Mind CTI Ltd (MNDO) 2006 Q1 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the first quarter 2006 MIND CTI earnings conference call. My name is Audrey and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Miss Andrea Dray. Please proceed, ma’am.

Thank you, Audrey. Good morning everyone and welcome to MIND's conference call. Yesterday, MIND reported the results of its first quarter ended March 31, 2006. On the call this morning from MIND is Monica Eisinger, MIND's CEO. Monica will discuss the Company's developments and achievements during the first quarter 2006, before we turn the call over to entertain your questions.

As a reminder, some of the comments made in this call by management and the responses to your questions may contain some forward-looking information. Such statements are subject to the risks and uncertainties as described in the Company's press release and Annual Report filed with the SEC, so actual results might be materially different.

I would now like to turn the call over to Monica. Monica, please go ahead.

Thank you, Andrea. Good morning, ladies and gentlemen. Thank you for your interest in MIND and for joining us today. In our call today, I will summarize our major achievements in the first quarter of 2006 and discuss our business. The financials can be found in our press release.

We are extremely pleased with our record revenue in the first quarter that was mainly driven by our solid customer base and success in winning new business, the successful integration of the acquired entity, and the timely delivery of our solutions. In the last four quarters we have shown continued revenue growth. In the first quarter we reached revenue of $5.25m, a 70% increase over the first quarter of 2005 and 4% increase over the fourth quarter of 2005.

Operating income in the first quarter of 2006 was $575,000, a 76% increase -- a 67% increase over the first quarter of 2005 and a decrease of $631,000 from the previous quarter.

We encountered in the first quarter non-recurring costs, including an addition to the provision for severance for the Israeli employees, and an increased investment in development of the next product release. Also the amortization of intangible assets reached a fixed value, and we expect that the amortization of intangible assets will decrease in the second quarter.

Net income, excluding amortization of intangible assets and equity-based compensation expense, was $1.06m. The total net income for the first quarter, on a GAAP basis, was $654,000 or $0.03 per diluted share. Our cash position remains strong after the dividend distribution in March of 2006, with close to $37m as of March 31, 2006.

The professional services part of our business is increasing, as we offer managed services models to our existing and new customers. This model includes three to five-year contracts, increasing our visibility for the long term. In the first quarter, sale of our licenses represented around 47%, maintenance around 29%, and services around 24%.

We operate and win business around the world, and lately we focus mainly on the Americas and Europe. For the first quarter of 2006, the geographic revenue breakdown was roughly 50% for the Americas, 32% from Europe, and the rest divided between Israel, Africa and Asia Pacific. Each quarter we add new customers, and at the same time our revenue includes license upgrades, additional services and maintenance fees from recurring sales to existing customers.

In the first quarter we had two new wins in the wireless space, both being in the U.S. The first is a long-term contract for managed services supporting rating, billing, customer care activities, and subscriber [web sales share]. And the second is an end-to-end mobile billing platform for an emerging carrier.

Based on feedback from the shows we exhibited at in 2006 and on our strong pipeline, I believe that we are well-positioned to seize the opportunities that we see mainly in the Americas, taking advantage of the fact that most of our competitors do not offer the same type of complete proven solutions as we do. We continue to invest for the future. We have gradually increased the Company’s size over the last few years, and we believe that we have succeeded in building a great team that includes experienced professionals.

We continue to invest in the development of new functionality of our core product, and new technologies that are targeted to solve carriers’ existing and future needs.

One of the biggest challenges that service providers encounter is timely deployment of new business processes. In order to meet this need, MIND offers a business process suite that is a [inaudible] automatic workflow environment that provides creation and execution of dealing in customer care business processes, such as order management, travel tickets and debt collection. The processes can be easily tailored according to the operator’s unique business model, using a GUI drag-and-drop process creation environment

Our sales strategy includes investing in marketing. A niche market that we see opportunities in is the MVNO - mobile virtual network operator - market. Market saturation is pushing host carriers to use MVNO as an alternative means for subscriber growth without incurring the associated costs of servicing the subscribers.

At the same time, with cutting operational costs, it enables the operators to increase their network utilization and revenues through these wholesale agreements. U.S. based MVNOs are well-positioned to gain market share, as they establish brand awareness in their target customer segments. They specifically target consumers in well-defined niches such as with the demographics poor credit and young people. Niche markets, previously considered undesirable by wireless carriers due to exotic usage profiles, attract attention now.

Throughout Q1 2006 we continue to strengthen our market presence. We exhibited at various shows in the U.S. and Europe. At the GSM World Congress in Spain, we exhibited with the Israeli Mobile Association in the largest GSM congress ever, targeting European mobile operators. At CeBIT in Germany we exhibited together with IBM, demonstrating our billing solutions for both service providers and large enterprises.

At VON, Voice Over the Net, spring in California, we exhibited, targeting Voice over IP operators. At MVNO Summit in Germany, the largest MVNO show in Europe, and at MVNO Summit in the U.S. we exhibited, targeting the most active carriers today, the MVNOs. At CTIA Wireless in the U.S. we held meeting with many existing customers and partners, and targeted wireless carriers and data content providers.

Some of the analysts now have a positive overall view on the billing sales and claim that we are at the beginning of a multi-year cycle of investment in the billing sales, as carriers seek to improve their operating effectiveness and monetize new services. As we share the same view, lately we increased significantly our investment in marketing, with a clear focus on the Tier 2 and Tier 3 MPlay multiple services carriers that require a complete end-to-end BSS solution. We believe that these efforts will bring future business.

Regarding our acquisition strategy, we hold a strong cash position that enables the ongoing search for acquisition targets. We continue to look for additional acquisitions that again will complement both our geography, technology and also enhance the customer base and the relationship with additional partners. We are encouraged by the success of our two previous acquisitions and our constant exposure to potential targets.

As always, we are conservative in providing guidance. At this time, MIND is not providing guidance for the second quarter of 2006. We have a strong pipeline, and we hope that we have built confidence in our business and in the execution of our long-term strategy. Operator?

Yes. [OPERATOR INSTRUCTIONS]. Our first question will come from the line of Rami Rosen with Oscar Gruss. Please proceed.

Thanks. Hi, Monica; good quarter. First question relates to -- following the acquisition of Portal by Oracle, how do you view the competitive landscape, especially with more value-added services companies such as Compass maybe entering the sale of billings?

Hi, Rami. Fortunately, both converge, such as Amdahl’s converges and Portal, are in a state that is not the MIND state. And when we speak about the markets that we target, we speak all the time about Tier 3 and low Tier 2 carriers. And the state that these guys are in now, Oracle being one of them after buying Portal, is really the Tier 1 carriers.

I think that Portal was sold at a very low value, probably because of the financial constraints or some constraints that was on them, because Portal has very important customers such as Vodaphone, Telefonica, AOL, France Telecom, and the value of these Tier 1 customers for Oracle is certainly important. And we hope that they will keep focusing on the Tier 1 carriers and competing against the giants, and leave us the space where we operate better and this is the Tier 3 and Tier 2 carriers.

Okay. Now, you’ve said you're not providing guidance at this stage. But is it reasonable to assume, as you suppose -- or as you increase -- continue to increase revenues to deal with the sequential growth, that you are presenting additional operating leverage?

If we assume in Q1 the -- we had kind of a peak in expenses, and I try to explain this peak in expenses by some really one-time charges that we had with the severance, with some non-cash things that we had in Q1, like amortization. And certainly we expect a much better margin in Q2, if I understood correctly your question.

Yes, okay. Thank you for now. Good luck going forward.

Thank you, Rami. Thank you.

Our next question will come from the line of [Devon Waite] with [W. Cohen] Securities. Please proceed.

Hi, good morning, Monica.

Hi, Devon.

Would you -- could you give me a geographic breakdown of the -- of your sales force and how that lays out across your geographic markets?

You don’t mean the distribution of the revenue of the sales, but the sales force?

Yes, just the headcount in each of the geographic regions.

When I look at both the salespeople and sale engineers that we have, we have around five in the U.S. One of them is a new addition really very lately, the last month, and we are trying to add more in the U.S. And I think, I would say, around seven based in Israel but where they operate in different parts of the world. I would say maybe four operate for the European market, and three for the African and Far East markets.

Lately we focus much more in the -- and I probably -- I forgot two of them, so it’s not seven it’s nine, but our focus is mainly in Europe and in the U.S. And if we look now of where we want to add people, we are adding people in the U.S. team.

Great. Okay, thank you.

Thank you, Devon.

Our next question will come from the line of Dave Heger with Kennedy Capital. Please proceed.

Thanks. I just want to get a little clarification on the charges that look to be one-time in nature, and first on the severance charges. Can you give a sense of about how much -- what the dollar amount of those were, and did those sit in SG&A expense, or where do those sit on the income statement?

Because in Israel the general rule is that when you fire somebody you have to pay them one month for each year that they worked with the company, every time that we have an increase in salaries, and this happened, that we had a quite significant increase in Q1 of 2006. And if you have such an increase, you immediately have to add to the provision for that severance, and the amount is around $150,000.

Okay. And then on [inaudible] and amortization that you said would be coming down in future quarters, was there a reason that it was unusually high in the first quarter or is there -- was there an indication more that in future quarters that'll be dropping in amount?

It’s dropping because that was the last quarter where we had the depreciation for the first acquisition that we made in 2001. So until two quarters ago, we had only the depreciation of the activity, the product line that we got in 2001. And that was the last quarter that we had that amount. And the depreciation -- the amortization from the Sentori acquisition depends on completion of different stages.

And most -- more than half of the amount that is related to that part of the amortization was recorded in Q1. So it will -- so we’ll certainly see that amount being lower as we move forward as well.

Okay. Do you have a sense for about how much amortization may drop off in the second quarter?

I'm not 100% sure.

Okay. And then you also mentioned -- sounded like R&D expenses were higher with working on a new product rollout. Do you anticipate R&D expenses will continue at the higher level for some sort of time period, or will that start to drop back off?

No. I expect them to start dropping partially in Q2 and back to the -- to our normal costs in Q3 and moving forward.

Okay, thank you.

Thank you.

Our next question will come from the line of Dwight [Momental] with [One Cell]. Please proceed.

Hello. Morning, Monica.

Hi.

Hi. So when you talked about your R&D expenses stabilizing in Q3 and moving forward, what number would that be?

I think it used to be at around $1.2m, if I'm not mistaken, $1m per quarter, so somewhere in that area. And this quarter we had an especially high number. Part of that is because of the -- some of the growth but it’s a very small amount. It’s because of the option costs that are now inside the operating results. Part of them is because of the -- also the severance that we have to provision for, it’s also by department. Part of that is because we have a unique kind of cost with -- where we used outsourcing that is very unusual for us, and we did it for the full Q1, part of Q2 and then that will disappear.

Okay, great. And when you talked about the gross profit margin improving in Q2, would it be safe to assume that it would go back above or at the 70% range?

The gross margin, I expect it to go up. And also I think that I mainly talked about the operating margin that I expect to go up.

Okay. So both the gross and the operating margins will go up?

Yes.

Okay. And I noticed that you hired about 22 new people for the quarter. Can you describe which groups these 22 employees will be allocated?

A lot of them -- the truth is that there is a kind of [normal] distribution in all the departments. But I think that in the deployment in -- but I think it’s all over the board.

Okay. So it’s evenly distributed?

Yes, I think so.

And I think you’ve mentioned it already, but I might have missed it. What did you say the D&A was for the quarter?

The --

The depreciation and amortization number?

Depreciation and amortization, I have to look for it, somebody will look for it here - $486,000.

$486,000. Okay, great. Thank you.

Thank you.

Our next question will come from the line of Bill Swanson with MJSK Please proceed.

Good morning, Monica. I'm sorry I jumped on the call a little late, so some of my questions may be repetitive. It looks like you're saying in the press release that the operating income was $1m, excluding amortization and stock option expense. But the depreciation and amortization number you just gave, of $486,000, would certainly put you well above $1m. So can you give me be breakout of what -- how you’ve arrived at the $1m operating level?

The difference between the $1.6m and the $575,000, this is the difference really. It’s [400 ’07] and this is not the same, and this is the amortization and the options. If you look at $486,000, this is a different number and this is the amortization planned for depreciation. But depreciation we have all the time because this is the depreciation of the equipment over a period -- over different periods.

Right. Do you have the split, then, on what depreciation was and what amortization was, then?

$330,000 was amortization, the other $156,000 was depreciation, and $77,000 was the option cost.

Okay. Alright, that gives me the number. I don’t know if you gave any commentary. It doesn’t look like there's any guidance for Q2. But can you just share with us what the landscape looks like, as far as opportunities, pipeline, how the backlog sits?

The talk is that the landscape is very active, and this is the reason that we decided to go to shows. Almost every two weeks we had a show, either in Europe or in the States. And in most of them we have seen a lot of traffic and I think that we got very good feedback, both when we are compared to the competition and from the point of view of people willing to spend in either replacing their billing solution, or in building a new operator and then the need of a billing solution. And the pipeline looks good.

Okay. One last question, then, is the accounts receivable are trending up quite a bit. Is that a function of the way that Sentori does their billing, or what's happening there?

The receivables went up this -- and the DSO is now at 75 days. We had a few payments that were delayed by a few days just from the end of March and to the beginning of April, and we have succeeded to collect all of those during April.

Okay. So that would mean the cash level’s closer to $40m than $37m?

On the other hand, we had -- part of the dividend was paid in March but the tax on the dividend was paid in April now only. So there was an expense on the cash for that. But there was a -- not an expense but there was an amount that was taken out of the cash. So I would say that the cash is kind of in the same position.

Okay. Okay, thank you very much.

Thank you.

And at this time I show that there are no further questions inside the queue.

Thank you all for being with us.

Ladies and gentlemen, this does conclude your presentation. At this time you all may disconnect and have a wonderful day.