Mind CTI Ltd (MNDO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter MIND CTI, Ltd., earnings conference call. My name is Clarissa, and I will be your 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 today's conference. (Operator Instructions)

At this time, I would now like to turn the call over to your host for today, Ms. [Nadine Emel]. Please proceed.

Thank you. Good morning, everyone, and welcome to MIND's conference call. Yesterday, MIND reported the results for the first quarter of 2007. On the call today from MIND is Monica Eisinger, MIND's CEO, and Oren Bryan, the company's CFO. Monica will discuss the company's developments and achievements during the first quarter of 2007, 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 responses to your questions may contain some forward-looking information. Some statements are subjects to the risks and uncertainties as described in the company's press release and annual report filed with the SEC. Actual results might be materially different.

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

Thank you, Nadine. Good day, 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 2007 and discuss our business. The financials can be found in our press release.

During the first quarter, we continued to focus on marketing our end-to-end billing and customer care solutions for tier 2 and tier 3 service providers and on delivery. We believe that we are on the right path to enhance our presence and position in this market. We estimated in the past that as we achieve our goal of increased average deal size and increase customer base, the professional services part of our business will grow as well. We planned accordingly and significantly increased our professional services team to support the growth and to enable offering of additional services to customers.

This strategy succeeded. The maintenance revenue built up, and we encountered demand for extended services in customizations, project management, special tasks, onsite support, and migration of existing solutions to new versions of our new and enhanced product offerings.

During the quarter, we started implementation of a new win at the Scandinavian IP carrier. This is a next-generation network operator that signed a three-year managed services agreement. With our managed service deal, we built long-term relationship with our customers as well as future revenue stream. This carrier and other IP-based network operators, as well, choose MIND based on our 11 years of experience in the IP billing industry and the proven track record of on-time and within budget deployments. They choose our billing solution as it provides the converged platform that includes a seamless integration to the network and full support for multiple services and comprehensive customer care.

We focus on expanding our relationship with our customers as they grow their business or transform their businesses to address convergence by adding new services. During the first quarter we received multiple follow-on orders from a variety of customers in Africa, Europe, and the U.S. for increased license, additional professional services or extended functionality.

Oren will now review some financials.

Thank you, Monica, and good morning, everyone. In the first quarter of 2007, we reached revenue of $4.81 million compared to $5.25 million in the first quarter of 2006. GAAP operating income in the first quarter of 2007 was $668,000, a 16% increase over the first quarter of 2006. Operating income, excluding the monetization of intangible assets in equity-based compensation expense, was $848,000, or 18% of revenue.

GAAP net income was $1.15 million, or $0.05 per share. Net income, excluding the monetization of intangible assets and equity-based compensation expenses was $1.33 million, or $0.06 per share.

Cash flow from operating activities in the first quarter of 2007 amounted to $855,000. However, if we take into account the payment of approximately $820,000 with respect to a tax assessment of previous years, our cash flow from operating activities amounted to a record of $1.7 million in the first quarter of 2007.

During the first quarter, we distributed a cash dividend of $0.20 per share. Following this dividend distribution, our cash position remained strong with over $34 million as of March 31, 2007.

In the first quarter of 2007, revenue from our customer care and billing software totaled to $4.05 million while revenue from our enterprise call management software was $755,000. Licenses represented around 40%, maintenance around 35%, and services around 25%.

We operate and win businesses around the world as we continue to focus mainly on the Americas and Europe. In the first quarter of 2007, sales in the Americas represented 41% and sales in Europe represented 43% of total revenue.

Monica will continue with a review of our business.

Thank you, Oren. I will now review some successful ongoing implementations. As we already announced in the previous quarters, we have been awarded contracts that include several milestones. The implementation of this project is extended over a number of quarters. During the first quarter, we met the timetables and the milestones in the delivery of our solutions in this project. We expect to continue to successfully execute the delivery of our high-quality solutions.

In the second quarter of 2006, we announced that we have received an order for our end-to-end convergent billing platform from an East European national provider of telecommunication services providing fixed and mobile telephony, data transmission, and Internet connection. Implementation commenced in 2006, and was expected to be completed within the next two to three quarters.

During the implementation process, the scope of the project was enlarged and extended. We have successfully completed the mobile phase of the project, and the carrier went live with the solution in the first quarter of 2007 as scheduled. The increased scope is expected to be delivered in two additional phases during the year and be fully completed in the last quarter of 2007.

In the third quarter of 2006, we announced a new win with an MVNO, mobile virtual network operator, in the U.S. They chose our solution for starting their operations targeted to power in (indiscernible) residents in the U.S. This is, as well, a multiple-phase deployment that started in 2006 and is being implemented since. This operator starting offering prepaid services in the first phase, and postpaid services in the second phase. We expect to complete this implementation during the second quarter of 2007.

The win in Central America that was announced in the last quarter of 2006 is under deployment as well. We have gradually increased to the company size over the last few years, and we believe that we have succeeded in building a great team that includes experienced professionals. We believe that, as we already completed some major milestones in product development, and our team gained experience, our team is now at the right size to enable us to sustain and increase our revenue.

I would like to go through some marketing activities. In the first quarter of 2007, we continued to strengthen our market presence. We exhibited at various shows, especially in the U.S., including the RCA, the rural carrier show, Billing World in Chicago, and CPIA Wireless, an important show for us where we held meetings with many existing customers and partners and targeted more wireless carriers.

Our marketing therefore also includes building new partnerships and expanding existing ones with both equipment vendors and system integrators. Our partners generate leads to refer their customers to us, and that increases our opportunities.

Regarding our cash position, it's steam is strong with over $34 million, and do intends to maintain a strong cash position in the future as well. Our strong cash position and our positive operating cash flow enables us to fund our operations and to invest in our business. Our cash position enables us the continuous search for acquisition targets.

We continue to look for additional acquisitions that, again, will complement our geography, our technology, and also enhance the customer base and the relationship with additional partners.

Regarding guidance -- we share the analysts' view that the environment is almost universally weak and that decisions are delayed, while the same cycle alone and the timing of required deliveries is difficult to predict, we see ongoing demand for our products and services, and we expect -- that we expect to provide us with growth opportunities in the long term.

We expect to continue to execute our strategy targeted at our profitability, that is now challenged by the ongoing significant weakening of the U.S. dollar versus the euro and the Israeli shekel, and by the increasing cost of employment in all our locations. We expect to achieve a non-GAAP earnings per share of approximately $0.20 for the full year of 2007.

Operator?

(Operator Instructions) Rami Rosen, Oscar Gruss.

Monica, can you give us a sense on how big is your average deal size and the trends you are seeing in the last couple of quarters of that?

The trend that we see is easy to describe because it is a trend of larger deals, deals that are more complex, and if we look at first-year revenue that we expect to get from the deals, I would say that the average deal size is over $0.5 million, but as we talk about multiple-year deals, some of the deals are larger than that and also we see that existing customers increase their purchase orders to us as they increase their business.

Okay, and the business you reported with the Scandinavian carrier, is that falling in the above-average deal size?

I can't disclose the exact size, but this is a deal that is over three years, it's many services deployment. In this case, the way that we build these deals is that the first implementation phase we charge mainly for the implementation services and for basic licenses that are given to the carrier. And over the period of the agreement, we recognize, on a monthly basis, the part of license as it is used by the customer as well as professional services related to it.

Do you see a potential, therefore, repeated business?

With specific customers or with all the customers?

With a specific customer, yes, the Scandinavian one.

I hope that their size will grow, as our agreement is enlarged as they increase their subscriber base. The original agreement is a phase-to-grow agreement where they commit to a minimum monthly fee, and as they enlarge their customer base or as they add more services, the scope and the top-end value of the agreement increases as well.

Now a question for Oren -- how much cash do you expect to generate during '07?

We expect that we will generate between $3 million to $5 million of, say, operating cash.

Now another question regarding the expected margins, gross margin and operating margin, is that contracting along the year or remain flat with first-quarter levels?

Our margins, on the last three quarters are stable, and they are expected to be stable in the next quarters.

Okay, guys. Thank you very much and good luck on the forward.

Shaul Eyal, CIBC.

Actually that's Shaul Eyal and this is R.M. Naranyan. I'm sitting in for Shaul at CIBC. I just have a few questions. On your professional services, you said that the professional services mix is increasing, and the numbers I have is 30% for license, 30% for maintenance, and 25% for professional services. Is that correct?

We have 40% for license, 35% for maintenance, and 25% for professional services. Maintenance being part, really, of the professional services. So if we look, we have a total of 60% for professional services, where we see, if you look not only at percentage-wise, but at the numbers themselves, you can see that the maintenance total number is growing every -- certainly, as we add more customers and customers renew their maintenance agreements, the maintenance part of our revenue is growing.

If you looked two years ago when we understood that this is where the industry is going and where we should be going by building a strong professional services team, our license versus professional models used to be very different. For example, in 2005, we had close to 50% license and before that, even close to 60%. So now we are at 40% license and a total of 60% professional services, and we think that this is -- thanks to the larger deals and the long relationship that we have with our customers, we think that this is a good percentage to be at.

So you expect the percentage to remain kind of steady? You wouldn't expect it to continue changing then?

We'd expect it to either to remain in the same region or change slightly again for even higher percentage of professional services.

Great, and, also, the other thing is -- I think because of the mix, are you think any kind of margin pressure as a result? Or do you see actually margin expansion because of professional services?

We hope that our margins will stay in the same region that they are now.

Okay. Also, if you can just give us some visibility on the next few quarters, sort of an idea of your buying plan.

Although our buy plan is very strong, and we have lots of opportunities both in the U.S., in South America, also opportunities in Africa and opportunities in Europe. Because we see that the sales cycle is very long and, really, the carriers are in no hurry to really close their purchase orders, it is difficult for us at this time to give guidance on revenue. But we do try to give guidance at this point in time, and this is the guidance on the earnings per share for the full year.

Great, great, and my last question is, you said you had some cash, and you may want to use it for acquisitions -- what kind of acquisitions are you going to be looking for? What's your criteria for acquisition targets?

Our criteria for acquisition is that the companies that we look at are companies that are in our space, in the telecom space, either doing billing or doing something different, but billing for different types of activities or other pieces of the solution for the telecom space. We are looking for geography that is interesting for us, meaning because we concentrate our efforts in Europe and U.S., we look for companies in these locations. And also some of the companies that we look at are losing money at this point in time, but also when we look at the combined business model after a potential acquisition by MIND, we look at companies that within two to three quarters will become accretive to us.

(Operator Instructions) Bill Swanson, Northland.

I missed the EPS guidance that you gave. Could you please repeat that?

Yes, hi, Bill. Non-GAAP EPS guidance is $0.20 for full year 2007.

You talk about lots of opportunities and long sales cycles, and it feels like we've heard about long sales cycles for quite a long time. Is it a function of just the group of customers that you sell into or, being the tier 2, tier 3 carriers, or is there something that takes customers longer for you guys because of your small size in nature? What kind of color can you give us to help us understand a little bit more on your customers in the market and how decisions get made?

I think that delaying decisions and especially delaying spending in the telecom market is an overall situation, and I think that for the tier 1 where we don't play but we see the other players, the consolidation also changes the environment, and for our tier, I think that the specs, that the addition of new services that were introduced in the last few years did not always bring the expected revenue. Carriers are very cautious before they go into new services. Carriers are looking and building the model for internal investment, and they decide only when they are convinced of quite fast return on investment, and this is why they realize the intent to spend money.

Okay, well, it would look like, given a change in the business model since you acquired Sentori, it looks like your visibility on just -- if you call it recurring revenue -- I mean, your service and maintenance was about 50%, $2.9 million in the quarter. Is that the kind of visibility you have in a Q2 where you have about 50% of the revenue you're looking at, and then the rest of it has to come from new business or how do we look at it from that standpoint?

I think that our visibility is much, much higher than 50%, I would say, even higher than 70%, because we do have the ongoing implementation that got recognized over many, many quarters, and we have the maintenance and professional services part. This is now only the maintenance and professional services are at 60% together. So we depend on much less new deals in order to see the numbers. So, yes, visibility is higher and it's getting higher as we get more long-term deals.

Right. So if you look at the second quarter, and you say you've got 70% visibility, is it conceivable you could look at a second-quarter revenue number that would be flat and, thus, the reason why you're giving $0.20 guidance because we can kind of extrapolate you earned $0.05 this quarter. That's pretty easy to get to $0.20 from there. What about growth? I mean, what are your thoughts on being able to grow the top line above what you did last year and at what percentage are you feeling comfortable with?

Okay, we are not giving guidance on the revenue, as I said, and we do expect that after the effort in 2005 and 2006 in expanding our offering, our product line, and the effort in 2007 that started the end of 2006 in more marketing and more positioning of our solutions, we do expect that eventually we will see growth. We will not define a timeframe for that growth, especially because of the delayed decisions and the difficulty that our customers have to commit.

On the other hand, the fact that we talk about profitability is because we are in a challenging environment of, as I said, the exchange rate of the U.S. dollar that might hurt us, and the exchange rate, in general -- the weakening of the U.S. dollar around the world, and this affects our balance, our P&L, and we do want to express that, as we use to execute the unprofitability in the past, we keep an eye on our expenses, and we are aware of the different effects that influence our expenses, and this is why we felt that it would be a positive to give the guidance of approximately $0.20.

Kevin Dede, Merriman.

Just to piggyback off of Bill's question, I was wondering if you'd imagine that the $0.20 you're expecting this year is still sort of a consistent mix in income from bank income versus operations, and the same proportion that you saw in the first quarter?

The amount of interest that you saw in the first quarter, it will be almost the same, a little bit less, in the next quarters because of the dividend distribution that we had. So, with that, the first quarter with around $37 million, $38 million, and after the distribution, we ended the quarter with around $34 million, a little bit over $34 million. Then we can expect interest on $34 million and growing cash through the end of the year.

So, yes, this is the way that we build the EPS, partly from interest on our cash and part from the cash flow and the net income generated.

I know that you've repeatedly said through the course of this call that you didn't want to offer revenue guidance, and I respect that. I was just wondering, I guess this is, again, sort of Bill tried to triangulate on this question -- are you pretty much counting on sort of a flat revenue scenario in order to get to the earnings that you're expecting?

Kevin, you know, it is a different type of asking the same question, and it was our decision, and the Board's decision, not to give guidance. We believe that we've seen around so many companies that gave guidance and disappointed, so we prefer to look at the bottom line and not to disappoint.

Very good, okay. I know that you've talked about the environment, and analysts' view of that, I'm just wondering who you might say some of those analysts are? Are those the third-party IDC Gartner types that you're referring to?

No, I'm looking mostly at financial analysts and the way that they -- the notes that they took out after the results of different companies in the telecom field, and also when they analyze the results of other companies and we, ourselves, analyze the results of both our competitors or other players in the field.

And when you look at the revenue, you can see that most of the revenue in the telecom area comes now from professional services and less for license, and this is not a MIND-specific thing, this is a more general thing, and also when you look at the large deals that happen now with infrastructure, they are mainly in Asia Pacific where, on the other hand, it is more difficult to sell software than hardware, and also where pricing is much lower than in other regions in the world.

On the other hand, in the U.S., I think that you see that although there are new opportunities all the time, and you see that they are either new MVNOs or new alteriors that replace old platforms, and this is where we get our business from. At the same time, you see that decisions are really pushed to the last moment.

Okay, and I guess that's why you're being very cautious about how your business can develop through the course of the year.

Yes, exactly. When we look, and we try to analyze our business moving forward, we don't look only at ourselves and get very excited about the pipeline because we are excited about our pipeline. But, on the other hand, we see results of other companies, and we see how industry's behavior, and we are cautious.

Very good. Okay, you highlighted some of the activities you participated in in terms of marketing, what I was wondering what you were doing from a headcount perspective?

From a headcount perspective, as I said, for a long period of time, we have increased and increased, and I think that a quarter ago, or maybe even more, we started talking about that we reached a high number of people, and as they get more experienced and also the cost of employment grows, we don't expect to -- at all -- to increase that number -- on the contrary.

Okay, so could you just give us a ballpark on what your headcount was and what you have in marketing and sales?

Our headcount was close to 300 people, and it will probably stay there or a little bit less in the next quarter. And I think that in sales, all around the world, we have around 15 people.

Okay. Did you have any 10% customers and can you give us a ballpark on the number?

No, we didn't have any 10% customers.

Okay, can you give us a range of the number of customers you served?

The number of customers?

Yes.

If you look at -- this is one number that we didn't prepare as a percentage of, let's say, the first 10 customers, but there wasn't any significant customer. We recognized revenue on many projects that are ongoing or many follow-on orders. So it's really built of different -- multiple numbers from different customers.

We have no further questions at this time. I'd like to turn the call back over to Nadine Emel for closing remarks.

Thank you for being with us today.

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