Mind CTI Ltd (MNDO) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to MIND's Q1 2008 earnings conference call hosted by Andrea Dray. My name is Ina and I will be your coordinator for today's conference. For the duration of the call you will be in listen only. However, at the end of the call, you have the opportunity to ask questions. (OPERATOR INSTRUCTIONS). I'm now handing you over to your host to begin today's conference.

Good morning, everyone, and welcome to MIND's conference call. Today, MIND reported the results of its first quarter 2008. On the call this morning for MIND is Monica Eisinger, MIND's CEO. Monica will discuss the Company's developments and achievements during the first quarter of 2008 before we turn the conference over to entertain your questions.

As a reminder, some of the comments made in this call by management and in response 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.

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 first quarter of 2008 and discuss our business.

During the first quarter we increased our marketing efforts for our end-to-end billing and customer sales solutions for PS2 and PS3 service providers, and at the same time we focused on successful delivery of our many projects with strict time frames and multiple milestones. We continue to build for the future to enhance our footprint in the US market and worldwide in order to win both new deals and additional business from our growing customer base. Our continuously growing professional services teams enable us to support the existing customers as well as future potential growth, and our account managers are now able to offer additional services to existing customers.

The Managed Services and standard maintenance revenue built up and to encounter demand for extended services such as customization, consultancy and migration of existing solutions to new versions of our new and enhanced product offering.

We report now for the first time the backlog for our [billing] product line. As of March 31st, 2008, the long-term backlog was $16.5 million, of which $8.7 million is expected to be billed by year end. The revenue from our enterprise solutions product line was, in 2007, around $3 million, and we expect it to reach the same level this year, in 2008. There is almost no backlog for this product line, as these are out-of-to-box products distributed mainly to our resellers. We believe that the backlog is an important metric in understanding and assessing our business.

We continue to enhance our solutions and to add new functionality [towards] our products. The new modules that we have described at length in the fourth-quarter conference call, the point-of-sale, already helped us win new business and is now being installed at two new customers. This Web application is aimed at the wireless retail markets, enabling operators to offer their products and services in retail stores and to manage the process within our [enhanced] solutions.

The revenues for the first quarter of 2008 were $5.4 million, representing an 11.5% increase over the first quarter of 2007 compared to $5.6 million in the fourth quarter of 2007. Operating income, excluding amortization of intangible assets and equity-based compensation expense, was $291,000, or 5.4% of revenue. GAAP operating income was $79,000, or 1.5% of revenue.

The operating results in the fourth quarter of 2007 and the [first] quarter of 2008 are affected by the weakening of the US dollar and non-recurrent expenses relating to our last acquisition in the UK, [being] the restructuring of [workforce] and infrastructure in the UK office.

For the first quarter of 2008 revenue from our customer care and billing software was $4.6 million, and revenue from our enterprise call accounting software was $768,000. We operate and win business around the world, and we continue to focus mainly on the Americans and Europe. For the first quarter of 2008, the geographic revenue breakdown was roughly 27% from the Americans, 63% from Europe, and the rest divided between Israel, Africa and Asia-Pacific.

Our long-term business model contemplates that licenses, services and maintenance fees will each represent around 30% of (inaudible) and contemplate gross margins of approximately 65%. In the first quarter of 2008 licenses represented around 30%, while maintenance and services around 70%, in line with our model.

During the first quarter we had two wins. The first one is in the UK. In October 2007 we announced that we acquired a UK-based company that provides billing and customer sales software solutions in a service-bureau mode, mainly to European carriers. This is our first win with (inaudible) Company. It is with a rapidly growing UK communications company that provides various services through large (inaudible) networks and complex converged voice and IP networks, as well as traditional voice and line rental services.

This is a rolling one-year contract for fully outsourced service, including performing day-to-day operational billing tasks, production of month-end billing and revenue share statements, invoicing and support of the customer's value chain.

The second win is with a regional mobile operator in the US that offers pay-as-you-go plans. This is a Managed Service contract for five years, including performing day-to-day operational business tasks, support for software configuration changes, support for third-party interfaces and proactive monitoring of the system. The solution includes the new MIND offering, the point-of-pay module, as well as customer care and electronic bill presentment and payment, creating billing provisioning remediation.

Lately we have seen [increasing] interest in our solutions in the UK and the US, mainly for billing and CRM Managed Services from wireless and pay-per-play operators. We are pleased with the continued momentum, and we believe that the new wins strengthen our position as the leader in billing and CRM solutions for mobile operators, providing regional coverage with unlimited wireless calling plans.

The new five-year Managed Service agreements increase our long-term visibility.

Regarding our cash position and the auction rate investments -- as previously announced, we continue to receive the interest payments every month on the held auction rate securities, which are now rated BBB by S&P and A3 with CreditWatch with negative implications by Moody's. As of March 31st, 2008, our cash position excluding the auction rate securities was $13.8 million before the dividend distribution that took place in April 2008.

Yesterday we announced the appointment of a new CFO. Mr. Itay Barzilay comes to us after holding several financial management positions with Avaya in US since 2003. Prior to Avaya, he served as a consultant at Ernst & Young in Israel, and he is a CPA and holds a BA degree in accounting and economics and an M.B.A. from the New York University.

At the same time, we also announced changes in our Board of Directors. Mr. Rimon Ben-Shaoul, who served on the Company's Board of Directors since 2002, resigned lately in order to pursue other business opportunities. Me personally and MIND, the Company, express our profound gratitude and appreciation to Rimon for his significant contribution to the Company.

The Board of Directors yesterday elected Mr. Michael Rothenberg to serve as a Class II director and member of all committees. Mr. Rothenberg is the founder of BreezeCOM that later became Alvarion. Alvarion is a wireless broadband pioneer and a leading provider of WiMAX. Mr. Rothenberg served as CEO of Alvarion from 1993 to 2001. During this time, the Company reached over $100 million in sales, and completed an IPO and a secondary offering, both in 2000.

To summarize, as previously reported, we intend to continue focusing more on internal growth, and increase our marketing and sales activities, and we see more opportunities in the Americans and Europe. We believe that there is a clear need for billing solutions to replace existing solutions, with the growth of wireless carriers and the offerings of new services to their subscribers.

The pipeline of MIND is robust, and the sales team is very [experienced]. The competition is very strong, as always, and the sales cycles remain long. We pursue more (inaudible) opportunities, and we believe that our convergence, (inaudible) base end-to-end solution, our reputation and the Managed Services offering will help us win new [business].

Operator?

(OPERATOR INSTRUCTIONS) Kevin Dede, Morgan Joseph.

I don't have the full P&L; I was hoping you'd give us a little glimpse of the gross margin trend versus fourth quarter and expectations going forward.

As I said, our model is around 65% gross margin. This quarter, we have 67.5% gross margin, meaning that out of the revenue of $5.36 million, the cost of revenue was [1744]. So this brings us to a gross profit of 3.616, and this means 67.5% gross margins.

What do you think the primary influence of the higher-than target? I noticed license revenue looked pretty strong. Is that the primary driver?

It's never exactly a fixed number. It always depends -- yes, you are right; these license [fees] are higher, then certainly, the gross profit is higher as well. Also it depends upon the third-party costs like licenses for database, so other third-party costs that we have in the specific quarter.

But this is the area, 2% up, which may be a good sign, but it's not really a sign. We are in the area where we want to be.

I don't remember exactly the name of the company that you acquired in England, but I was hoping you could give us a review of the progress of integration there and whether or not the win had to do with -- is that with the UK, or it had to do with that acquisition?

Yes. The win in the UK is a in by the UK team. And also, we see now that we get leads and we're active with opportunities in the UK that we were not aware of those opportunities before. We've had some restructuring in that team, and we incurred costs, as I said, both in the fourth quarter of 2007. We will have some restructuring costs also in the second quarter of 2008, but less than this quarter. And this quarter, we have approximately $150,000 of restructuring costs and nonrecurrent costs in the UK.

The UK company is called, now, MIND C.T.I. UK, of course. But it used to be called Abacus before this, and (inaudible) mainly in full outsourced billing, and we see in the world, more interest now for Managed Services and full outsourced service bureau than we saw in the past. We believe [that they're both], based on the fact that the local presence in UK [brings] up more opportunities that were not open to us in the past, and to the fact that we have this new business model, will help us grow our business.

So it's pretty clear, then, that you're marketing in the UK with MIND C.T.I. brand? And, that's universal across your international efforts, if I'm not mistaken?

It's almost everywhere. But in the US we do maintain both brands, both MIND C.T.I. and the [Centauri] brand that we bought in 2005 because we believe that the marketing efforts that Centauri did before we brought them in August 2005 did build some reputation for that name. And this is my interpretation, in being both in the MIND C.T.I. name and the Centauri name.

Okay, so that's the plan -- keep both of those in the US going forward?

Probably, at some time, at some point, we'll switch completely to MIND C.T.I. worldwide.

Can you give us a view -- well, as you see it, of some of the emerging networks as new technologies allow them to develop? I'm speaking specifically to WiMAX, but I was hoping you would give us a glimpse of that market. And then also, the way that you see the competitive market evolving and whether or not you think there's an influence of global economic trends on how some of your competitors are reacting to perhaps looking more closely at tier 2 and tier 3 operators?

Okay. Regarding WiMAX, we do have some opportunities in the pipeline, mainly in the emerging market, I would say former Russian countries, some countries in Africa, IP networks that combine with the WiMAX technology. I can't tell you that, until now, we have any win of this kind, but we're certainly working together with partners such as Alvarion to get our solutions together when they implement such networks.

As I said, although we are working on multiple -- and I will say maybe more than 10 opportunities like this, we didn't have -- well (inaudible) [we didn't have a lot yet, either]. This network takes time for all proper decisions to be there, and for the network to be built, [but certainly] believe WiMAX being deployed around the world.

Regarding our competitors, I think that there are a few facts that we need to look at, and this is -- one fact is that we see in the US lots of action, new carriers, regional wireless carriers, still being some infrastructure, doing, leasing some lines from the tier I operators and really getting traction with winning subscribers. I think that we are now in a good position to really be the leader of this type of solution. We had some of the wins lately -- I would say most of the wins, but it's not really most of the wins, but some of the wins lately have been with these type of regional carriers that offer unlimitedly space (inaudible) pay-in-advance, [small bills] and we have no contracts. And they attract really lots and lots of new subscribers, and we've seen the existing carriers growing and we've seen new carriers that, either by licenses [into] market or that they were very small and used some in-house or very small solutions, and as they grow, they need to upgrade to a more flexible, more stable solution, and then they move to us. And this is where we see lots of actions.

And the other action we see is in the triple play; people get maybe started with cable, but now are introducing wireless. Companies get started in one field of telecom, and they certainly are moving into the [more people services] play.

Regarding our competitors, we don't compete against the big guys, the tier 1 [and of -- and their friends]. So this is not a problem because we don't compete against them. What we see is that companies that don't have the financial strength that we have and don't have the worldwide presence that we have, are losing market share nowadays, and we hope that this will help us win more business and get more market share.

And then how about the -- so, I guess what you're saying is that the larger billing software companies aren't feeling economic pressure and the need to target tier II/tier III type carriers?

No, not that we see. But I don't know why; there are many reasons why they shouldn't target these carriers, because they have the megadeals with the megacarriers. And it just will be -- serve their business to deal with the smaller deals. And this what we felt until now, and this is what we feel now as well.

[Ryan Carr], [Sparta].

One of the questions I have is the CFO turnover. You've now hand two CFO's it looks like in the last three months. Is that the reason why we haven't seen any P&L's for Q4 and Q1? Can you just give me some color on that?

There is no connection between the P&L and the CFO. The reason that we don't have any P&L is because, in order to have a P&L, we need to get estimates for the evaluation of the auction rate securities. We didn't do that for Q4 because the CDO auction rate security that we hold is a very, very complex security, and the cost and time frame to achieve -- to get such an evaluation that was also recognized by our accountants, it wasn't economical, and it wasn't in the time limit that we had. What we said is that, by June 30, when we have to file the (inaudible) we will spend the time, the effort and the money to get it.

I was just going to say that, there's a lot of companies that are dealing with this every quarter, and they are at least putting out P&L's. They're all finding ways to do it on a quarterly basis, either moving into long-term investments, marking it down 5% -- that type of thing. How are you guys different than all the other publicly traded companies out there that are dealing with this?

Part of the companies that are dealing with the auction rate securities have -- they're much larger companies. Like we know one of those in Israel, that they have a full team of people doing the evaluation work themselves. This not practical from our point of view. And in other cases the evaluations were taken from the brokers and not from firms that give independent evaluations. And lately, we were [announced] by [PWC] that, in any case, an evaluation by a broker will not be considered an evaluation anymore as by the new -- I think it's a new SEC rule.

Also, the [thing] is that we believe that the fact that we are in arbitration. We have filed a claim against the bank, and the fact that we are in arbitration right now will eventually get solved, and will influence, in any case, our results.

Okay, so we can expect something by June -- is that what I'm hearing? Between now and then, assuming -- the broker and that type of thing could take years. We can't go by years until we see a P&L, just to see the metrics of the Company. So we should see something by June 30th?

By the SEC rules, we have to file the 2007 financial report by June 30, and we plan to do that.

So when do you think that we might see the first quarter that you just reported? That won't be June 30th? That could be next June (multiple speakers)?

The moment that we have that evaluation for -- it will be the evaluation that can be used for any other data until then.

Let me ask another question having to do with the sales and marketing that you mentioned. I know it's been a thing that you and I have talked about over time, just bringing on new salespeople. Do you think now you can support -- so, you have the ability now to support greater than $5 million in revenues every quarter, at this point? It just seems like that's always the stopping point between $5 million and $6 million a quarter. Can you grow from here now, with this new sales force in place, or do you still have to keep hiring?

I think that we can grow.

So are we going to grow on the Managed Service side? It looks like this year, if I just do so quick math, you don't give guidance much anymore. If we use this backlog of $8 some-odd million and add maybe $1.5 million or so in licenses each quarter, we get around $15 million in revenues. Is that something that we should think is low? Or, it would be less than last year. So, what are we thinking in the way of any amount of growth this year?

I don't know the math that you did, but if you take the fact that we already announced the first quarter and you add to the backlog for this year of $8.7 million that we hope and expect to be billed by year end, and you add the fact that we said that this is a the backlog cap for billing and it does not include the revenue for our call accounting for the enterprise solution product line, I came up with different numbers, so -- that look much better.

What numbers did you come up with? Okay, that's fine. That's all I had.

[Ben Westin], [WestCap] Management.

Could you give us what your interest income was for the quarter, please?

The interest for the quarter, the financial income for the quarter was $469,000. Of course, this is billed from the different interest that we get from the auction-rate security or our standard bank deposit, net of the cost of -- and so on. So the financial income is $469,000.

Okay, good. And could you -- I want to make sure I got clear here -- did you say that your maintenance revenues for the quarter was about 30% of total revenue?

No. License was 30%, and maintenance and services was 70%.

And then, what part of the 70% was pure maintenance?

I don't have the exact number, but normally somewhere -- half is the services and half is maintenance. It is approximately out of the 70%.

Okay, so maintenance as a whole is roughly about 30% of your overall revenue, then?

Yes, roughly.

Right? So, it would be split 30% each way -- license, revenue and service?

Yes, but now because license is 30%, then maintenance is a --

So it's a little higher?

Yes, it's a little bit higher.

Okay, got it. And then, your backlog that you put out there, two questions there. First, the $16.5 million that you called backlog for your billing product line -- what was the backlog last year at this time?

We never, until now, either calculated or announced or reported backlog.

Okay. And, besides -- because this one kind of clarifies billing product line backlog. Is there another number there that is not included in this $16.5 million figure?

Yes. We have two product lines -- one is the billing for carriers product line, and one is the call accounting for the enterprise, or for [corporate] product line. Last year, the enterprise solutions brought in revenue of around $3 million. We expect it to reach probably the same this year or in the same range. You can see that out of this quarter's revenue of 5.36, we've had 4.6 was -- roughly, 4.6 -- was billing and a little bit less than $800,000 was enterprise solutions.

Okay, understood. And the enterprise solutions revenue or backlog is not included in either the $16.5 million or the $8.7 million you gave?

Yes.

Yes? That means it's not included?

Yes, it's not included.

Okay. And then, the auction-rate security update -- okay. Just to get some more clarity there, so at this point, did you say that you are in arbitration right now?

Yes.

So has the proceeding actually started?

It's [partly] started. It will take some more time.

So, is there like a date that you actually present in front of the panel?

Not yet.

Is there any idea of when that's going to happen?

Not really, because it looks like they can get some postponements for different reasons, and this is where we are now.

I think that's all I have for you right now. Thank you very much, Monica.

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

Thank you very much for being with us today.

Thank you. You may now replace your handsets.