Magic Software Enterprises Ltd (MGIC) 2008 Q2 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 Second 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, August 7, 2008.

Earlier today, Magic Software issued its financial results for the second 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.

Basically, the second quarter had record financial results and significant strategic momentum for Magic Software. Revenues for the quarter were $16 million, which is up 12% compared to the second quarter of 2007. Our gross margin for the quarter was 58% compared to 52% for the second quarter of 2007, and we posted a nice net profit of $1.7, giving us our seventh consecutive quarter of profitability.

Our results for the quarter reflect two important factors; one our performance is the outcome of the changes that we have put into place during the past several months, and second is that for the first time in many years,, we are launching technology that has a significant competitive edge. I believe with this technology, we have the potential to regain our status as a dominant player in the application platform and integration markets.

Strategically, we continued to make good progress on all fronts. During the next few minutes, I would like to give you some more details on the activities during the quarter, then I will pass the call over to David, 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, the uniPaaS launch and Analyst Recognition. In May, we introduced uniPaaS, the next generation of our eDeveloper solution. uniPaaS features the industry's broadest choice of deployment modes, on-premises, on-demand, software to service, full client, web, global, local or any other form. It also offers full compatibility with eDeveloper Version 10. And its unique single development paradigm provides significant cost of ownership advantage to our customers. This has been one of the main reasons it was already chosen by two of our main customers in Japan.

After the introduction, two leading independent IT industry analyst firms invited us for a briefing on uniPaaS and its potential to enable a paradigm shift in the development and deployment process of web-based applications.

In addition, Gartner listed Magic Software as one of the two software to service enabled application platform only vendors in their recent report, July 2, '08. In three recent conventions in Japan, US and UK, the Magic user community gave an enthusiastic reception to the new uniPaaS product. Attendance at Magic Software Japan's Annual Customer event broke all previous records, reaching over 650 participants, all partners, of course.

The second focus area was our integration business. We announced our partnership with Salesforce.com in May at Dreamforce EMEA event in London. At the event, the Company initiated discussions with key partners in the Salesforce.com ecosystem that already brought us some new nice leads. SAP awarded Magic Software its 2008 SAP 2008 Business One Global Solution Partner Award for Leadership in Innovation. We start to see more eDeveloper and iBOLT customers, and we also see increased repeat business in all countries, renewals, upgrades, extended licenses, and so on.

In summary, we feel the potential with uniPaaS from the feedback and excitement by the market and our community. In addition, we are now focused in completing our longer-term strategy. I feel confident with Magic and our people, and of course, technology and cautious optimism towards the coming quarters.

With that, I will stop and turn the call over to our CFO, David, 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. I will be happy to answer any questions about the GAAP or non-GAAP number during the question-and-answer period.

Revenues for the quarter set a new record for us, $16 million, up 12% compared to the second quarter of 2007. On a geographical basis, North America accounted for about 29% of our sales, 44% of our sales were from Europe, 16% from Japan and 11% from the rest of the world. Gross margin for the quarter was 58%, up from 52% in the second quarter of 2007, reflecting the increase in higher margin licenses.

Our operating expenses for the quarter were $7.6 million compared to $6.9 million in the second quarter of 2007. This reflects an increase in sales and marketing activities.

With stronger revenue and improved gross margin, we were able to deliver $1.6 million operating profit compared to $0.4 million in the second quarter of 2007. Our net profit for the quarter was $1.7 million, or $0.05 per share compared to $0.3 million, or $0.01 per share in the second quarter of 2007 before discontinued operations.

Turning to the balance sheet, as of the end of the quarter, our cash and short-term bank debt with its marketable securities totaled $34 million, and we are carrying almost no short-term bank credit. Net cash provided by operating activity was almost $7.5 million in the first six months of 2008.

In addition, we have recorded deferred revenues totaling $6.7 million. This reflects 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 good financial position and has the resources it needs to carry out its plans for growth. Thanks for your ongoing support and participating in this conference call. With that, we will open the line for your questions. Operator?

Thank you David. (OPERATOR INSTRUCTIONS).

Charlie Silk, C. Silk & Sons.

Hi Guy, congratulations with moving ahead now. I've got a lot of questions to ask. What's going to happen on marketing and promotion of the uniPaaS? Are you going to be spending some money in advertising and stimulate the rest of the world with what you've got, tell the rest of the world what you've got?

Yes, probably we will have to increase, or let's say to increase the marketing budget, but of course, we will probably bring it from somewhere else, meaning the total budget that we've planned for the year is not going to change in terms of profitability.

Okay, in Japan I know there was a great gathering there of people. Has this generated any revenue in the last quarter, significant revenue, and what does it look like this quarter?

First of all, it did not generate any revenues or significant revenues in the last quarter, and as for this quarter, we are in a phase of tests with two very important customers, big customers, in Japan. We believe that during the quarter, they will decide whether they're going to base their all applications on this platform. If, of course, they do so, then it will generate a lot to Magic.

What is the certainty of them going ahead? It's on the test phase, well how far are you on the test phase?

Let's say that until now, we did not hear any noises in terms of the functionality of the product.

Okay, you mentioned in there Gartner, and I went to the site and I'm not a buyer or user of Gartner, and I just wonder what the report was like.

The report basically dealt with the software as a service platform in the market, and they basically mentioned Magic as one of the leading platforms for software to service.

Well, they mentioned that there were two people, you and who's your competitor that they mentioned?

I don't remember the name. I can ask Arita in a few minutes, and I'll tell you in a few minutes, okay?

Okay, what about Forrester? I understand Forrester is looking at uniPaaS also.

Charlie?

Yes?

We have Arita with us, so she can answer all your questions regarding Gartner and Forrester.

Okay.

Hi Charlie, how are you? The first question you had about the report, the report talks about the impact of (inaudible) in general and their service and their platform, and it was published July 2. And the other player of that (inaudible) area, only vendor is Gordys, and that is software.

What was that again, the --

Gordys, G-o-r-d-y-s.

Gordys, okay. How about the Forrester, are they putting a report out soon or --?

We expect that they are actually going to have a report out in August or September, and we expect to see Magic --.

I didn't get the connection again, would you repeat that a little slower?

We expect to see a report from Forrester during August/September.

And September okay, August or September. On the UK with your new Salesforce person indicated that you had three deals starting right away. Now, one of them you announced, which looked like it was very good. What kind of revenue are you getting from those three deals, or have you got them yet, and revenue yet from them?

No, we did not mention any revenue regarding the deals, but I can tell you that we are talking, the basic deal is talking about a few tens of thousands pounds for the license, and then, of course, we have the traditional services around it, and of course, we prefer to go with partners in order to increase the model.

Let me open it up to some other people, and then I'll get back. I may have some more questions.

Okay.

Stephen Silk, C. Silk & Sons.

Good afternoon. I'm still concerned that you're not looking to break out revenue by the two divisions in the core part of Magic so that while you say that you're building momentum for what you grow, is that more of a story that's happening and perhaps the divisions are having stronger quarters?

I'm not sure I understand your question.

Well, you don't break out the CoreTech revenue and you don't break out the Hermes revenue, so we don't really know what you're getting as far as revenue from iBOLT, eDeveloper and the new initiatives.

I can tell you one thing; the main increase in revenues came from the core business.

Okay, and again, if you start talking about your story to the Street, they're going to want to be interested in the growth and the potential for that area, so why can't you break that out?

I think now we did not break it; I think we will consider to do that while we are out with the story.

Okay, when do you expect perhaps that you might start generating revenue from Salesforce?

From Salesforce we already are.

Okay, oh I thought you said during the last quarter, you hadn't gotten any revenue yet.

No, from uniPaaS.

Oh, for uniPaaS, okay that's all I had then, thank you.

(OPERATOR INSTRUCTIONS).

[Randy Colb].

Hello everybody, are there plans for Magic to develop their own [cloud], perhaps like a uniPaaS.com place where perhaps Magic apps exchange or Magic applications could be offered on a subscription basis?

It's a good question because we are, we have a lot of discussions about it, and we need to see whether our partners are ready, of course, to go there because at the end of the day, we are totally dependent on our partners to, of course, convert their applications to be based as software service applications, and from there, of course, to build the partnership with the hoster in order to provide the service.

So I can tell you that we already checked with some partners in Israel, and we have a way to go there. But it's in the first stage of discussion.

Would you consider maybe an acquisition in the direction of a hosting service?

Hosting service? No I don't think so.

Okay, you would just use them as a partner like I forget the name of the company that you partner with.

[Opso].

Yes, so that would be the direction you would go in; you wouldn't want to maybe merge or buy a company that would handle the hardware side of it.

No, no.

Okay, that's fair enough. Are there any prospects for offering on-demand tools, perhaps on a limited basis as a marketing tool, maybe like a Discovery version of an on-demand tool?

Yes, there are some thoughts about it with even something that is going on in the Netherlands regarding the iBOLT to basically provide integration as a service. And we have some thoughts maybe to take some of the more general applications and put them as software service applications in order to promote Magic.

Would this be -- I don't know if you're familiar with -- Quick Pace by Intuit? Would that be something along those lines?

I don't know it too well.

It's the basic Magic, maybe Magic 2.0. Anyway, you guys are far ahead of them in that direction, and I was just kind of wondering if you put something out there like that.

Buy anyway, does Magic track a pipeline or backlog of potential deals? And if so, is there a dollar amount that you can put on that?

We do not release the pipeline or the funnel or the forecast going forward. After we go out probably with the story of Magic and we get some coverage, we may do so.

And how long will it be before we go out with the story of Magic?

We are in I would say, it will take us a few weeks to package the strategy for Magic, and after we have the strategy, we probably have to make some changes following the strategy, and then we'll start to push the story, of course, and try to get some coverage.

Are you going to wait until February when the final version of uniPaaS comes out, or --?

No, no, no.

So you're going to kind of kick this off --?

We probably kick it during Q4.

Okay, and I know you said you've seen an increase in Version 10 upgrades. Do you have a number, or is there any way to track who's back on the earlier versions, and what you anticipate in terms of people upgrading to the new version?

Or course, there is all the pipeline of the companies based specifically on deals and each salesman is required to write exactly what kind of deal he's working on. So we basically know where we are headed to. In terms of migrating to Version 10, I think the uniPaaS is a great catalyst for these kinds of deals.

I agree, I think it gives everybody a reason to upgrade, and I can't help thinking back around Y2K when everybody came out of the woodwork and started upgrading because they had to. And I just wonder how many people are back in earlier versions, and now they might have a reason, a real reason to upgrade.

This is exactly the case, because when you go to customers and you tell them, "Look guys, you need to upgrade because we came out with a new version", it's nice, they get some new things in these versions and it's nice to have. But when you come up with uniPaaS that basically gives the customer the ability to expand his business, it's totally different. You don't need to convince him.

Yes, I completely agree. Well, thank you very much for your time.

Marc Silk, C. Silk & Sons.

Hi guys, congratulations on another good quarter. Here's my issue; we are believers in the product and the Company, and your cash per share is about $1.06, and just say you sold CoreTech and you sold Hermes and maybe you sold your building and let's just say you got another, I don't know, let's say $16 million. So you get about $1.56 a share in cash.

Your enterprise value is $0.30, and you're continuously making money, so I'll be patient, but when you try to get coverage, and if it's not happening like you think, or if you get coverage and you don't have institutional ownership, I would hope that you could look at the frustration of the shareholders and work together because between what you own and what [David Asea] owns, that's 58% of the Company, and I can tell you from my experiences, a lot of institutions are not going to buy a stock when one company, one entity controls so much of it, and that the float is so narrow. In three months, your average shares traded is about 14,000 shares, and that's being generous.

So again, we are believers but and here I'm going to get to my point; you have great products with iBOLT, eDeveloper and uniPaaS, and maybe down the line you're thinking of Formulas, thinking of selling the Company at a great price, $6.00, $7.00 whatever, you may be waiting for the revenues to keep ramping up. But also I want you to think about it this way. If under an IBM or a (inaudible) or an Oracle, or even a Salesforce.com, if they think they could take this product and make several millions of dollars and bring their revenues up to the next level, maybe you should also be thinking, instead of just getting coverage, is maybe hiring somebody just to kick the tires, but let them know that [main] worth the sale at right price, because the worst they could say is, "No not right now", and that's fine because you're not desperate. You're making money right now, but I think for the shareholders, that's definitely an option you should look at, and that's kind of my only point, and you can comment or not, but I just wanted to throw it out there.

Okay, first of all, thank you for the, for sharing your thoughts with us. I can tell you one thing, from my point of view, I must say that I'm only a few months in the operation of this Company, and therefore, I prefer to gain some more comfort before I go to the market and get some coverage. This is one thing, and of course, I understand you that you want me to go out there and have coverage as soon as possible.

Other than that, on the Formula level as I represent Formula as well, Formula is buying shares all the time because we do believe that it's a good deal for Formula.

Now, if you ask me whether I will sell some shares in order to increase the floating stock, at this price, no. So --.

I'm not really asking for that, so maybe on another venue because I think that if there's no institutional buyers that maybe I would hope you wouldn't think of giving a dividend -- that would be the worst thing that you could do -- that maybe also Magic buys a million shares back because if you keep making money, your earnings per share is going to increase, and that may be the catalyst that gets the public to look at the stock.

So we're on the same, we're in this together, and again, we feel confident of your technology and what have you, but sometimes you've got to think outside the box to increase shareholder value.

Tell me something; why does it matter whether Magic will buy shares or Formula will buy shares? It's basically the same.

Right, well if Formula buys shares, will that impact the shares outstanding, whereas if Magic does, there will be less shares outstanding, so if you make the same amount of money, earnings per share increases. So in my opinion, it does make a difference.

Okay, I believe it makes a small difference.

Okay well good luck.

Formula is not there in order to sell later on a million shares.

No, no I don't want that to happen. I think if Formula is going to sell, they're going to do something like a Blue Phoenix and get somebody involved and do it that way. So I wasn't looking for Formula to put shares on the market. I think if Formula is going to buy, the more who buy this, in my opinion, the better.

Okay.

Thank you.

There are no further questions at this time. Before I turn the call over to Mr. Bernstein to go ahead with his closing remarks, I'd like to remind participants that a replay of the call will be available starting from tonight. The numbers are available on Magic Software's website, www.magicsoftware.com in the Investor Relations section.

Mr. Bernstein, please go ahead.

Thank you all for joining us. We look forward to speaking to you again in the next quarter, and I hope we'll bring you some good news. Thank you very much.

Mr. Bernstein, we actually do have another question. Are you available to take it?

Sure.

Great, Charlie Silk.

Hi Guy, I almost missed you again. I have some more questions. How many partners are there now on the SAP area?

Approximately 300.

Three hundred, now how many people are using the special edition of the R3? Is that starting to move?

It started to move, until today, Magic tried to keep it on behind the scenes because we had some kind of objection from SAP because of NetWeaver. Today, we see more and more demand for the R3, and of course, it makes a lot of sense to us because the deal side is much higher. And therefore, we start to push it going to proactive mode from where we were.

Okay, could you talked about JD Edwards on I guess regularly I spoke with him and he had a great conference with the JD Edwards people in Denver. How is that accruing? Are you starting to get more interest in the JD Edwards?

Yes of course.

Is it generating any significant revenues right now?

Yes, basically JD Edwards is very similar to the R3 deals. We are talking about nice deals for Magic.

Good, are there any other divisions of Oracle that you can go -- I know they have their what they call their Focus or their system for integration?

Basically, we have a guy here that is responsible to identify the right ecosystems in order for us to go there and leverage on iBOLT.

Okay, now are you forecasting revenue for the next quarter? Most people are out there just give you at least a quarter-to-quarter forecast. Are you coming out with one, or are you stating one?

I prefer not at this stage, in this quarter specifically with the accounts in Europe. It looks like we are going to lose some sleep here in order to give numbers and then of course, achieve them.

Going back to Japan, from what I understand they don't, very few people in Japan will get maintenance contracts. Is that still true or are they starting to move into maintenance contracts?

We are checking the model because today, unlike in previous years, Japan is moving more and more toward accepting maintenance. But we need to check the model, the economic model because the minute you have the maintenance, which is fine, you get I don't know, 15%, 18%. In Japan, they are used to order new licenses every two or three years. So we need to check whether we are going to win or lose from getting into maintenance.

Okay, going on the buybacks from Formula buying Magic, I know the last proxy statement, you were up to $17 million, and have you bought any, has Formula bought any in the last quarter?

Of course, we are buying all the time except from when we are on blackout period.

When is the blackout period end?

Now, today.

Today, okay, and what is Magic going to be buying stock back now from themselves within Magic Company?

No.

Yes?

No, no Magic is not going to buy at the moment.

Okay, all right, that's about what I have, and keep the good work. I think it's just the, my opinion you're just on the start of a very great movement. Matter of fact, the stock has been languishing so much, but it just traded at $2.05. Just keep it going.

Good.

Thank you.

I'm happy to hear that, and again, thank you all for joining us, and we look forward to speaking to you again next quarter. Thank you.

Thank you. This concludes Magic Software second quarter 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.