Mind CTI Ltd (MNDO) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the MIND CTI 2007 second quarter earnings conference call. My name is Cammie and it will be my pleasure to be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Ms. Andrea Day. Please proceed, ma'am.

Thank you Cammie. Good morning everyone and welcome to MIND's conference call. Yesterday, MIND reported the results of the second 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 development and achievements during the second 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 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 reports 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 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 second quarter of 2007 and discuss our business. The financials can be found in our press release.

In the first half of 2007, we experienced a decline in our revenues mainly due to delayed decisions and long sales cycles. We experienced delays in expected upgrades from existing customers as well as delays in [new expected wins]. Some delays were due to [later] financing, some because customers postponed the offering of new services or the replacement of existing solutions. Being well aware of the fact that the environment is almost universally weak as we mentioned in our previous call, we carefully planned our operations and we succeeded in managing our expenses accordingly and we generated over $2 million in cash flow from our operations in the first half of 2007.

We continue to focus on marketing our end to end billing and customer care solutions for Tier 2 and Tier 3 service providers and on on-time delivery. We build for the future. We've increased average build size and a solid customer base. As a result, the professional services part of our business grows continuously. Our professional services team enables us to support the existing customers and future potential growth and enables us to offer additional services to existing customers.

The maintenance revenue built up and we encountered demand for extended services, such as customizations, on-site training or consultancy and migration of existing solutions to new versions of our new and enhanced product offering.

During the second quarter, we received follow-on orders from a variety of customers in North America and Europe for increased license, additional professional services, or extended functionality. We believe that the strong installed base and the long-term relationships with our customers continue to represent the majority of our revenue are to the basis for future revenue streams. They provide for ongoing revenue, but more than that, new wins are based on existing customer referrals and references.

MIND is pleased to announce a new win this quarter with a Pan-European IP services carrier fully financed by a West European capital group. The main line of business consists of offering Internet access and voiceover IP. This company develops [expanse] and support Internet services provided over cable and fiber optics. It specializes in providing corporate and residential solutions for subscribers in multiple (inaudible) in these European countries. The signed contract includes license to hundreds of thousands of subscribers, migration from existing systems and support for three years. The MIND solution was chosen based on its flexibility, reliability, multi-currency and multilingual support. The scope of work definition process has already started and the implementation is expected to be completed within two to three quarters.

Oren will now review current financials. Oren, please.

Thank you, Monica, and good morning everyone. In the second quarter of 2007, we reached revenue of $4.1 million compared to $5.1 million in the second quarter of 2006. GAAP operating income in the second quarter of 2007 was $42,000 compared with $710,000 in the second quarter of 2006. Operating income, excluding amortization of intangible assets and equity-based compensation expense, was $211,000, or 5% of revenue. GAAP net income was $508,000, or $0.02 per share, compared with GAAP net loss of $492,000 in the second quarter of 2006.

Net income, excluding the amortization of intangible assets and equity-based compensation expenses, was $677,000, or $0.03 per share. Cash flow from operating activities in the second quarter of 2007 amounted to $1.34 million. During the second quarter, we completed a dividend distribution with payment of revolving tax of $736,000.

In the second quarter of 2007, revenue from our customer care and billing software totaled to $3.1 million, while revenue from our enterprise call management software was $915,000. Licenses represented around 28%, maintenance around 43%, and services around 29%.

We operate around the world and we continue to focus mainly in the Americas and Europe. In the second quarter of 2007, sales in Americas represented 43%, sales in Europe represented 38%, sales in Africa represented 10% and sales in Israel represented 8% of total revenue.

Six-month financial highlights. In the first six months of 2007, revenue totaled to $8.9 million compared with $10.3 million in the first six months of 2006. GAAP net income was $1.66 million, or $0.08 per share, compared with GAAP net income of $162,000, or $0.01 per share in the first six months of 2006. Net income, excluding amortization of intangible assets and equity-based compensation expenses, was $2.01 million, or $0.09 per share. Cash flow from operating activities in the first six months of 2007 amounted to $2.2 million. Our cash position remains strong with approximately $35.5 million as of June 30, 2007.

Monica will now continue with a review of our business.

Thank you, Oren. As mentioned by Oren, sales of our enterprise call management solutions was stronger than usual this quarter. We believe that the stronger demand for our product in this area is fueled by the replacement of traditional switches by voiceover IP switches. Our success to transform this into revenue is a result of our enhanced investment during the last two years in new products designed to answer this specific changing market need.

The enterprise market is our historical marketplace and we offer solutions used by organizations for caller counting, traffic analysis and fraud detection. Caller counting allows customers to produce sophisticated reports and graphs for easy and effective analysis of call activity and to allocate telephone expenses for specific departments, what is called internal billing. Our traditional enterprise software has been installed over the years in over 15,000 locations throughout the world. We supply a second product that is directed towards enterprises that implemented IP switches.

Our latest product, PhonEX 1, delivers a unified solution for all voice communication expenses, including traditional voiceover IP and mobile telephony. The flexible and scalable architecture of PhonEX 1 meets the needs of large enterprises supporting an unlimited number of expansions and size. It introduces full functionalities through a Web browser based on Microsoft's [Excel] database and enhanced by the advanced ASP.net technology.

Our reputation of commitment to our customers in these businesses continued to new wins and recurring revenue as well in this build. We have implemented successfully more than 20 large projects in the last 12 months, some to new customers and some to existing customers who have migrated to the new solution. We intend to further develop and market this product as the emerging market for voiceover IP systems for enterprises grows.

In the carrier billing market, we have increased our marketing efforts and focused on building new partnerships and extending existing ones with both equipment vendors and system integrators. Our partners generate leads and defer their customers to us, increasing our opportunities. Following our extensive and successful investment in new functionality development, our solutions support new technologies such as [WiMARK], satellite, IMS and IPTV, enabling us to cooperate with new partners and to offer new innovative features.

As we already announced in the previous quarters, we were awarded contracts that include several milestones. The implementation of this project is extended over a number of quarters. During the second quarter, we met the timetables and milestones in the delivery of our solutions for these projects.

MIND posts a strong cash position and intends to maintain a strong cash position in the future as well. Our strong cash position and our positive operating cash flow enable us to fund our operation and to invest in our business. Our cash position also enables us the ongoing search for acquisition targets. The consolidation amongst carriers encouragers builder consolidation as well and we believe that we are well positioned to become a larger company, even when we find [available] additional acquisition targets if a [gain] will complement our geography, technology and also enhance the customer base. We receive leads in this direction from bankers around the world, but as always, we act carefully and consider only those opportunities that we believe will bring real value enhancement.

As we continue to experience long sales cycles and complex implementations, the timing of revenue recognition based on deliveries is difficult to predict. At the same time, we see ongoing demand for our products and services and we participate in multiple vendors around the world. We are pleased with our new win this quarter of the Pan-European IP services carrier to whom we will provide the complete customer [carrier] (inaudible) solution. This is the type of carrier that we target in our marketing efforts. We are in different sales stages with other carriers and in the process of finalizing agreements with two additional customers that have already chosen our solutions. We expect to see new wins in the following quarters and we expect to increase our profitability as well.

Operator?

(OPERATOR INSTRUCTIONS) [Dwight Mamanteo], [Winfield] Capital.

You have roughly about $35 million in cash on the balance sheet. Can you tell me what the interest rates are that you're receiving for that cash?

The interest rate that we receive is above 5%. It's between 5.2 to 5.4%, and this is a monthly renewable kind of interest base bank account.

And you mentioned that some of the uses of that cash would be to fund organic growth. How much do you think you need to fund organic growth?

I didn't mean that we are really going to use it. It gives us a strong position. It gives our customers the kind of encouragement that they are building with a financially strong company, [but they have seen], we've been creating cash and we've been cash flow positive for a very long time now and we intend to continue to do so. That being said, if needed, and if we decide that at some point we find some new area to invest in or some new development that we would like to do, then we have the ability to do that. But in our day-to-day business, we believe that we'll stay cash flow positive.

Okay. And you talked about acquisitions. Have you given yourself a time frame with regards to when you plan to deploy the cash? Are we talking years out or a shorter time frame?

I can tell you that at any point in time is we are very active with multiple vendors around the world. We are also active and in different stages of either negotiations or [permitting] or similar with companies around the world. The difficulty of closing such deals is the fact that the due diligence processes are long, and most of the times, deals do not close. But, at the same time, we do hope that we will be able to close an acquisition that will be positive for MIND in 2007.

2007? Okay. I guess the reason for my questions is that you have about $35 million in cash. I'm sure a vast majority of that is not needed to fund organic growth. And you're generating 5% interest right now. I'm just thinking that maybe the shareholders would have a better way to deploy that cash and generate a better return than the 5% that you mentioned. I guess my request is that when you do review the uses of cash, can you also include potentially returning a vast portion of that back to shareholders so that we can use it to generate I guess a better return? Thank you.

Thank you, Dwight.

(OPERATOR INSTRUCTIONS). Bill Swanson, Northland Securities.

I was just wondering, we have had Sentori under our belt for some period of time now and the Company seems to be stuck in a range of revenue between 4 to $5 million. While profitable at those levels, I think the real reason for shareholder value here is that you can grow the business and we kind of always seem to have some type of -- deals don't close as fast. What can be done on the sales and marketing side to improve visibility on pipeline and to get the Company to break out above and beyond the current $20 million run rate that we seem to be stuck in here?

We have increased our sales team end of 2006, and we have been more active in our marketing efforts [since]. The delay in deals that -- we really hoped -- like, there were some deals that we saw the upgrades of existing customers, that we were given a timing for that. And then, it was delayed. And also, the sales cycles are very, very long. And as I said, we increased our sales effort. We believe that with our more enhanced product that we have now and with increased sales and marketing efforts that we did during the last six to 12 months, we believe that we will be able eventually in the long term to see the growth. Unfortunately, the environment now is full of new prospects and we are in the process of -- in different stages in the sales process. That means, if either before a modify, after a modify, within some proof of concept or workshop stages around the world, but still, somehow, do not close within the time frame that is expected. So what we need to do, we believe that we did two very important things, and this is develop -- invest in development, that we have done for the last two years, and then increase investment in sales and marketing that we have done for the last let's say eight to 10 months. And we hope that this will bring the growth that we know our shareholders expect.

Okay. And then, in regards to the business, since you acquired Sentori, it looks like this quarter is the low quarter that you have had together as a combined business or a combined entity. Given the pipeline, given the increase in sales and marketing, have we seen the low watermark here as far as revenues go in the second quarter? Do you think you can grow above this $4 million level in the back half of the year?

Of course, we hope and expect that we will grow, but at the same time, as I said, we cannot control the timing of the decision of our customers. And even when we see finally that they come to a conclusion and they choose our software, then we start a long process of implementation that does not depend only on us. Sometimes during the implementation, most of the times during the implementation, there are phases that depend on the customer acquiring hardware, building network or even putting the resources to work for (inaudible) project. So even after we win something, delivery -- and as you know, our revenue recognition is by delivery. So delivery is not always on time as we would like to see it. But certainly, we try to do our best to achieve growth in the future.

Okay, thank you.

(OPERATOR INSTRUCTIONS). At this time, we have no more questions in queue. On behalf of MIND, thank you for attending today's conference. This concludes the presentation. You may all disconnect and have a great day.