Magic Software Enterprises Ltd (MGIC) 2008 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 2008 financial results conference call and thank you all for holding.

(Operator Instructions)

Earlier today, Magic Software issued its financial results for the third quarter 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 on the investor relations section of Magic Software's Website at www.magicsoftware.com.

On the call today are Guy Bernstein, acting 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 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 may involve several risks and uncertainties, including, but not limited to, the company's ability to successfully execute growth plans, 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 annual results of operations, commercialization and technological difficulties, risks related to operation in Israel, and other risks detailed in the company's annual report on Form 20-S, 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, acting Chairman. Guy?

Thank you, Julie. We are pleased to report another strong quarter for Magic Software, continuing the positive momentum for the past quarters. But despite the difficult global economy, we achieved on track top line and bottom line growth. Our revenues for the quarter were $15.8 million, which is up 8% compared to the third quarter of 2007. Gross margin for the quarter rose to 58% compared with 52% in the third quarter of 2007, and we posted a nice net profit of $1.7 million.

Now, with good financials and a healthy balance sheet, we are well positioned to pursue options for growth, whether organic growth or through acquisitions. At the same time, given today's market volatility, we continue to minimize expenses while monitoring the economic climate.

During the next few minutes, I would like to give you more details on the quarter's activities and the trends we see in our marketplace. Then I will pass the call over to David Zigdon, our CFO, to go over the financial results and open the line for your questions.

On our development platform, we successfully launched our groundbreaking offering for [Regent MF] Application and software as a service, uniPaaS. We received good feedback from partners, customers and technology analysts.

From the partners, it appears that the business offer we gave them is going to expand their business and, therefore, they have the ability to go with their current applications and explore new markets with them, new customers, under the same investment they already made.

For the customers, we provide even better total cost of ownership and savings, while maintaining their applications from centralized locations.

And from the analysts, we see a lot of excitement when we are the leading platform for Regent MF Application and software with the service that exists in the marketplace, while ours, unlike many other competitors, already deployed.

On the iBOLT business, on the integration business, we are quite pleased with the development in the business. We continue our focus with the ecosystem strategy that focuses on captive communities, such as salesforce.com, SAP, JBE.

It appears that it's shortening the sales cycle, while we are going with a special edition integration for a specific need. Therefore, we see license sales growth and we feel quite positive momentum worldwide.

In summary, our momentum continues and we feel confident regarding our future potential, though given current market realities, it is hard to predict what will be in the immediate future. But I think we are well positioned and working to achieve our full potential. 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 referring only to the results according to the US GAAP. In the press release, we have also included non-GAAP financial measurements which we believe offer additional insight in our business. I will be happy to answer any questions about the GAAP or non-GAAP numbers during the question-and-answer period.

Revenues for the quarter were $15.8 million, up 8% compared to the third quarter of 2007. On a geographical basis, North America accounted for about 31% of our sales, 44% of our sales were from Europe, 15% from Japan, and 10% from the rest of the world.

Gross margin for the quarter was about 58%, up from 52% in the third quarter of 2007. Our operating expenses for the quarter were $7.5 million, virtually unchanged from $7.4 million, despite a strong increase in our activities. This reflects the fact that we have been very careful with our expenses, even while we have grown the Company.

With total revenue and improved growth margin, we were able to deliver $1.6 million operating profit compared to $0.2 million in the third quarter of 2007. Our net profit for the quarter was $1.7 million or $0.05 per share.

Turning to the balance sheet, as of the end of the quarter, our cash [short term] bank deposit and marketable securities were about $32.8 million and we are carrying, almost short term [bank] credit. So, that is for the quarter.

Second of all, the company is in a good financial position and has the resources it needs to carry out its plans for growth. Thank you for your ongoing support and for participating in this conference call. With that, we will open the line for your questions. Operator?

Thank you, David.

(Operator Instructions)

The first question is from Stephen Silk of C. Silk & Sons. Please go ahead.

Good morning and good afternoon. Usually, in your prepared remarks, you only speak about iBOLT and the Magic core software, but CoreTech, so I have a couple of questions there. In the Internet bubble, one of the areas that really got hurt was consulting, where projects were delayed or canceled.

And so, while that has been profitable for you, can tell you us what you're seeing there as far as their projects and how they're progressing, if there's cancellations, new bookings? Because pretty much on a consulting basis, they're fixed costs as far as consultants. And so, I was just wondering if that falls off the table, how you're going to make that up.

Okay. I must say that although the situation in the US market, CoreTech is doing quite good. The company continues to grow. They are doing quite nice with two of their main customers and, basically, I think they're in very good shape, doing well.

Is the idea to still hold onto it? I know earlier in the year, there was a possibility of selling the Company. Is that off the table?

At the end of the day, it's a matter of price. The current prices in the US for such companies, I don't believe we will sell it.

I think we will improve the Company. We'll increase the volumes and grow the company and then, hopefully, when the market is there, we will consider it again.

Along the line of HERMES, can you just give us any idea of what's going on there? That's a mixture of software licenses and consulting. And can you talk about the pipeline of projects and the prospects there?

The pipe looks okay currently, although with all the uncertainty, you can never know. The Company is doing good. It's still a small company, but they are profitable and they are doing okay. They are still playing with some of the T1 players in the market in terms of prospects and are developing their application towards the mid and small sized customers in a different business model in order to increase, of course, the volume.

Now, it looks like on deferred revenue, you pulled in about $3 million into revenue this quarter. Could you talk about what your -- I guess the new licensing comes in, usually you see that grow in the first quarter and then it works its way down through the year.

What type of renewals do you have on licensing and what can we expect? Is there uncertainty as far as the economic conditions of being able to sustain the levels of what you've had as far as licensing revenue in the past?

I believe you refer to the maintenance and support.

Correct.

Okay. Along the years, we saw that customers continue to renew their maintenance and support contracts. We definitely need to improve and bring more maintenance and support revenues, because we do think that there is much more of unpaid maintenance and support out there with our customers.

Some of it, we need to go to our customers and convince them that there is business value for their customers because the main reason for them not to go after their customers is that they think basically it takes more technology and more technology and there is no business advantage for our customers.

Now, I think with the rich Internet application and with the software as a service platform, it's a pure business advantage that we give them and, therefore, we believe that if we found additional work -- we can get more out of it.

In your press release, you said that licensing sales are continuing to grow for iBOLT. Can you talk about what kind of numbers that is or what the percentage is? Is that also similar to what would be an upfront one-year payment and then you would have it three-quarters in deferred revenue and work that down, as well?

For the iBOLT, it works a little bit different. It defers from selling to ecosystems partners for, let's say, SAP or cell phone or JBE and selling to the end users, meaning corporate.

When you sell to partners, of course, it's an exponential model where you can expect one more sale. So, you sell them licenses, you get the maintenance, and then whenever they sell to their new customers, you get more licenses and more maintenance, which is, as you can understand, the preferred model, business model for Magic.

For the corporate or end users, it's a bit different, because you sell them the license, then you enjoy the maintenance. And right now, what we are doing, because we are talking -- the iBOLT basically is a door opener for other technologies of ours. What we are doing now is going after the up-sell in order to sell the uniPaaS platforms and other services.

So, the current license sales would lag the revenue potential that you see down the line.

Yes.

Okay. The cash was down a little bit quarter-over-quarter. Did you generate any cash in the quarter or was there some cash burn?

I don't think there was a cash burn. I think there is one customer that changed the payment system and, therefore, we already collected some of the money and we expect some more.

So, it was a few hundreds of thousands. Other than that, if you look at the maintenance collection, basically, in most cases, we collect all the maintenance during the first quarter of the year and, therefore, later on, you are behind with the cash flow, because you collected the full-year maintenance and support in advance.

Right. That's why I was asking earlier about the renewal of licensing coming up in the first quarter, to see how that will replenish. So, do you see your cash, when you said organic and inorganic growth, are you currently looking for an acquisition?

Yes. We already started to look for some potential acquisitions and unlike a few months ago, now we see things in a much more reasonable or even good price.

Do you have a criteria that it would have to be a profitable company and be accretive immediately or something that would be more of a development?

We'll not go after the kind of startup technologies that we are going now to sell. I prefer to go after completing technologies that already have a proved install base that we can leverage on.

Did Magic buy any shares back in this quarter?

No.

Okay.

I don't think so.

But you have a plan in place, correct?

We have a plan to buy shares. I don't think we buy shares. By the way, I can tell you that as a representative of Formula, we buy shares all the time.

Yes. That was my next question. What is the Formula up to as far as percentage of ownership in Magic?

At discount price, I would take it private, if I can.

I know that. But at this point, what percent is Formula up?

I think we published it like close to 60%.

The last I saw was around 58%, I believe.

58%, 59%, something like that.

So, in the context of you representing Formula, as well, what is the plan as far as perhaps Formula having to monetize the asset of Magic?

Owning such a large percentage, you really can't -- even if the stock price goes up, it's not like you could sell that much. It's just Formula's position in retail. There's no institutional ownership.

So, does Formula have a plan where they grow Magic to a certain point and then try and sell it or, as you said, at 58%, would you take it private?

During these days, it's hard to plan. So, I must say that when Magic had like enterprise value of, I don't know, 20 million and this company generates currently like 1.7 million per quarter, I would continue to buy. And there is a phenomena today that private companies are worth much more than public ones.

Right. That's why I would tend to think if Magic themselves was aggressive in repurchasing shares, it would benefit not only Formula, but other current shareholders that are waiting for some appreciation. So, one man's suggestion is I would be aggressive not necessarily to move the price of the stock up, but to take advantage of the low current price.

I'll tell you what is the -- the problem is that when you look at Magic today and you see the cash that you have and all the cash that is available for acquisitions, and, really, although Magic, I think, is in a very good price, we can find great opportunities in today's markets.

Okay. Thanks for taking my call.

Thank you.

The next question is from Charles Silk of C. Silk & Sons. Please go ahead.

Hi, Guy. I was hoping it would be a little more on the top side on the revenue, and I want to find out -- when talking about Japan, Sharp and Fujitsu and some other large clients, you don't really expose those to us on the conference calls of different companies, of how they're doing and what they're doing, et cetera, and we used to get it about a year ago.

We'd know a whole series of new accounts and it be a little more reinforcing. But what's happening in Japan? You said -- I know that you had the conference call there and you had over 600 partners there. What is that doing as far as generating revenues down the line?

You see a lot of big partners that are testing the new technology. You must understand that we're talking about partners that have a few hundred, if not thousands of applications. So, it takes time.

Now, as for Fujitsu, for example, we didn't see any -- we didn't hear from them any bad news. Okay. This is the good news. The bad news is that they are moving slow. They're asking questions. They need our support. I would say it's progressing, but not as we expected.

How about Sharp, what is happening there?

Sharp started to work the system and we definitely expect to see some development there. Same goes for Oki. Oki already ordered a few hundred of thousand and we do expect more orders this quarter.

As you know, the current economy doesn't help.

Okay. Well, what about the people who were at the meeting, the 600-plus dealers? How are they doing and what are they doing? Are they just the same phase as Fujitsu, we're working it out and see what's happening?

Some of them are testing the new technology. Some of them continue to work with the previous client server technology. Some of them are checking all kind of opportunities for the iBOLT, especially with SAP and IBM Domino integration. There is a lot of activity, but--.

But no bottom line yet. The question is that you had the J.D. Edwards conference. You got a lot of response from there and then you went to Japan with the dealers and were out there. And then the Dreamforce, I understand, has generated a lot of interest.

What are you doing to pursue the promotions? Because the marketing seems to be growing and getting good, but what about the closing? How is that coming? You've got all these leads, et cetera, and what is the problem on not getting more closings that you could have?

I can tell you that with Dreamforce in the U.K., we closed a few nice deals. Definitely, you can see a trend on the iBOLT that we have much -- the pipeline is much bigger.

We have much more sales, license sales, and the deal size is bigger. Other than that, on the Dreamforce, in the US, it's too early to say, because we just ended up the Dreamforce two weeks ago.

Right. I don't have any other questions. You can open it up to the others.

The next question is from [James Porterese], a private investor. Please go ahead.

Hey, Guy and David. Thanks a lot for the hard work. I have a question and a suggestion.

My question, Mr. Silk had asked, with the cash, we had $34 million last quarter and now I see we're down to about $32.8 million. So, if we can just kind of preserve that number. I know it's tough in this economy, but I think you guys are moving forward and it looks good.

So, the suggestion, last week, John Chambers at Cisco came out with their earnings call and, again, in October, and they were down sales 9% and he said this was the toughest period that he's seen since he's been in the business.

And he made some suggestions in moving forward and some strategies for Cisco and I know they're a much different company than Magic, but if you guys could listen to it, I just thought it was very, very valuable, to spend a half-hour and just some of where he's moving that company for the next six months to a year and maybe you guys could use some of those and kind of take that to a much smaller degree and use that with Magic.

But I thought that was very valuable and maybe you guys can get something from that. But thanks again for all the hard work and it seems like if we're going to get there, we've just got to keep our heads down and push through this. So, thank you guys very much.

Thank you. We will be more than happy to learn from him.

Thank you.

The next question is from [Randy Cove], a private investor. Please go ahead.

Have you released uniPaaS version 1.5 in an parts of the world yet?

We went out with a pre-release to some customers and we are going to release the full version on November 15.

Are the companies in Japan using that dot-net version?

No. The companies in Japan are using the java version.

Is that one of the reasons --?

By the way, the transition from the java version to the dot-net version is going to be totally transparent.

I guess my next question would be then, since you really don't have a deployable version out right now, you just have the java version out there. You haven't really recognized any revenue yet from the new uniPaaS platform.

Not true. We did.

In what way? I mean, I'm not talking --.

We just mentioned that the deal, for example, with Oki, everything is based on uniPaaS.

I guess what I'm saying is that the real potential of revenue coming in from a deployable version really hasn't started streaming in yet. And I guess my follow-up question would be what do you kind of expect for this year in terms of a bounce in terms of revenue recognition from license sales.

If we were acting in a reasonable market, we'd expect a significant growth. Currently, I must say I have no clue. Of course, we will push the field and we will do whatever needed in order to grow and to push it, but the uncertainty is quite high in terms of new deals or customers that are willing to go into investments.

So, it's true that the market is working for us, because while, before, customers were considering to move to different platforms, now it's becoming way too expensive. So, we can nail our customers down for more years.

Of course, hopefully, they will be happy, as well. Other than that, before, we were bidding for a project with, let's say, 1 million and Accenture came in with 8 million, they won the project.

Now, you know what? I don't know. Maybe we do have a chance. Especially when we have a good, strong backwind from the technology analysts.

Right now, you're growing at 10% annual rate and assuming Armageddon doesn't happen, I know it looks bleak for some people, but assuming everything turns out okay, but before the crisis, before the -- what were you expecting the bounce to be from the new uniPaaS going out there?

Before the crisis?

Yes. I guess when you knew that you were going to get additional revenues from RIA, did you have any projections? I know you're saying you're on track every quarter and apparently on track means 10% each quarter. I mean, that's what your internal budget must be for revenue. So, before the crisis, what did you expect your revenue to be from the new uniPaaS?

I prefer not to go there, because I think in the current situation of the market, it will be misleading.

Fair enough. Okay. Well, thank you very much and I hope everything goes well.

Thank you.

The next question is from Marc Silk of C. Silk & Sons. Please go ahead.

Hi, Guy. I wanted to know what the status was on your potential selling of the building.

Selling of the building. We are still waiting for the right price.

Okay. Thanks. That's it.

Thank you. There are no further questions at this time. (Operator Instructions) Mr. Bernstein, please continue with your closing remarks.

Thank you all for joining us and we look forward to speaking to you again next quarter.

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