Mind CTI Ltd (MNDO) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to MIND's Q2 2008 Earnings Conference Call hosted by Andrea Dray. My name is Clementine, and I will be your coordinator for today's conference. (Operator Instructions).

I am 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. Yesterday MIND reported the results of its first and second quarter 2008. On the call this morning from MIND is Monica Eisinger, MIND's CEO and Itay Barzilay, the Company's CFO. Monica will discuss the Company's developments and achievements during the second quarter 2008, and Itay 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 summarize our major achievements in the second quarter of 2008 and discuss our business. The financials can be found in our press release.

We are pleased with our results, and we believe that we are in the final stages of our transition to becoming a complete solution company, offering mainly end-to-end billing and customer care solutions in a managed service or fully outsourced model. MIND's outsourced solutions act as an extension of the carrier, providing a reliable, comprehensive, and flexible billing service. The carrier realizes cost savings and a reduced time to market. They can be more flexible and better able to adapt to changing market conditions. While they focus on winning subscribers, we take care of increasing the level of service that is demanded in today's market and supply all the reporting and analysis they need. Our billing operations team is skilled, highly experienced, and capable of dealing with the most complicated billing requirements. We take pride in complying with the most stringent security, quality, and certification procedures available.

We are pleased to announce two new wins with our billing platform, one major win with our call management platform, and one major upgrade of license from an existing customer. In the second quarter we secured two new customers, one in the US and one in Europe, as well as a major upgrade.

The first win in the US is with a regional mobile operator that offers pay-in-advance plans in two states over a CDMA network for voice, SMS and MMS services. The plans include unlimited local phone service without having to sign up for long-term contracts at very affordable prices compared with other major national carriers. MIND will deliver a complete solution that includes the Point of Sale module within a six-year managed service contract.

The second win is in Europe with a small telecom reseller, and this is also a managed service contract.

The license upgrade from the existing customer includes the new MIND offering, the Point of Sale module as well as an upgrade of subscriber license. We are delighted with securing this upgrade, as it validates our strategy to develop new modules to be marketing into the existing customer base.

In the second quarter of 2008 we achieved a strategic win for our PhonEX-ONE Telecom Expense Management with a major financial institution in the UK. The financial sector is an important market for our enterprise solutions, and we believe that this win, which follows multiple deployments with financial institutions, is an important step towards reaching a leading position in this market segment.

Winning new business in this field is driven by the acceptance of IP switches and the seamless integration of our products with new equipment and technologies. The PhonEX-ONE solution is the first billing and call accounting product that has official certification for Cisco Unified Communication Manager version 6 and has passed the Interoperability Verification Testing that took place in February of 2008. We have already successfully implemented this solution together with Cisco's latest version at customer sites.

We continue to build for the long term, to execute on profitability, and to win new business. MIND delivers an end-to-end solution that suits carrier-specific needs. Our integrated Point of Sale module completes our platform that includes customer care, electronic bill presentment, and payment, rating, billing, provisioning and mediation.

MIND now offers a truly convergent, real-time solution across any line of business - voice, data, content, and video for fixed, mobile, cable, and satellite, both in prepaid and postpaid mode. We support automated business processes and sophisticated business models.

Itay Barzilay, our CFO, will now review some financials.

Thank you, Monica, and good day everyone.

In the second quarter of 2008 we reached revenue of $5.1 million, compared to $4 million in the second quarter of 2007. Operating income was $682,000, or 13.4% of revenue, excluding amortization of intangible assets of $166,000 and equity-based compensation expense of $43,000. GAAP operating income was $473,000, or 9.3% of revenue.

Impairment of auction rate securities in the amount of $796,000 contributed to a recorded net loss of $87,000, or zero cents per share, excluding amortization of intangible assets and equity-based compensation expense. GAAP net loss was $296,000, or $0.01 per share, compared with GAAP net income of $508,000, or $0.02 per share, in the second quarter of 2007.

In the first six months of 2008, revenue totaled to $10.2 million compared with $8.9 million in the first six months of 2007. We have deferred expenses of $862,000 in the first six months of 2008, as these expenses were incurred in customization and deployment of projects for which both revenue and cost will be recognized over the period of the agreement, which is approximately five years. These deferrals have a positive impact on the operating income as they lower our cost.

Cash flow from operating activities in the first six months of 2008 amounted to $2.1 million.

We continue to maintain a strong cash position, and, after the dividend distribution that took place in April 2008, we had cash and cash equivalents of $9.7 million on June 30, 2008.

As previously announced, we continue to receive interest payments every month on the auction rate security, which is now rated BBB by S&P and Ba1 under CreditWatch with negative implications by Moody's. Due to the lack of availability of observable market quotes on our investment in the security, the fair value was estimated by an investment advisor based on a valuation model. The model considered the structure of the security, the quality of the collateral, the default risks, and the liquidity determinants affecting the security. Factors that may impact valuation include changes to credit ratings of the securities, as well as the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral values, discount rates, counterparty risk, and ongoing strength and quality of market credit and liquidity. The estimated fair value of our holding in auction rate securities on December31, 2007 was approximately $5.1million, and we have recorded an impairment charge of $15.2million for the year ended December31, 2007. The credit and capital markets have continued to deteriorate in 2008. We have recorded an additional impairment charge of $1.8million for the six months ended June 30, 2008.

Regarding our revenue distribution for the first six months of 2008, we operate globally, and we continue to focus mainly in the Americas and Europe. Sales in the Americas represented 42%, and sales in Europe represented 50% of total revenue. Revenue from our customer care and billing software totaled $8.7 million, while revenue from our enterprise call management software was $1.5 million. The revenue breakdown from our business lines of products was $3.5 million, or 34%, from licenses; $3.4 million, or 33%, from maintenance; and $3.3 million, or 32%, from services.

I will now turn the call back over to Monica. Monica, please go ahead.

Thank you, Itay. We are pleased to announce the appointment of a new board member, Mr. Shmuel Arvatz. Mr. Arvatz serves as the CFO of ClickSoftware Technologies, traded on NASDAQ as CKSW. Prior to his position at ClickSoftware, he served as the CFO at a leading investment house in Israel and, prior to that, as Executive VP and CFO of Tecnomatix Technologies. Mr. Arvatz holds a B.A. in accounting and economics from Bar-Ilan University and is a certified public accountant in Israel.

To summarize, as previously reported, we intend to continue focusing on future internal growth, on increasing profitability, and targeting our marketing and sales activities especially to the mobile markets in the US and alternative carriers offering IP services to their subscribers in Europe.

We pursue opportunities and encounter long sales cycles, and we expect that our convergent product-based, end-to-end solution, our reputation, and the managed services offerings will help us win new deals.

We believe that the backlog is an important matrix in understanding and assessing our business, and we report for the second time our backlog. As of June 30, 2008, the long-term backlog was $16.1 million, of which $6.4 million is expected to be billed by yearend. The timing of some purchase orders slipped into July, and, as of the end of July, the long-term backlog was $19.1 million, of which $6.9 million is expected to be billed by yearend.

If we have any questions, please, operator.

Thank you. (Operator Instructions). We have one question from the line of Dwight Mamanteo. Please go ahead.

I notice that your EBITDA margins came down quite substantially. Can you provide some insight as to the increase in expenses - operating expenses?

The EBITDA-- If you look at Q1 2008, the EBITDA was $406,000, and this is quite similar to $458,000. If I look at the last four quarters, it was $261,000, $577,000, $458,000, and then $406,000, which is quite average. And the EBITDA in Q2, as I see it to be the opposite. It's $779,000. So I think that the opposite. The cost that we reported is influenced by what we described as the deferred numbers, both in costs and in revenue. And, although we do experience, as all the other companies, the changes in the exchange rates and so on, I cannot answer you as I don't know to what number you refer.

Okay. So you're indicating that, in terms of an EBITDA number, that it's pretty much flat year over year?

I don't have Q1 2008 here, but in Q2 2008, the opposite-- EBITDA was very low. It's $261,000. And, in Q2 2008, it's at $779,000. So this is a huge improvement. Of course, this improvement is not so much because of cost reduction-- not at all, really-- but because of the deferred expense that goes over the life of the long-term contract that we have. As we explained both in the press release and in this conference call, some of the work that we are doing now is being deferred towards the life of each contract - both the revenue and the costs of the implementation.

Okay. Thank you. And when you do you think you'll be able to get EBITDA margins at the high double-digit percentage?

You know and we know that this is our target to get back to where we used to be, as you say, in the double digits. And we are working towards it.

I wanted to remind you that, in October of 2007, we also have acquired a company in the UK. And the integration costs of this merging the two companies was felt in the last quarter of 2007 and also in Q1 and Q2 of 2008. We have completed the restructuring of this other company in the UK and do expect that we'll see some improvement in costs when all the remaining of this cost restructuring will be done.

Okay. In terms of a micro picture, do you see more RFPs, or is that coming down or increasing?

It's certainly not increasing. I won't say that we see less. But, certainly, this is-- Although the sales team is very active, but the sales cycles are so long that we have the same names again and again every quarter in the pipeline - every day, really. The world is, from our point of view, kind of on a steady state.

Okay. Great. Thanks. One last question. The $5.1 million that you indicated - is that part of the $9.7 million of cash that you've also mentioned?

No. The $9.7 million is cash and cash equivalents only.

Okay. Great. Thank you very much.

Thank you. We currently have no further questions. (Operator Instructions). We have a question from the line of J.D. Padgett from The Boston Company. Please go ahead.

A couple of quick ones; one on the-- Is it a new accounting treatment for the costs that are now being deferred over the life of the contract, whereas, prior, they were just expensed as incurred?

Until now, we expensed all our costs as incurred. And, now, we had in these two quarters-- We had implementations that were of a significant revenue and significant costs. And it wasn't the case in the past. The fact that it was now a significant number required that we defer both the costs and the revenue from-- related to the implementation of this long-term project.

Okay. So I think, also, when you gave your preliminary look at the first quarter, you thought revenues might be a little bit higher and expenses a little bit higher. So it was just the adjustment from that is reflecting what you just described?

Exactly.

Okay. That's helpful. The other question had to do with the auction rate securities. Are your financial advisors telling you that that much of the value has been impaired, because it started, what, at $20 million, and now we're down to $3 million?

This is the valuation that we get from our advisors. And, until now, there was no valuation from any source. So, as you know, we postponed the report for Q4 and Q1 until we got economic evaluation from the cost point of view to us. And, now, this is the evaluation that we got. This is where the evaluation is very complex and takes into account many, many, many parameters.

Who was the issuing bank? Was it an Israeli bank or a US bank?

No, no. The issuing bank of the (inaudible), but the broker or the bank that sold us the auction rate securities is Credit Suisse, and we are in an arbitration process that we started back in February or March of this year. And it's an ongoing process of arbitration (inaudible).

I know a lot of the banks here have agreed to make many of the retail investors in ARS whole and buy those back from them. So I guess, just given that kind of information flow around it, I would have not guessed that it would have been so largely impaired.

First of all, the impairment is back to June 30. I don't know what the impairment would have been today. And all the news that's flowing today certainly-- We hope that it will have a positive impact on the results of any arbitration, ours and other companies as well. But this is the evaluation that we got from somebody that was authorized by our accountants and is the right institution to give us an evaluation.

So the likelihood that you, at the end of the day, realize something higher is not totally out of the realm of possibility.

Of course, we really hope that the result of the arbitration will be that-- As the regulators have now influenced other banks to buy back this type of securities from retail, eventually there will be something similar as buying back from companies that found that their money was invested in this type of vehicle.

Right. Did you say CS First Boston?

Yes. I think it's Credit Suisse now. It used to be CSFB at some point, but I think that the name now is just Credit Suisse.

So they're the ones that securitized this particular portfolio?

Yes.

So they, at the end of the day, may stand behind it. And, if you guys can be made whole or even get something more than the $3 million, that obviously would be a good outcome.

Of course we don't have any results as of now, but this is what we ask for and we hope for. But this is not something that we even have an estimate on the outcome.

Okay. Good. And I guess the final question on the growth in backlog. It sounds like things are a little bit better than steady if that backlog number is growing. Right?

The backlog is growing. And, as I said, it slipped a little bit. We expected some purchase orders to be completed by the end of the quarter. It didn't happen. But, fortunately, they did close in July, and this is why we mentioned that we see the growth in the backlog. But, still, the environment is not an environment of growth. It's not an environment that is completely inactive. There is activity, but it's not an environment of growth, unfortunately.

Okay. Are you pursuing deals that are not long-term in nature anymore, or is that everything you're pursuing?

The truth is that we pursue everything that-- Every tender that we are invited to, we go for it. This is why we take mainly managed services agreements that we do now. But the truth is that the markets now require this type of services. When we look at where the markets are and what carriers are looking for and I can tell you that also large organizations are looking for, is really managed services - outsourcing as much as they can to be able to control their costs and to deal with their main business while they let us deal with what we do best. And this is operate the billing for them.

Okay. And all that backlog obviously doesn't show up on the balance sheet.

No, not at all.

Okay. None of it does, in fact?

Some of it might because, if it's maintenance agreements that we invoice for the whole year and it's recognized over the period of the year, then you will see it in deferred revenue. But this is a minor number compared to the backlog because the majority of the backlog we invoice on a monthly basis.

Okay. Thank you for the explanation.

Thank you. We have a follow-up question from the line of Dwight Mamanteo. Please go ahead.

The fair value of the auction rate securities again-- What was that number? Is it $3.1 million or $5 million?

It's $3.4 million.

Okay.

$3.4 million at the end of June 2008.

Okay. And your fully diluted shares outstanding?

It's around 21.5 million.

Okay. Great. Thank you.

Thank you. We currently have no further questions, so I hand you back to your host to wrap up today's conference.

Thank you for joining us today.

Thank you for joining today's call.