Magic Software Enterprises Ltd (MGIC) 2008 Q4 法說會逐字稿

Welcome to Magic Software's fourth quarter and full-year 2008 financial results conference call, and thank you all for holding. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded today, February 18th, 2009.

Earlier today, Magic Software issued its financial results for the fourth quarter and full year 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 on the Investor Relations section of Magic Software's website at www.magicsoftware.com.

On the call today are Guy Bernstein, Chairman, and Hadas Gazit-Kaiser, 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 involves several risks and uncertainties including, but are not limited to, the Company's ability to successfully execute its growth plan, the ability to recognize revenue in future periods or 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 the Form 20-S and other filings with the Securities and Exchange Commission.

Magic Software undertakes no obligation to publicly release any revisions of 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 to Mr. Guy Bernstein, Chairman. Guy?

Thank you, Sheila.

Good morning and afternoon, everyone, and thank you for joining us today. I am pleased to report that 2008 was a good year for Magic Software. We continued to show an increase in sales and profit, despite the economic climate.

From a financial point of view, our revenues were up 6% to $62 million compared with $58 million in 2007. From these sales we delivered net income of $4.5 million for the year, which is up more than 300% compared to $1.1 million from continuing operations in 2007.

During the next few minutes I would like to give you more details on our activities and the trends we see in our marketplace. Then, I will pass the call over to Hadas Gazit, our newly appointed CFO, and finally open the line for your questions.

One of the most important efforts during the year was the successful introduction of our newly branded core technology, uniPaaS. Our existing customers and partners welcomed the new application platform with a lot of excitement and real commitment.

We also gained the industry recognition with excellent analyst feedbacks on uniPaaS as a world-class application platform that gives customers the power of choice, 100% flexibility regarding the mixing and matching of client/server and Rich Internet Application technologies in deployment of applications. And we have also seen some new customers for uniPaaS. As a result, of course, we achieved significant growth in license sales.

As to our integration suite, iBOLT, we have increased our penetration of high-end enterprise customers in both JD Edwards as well as the SAP market at the level of the SAP R/3 offering. We also have a growing number of iBOLT projects that are aimed at integrating SAP with Salesforce.com, where our solution is probably the best in the industry.

In summary, we are pleased with the momentum that we have developed so far, and confident regarding our future potential. Today's market realities obviously make it hard to predict to the immediate future. Still, we have the right product for market [in it] of solutions, our [churn-ins] are expanding and we have a strong customer base. We will continue to work in the year ahead to take full advantage of these strong assets and our favorable market position.

With that, I will stop and turn the call over to Hadas to go over the financials. Then we will both be available for your questions. Hadas?

Thank you, Guy. I will be referring only to the results according to US GAAP. In the press release we have also included non-GAAP results, which we believe offer additional insights into our business. I will start with the results for the year.

Total revenues were $62 million, a 6% increase compared to $58.4 million in 2007. One of our significant achievements during 2008 was the increase in our license revenue. License revenue grew around 20% to $17.9 million compared to $15 million in 2007. This is in line with our previous calls to achieve a healthy mix of sales, maximizing our profit, while generating strong maintenance and support lines.

With regard to profitability, our operating income reached $4.3 million, a 231% increase compared to $1.3 million in 2007. This is a significant improvement was -- a significant improvement [where] it was translated to the bottom line, with $4.5 million in net income compared to $1.1 million in the previous year. The improvement in profitability is mainly because of the increase in license sales, as well as significant improvement in the efficiency in all our branches throughout the world.

Revenue on a geographical basis for 2008 was as follows -- 41% of our revenues were from Europe. North America accounted for 31% of the revenues, 16% from Japan, 8% from Israel, and 4% from the rest of the world.

As for the fourth quarter results, revenues were $15.1 million, slightly down compared to the fourth quarter of 2007. The reduction is also due to the decrease in the euro/dollar exchange rate, which has reduced our European sales as expressed in the dollar terms. Since a significant portion of our sales are from Europe, this is a significant factor for us.

Net income from continuing operations for the fourth quarter was up 267% over the fourth quarter of 2007. The fourth quarter became our 8th consecutive quarter of profitability.

Please note that, for the fourth quarter of 2007, included a one-time capital gain of $9.3 million from the sale of AAOD. This was recorded in the discontinued operations section.

If we turn to the balance sheet, as of the end of the year our cash short-term bank deposits and marketable securities totaled $32.6 million, with almost zero short-term [bank credits.] In terms of cash flow we have managed to translate the net profit for the year into an operational cash flow of $5 million.

The healthy balance sheet allows us to continue pursing our strategic goals, both organically as well as mergers and acquisitions. Specifically for the fourth quarter and for the year 2008.

Looking ahead towards 2009, we believe the Company is in good financial position and has the resources it needs to carry out our business plans.

I am very excited to join Magic Software and I look forward to working with you all. Thank you for participating in the conference call. With that, we will open the lines for your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS.) The first question is from Stephen Silk of C. Silk & Sons. Please go ahead.

Good morning. I had a couple of accounting questions. The deferred revenue, that is mostly made up of licensing revenue that gets prorated -- put on revenue over the year. Is that correct?

Yes.

Okay. Excuse me. So, last year the deferred revenue jumped from the $2.3 million in December of 2007 to just over $8 million, which would indicate to me that most of your revenue, deferred revenue or license renewals, occur in the first quarter. Can we expect that in a large inflow of cash in the first quarter?

Yes.

Yes, definitely.

Okay.

Actually, what happened in the fourth quarter of 2008, we invoiced the customers but still didn't get the cash, so this is why it's not reflected in the deferred revenue. But it will be reflected in the first quarter of 2009.

So, if it's comparable to last year, we're looking at probably an inflow of about $6 million or $7 million -- ?

-- Yes --.

-- $6 million or $7 million of cash. Okay.

The next question, the financial income was a loss of $34,000. I know you have $32 million of cash in the bank. What was the expense against that?

It was mainly the exchange rate that was against us. I mean, euros that we had which influenced this. Euros and also pounds, which we have been -- in the branches. This was the reason. As you probably know, the interest rate is really low and we are keeping our cash in very conservative deposits and bonds. So, this is why the interest rate is low.

Okay. That's fine. I noticed in this quarter that the gross margins were lower. Would that indicate that your non-core Magic CoreTech and HERMES are doing better since they are lower margin products?

Yes, they are doing better, both of them. But still, the core business has really improved during all this year and also the fourth quarter. But both of the non-core, CoreTech and HERMES, are doing much better.

Is there a point where you would feel comfortable breaking out the core Magic revenue and the CoreTech and HERMES, the non-core, so that we and your shareholders can get a view of really what -- if you're looking to invest in this company as far as Magic and Magic Software, get an idea of trends as far as software sales and how that's going instead of keeping it somewhat hidden?

Eventually, what we plan to do is focus on the core business. This is why we -- actually we sold AAOD. So, this is what we're aiming for. We're aiming to focus and generate more revenue, profits and cash from the core business. I don't know about revealing the numbers, but we are doing everything in our -- focusing in what's important to us, which is the core.

So, is divesting CoreTech or HERMES on the table as something you're thinking about?

During the current market, it's not likely that we will sell it. But of course, if we face a good opportunity to sell them, of course we will.

Okay. In the last quarter Formula paid out a pretty sizeable dividend to their shareholders. Considering the uncertainty in the market, your balance sheet is one of the real strengths of the Company. Could you definitively tell us that giving a dividend to Magic shareholders is something that is definitely not on the table?

I cannot promise that. We definitely are not going to risk Magic, okay? But I can say that there were a lot of questions from shareholders, why not to distribute something, even a small thing, in order to give some millions to the investors.

Okay.

But we are not planning to distribute, like, $30 million.

Okay. That's fine. In my opinion, one of the things holding back probably shareholder appreciation in this company, which has been profitable four quarters, is the large ownership of one entity, which is Formula. Considering Formula paid a dividend to their shareholders to increase their value, would there be anything of interest for Formula distributing your shares to their shareholders so that you can get some float out there and some new interest for people that -- I mean, you just don't have any institutional ownership interest, and I don't see how you can get it where there's really not that much chance available.

I don't see what's in it for Formula. Because after all, if Formula would decide [whether] to sell Magic, it would probably get some controlling premium. Just to distribute it as a dividend in kind doesn't make any sense.

Well, that would benefit the Formula shareholders similar to getting the cash dividend. But what do you -- do you have any thoughts on what Formula's plans are for Magic? Maybe it makes sense for them to tender for the rest of the shares.

Let's say that the first step was to improve the Company and to bring it into some level of comfort with the current business. I think the next step is to -- specifically under the current situation in the market, is to look at some acquisition in order to increase the size of Magic.

Okay. Thank you very much. Good luck going forward.

Thank you.

Thank you.

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

Okay. Thank you all for joining --

-- Excuse me. There's more questions. Would you like to take them?

Sure.

Sure.

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

Hi, Guy. Things are going well and looking forward, except for the last quarter was sort of a disappointment. How much of the disappointment was due to the currency?

Most of it.

Most if it? So --

Yes. We suffered some -- we suffered -- I assume we suffered approximately $700,000 from the euro exchange.

Okay. So then, if you didn't have that, you would have been ahead of the last two quarters it seems like, or close to it.

Kind of the same.

Okay. All right. On Japan, there's so much that you're looking forward. And what's happening -- I know Nokia is going ahead. What about Sharp and Fujitsu and the 600 dealers that were at the user conference? How is that generating? Is it generating more money? Or is the recession in Japan affecting the sales or deferrals?

First of all, I must say that there is a very severe recession in Japan and of course it affects us all. Other than that, I can say that both Fujitsu and Sharp are in progress and, for now, it looks okay. I hope that the recession will not hold them back.

Are they generating revenue (multiple speakers) revenue to them?

Yes.

Okay. All right.

Not significant numbers yet, but they are moving ahead.

Alright. Okay. On the new release of the -- what is it, the data replication to Salesforce.

Yes.

Can you give me an indication of what the pricing is or how you're going to market it as far as dollars go?

If I remember correct, the pricing is -- the pricing starts at $5,000 for the replication package. And from there on, of course, if people -- if small companies will download it and just do it by themselves, then fine. If -- it's basically a teaser for people to try that, to see that it's a very plug-and-play product. And from there on, of course, to develop it to a bigger extent.

Have you made sales on it already? When you announced it you said it was available. Have people stepped up to buy some of it now?

It's just two weeks since we launched it.

Right. Okay. Is there a possibility of applying this to the IBM -- or the iSystems and the JD Edwards and SAP? Do they have use for this data replication?

The data replication is specifically for Salesforce.com. We found out that the main problem with Salesforce is that the big organizations usually prefer to have their data onsite. And they have a very big problem having the older in-house data on the Web. Therefore, it's a very specific product for specific needs. It's unlikely JD Edwards or the R/3 for SAP.

Okay. Because I know most of the people who are Salesforce customers are very small. But will that level of data replication go down to them, also?

Yes.

Okay. One more I have. Why did Formula stop buying more back of Magic Software stock?

Good question. We were quite busy with the dividend, and I believe we found it quite hard to find more stock.

Okay. All right. That's all the questions. I think you've got enough going ahead. And how is it affecting the -- your business in Israel?

The business in Israel is basically doing quite well. Q4 was quite strong for Israel.

Okay. Are there any other -- how about -- I understand that you're starting to move into Latin America. Is that generating --

Yes, we've started. We started to move to Latin America. I can say that basically in Israel we were holding some education lessons regarding the new technology and there was huge excitement around it.

Good. Now, going back to the times when David would come out with the report, you'd have a list of new clients, etc. You only made one announcement in the last three months on the one out of New York. And nobody really knows who owns the stock or what's going on on a customer basis or how it's accelerating. It just seems like there's a lack of communications to the stockholders that still exists.

2008 was a good year for Magic on the customer side. I mean, there were quite a few new customers. Most of them we're not allowed to expose, but still, we will do something about it. We will try to do --

I guess the -- your website was improved considerably. Then all of a sudden in the last two or three months it's just sort of died down. And the only -- the thing is that the biggest announcement was from outsiders, was four different companies were talking about the data replication, but there's nothing else. It's just disappointing to not see what's going on.

And the problem was that the market did not provide us with the motivation because, no matter what you release, it doesn't do anything in the current market.

In the current market. Okay. I'll turn it over to somebody else.

Okay.

Thank you.

Thank you.

There are no further questions. Mr. Bernstein, would you like to continue with your closing remarks?

Yes. So, thank you all for joining us and we look forward to speaking with you again next quarter.

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