because it is too thinly traded and Formula owns a big chunk of it. So no matter what happens, even if you have a few other good quarters over the next -- this year, I don't think anything is going to change.

So my question to you is wouldn't it make sense to bring in an investment banker, because you have a situation where you have IBM, you have the J.D. Edwards Oracle situation, you have now Salesforce.com, you have SAP and then you obviously have maybe private equity money that if you get two people interested in you guys and you have a bidding war, because I think you know and we know that this is not a $2.00 stock and I think the value of this Company is at least worth $5.00 for all the potential you have, but I think there is something that -- I think because you raised all this money, I don't think -- I don't mind using some of that money to bring in an investment banker and just see what is out there. And I know you have done something like that in the past, but in the past, you really weren't making money. I am talking in '06.

Now that you are making money and you have all these relationships, what is the damage if you do something like that? The worst that could happen is you don't get -- maybe the value of that comes back to Magic. It doesn't make sense for you to sell the Company at that price, but if someone comes in at $5.00 or $6.00, I would rather put feelers out to see if that's a possibility because, besides that, it is going to be very hard to get institutional ownership in this stock with Formula owning 53%.

First of all, I can understand where you are coming from. The only gap between us is that I believe we need to prove a few things before we go there on the business level because I don't see any investor that will invest for, I don't know, even $4.00 today at the current situation.

Which goes back to what my brother, Stephen, is saying. So you say next quarter you are going to at least break out your iBOLT and your eDeveloper revenue because we know you are looking to eventually sell off the CoreTech and the Hermes and then going forward, I think if you can see the growth in iBOLT and eDeveloper, then it can get to that stage of bringing in an investment banker. Does that make sense?

We will consider it.

Okay, thanks for taking my call.

(OPERATOR INSTRUCTIONS). [Eric Best], [Best Holdings].

Yes, hi. I have a question regarding the selling and the G&A expenses. It seems that, compared to last year, there is a huge increase in that, almost from $6 million almost to $8 million. Can you explain and just elaborate a little? Thank you.

As I said in the conference call, we have two objectives that affect this. One, it is increasing in the sales and marketing activities that we have done. We invest in our subsidiaries all over the world and on the other end, we have one-time expense regarding the departure of our CEO, Eitan Naor, in this quarter.

There are no further questions. Mr. Bernstein, please continue with your closing remarks.

Okay, thank you all for joining us. We look forward to speaking to you again next quarter.

Thank you. This concludes Magic Software's first-quarter 2008 results conference call. Thank you all for your participation. You may go ahead and disconnect.