Mind CTI Ltd (MNDO) 2007 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the MIND Q3 2007 earnings results conference call. (OPERATOR INSTRUCTIONS)

I'll now hand you over to Andrea to begin today's call.

Thank you, John.

Good morning, everyone, and welcome to MIND's conference call. Yesterday, MIND reported the results of its third quarter of 2007. On the call today from MIND is Monica Eisinger, MIND's CEO, and Oren Bryan, the Company's CFO, as well as Karl Wills, the Managing Director of the recently acquired UK company.

Monica will discuss the Company's developments and achievements during the third 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 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 day, ladies and gentlemen. Thank you for your interest in MIND and for joining us today. In our call today, I will discuss our latest acquisition, I will summarize our major achievements in the third quarter of 2007 and discuss our business. The financials can be found in our press release.

In October 2007, we announced that we acquired the UK-based Omni Abacus Billing that provides billing and customer care software solutions in a service bureau mode mainly to European carriers. Omni's based in the London metro area and has over 30 employees, a unique and extremely strong methodology for its outsourced offerings, supported by regulatory accreditations. We believe that carriers around the world are lately looking more into the managed services option and we are now better positioned to capitalize on this trend.

Abacus Billing's solid reputation and proven expertise in the European market, its strong existing customer relationships and the great team of people complement MIND's strong management, deep industry knowledge, financial backing and global resources. We believe that this acquisition puts MIND in a good position for increased success in the European market.

The new division will continue to be led by Karl Wills, as the Managing Director of MIND UK, and the current management team.

Karl has been with Abacus since 2000, serving initially as COO, and from 2001 leading the company as CEO. He has more than 25 years of international business experience in information technology and telecommunications and also has considerable expertise in general management and logistics. He holds a master's degree in business science from the University of Manchester and is a visiting fellow at Manchester Business School, focusing on IT strategy.

Karl will now elaborate on Abacus.

Thank you, Monica, and good day, everyone.

Abacus Billing started in 1996 as a software consultancy company. Abacus Customer Care and Billing, developed and marketed, became the focus for the company as it gained traction. The initial targets for the Abacus Customer Care and Billing were small to medium-sized UK-based telecom resellers.

In 2001, the Abacus Billing Managed Service was launched. It was aimed at providing carriers and larger resellers the complete outsourced billing service. The end-to-end service includes the management, not just of billing, but where required mediation, fulfillment and cash collection. This is one of the initial truly outsourced billing operations in the UK.

The Abacus Managed Service is targeted at customers that have a complex operation, sometimes for a single range of products, where their existing applications and processes cannot adapt either quickly enough or at all.

For example, a major carrier in the UK selected us to bill for wholesale line rental, after they estimated that in-house development of this specific line of business would take at least 12 months.

We changed the market approach from small resellers to blue-chip organizations, including multinational carriers, non-active owning telecom aggregators and branded resellers, MVNOs, mainly in Europe, but also further afield.

Abacus Billing now provides specialist outsourced billing centers to customers in the UK, Europe, USA and Australia, with 40% of the revenue being earned outside of the UK.

The credibility of the Abacus Managed Service is underlined by the focus on process controls and certification. Abacus Billing is unique in having the Ofcom, the UK regulator, virtual metering and billing certification and with TKV Section 5 accreditation from the German regulator and also having ISO 9001 2000.

Abacus Billing's reputation for providing what customers really need and want is highlighted by the fact that revenues have grown threefold in the last four years.

I am thrilled with the opportunity to continue to lead the Abacus management team as managing director. I believe that within the MIND Group my international experience and my teaching experience will bear fruit.

I'm also supported by a great team, including Chris Robson, our Operations Director, and Ian Williams, our Billing Solutions Director.

Chris was previously responsible for billing and mediation at Verizon UK. Prior to that, Chris spent 15 years in a number of IT and telecom roles in the UK and Europe. Chris is responsible for the day-to-day managed service operations and the development team.

Ian has been with this company since its inception and is responsible mainly for presales of business consultancy.

Additional to our telecom billing expertise, we have been a pioneer in electricity, gas and water smart meter information and billing. We believe that the utilities industries are moving away from single manual reads to half-hourly or less meter reads with the information collected electronically.

The expertise demonstrated by Abacus has led to the establishment of a number of partnerships with leading smart meter manufacturers in all of the utilities sectors. As well as undertaking initial pilot installations at a few companies in the UK and Germany, we have published articles for a number of utility trade journals and we also present at conferences in this space.

As part of the MIND Group, we have the opportunity to further develop our presence in Europe by being European head office and being able to offer the complete range of MIND's billing applications for licensed sales or managed service to carriers, as well as to large enterprises' [core] accounting.

Monica will now continue with a review of our business.

Thank you, Karl, and welcome.

During the third quarter, MIND has been selected by a wireless communications service provider in the U.S. to support its unique model for mobile solutions, thanks to its product flexibility and openness in managing innovating needs. This is a five-year agreement for managed services, extended maintenance and enhanced support services that includes performing day-to-day billing operational tasks. The MIND solution will help deploy new services, and this includes billing, customer care, order management, inventory, provisioning and mediation.

We also announced a win with the provider of both wireless and wireline services in the U.S. As the first phase, MIND was chosen to perform billing and customer care for the new offerings of this wireless provider. This new win is for the fixed-line operation, where the consolidated MIND billing customer care, order management and the inventory platform will be deployed.

MIND has also received a significant follow-on order for license increase in professional services from a mobile carrier that is extremely successful in the U.S., and additional smaller follow-on orders, mainly for extended functionality from customers in various locations.

We believe that these two new important wins and follow-on orders reflect our strengthening presence in the U.S. market, both in the mobile and in the wireline industry, and also the fact that our customers view us as a strategic partner.

We spare no effort in order to strengthen these long-term relationships. As our customers extend their businesses by winning subscribers and adding new services to their offerings, we experience continued new business opportunities with existing customers.

Implementation of these projects is expected to be completed within two to four quarters.

Oren will now review some financials.

Thank you, Monica, and good morning, everyone.

In the third quarter of 2007, we reached revenue of $12.03 million, compared to $4.66 million in the third quarter of 2006 and similar to the revenues of the second quarter of 2007.

GAAP operating income in the third quarter of 2007 was $391,000, compared to $415,000 in the third quarter of 2006.

Operating income, excluding amortization of intangible assets and equity-based compensation expense, was $550,000, or 14% of revenue.

GAAP net income was $955,000, or $0.04 per share, compared to GAAP net income of $710,000 in the third quarter of 2006.

Net income, excluding amortization of intangible assets and equity-based compensation expenses, was $1.11 million, or $0.05 per share.

Cash flow from operating activities in the third quarter of 2007 amounting to $2.04 million.

In the third quarter of 2007, revenue from our customer care and billing software totaled to $3.54 million, while revenue from our enterprise call management software was $486,000. Licenses represented around 32%, maintenance around 41% and services around 27%.

We operate around the world and we continue to focus mainly in the Americas and Europe. In the third quarter of 2007, sales in the Americas represented 46% and sales in Europe represented 41% of total revenue.

Nine months financial highlights.

In the first nine months of 2007, revenue totaled to $12.88 million, compared to $14.98 million in the first nine months of 2006.

GAAP net income was $2.61 million, or $0.12 per share, compared to GAAP net income of $872,000, or $0.05 per share, in the first nine months of 2006.

Net income excluding amortization of intangible assets and equity-based compensation expenses was $3.12 million, or $0.14 per share.

Cash flow from operating activities in the first nine months of 2007 amounted to $4.24 million. Our cash position remains strong, with approximately $37.4 million as of September 30, 2007.

Monica will now continue with a review of our business.

Thank you, Oren.

We are confident in our long-term strategy and our execution and we expect to see the results of our successfully completed transition commencing in the fourth quarter of 2007. We started over a year ago to invest heavily in the enhancement of our solutions while focusing on building our business for the long term with larger deals and long-term contracts.

The focus on larger deals that require longer sales cycles and longer revenue streams has increased our results in the last four quarters. At the same time, our visibility has continuously increased. Our outstanding operational execution enabled us to maintain profitability.

In addition to new wins, great positive cash flow and significant recurrent revenue from our customer base in the third quarter, we also succeeded recently in achieving the long-term goal, acquisition of a UK-based company. We will continue the ongoing search for acquisition targets.

We believe that we have achieved our goals that we set until now and we are prepared for the next goal, revenue growth. We expect to achieve over 10% internal growth in the fourth quarter of 2007, compared to the third quarter of 2007, and to reach in total a new revenue record of approximately $5.4 million.

We would like to take questions at this time.

(OPERATOR INSTRUCTIONS)

The first question we have comes through from the line of Dwight Mamanteo, an analyst from Wynnefield Capital.

Please go ahead with your question.

Good morning, Monica.

Good morning, Dwight.

Let me understand. The 10% internal growth quarter-over-quarter, that would mean that internally you would generate $4.4 million in revenue for Q4.

Approximately.

And then Abacus would generate about a million. Now, can you tell me if the Abacus acquisition was accretive, or is accretive?

First of all, if we look in the long term or in the short term, in the short term, we believe that it is neutral. Of course, when we exclude the different amortization of intangible assets, if we look in the long term, we believe that after two or three quarters it will become accretive.

Okay. So, for the fourth quarter of this fiscal year, the operating expenses will increase by how much, do you think?

This is difficult to say because, as you know, the operating expenses, although most of it is the salaries and the cost of traveling and of offices, part of it is also related on the sales that we do, because we do have some third-party licenses, for example, to Oracle, because almost every solution that we sell includes an Oracle license and Oracle support. And we also have from time to time some other third-party expenses.

But if you look at the profitability, we certainly expect to be able to show at least the same level, although of course it will be influenced by the new cost of the Abacus operation.

I've noticed that your revenues, just the MIND portion of the business, seems to have gapped down about 12% year-over-year if we assume $4.4 million for the fourth quarter.

Is the market shifting? Or what's happening in the market that would actually explain that kind of downward momentum, I guess, in your revenues?

I think that we've been talking for more than a year now about the transition phase, about the fact that MIND decided that in order to really grow in the future, it needs to sacrifice in the present, sacrifice smaller deals and build itself for enabling larger deals.

And I think that from the point that we took this strategic decision until we saw it in the report, it didn't happen immediately. It took some time but at some point it did [heat up]. And what we see now is that we did win larger deals. We see the visibility increasing as part of the deals. There are managed services deals where the revenue is spread over not only a few quarters but sometimes over three to five years.

And I think that if you look at MIND, this is what happened to MIND.

If you look at the whole space, the whole space is very active, but it isn't growing, at least from what we see. I think that the total market isn't really growing, although MIND is such a small part of the total market that there is lots of space for MIND to grow into.

Okay. Does that mean, then, that you plan to, I guess, increase the offerings in your platform? Or what's your strategy moving forward, especially with the usage of the $30 million of cash that you have on your books?

I think that our strategy, and you can see that we execute on this strategy is, first of all, we invested heavily in being able to offer an enhanced platform where we can market it to larger carriers at higher prices and also be able to collect some additional professional services from these carriers.

And at the same time, while we try now to sell more and more of these solutions, we see the target moving from tier three to tier two into the tier two space and coming with even larger deals. And winning new deals and larger deals, this is where we see the internal growth. But of course we continue to look for acquisitions.

I think that as we are always very cautious, we've been very cautious, we've looked at many, many companies until we decided on the company that we wanted to acquire; and we are going to be very cautious in the future as well. But we do believe that we will continue to find the right targets and we will continue to acquire more.

And when we talked about acquisitions in the past, we said we are looking for geography, for customer base, for complementary technologies. And we have achieved in -- starting with 2005, we have achieved the presence in the U.S. through the Sentori acquisition. And we are very encouraged by the success of this acquisition.

And now we see that the next step, the acquisition in the UK -- we believe the presence in the UK is important for a billing company, for a company that is selling in the telecom space. The UK is not only a great market for itself, but it's also a gate to Western Europe.

Okay, thank you.

So if I understand this correctly then, you've hit your targets for geographical, I guess, spots. Any plans to go outside of the billing and call center space?

We are looking also at other opportunities of different platforms in the telecom world. And, yes, we are looking at complementary products as well.

Okay, great, thank you.

Thank you, Dwight.

Thank you.

The next question we have comes through the line of [David Scwhiebel], a Chairman of [Habel].

Please go ahead with your question.

Good morning, Monica, how are you?

Hi, David. Fine.

I want to first congratulate you on your achievements from the third quarter and I hope the investment community will recognize these achievements and the potential of the Company.

Just two quick questions. Would you ever consider a share buyback?

We considered it, but we believe that as liquidity in the stock is important, this was something that our Board of Directors did not approve at any point until now. It has been considered a few times. I think that the method that we use, the dividend instead of share buyback, is a method that should be considered by more companies and is the policy of choice.

Second is, are you satisfied that the cash that you have now is achieving the maximum returns with the minimum risk?

I believe so.

And the cash that we have serves two purposes -- one, to show our financial strength to potential customers, and second, to enable us to buy companies when we find the right target. And in the meantime we just try to keep it in bank deposits or something that is risk-free.

Okay, thank you very much. Have a good day.

Thank you, David.

Thank you.

The next question we have comes through from the line of Kevin Dede, an analyst from Morgan Joseph.

Please go ahead.

Hi, Monica. Kevin Dede.

Hi, Kevin.

Also, congrats on the UK announcement.

Now I apologize, I may have missed your earlier comments. Did you say that deal's closed at this point?

The deal, the acquisition of the UK company, is completely closed, yes.

Okay.

And could you just refresh me on when, what that date was? Was that during the third quarter or into the fourth?

It wasn't through the fourth quarter. It was October 10 of 2007; very close to the end of the quarter, really.

And we acquired the company for GBP3.6 million, 80% payable immediately and 20% payable in two installments of 10%, based on certain targets that the company has both on revenue and profitability.

Okay.

Would you say the margin structure parallels that of MIND? Would we expect -- what? -- 70%, roughly, gross margins there?

Because it is a service bureau and managed services, I believe that the margins there are at this point in time lower. But I believe that with the cost structure that MIND has in place and with the benefit of the merge we'll be able to get better margins on that as well, and especially that we expect the entity in the UK to act as our head European office and also to start selling the MIND solutions.

So the integration of the company will be a full integration where we will use the different facilities for both development, sales support, in a combined way.

So if you ask if in the long term it's going to hurt our margins, I believe in the long term no; in the short term, probably yes.

Okay.

Can you give us a rough idea on headcount, what you're adding and what you'll be at year end?

We have today 287 employees --I mean -- today, I mean end of the quarter. We added in October 30 employees from the UK entity, as we expect this operation to grow. So if we are 300, around 320, we expect it to be a little bit higher but in the same kind of count.

Okay.

Can you give us a little more information on the wins and follow-on orders that you won in the U.S.? Understand that there are two separate new wins, is that correct?

Yes.

There are two separate new wins, one is a license deal and the other is a managed service deal.

And the follow-on orders, we had many, many minor follow-on orders, but we also had one major follow-on order. And of course being mainly licensed -- also some professional services, but mainly licensed, this is the type where we get the best margins.

It is based on the fact that the customer is growing, but also on the fact that they are happy with our support and with our solutions. And each follow-on order that we get from existing customers, we are happy because this means that we are acting correctly, we are servicing them well; and we know that in the billing world new deals are won because of good references.

Okay.

So I guess the big question is whether or not these follow-on orders point to successful implementation of your chasing the larger deal strategy. Can you give us an idea of your customer mix and, I mean, maybe how it's changed a little bit over the past four quarters since the implementation of the larger-deal-focused strategy?

I'm not sure that I understood about the customer mix.

What I can tell you is that our deals are very different from what we used to have two years ago. They are much larger. The part of the professional services is normally higher; and you can see this in our results, that we are around the 40% maintenance, 30% services and 30% license.

And most of these deals, if it's managed services, the monthly amount grows as the subscriber base grows. If it's licensed deals, it's the same except that it comes in [bulks] of license increases.

I'm not sure that this answers your question or if I understood it correctly.

Yes, no, no. I understand that you've been driving the Company to win larger deals, and I just was -- no, that helps understand how larger deals have changed.

I guess I'm still just curious -- the new wins were with companies that you hadn't touched before but you're seeing a lot of follow-on orders from customers that you've had.

The truth is that one of the new wins in the U.S. is with a company that we did do some other type of service for them in the past. And when they decided to replace also the wireline solution -- we used to do the wireless solution for them and they had a different solution for the wireline, and when they decided to look for a new solution for the wireline, this is when we had this new win.

It's a new win because there was a tender and we won, but it's not a completely new customer.

Very good. Okay, thank you for taking my questions and congratulations on the UK deal.

Thank you, Kevin.

(OPERATOR INSTRUCTIONS)

The next question that we have is from the line of Mr. Bill Swanson, a broker from Northland Securities.

Please go ahead with your question.

Good morning, Monica.

A couple of questions.

First off, in terms of your whole transition strategy into bigger deals, can you kind of give us a comment on where the average deal size is, or your ASP today versus six to 12 months ago when you started your switch towards bigger deals, to give us some type of an idea the order of magnitude of the size of the deals that you're winning now versus what you used to do in the past?

Hi, Bill.

I think first of all we didn't start the transition only six months ago. I think more like 18 months ago that we started this process, or even much before. And that I think that at some point during this process we said that the initial leveraged deal is over $0.5 million, and I think that now we are maybe at double this size.

Okay.

Now, you talk in terms of you've improved visibility over this period of time and you've given guidance for 10% internal growth. And then correct me if I'm wrong, but is the Abacus acquisition at about $1 million in revenues in the quarter?

Expected to, yes.

Okay.

Now, how far does your visibility go out? Can you grow 10% internally throughout fiscal '08?

At this point in time, I think that after a very long time we supplied expectations and the estimates for the fourth quarter after for a long time we didn't give any estimates. And we will not supply at this time any estimates for 2008.

Okay.

So visibility's improved but it's not better than a quarter out, is that what you're implying?

No. Visibility has improved for much longer than a quarter, and when we look even at three, four quarters from now, we have a strong basis to start from, from our maintenance agreements, managed services agreements and so on.

But, still, we will not give estimates for 2008.

Okay, that's fair.

I guess I do have another follow-on question. You talk about getting approval for a $0.20 dividend for this year. Historically the Company has paid out of operating earnings, so I think you have $0.12 in earnings so far through the nine months. Is that implying that you expect to earn $0.08 in the fourth quarter?

We estimated a non-GAAP of $0.20 beginning of the year, but this is non-GAAP.

And also the 20% (sic -- see press release) dividend is not fully related to the GAAP or non-GAAP EPS. It's more related to the fact that this is an average of what we distributed. We distributed already five times. Three times was out of the net income and two times it was out of the existing funds. So. And this time it might be that it would be kind of a hybrid distribution.

But in general we expect to come to the Board in around February and approve the distribution of $0.20.

Okay.

Now, the last and final question, and I'll let someone else ask you a question. Historically, when you guys have gotten to the $5 million quarterly revenue run rate you've been able to produce a 20% operating margin. With the new acquisition, is that a number that's not achievable at this point in time; will take you some time? Or do you still believe you can produce a 20% operating margin with the current setup of the businesses?

I think that eventually we will be able to do so. But this is the first quarter where we consolidate our business; and I think that to achieve this in the first quarter would be very, very difficult, not to say impossible.

Okay. All right, thank you very much.

Thank you.

Okay, thank you. The next question that we have comes through from the line of Dan Weston, an analyst at WestCap Management.

Please go ahead with your question.

Oh, yes, hi, good morning, thanks.

A couple questions, sorry if I missed it. On the Abacus side, have you disclosed what Abacus revenues were in fiscal year '06?

No, we didn't.

Okay. Is that something you're just not comfortable in sharing?

It's something we did not disclose.

Also, their financial year was different from our financial year; and they report in English pounds and the English pound changed through the last two years as well, so we did not disclose it.

Okay.

I believe you mentioned that -- if I heard right, that the growth in that business has grown threefold. Is that what I heard on the call?

During the previous (inaudible) of time.

Three years, is that what you said? I'm sorry. Did you say in the last three years?

Karl, maybe you can help me with that.

Yes, it was threefold over the last four years.

Over four years, okay.

Thank you, Karl.

And, Karl, do you still see that type of growth rate currently in the business?

We will not give estimates on that operation. We hope that as a Group we will achieve growth in the future, but we will not -- in any case, the operation is changing; it's becoming one division and it will be merged into the MIND Group.

Okay, understood.

And just a couple of questions in regards to your latest deals that you signed in the quarter. You mentioned one U.S. wireless carrier. That was a five-year deal. Was that the licensed or the managed services deal?

That was the license deal.

That was the license deal. Okay.

So on a deal like that, typically what happens in terms of the flow of revenue? How much are you able to book upfront? And then what happens to the services and the maintenance program? Does that get thrown into kind of like a backlog, if you will?

No. It does not go into the backlog. But also the revenue recognition for such a deal will be over the period of either implementation or customization for the customer. And we expect this to take two to four quarters. And after this two to four quarters, where we recognize both the license and the implementation services, we'll start recognizing the maintenance over the period, over the next few years.

But the truth is that nothing goes into the backlog because nothing is invoiced before it is implemented.

Okay, I see.

So the license revenue that you discussed this quarter, I think you mentioned it was 32% of your revenue. So was any of that license revenue from the three new contracts that you signed during the quarter?

Almost nothing.

Almost nothing, okay.

And, by the way, do you disclose a backlog number?

No. And also, as I said, we normally invoice only upon completion of things, so the backlog would have no value.

Okay, okay.

And on the Abacus side of the business, do they have kind of like a maintenance or recurring revenue stream that you could talk about, as well?

This is 100% recurring revenue business, or almost 100%, because it's only a service bureau. Until now they did not sell any licenses. They only sold deals through managed services agreements.

Okay, and those managed --

So it's a recurring [monthly] business.

Got it.

And those managed services revenues that Abacus has generated, could you talk a little bit about how you sell that service, and then -- in other words, is it only on a one-year type contract, or longer?

And then could you discuss over the last few years what you've seen in terms of renewals on those service contracts, as well?

Karl, can you elaborate on that?

Hello, can you hear me now?

Yes.

Yes, sure.

The deals can be anything initially from one to three years. And in fact we have contracts going back all the way to 2002. Most deals are either automatically renewed because the contract allows for that, or then renegotiated with the customer if that's how they've structured the contract.

And so we do tend to keep most of the contracts running through.

Okay.

And then could you talk, give us a little bit of color in terms of, in the past, what has your renewal rate been on renewing those existing service contracts?

Okay. Probably the best way to say is that in fact the only ones that haven't renewed over the last four or five years have been where the customer has actually been acquired by somebody who's a much larger player in the market themselves and were taken into their own in-house operation.

So we -- basically with all of our contracts, other than that situation, they have renewed.

Understood. Okay.

And then finally, Monica, so if I'm reading this right, combined with your pure maintenance revenue over at MIND, and then coupled with Abacus' business, which is pretty much all recurring revenue, is the combined Company operating now at something north of a 60% recurring revenue model?

I would say so.

Okay. Okay, very good.

Well, thank you again for taking the call, and good luck with the integration.

Thank you.

Thank you.

There are no further questions at this time. (OPERATOR INSTRUCTIONS)

Thank you all for being with us. Good day.

Ladies and gentlemen, the call is now finished. You may hang up your phones.