Mind CTI Ltd (MNDO) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Quarter 2 2006 MIND CTI Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Andrea Dray.

Good morning everyone and welcome to MIND's conference call. Yesterday MIND reported the results of its second quarter ended June 30, 2006. On the call this morning for MIND is Monica Eisinger, MIND's CEO, and Oren Bryan, the company's new CFO. Monica will discuss the company's developments and achievements during the second quarter 2006 and Oren will summarize some financial data 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 second quarter of 2006 and discuss our business.

The second quarter results reflect the change in our business model and the change in our customer base. As we close more managed services deals, we build long-term relationships with our customers as well as future revenue streams. As we achieve our goal of increased average deal size, our business model changes and the professional services part of our business grows.

We continue to increase our focus on end-to-end billing solutions for tier 2 and tier 3 service providers and one of the consequences, is that most projects are now of a more complex nature with revenue recognized over longer periods.

Our revenue recognition policies are also moving from being milestone-based only to a mix of milestone-based and percentage of completion. These factors typically extend the recognition period of both license and service revenue streams and have some balance sheet impact. We consider this a normal and expected development for our business as it grows and matures.

In the last three years, we significantly increased our professional services team to support the growth in services offered to customers. Our new business model contemplates that licenses represent approximately 40% of revenues, maintenance approximately 30% and service fees approximately 30% of revenues and contemplate gross margins of approximately 70% and we target operating margins of close to 20%.

In the second quarter, we announced a change in cash management policy. Since March 2002, we have deposited most of our cash in structured callable time deposits. Under the arrangements with the banks, whether or not to the deposits bear interest depends upon the prevailing LIBOR rate. Until May 2005, we achieved relatively high interest rates of over 7% per year. Since May 2005, due to the increase of the 6-month LIBOR rate, the deposits did not bear interest causing our financial income to decrease substantially, starting in the third quarter of 2005.

Since we estimated that there is a risk that the long-term structured deposits will continue to bear no interest for the foreseeable future, in the second quarter of 2006 we withdrew the funds from two of the three accounts incurring penalty of $1.33 million. By investing in the structured deposits from March 2002 until now, we earned interest in the aggregate amount of approximately $8.5 million, which, after deducting the current one-time penalty for withdrawal at this time, is approximately $4 million more than we would have would earned had we invested that cash in standard bank deposits during the same period.

We have a new CFO at MIND, Oren Bryan that joined MIND in November 2005 as Controller and was lately promoted to CFO. Since January 2002 and until joining MIND, Oren worked for Dor Chemicals, a multinational public company. Prior to that he was the controller of a private software company and worked as an auditor at Ernst & Young. Oren, please proceed.

Thank you, Monica, and good morning everyone. In the second quarter, we reached a revenue of $5.07 million, a 48% increase over the second quarter of 2005. Operating income in the second quarter of 2006 was $710,000, a $135,000 increase over the first quarter of 2006. Net income, excluding amortization of intangible assets, loss from premature withdrawal of long-term bank deposits and equity compensation expenses, was $1.09 million. As expected, the amortization of intangible assets decreased in the second quarter from $330,000 in the first quarter to $170,000 in the second quarter and is expected to slightly decrease further.

GAAP net loss was $492,000 resulting from the premature withdrawal of long-term bank deposits in the amount of $1.33 million. Cash flow from operating activities in the second quarter amounted to $607,000 and our cash position remains strong with $35.7 million as of June 30, 2006.

The professional services part of our business is increasing as we offer managed service models to our existing and new customers. This model includes 3 to 5-year contracts increasing our visibility for the long term. In the second quarter of 2006, the sale of licenses represented around 39%, maintenance around 29% and services around 32%.

We operate and win business around the world and lately, we focus mainly on the Americas and Europe. For the second quarter of 2006 geographic revenue breakdown was roughly 56% from the Americas, 31% from Europe, and the rest divided between Israel, Africa and Asia-Pacific. Monica will now continue with a review of the quarter's highlights.

Thank you, Oren. 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. We believe that we have achieved further progress in penetrating the Tier 2 service provider market with the three new contract wins in the second quarter. We have received an order for our end-to-end convergent billing platform from an Eastern European national provider of telecommunication services providing fixed and mobile telephony, data transmission and Internet connection. Implementation has already started and is expected to be completed within the next two to three quarters.

The second win is an alternative telecom operator in Europe, which provides a full-range of telecommunication services in the fields of Internet telephony and video conference. They chose MIND for end-to-end billing for these next generation services to be implemented in the third quarter. The third win is for an MVNO mobile virtual network operator in the US that chose our solutions for starting their operations, targeted towards Asian residents in the US. This is a managed services agreement that will be implemented this year and the contract runs for a period of three years.

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 believe our team is now at the right size to enable us to sustain and increase our revenue. In the second quarter, MIND announced the appointment of Ms Sara Shekel as the company's Chief Operating Officer. Ms Shekel comes to MIND after serving in various positions at Amdocs since 1997. Her outstanding achievements include managing the Vodafone project in Germany for five years with 400 employees involved, resulting in her winning of the Innovation Award.

We welcome Sara to our team and believe that her proven record of on-time delivery, building of process methodologies and management of large-scale projects will help us deliver in a cost-effective and timely manner more sizable projects as we win them. Sara will be in charge of all aspects of delivery including development, engineering and professional services across our customer care and billing platforms. This addition to our team reflects our positive view on the present market and the belief that there are additional growth opportunities where we can take our technology and expertise and leverage them to create additional value.

MIND holds a strong cash position that enables the ongoing search for acquisition targets. We continue to look for additional acquisitions that will complement both our geography, technology, and also enhance the customer base and the relationship with additional partners. As always, we are focused on successful and timely deliveries of our billing and customer care product-based solutions, building our business for the long-term and increasing our operating margins.

MIND is not providing guidance for the third quarter of 2006. We encounter long-decision cycles and competition is as strong as always. We believe at the same time that given our customer base, professional and experienced team, and technology we are well-positioned to continue the execution of our long-term strategy. Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Devon Wade] with W. Quillen Securities.

Good morning, Monica.

Hi Devon.

Hey, I was wondering if you could help, just in speaking in general, with the size of these contracts, just giving us a sense of the average. I mean if you sort of look back over kind of the wins over the last eight or so quarters, how these wins in dollar terms compare to the wins in the past?

Okay so we've been talking a lot about increasing the deal average size and we continue to succeed in doing this. And we in the past discussed an average deal size of, first over $400,000 and over 500. Now we are talking about a much higher average but I wouldn't say that this -- I wouldn't look at this as being the threshold for future quarters because as we explained one of the deals is a very large deal for MIND and the recognition for it is going to happen through four quarters, three to four quarters. But in general, we are talking about an average deal significantly higher than the $0.5 million we talked before.

Okay great, one other thing. So the -- you would expect to see when you announce these deals, particularly if they're of a little higher average size, you would expect to see then both the service portion of your revenues as well as the licensing portion of the revenue recognized over, as you said, it seems like it will be recognized over a larger number of quarters, is that correct?

Yes, this is correct and first of all, I wanted to express our feeling about announcing deals. We feel nowadays that our customers and most of the customers in the world are not as keen as in the past to give announcements with their vendors. And this is really the reason -- we had three new wins during the quarter and we didn't announce any during the quarter. We ask our investors to be patient. We are doing our jobs. We are bringing new deals every quarter but we don't feel comfortable to have the press releases with the customers. Also, because the deployment takes quite a long time, it is difficult to know if the announcement with the name of the customer should be in the beginning of a project or at the end. So I'm not sure that we'll ever announce the names of those customers.

If we look at the (indiscernible) [terms] of the revenue recognition, because we now recognize most of our deals on a percentage of completion base what it really means is that both the license and the services are recognized over the period of the implementation and this is because implementation requires services. So, unlike the deals we used to have, where the services were really just the installation itself and we recognized in one quarter mostly, with a few milestones in two quarters or so the deal and then we recognized in the same quarter the whole license and the installation, with these larger deals where we work on a percentage of completion recognition, we will recognize pro rata both license and services.

Great, thank you very much.

Thank you, Devon.

Your next question comes from the line of [Inez Besalo] with CIBC.

Hi, it's a question for Monica actually. I think you actually already answered that question. I just wanted you to elaborate a little bit more on your revenue recognition methodology in the new contracts.

Oh yes, thank you. It is a big change in MIND the revenue recognition because until two quarters ago we used to recognize, like if we had an order from a voice-over-IP carrier somewhere in the world, we would normally come with a solution that was 80% product and 20% service fees and we would recognize it at once while we did the delivery and the delivery was normally a very short time -- in a very short timeframe.

What happens now, is that agreements that we get, after we sign the contract, we have a period where we sit with the customer and we define exactly the scope, the customization required, the deployment, how we are going to deploy it and it many times instead does it include also migrations from old solutions. So the revenue recognition goes over a period of time and in each quarter, we will recognize pro rata part license and part services as it is defined in the agreements.

Also there is a revenue recognition change based on the managed services agreements. What the managed service agreements would say, is that the first payment will be paid for the services of the implementation only, so in the first quarter that you recognize the managed services deal, we would recognize the services for deployment only. And then for the period of life of the agreement there can be three to five years and can continue afterwards, we would recognize on a monthly basis, the portion of license and the portion of services given the size of the deal, the percentage of service and of maintenance so every quarter from each of these deals we will have part license, part maintenance and part services.

Okay thank you very much.

Your next question comes from the line of Dave Heger with Kennedy Capital.

Yes with the change in the business model can you talk about as you go into a quarter roughly what percent of your revenue you already have visibility into going into the quarter because it sounds like now you go in with a higher level of visibility. Can you talk roughly what percent you may already be able to see as you go into the quarter?

We do go in with higher percentage. First of all, because the maintenance in the additional services but the ongoing services like the managed services and the maintenance are now up to 40% on existing customers. And in the last quarter, we also have seen this -- the recognition on contracts that are recognized with percentage of completion already were 40% of our revenue where the other 20% came from existing customers that had upgrades of their system. So I would say that our visibility grew, if it was 50 to 60% before it probably grew to something like 80% and up now.

Okay thank you.

Thank you.

Your next question comes from the line of Bill Swanson with MJSK.

Hey good morning. A couple of questions for you. First off, if your revenue recognition policy has changed over the last couple of quarters why wouldn't we see a tick up in deferred revenues on a sequential basis? And given the new recognition do you feel like you have better visibility into future quarters or less?

Okay hi, Bill. The deferred revenue is really revenue only for things that were already in voice and the revenue was not recognized. But with all our contracts we do not -- or the majority of our contacts, we do not invoice up front. We invoice on a monthly basis or on a quarterly basis and it's very rare that we invoice on a yearly basis. So you will see none of the revenue that comes from the managed services and none from the quarterly maintenance agreements, that's the majority of our agreements in the deferred revenue.

You will just see really the small deals, the deals that go on a yearly revenue invoicing and so on. If you ask about the visibility, the visibility gets better because if you recognize agreements over a period of a few quarters then when you get an order you already have the visibility going into certainly the next quarter and even further quarters. So we believe that the visibility is improved.

Okay, now given the visibility that's improved, your tone on the third quarter seems to be a little bit changed from the prior two quarters where you actually put comments in your press release talking about the pipeline and excitement going forward. Has something changed for you? Are you still excited and just being cautious or can you just kind of explain what the landscape looks like now?

First of all, we are still very excited but at the same time we are cautious. The decision cycle we think is very long. It used to be like this all the time but maybe it looked like it's going to shorten and it didn't. So the telecom markets are still not hurrying into any decisions. This is what we see. At the same time we have a great customer base and we have lots of ongoing projects that we deliver on this percentage of completion. And we do have a nice pipeline but the decision cycle is long and so we are positive, we are excited but we are also cautious.

Okay, and a last question you talk about three new wins in the quarter but don't really mention wins from existing customers. Were there any other wins beside the three that you highlight in the press release?

We did have wins from existing customers and these are different. This is what brought us the 20% revenue from the different types of license and services from the current customers. But now because we have many of the customers they just add additions like new modules or new things but are under long-term agreements, we don't count it anymore as a win. We just count it as an increase in the (indiscernible) revenue from the existing customer.

Right.

This is why we don't but next quarter we will try to better define the upgrades that we get from existing customers as well.

Yes okay well it's -- I mean as far as the new ideals and the pipeline's a little bit longer maybe or the timing of decisions closing is always, is always a challenge. But within your existing base do you feel like you're getting the customers asking more from you than say six, nine months ago and so you're seeing more opportunity within the existing base?

Within the existing base, we do expect to get some upgrades closed in the third quarter. But also we see lots of new opportunities especially in the US.

Okay now, one last question, it looks like in the first quarter you talked about the operating expenses reaching a high-water mark and it looks like they [trended] down. It looks like your gross margins improved as well as operating margin improved in the second quarter. Do you see that trend continuing through the third and fourth quarter?

We are certainly working into that direction and it is in our focus on a very high priority to improve the operating margins.

Okay great. Thank you.

Thank you, Bill.

There are no further questions in the queue at this time.

Okay I want to thank you all for being with us today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.