Mind CTI Ltd (MNDO) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to MIND's Q4 and year-end 2007 earnings conference call hosted by Andrea Dray. My name is Clementine, and I will be your coordinator for today's conference. (OPERATOR INSTRUCTIONS). I'm now handing you over to Andrea Dray to begin today's conference.

Thank you, Clementine. Good morning, everyone, and welcome to MIND's conference call. Today MIND reported the results of its fourth quarter and year ended December 31, 2007. On the call this morning from MIND is Monica Eisinger, MIND's CEO. Monica will discuss the Company's developments and achievements during the fourth quarter and full-year 2007 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 fourth quarter and the full-year 2007 and discuss our business.

As we announced in our previous conference call, we started over a year ago we invested heavily in the advancements of our solutions while focusing on building our business for the long-term with larger deals in three to five-year contracts for Managed Services. We're very pleased with the strong operational results in the fourth quarter.

As we announced, we expected 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 exceeded our expectations, and in the fourth quarter, we've posted record revenue of $5.6 million. In the fourth quarter of 2007, revenue from our customer care and billings software was $4.7 million, and revenue from our enterprise call accounting software was $852,000.

For full 2007 revenue from our customer care and billings software was $15.4 million, and revenue from our enterprise call accounting software was $3 million. We operate and win business around the world, and we continue to focus mainly on the Americas and Europe.

For the fourth quarter of 2007, the geographic revenue breakdown was roughly 36% from the Americas, 52% from Europe and the rest divided between Israel, Africa and Asia-Pacific. Geographic revenue breakdown for full 2007 was roughly 42% from the Americas, 43% from Europe and the rest divided between Israel, Africa and Asia-Pacific.

In 2006 we started a transition phase from smaller license deals to larger deals and long-term contracts. We enhanced our solutions and added entire new modules that can be sold as part of the end-to-end solution or is additional functionality offered to existing customers.

Lately, we started marketing one such addition the point of sale application. This Web application is aimed at the wireless retail market enabling operators to offer their products and services in retail stores and manage the process within our enhanced solutions. It is an easy to use integrated point of sale solution, allowing operators to offer services for new and existing customers and even to nonsubscribers. MIND's point-of-sale integrates with external systems such as the credit card clearinghouse, the external taxation engine and the address validation.

The application includes one, a cash rated for sales operation that handles both teleconferences and accessories. It integrates with (inaudible) hardware such as a [drawer], scanner, card swipe and (inaudible) while minimizing sales clerks' reports response time.

The second one is the cashier management application that supports the store management function such as drawer allocation, cash register monitoring, supervisor approvals of sales clerk operations and open day and close day workflows.

The third one is the inventory management application that supports shipments, transfers, on hand counts and much more. We expect that we will continue to benefit from our focus on building strong customer relationships with a view for the long-term combined with new product offerings.

During the year we saw significant recurrent revenue from our customer base with multiple customer upgrades of licenses and services, and we expect to see increased recurrent revenue in the future. We believe that the strategic acquisition in August 2005 transformed our presence in the US and in the mobile market and that we have proven execution of successful integration of an acquired customer base and market.

In October 2007 we announced that we acquired the UK-based company that provides billing and customer care software solutions in a service bureau mode, mainly to European carriers. Based in the London Metro area with around 30 employees and the strong methodology for outsource offerings, it is a good base upon which to build growth.

We believe that carriers around the world are lately looking more into the Managed Services option and that we are now put better positioned to capitalize on this trend with our US and now European presence. The addition of this service-based model and the fact that in the last 40 years we significantly increased our professional services deal to support the growth in services offered to customers changes significantly our business model.

Our new long-term business model contemplates that licenses, services and maintenance fees will each represent around 30% of revenue and contemplates gross margins of approximately 65%. In the fourth quarter of 2007, licenses represented around 28%, maintenance and services around 72%. In full-year 2007, licenses represented 32%, maintenance and services around 68%, in line with our expectations.

I want now to discuss our two new wins during the quarter. During the fourth quarter, we had two new wins where we have been selected by a telecommunications service provider in the US to support our unique model for mobile solutions. We were chosen based on our flexibility and our innovative solutions. This is a five-year agreement for Managed Services, meaning extended maintenance and enhanced support services that includes performing day to day operational billing stats.

The MIND solution that will be deployed includes consolidated billing, customer care, order management, inventory provisioning and mediation.

The second win is with the provider of both wireless and wireline services in the US. In the first phase, MIND was chosen to perform billing and customer care for the new offering of the wireless services. This new win is for the fixed line operation.

We're pleased to announce these two new wins. These wins reflect our strengthening presence in the US market both in the mobile and in the wireline industry. We believe that our innovative solutions, our reputation of on-time successful implementation will help us win additional contracts in the near future. We expect to have new wins in 2008 where our focus has been large to average deal size based on the enhanced functionality of our solutions, as well as additional recurring revenue.

The auctioned-based investments. As of December 31, 2007, we have a total of $20.3 million invested in asset-based auction rate securities and $12.4 million in cash and cash equivalents. While the liquidity of auctioned-based securities has been significantly impacted by market conditions, we continue to reassess interest payments every 28 days. We're not able to predict weather conditions in the market for these securities will worsen or improve.

We have been unable to obtain third-party evaluations for these securities in a cost-effective and timely manner. The complexity of the evaluation is the outside effect that these securities collateralize by 126 structured finance transactions. We plan to complete an independent evaluation in the second quarter prior to the publication of our audited financial statement. Such evaluation may require a charge to earnings for the fourth quarter of 2007 and full 2007 financials to reflect the material impairment of our long-term investments. However, we believe that we have positioned cash resources to extend the likely effects of the illiquidity of our auction-based securities on our operations.

On February 20, 2008, we filed a statement of claim with the financial industry regulatory authority and commenced an application against the international bank and certain employees that invested these funds on behalf of the Company. The claim related among other things that the the bank was supposed to invest the funds in highly liquid, highly safe 28-day auction-based securities, but without the Company's authorization invested the funds in CDOs.

The claim seeks among other things damages and other relief from all the respondents, including return of all the funds plus compensatory and punitive damages. We intend to pursue this arbitration vigorously. The arbitration however, has just begun, and no predictions of possible outcomes can be made at this time.

The dividend distribution. On November 5, 2007 as announced before, the board of directors resolved that the Company should seek the court approval formally required in order to enable a distribution for the year 2007 in an amount similar to previous years. Following the receipt of required approvals on February 26, 2008, the Board declared a cash dividend of $0.20 per share before withholding stocks.

According to the pre-ruling from the Israeli tax authority, tax will be withheld at the rate of 20%. This preruling applies only to this particular dividend and not to future dividends if any. The record date for the dividend will be March 18, 2008, and the payment date will be April 2, 2008.

As of yesterday, the board ratified the appointment of Rafi Wiesler as the Company's new CFO. Rafi comes to mind after serving as CFO at VocalTec Ltd, a NASDAQ traded company, and CFO of Tdsoft Communications. Both these companies specialize in Telecom IP applications. We welcome Rafi to our management team, and we believe that his financially experience will benefit the Company.

In 2008 we intend to continue focusing more on future internal growth and increase our marketing and sales activities as we see more opportunities in the Americas and Europe. We believe that there is a clear need for billing solutions for convergence of services and that many carriers are looking to migrate from the multiple niche solutions that they use today to one convert solutions for all types of services.

The pipeline at MIND is robust and the sales team is very busy, but competition is as strong as always, and the sales cycle remains long. We pursue multiple opportunities, and we believe that our convergent product-based end-to-end solution, our reputation and the Managed Services offerings will help us win new deals.

The new deals that we closed in the fourth quarter and since includes a long revenue strip. They help increase our visibility, and while each new win brings insignificant revenue for the same quarter and the near future, it increases the long-term backlog significantly.

Operator?

(OPERATOR INSTRUCTIONS). J.D. Padgett.

A question, if a lot of the new deals that you are closing really go into a backlog bucket, is there any way that you would share that with us on a go-forward basis?

First of all, thank you for your question, and to tell you the truth, this is something that I wondered myself before this call. We will certainly consider that. We never did share the backlog in the past, but as the backlog gets to be more significant and gets to be for a long period of time because we're talking about three to five-year agreements, we will certainly take it into consideration before our next call.

Okay, good. And do you have any comments about what we might expect for March quarter results?

We did not -- last quarter we did give guidance for this quarter. But at this point in time, it is not -- we're not prepared to give guidance just as we had these new deals, and there is a big spread of the revenue, and our quarter results depend a lot on the percentage of completion of projects that we are working on now. There are many projects that we're working on at this point in time either on a first phase of the project or later phases of the projects. And because of these larger products that we recognize on a percentage of completion, it is not easy at this point in time to give guidance.

Okay. Do you have the exact date that the last acquisition closed? I know it was sometime in October.

I think it was October 10.

October 10? Okay. And then I guess the last comment on the auction rate thing, the reason that potentially you would have to take a charge against that would be, what? Just that liquidity does not return to the market? Because it sounds like people are still timely with -- at least the pools are still timely with their interest payments to you.

I'm not sure that I completely understood your question.

I think the press release kind of alludes to the prospect of taking charge against your holdings there I guess. I am just curious why that would be if interest payments are still coming to you on a timely basis?

As you can see there, what we now posted is preliminary unaudited results. By the SEC rules before June 30, 2008, we have to finalize and post audited results. Our auditors request this evaluation, and this is why we said that we will get to this evaluation before the end of the second quarter.

And what would lead to a potential charge? Would it not be more related to whether -- I think the biggest determining factor in that would be if interest payments for any reason became delayed.

I think it is very difficult to be a profit and to know what is going to happen by end of June, but what I can disclose now is that, as of today, we received interest on these securities.

Okay. Thank you.

[Gary Simon].

With regard to these securities, are they rated? Do we have any AAA rating or investment-grade or non-investment grade rating?

In our November press release, we stated that these securities are AAA rated although under market watch. And I think that in the press release this time, we gave quite a detailed description of exactly the type of paper that we --

Right, no, no, you did give fair disclosure. I'm not questioning that. What I am just trying to understand is the AAA as a result of some insurance rating that they have, or is it AAA on its own? Are you aware or no?

I do not know.

You don't know? Okay. From an ongoing business point of view, historically we have had problems with the cash. And although probably over a period of time, you have generated interest income to support some periods where you did not get interest income or you might be getting more or less, doesn't it seem that we should be focusing more on the business and less on investing the cash? If the cash is available for acquisitions, okay; if not, it should be distributed?

I mean there's small distributions on an annual basis, but it seems as though people are not focusing on the business, which you seem to be progressing, although I want talk about the margins in a second. But the focus here and the whole value of the Company is being impacted by its cash.

I think, first of all, we do focus on our business and also in the last -- since 2001 we already acquired three companies, and there was a period between 2002 and 2005 that it was very difficult to acquire anything but (multiple speakers) as soon as it became a good timing to acquire something, we did in August 2005, and then we acquired the new Company as per our policy in 2007. And I believe that also the dividend policy is something that our shareholders are looking at it as a very positive thing.

And this is what we plan to continue to focus on the business, to continue to focus on growing the business, and I also said just before that we will continue to focus on internal growth.

But that is the point, if you are focusing on internal growth and even though you have done some acquisitions, you are still maintaining a very significant cash balance.

I think that I will take it as something I do not have to comment on.

Alright. As far as -- I mean we don't have an income statement here and I understand, of course, it is a preliminary announcement. However, it seems as though it is very hard to tell us where the gross margins are and the operating margins are, but on a bottom line basis, it seems that the level of revenue that you have your margins have come down. I imagine that is because of the bigger contracts that you are working with. But is that something that we should be projecting on a go forward basis that these are going to be the margins, or was there something special in this quarter that impacted it?

The acquisition of the UK company that is Managed Services, really is the Managed Services service bureau doing outsourcing of billing services. Of course, it influences our growth margin. And, as I said, the growth margin used to be based on more license deals or on a mix where we had licensed deals and Managed Services deals. And what we see lately is more and more Managed Services deals. So the gross margin goes to an expected 65% (inaudible).

Okay. And the last question is, are you saying the fact that you are such a small company that it is impacting you either positively or negatively and if you will be part of a larger organization, that the value of your product would be enhanced because of enhanced distribution and support?

We certainly think that we have a very high-quality state-of-the-art technology and that our product offering is really the best product offering, and yes, you're right. If we had a huge marketing and sales organization behind us, we could do better.

Well, maybe we should think about that and try to work towards that end. Because it seems like you've got a great product because you're attracting better and better customers as time goes on, but you have the difficulty of a small organization supporting such a robust customer base.

Again, I will not comment on that.

No, that is fine. Thank you.

J.D. Padgett.

I was just curious if there were any sort of onetime expenses this quarter around closing the acquisition?

No, the answer is no.

Why is it then that you get the incremental revenue but then it looks like the operating profit is about flat versus the third quarter?

When I said no, I meant not significantly, and there was one thing that hurt our profitability, and this is the weakness of the dollar against the Israeli shekel. Part of our costs is paid to Israeli employees, and we have our liabilities in shekel. The weakness of the dollar really hurt our profitability in the last quarter and in the full-year 2007.

Were there just also some increased investments in sales and marketing as you described earlier?

We keep increasing that kind of all the time. Now that we have acquired the company in the UK, the first thing that we did is hire two more salespeople that allocated in the UK, and we want to really build upon this location as we did with the US location. So, of course, we're going to invest more if it is in (inaudible) Europe, if it is in (inaudible) in the UK office.

It seems if the acquisition did around $1 million, and I'm not sure if that is right or not, but that means the core business was maybe up $600,000 versus the third quarter. I guess it is just a little surprising that some of that did not fall through to the bottom line.

As I said, there were some expenses, some of them because of the dollar rate. Some of them on maybe not significant amounts, but certainly for the acquisition. Certainly there are legal fees or other things that are in there.

But in general certainly the profitability that we see in Q4 is not our target, and we will seek the operating margins that are much higher than we have seen in other periods of time in the past at MIND.

Kevin Dede.

Can you give us a ballpark on exactly how much Omni added? The last caller estimated $1 million, but that seemed like that might be high.

If you look at when we estimated what the results will be for the first quarter, we estimate that we will show growth of around the 10%, and so everybody could really calculate, and we expect it to get to 5.4 after growth of around 10%. And we exceeded our growth percentage expected.

Okay.

So it is certainly in the area, even if I'm not giving the fixed -- the exact amount -- it is certainly in the area.

Okay. Fair enough. Can you give us the gross margin? I mean you -- I know obviously we have not seen the P&L, but you are expecting it to trend toward 65. I would certainly expect that in the March quarter, but given that Omni was only in for half of the fourth quarter, it seems to the me it should not be that low.

It was since October 10. So it is almost a full quarter, almost.

Right, right, right, okay, yes.

And also certainly the cost of the integration and until we get to the 65%, we're not there. We're lower now than the 65%.

Okay. Can you give us a little more insight on the point-of-sale application? Is that something that your customers have been asking for?

Yes. Our customers used until now a third-party where if you just sell them one part of the solution and you have to integrate with another vendor, there might be problems from time to time. And the truth is that a year ago we have been asked by our customers to look into developing this point-of-sale application, and we did talk to a few customers and ask them if there is real interest. And although there is no commitment, we believe that there is real interest and that we will be able to sell this application to existing customers.

Okay. The two new deals that you announced, are they totally new customers, or are they renewals of previous work that you have done for them?

It is totally new customers.

Okay. Can you give us an idea on how many new deals you one in '07 all told granted that you have been changing your focus toward more of a longer-term. I'm just wondering is that -- I know during '06 you were pretty forthcoming with regard to the number of deals that you would win in the quarter. But last year you were not so much. And I'm wondering if you would not mind sharing that now?

It depends how you count did. It is somewhere between six to eight deals.

Okay. And all of which are with that longer-term five-year type focus?

Two of them are not -- they are -- the revenue, there is a spread of the revenue, and none of the deals is fully completed yet from the revenue recognition point of view. But two of them are licensed deals, and the other are Managed Services deals.

Okay. And then granted, there is --

Or maybe I might be mistaken. Maybe it is somewhere, 2 plus minus 1.

Okay.

Okay. Can you characterize the general environment? Obviously there is some economic pressure. I'm just wondering if you think your Tier 2, Tier 3 focus and those customers might see more fallout with regard to the overall economic environment and their willingness to spend on new software applications.

Fortunately at least until now we don't see any signs of this, and I can tell you that I have been in Barcelona two weeks ago, and I have seen the interest and I have seen that people are looking for solutions. People are looking for solutions because they add the new services or because they have a very old system. Part of them are new carriers, but it is mainly existing carriers that are looking to migrate to a new solution that is more modern, that is more end-to-end, that supports multiple services, that supports convergence, pre and post date. And I think that the market does not suffer at all at this point in time.

Very good. Well, thanks for addressing those, Monica.

Thank you. We currently have no further questions. (OPERATOR INSTRUCTIONS). [John Weston].

Just a little clarity on the auction rate securities. You mentioned you had $20.3 million in total on the auction rate. Can you tell us what percentage of that was specific in the CDO investments? Or was it all of it?

I think that all the information that I could disclose I disclosed it in the press release, and I think that the press release is very detailed. I would not like to go into any other details.

Okay. Okay, that is fine. That is all I have for now then.

We currently have no further questions. (OPERATOR INSTRUCTIONS). We have no further questions coming through, so I hand you back to your host to wrap up today's conference.

Thank you all very much for being with us today.

Thank you for joining today's conference. You may now replace your handsets.