Mind CTI Ltd (MNDO) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to MIND's Q3 2008 Earnings Results Conference Call. My name is Tim, and I'll be your coordinator for today's conference call. For the duration of today's call you will be on listen-only. And there will be an opportunity to ask any questions at the end of the conference.

(Operator Instructions)

I'll now hand over to the host of today's conference call, Andrea Dray, to begin today's call. Thank you.

Thank you, Tim. Good morning everyone and welcome to MIND's conference call. Before we begin, I would like to point out that during this call, we will discuss certain financial information that is not prepared in accordance with GAAP. The company's management uses this financial information and internal analysis in order to exclude the effect of acquisitions and other significant items that may have a disproportionate effect in a particular period.

Accordingly, management believes that isolating the effects of such events enables management and investors to consistently analyze the critical components and results of operations of the company's business and to have a meaningful comparison to prior periods.

Also, this call includes information that constitutes forward-looking statements. Although we believe that expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated.

These risks include, but are not limited to, the effects of general economic conditions and such other risks as discussed in our earnings release and at greater length in the company's filings with the SEC. MIND may elect to update these forward-looking statements at some point in the future. However, the company specifically disclaims any obligation to do so.

Yesterday, MIND reported the results of its third quarter of 2008. The financials can be found in our Form 6-K. On the call today from MIND is Monica Eisinger, MIND's CEO and Itay Barzilay, the company's CFO. 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 the last few months we all experienced unique market conditions. Hasty and large changes in foreign exchange rates, interest rates that have declined to practically zero in some cases, and above all, the credit market situation that would impact economic activity around the world. We believe that there is no doubt that it will affect our potential customers' decision timing and our existing customers' spending decisions.

In this period of global confusion, we continue to execute our strategy of focusing on profitability and cash flow. We will continue to build for the future, based on our comprehensive offering, solid balance sheet and valuable customers. We believe that the extent to which an organization is effective in planning for a crisis has a large impact on its success in managing that crisis.

Currently we take into consideration the headlines that are full of stories about companies that are having difficulty finding financing. Those companies might have been our customers. As a result, we are reducing our expenses with the goal of maintaining and even increasing profitability.

When we look at our business, we do not see cancellation of existing commitments. But, in the last few months, we see hesitation in signing new deals or even adding new commitments to existing contracts. We support mission critical activities for our customers around the world, including managed services under long-term contracts. And this drives strong recurring revenue with high visibility and strong backlog. In the last two, three years we invested heavily in the development of additional modules to our solutions, such as Point of Sale and prepaid IN.

Towards the end of last year, we started marketing 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. Our integrated Point of Sale module completes our platform that includes customer care, electronic bill presentment and payment, rating, billing, provisioning and mediation. Since year start we secured two new wins that included the Point of Sale module. This quarter we have successfully completed these two deployments.

In addition to our billing and customer care solutions, we offer call management systems used by organizations for call accounting, telecom expense management, traffic analysis and fraud detection. Our high-end product, PhonEX-ONE, delivers one unified solution for all voice communication expenses including traditional, IP and mobile telephony. PhonEX-ONE is certified on a timely manner with new releases of IP switch vendors, including Cisco, 3COM, Siemens and Avaya.

These tools allow organizations to more effectively manage their communications resources. We expect that this line of business will suffer less from general slowdown and we focus on expanding it.

Competition in all geographies and all our product lines is intense. To compete effectively, vendors must be able to offer full technical support, ongoing product development and customization services. The principal factors upon which we compete are excellent customer support, ease of use, compatibility with new technologies, the multi-lingual and multi-currency nature of our systems, as well as our flexibility to meet customer business needs and business models. Itay will now review some financials.

Thank you, Monica, and good morning everyone. In the third quarter of 2008 we reached revenue of $4.6 million, compared to $4.0 million in the third quarter of 2007. Non-GAAP operating income was $481,000, or 10.4% of revenue. This number excludes a non-cash impairment of intangible assets, mainly goodwill, in the amount of $1.5 million as well as amortization of intangible assets and equity-based compensation expense.

We perform an annual test for impairment of goodwill during the third quarter of each year. During the third quarter of 2008, the company's management assessed the goodwill related to the Sentori and the Omni acquisitions for impairment. Since the carrying value of Omni exceeded its fair value, the company recorded an impairment charge in the amount of $1.5 million to reflect the difference between the implied fair value and the book value of the intangible assets related to the acquisition of Omni, completed in October 2007.

With relation to the Sentori acquisition completed in August 2005, no impairment was required. As a result, GAAP operating loss was $1.2 million. As previously announced, we continue to receive interest payments every month on the auction rate security that we hold, which is now rated CC by S&P and Caa3 under CreditWatch, with negative implications by Moody's.

In the third quarter we recorded an impairment charge of $1.1 million to the value of the security that we hold. The arbitration proceedings with Credit Suisse are still ongoing. As a result, GAAP net loss was $2.4 million or $0.11 per share, compared with GAAP net income of $955,000 or $0.04 per share in the third quarter of 2007.

Cash flow from operating activities was $1.2 million. Our cash position remained strong with approximately $10.9 million on September 30, 2008. We believe that cash flow from operating activities and backlog are the most important metrics in understanding and assessing our business. As of September 30, 2008, our long-term backlog was $18.4 million, of which $3.8 million is expected to be billed by year-end.

Revenue distribution for the third quarter. We operate globally and we continue to focus mainly in the Americas and Europe. Sales in the Americas represented 33% and sales in Europe represented 55% of total revenue. Revenue from our customer care and billing software totaled $3.6 million, while revenue from our enterprise call management software was $1 million.

The revenue breakdown from our business lines of products was $1.4 million, or 30%, from licenses, $1.6 million, or 35%, from maintenance and $1.6 million, or 35%, from services. Monica will now continue with a review of our business.

Thank you, Itay. On September 8th, 2008 we announced that the Board of Directors authorized a plan for the repurchase of up to 2.1 million of the company's ordinary shares in the open market, in an amount in cash of up to $2.8 million. Since the repurchase program required prior court approval, we expect to activate the program towards the end of November 2008, as originally estimated.

To summarize, we have successfully overcome past challenging periods and we believe that our experience helps us not only to better understand the current financial crisis, but also to plan the right next steps and to execute those steps promptly and effectively. Operator?

Thank you. (Operator Instructions) Our first question comes through from the line of [Dwight Momento] from [Winfield] Capital. Please go ahead with your question.

Good morning, Monica.

Hi, Dwight.

Hi. So based on my calculations, the free cash flow for the quarter is about $1.1 million. Is that accurate?

It's $1.2 million.

Free cash flow?

Yes.

Okay. Now --

Operations.

Okay.

Are you looking for operations or free cash flow?

Just free cash flow. So cash flow from operations, minus whatever changes. CapEx. Changes from CapEx.

$1.2 million.

$1.2 million? Okay. Now help me understand how you guys value your auction rate security investment. The original investment that you made was about $20 million? Is that correct?

It was $20.3 million, but I will let Itay answer this question.

So the question was how we value our investment in the auction rate securities. So we actually use an investment advisor, a third party, that creates a valuation model that is being updated every quarter. This evaluation model is based on several parameters, among which is the credit risk in total and the risk of default on that security. And it takes into account whatever parameters that are current in the economic environment. Do you have anything in particular that you wanted to ask me?

Well, I'm just curious, because the coupon was just repriced and I believe the coupon rate is about 4.3%, 4.4%, which is increased from the September coupons. And -- but I noticed you decided to write down further that investment. So I'm just curious, as the coupon rate increases, why you continue to -- why do you continue to impair that investment?

The coupon is only one aspect of what we -- what makes the current valuation. But the most prominent factors that made this impairment in this quarter was the downgrading in the credit ratings of the monoline insurers that changed the entire credit default swap spreads and also all the credit spreads and the liquidation risk that is attributed to our securities. And actually the coupon, which is tied to the LIBOR right now, has securities under failed auction, is -- has only a negligible impact on the valuation for the securities.

Okay. All right. Thank you. Thank you for that information. And the original investment, Monica said, was $20.3 million?

Yes.

Okay. And currently held on your balance sheet at what value?

Currently held on our balance sheet at $2.2 million.

$2.2 million. Okay.

Yes.

Now with regards to the current levels of cash that you currently have on your balance sheet then, the one -- the $10 million change. Obviously you talked about share buy-backs, but is there anything else in the works with regards to the remaining cash?

Dwight, did you mean acquisitions or similar? There isn't anything else.

Okay. And the remaining cash is held in --

$10.9 million is held in different banks, in money markets or solid, cash, liquid investments.

Okay. Great. All right. Thank you.

Thank you, Dwight.

Thank you. Our next question comes through from the line of [Richard Maguire] from Delta Equity. Please go ahead with your question.

Hi, Monica.

Hi, Richard.

I have noticed where there's a couple of companies in Israel, I know Incredimail had $5 million a day, were made whole on in Teva Pharmaceuticals, were made whole by Credit Suisse. So I'm wondering why them and what it means for your company, good or bad?

Okay. So the Attorney General reached a settlement with the different banks, including Credit Suisse, the day we'll purchase at par value, the ARS from the different investors, either private or companies, but it was limited to investors that held up to $10 million. In our case, we have more $10 million, so we were not included in that settlement.

Regarding Teva, the settlement was different. It was private settlement between Teva and Credit Suisse and they did not purchase the (inaudible) from the company, but instead they kind of paid the check to Teva to not go into the same arbitration type of process that we have at this point in time. We are now in an arbitration process, as we stated a few times in the past. It is longer than expected, this process, and moving very, very slowly.

Okay. As a follow-up to that, did those settlements give you any reason to be more convinced for or against your arbitration case? And as a follow-up, does this arbitration case, if it's not resolved by January or February of this coming year, will that have any impact on the dividend that you've been paying?

Regarding the outcome of the arbitration, it's very difficult to have an idea of how it will be influenced by this settlement. Certainly we hope that the influence will be positive.

Regarding the timing, the -- it's almost certain that the arbitration will not be done by January or February of next year. And the dividend will be discussed by the Board in February. And I do not know the outcome of the dividend, but certainly our Board of Directors understands the importance of the dividend to our shareholders.

Okay. Thank you very much.

Thank you.

Thank you. We have no further questions in queue. (Operator Instructions) We have a question come through from Kevin Dede. Please go ahead with your question.

Hi, Monica. Kevin Dede.

Hi, Kevin.

Hi. I was hoping you wouldn't mind going through a little more detail on exactly how you saw business conditions change through the course of the quarter and what you've seen so far into the fourth quarter?

Okay.

And I understand that you've seen some customers just sort of ratchet down on spending. But I was wondering what specifically from a geographic perspective, if there were differences and maybe when that started and maybe whether or not you think that's lightened up a little bit now that we're, well, almost halfway through the fourth quarter.

Okay. So first of all, we see that everybody's very, very confused and they are -- there is uncertainty about how everybody should act. And this is why sometimes they delay their decisions, even if the funding is there, because they want to make sure that the world is not going to collapse tomorrow and sometimes they -- they are hesitant.

We see people that were in the process of either replacing solutions or adding to our existing solutions more modules that say, okay, let's wait a little bit. Let's see where the world is going. The other thing that we see is that the customers are even more price sensitive than in the past. And we believe that our solution is a high quality solution and we price our solutions accordingly.

We are a company that bases our business on profitability and positive cash flow. So we will not go into any deals that we do not see profitability out of it. It doesn't have to be in the short term, but certainly in the long term. So sometimes we have seen customers willing to put prices to lower levels than we could offer.

Is it everywhere around the world? I see plainly in the US, because most of our activity is either in the US or in West Europe. We focus in these two geographic areas for the last year or two. And so we feel it mainly in the US, less in Europe. And I think that the last quarter's results you can see that geographically the -- Europe was much stronger than US. And I believe that part of it is because of the fact that the US customers react faster to any type of input, including this financial crisis. Or any potential financial crisis, or potential crisis. But in any case, they are more sensitive to it and we see this type of liquidity and this delay of decisions more in the US.

Okay. I'm -- as things have progressed through -- here through the fourth quarter, would you expect to see maybe less license revenue, but still maintain the same sort of level of revenue and maintenance and services?

The license is very dependent on the increasing license of existing customers. But part of the managed services agreements, part of the monthly fee, goes into license, the rights of use and part goes into services. More and more out of our customers are in this model of many services, and this is what makes our visibility higher and at the same time, it kind of gives you a known model for licensed services and maintenance and at the beginning of the year, we expect that it will be around one-third for each.

So it may vary from quarter-to-quarter. Last, in the second quarter, we had a large increase in license of one customer. So the license portion was higher. This quarter we didn't have any increase in license, so it was 30%, almost, the one-third value that is expected. And we expect to be in the same area.

Okay. So fourth quarter you'd expect a similar mix?

Yes.

Okay. And essentially what you're saying is that you've seen the US customers react pretty quickly and more sensitive to the environment. Europeans less so, but in -- there's been no change to the positive with regard to their behavior so far this quarter?

Yes.

Okay. And could you mind -- or would you mind giving us sort of a rundown on your decision on the stock repurchase versus maybe holding the cash and shopping around for acquisitions, such as the Omni deal, where you might be able to expand your geographic presence and your tool set?

First of all, I believe that eventually MIND has the cash required in order to do both, if we find an opportunity. I think that, as three years ago, we thought that getting footprint into the US is important and we acquired Sentori. And this was a very successful acquisition. A year ago, we acquired into the UK market, because we believe that this is a very important market as well.

At this point in time, there is nothing as -- we are not as focused as them because we covered this to market. And when we look at additional technology, complementary technology, to acquire, we don't see real opportunities. What we've seen, companies that we've looked at lately, some of them disappeared after the fact that nobody really found it interesting to acquire them because complementary technology that was developed during the last few years, there was no technical gap that required most of the technology that was developed or the small companies around that were not strong enough to get enough market share.

So unfortunately, although we like the idea of growing our business through acquisitions, we don't see around us any opportunities right now. And eventually we believe that the cash flow and the positive cash flow will keep building cash for us and also that eventually we will get the money back from the auction-rate securities. So we will be in a position where we can buy back shares, have dividends and acquire companies. Of course all of this is in a very optimistic short time frame and so on. But we do expect that eventually we can do all of those.

Okay, Monica. One last question for me and it just has to do with whether you're with your tool portfolio, obviously you're working on Point of Sale things. I was wondering if maybe there were, I guess, other facets of sort of operations software, opposed to just billing software, that you might be working on to extend your portfolio? Is there anything from a technology perspective that you might be working on to broaden --

The one thing that we -- yes, the one thing that we also developed and we just started marketing very recently and we don't have yet any installation is the prepaid IN. We have developed prepaid Voice-over-IP and prepaid data, prepaid IP for many years, like since '98. We had solutions for -- in the prepaid world. But the world of the IP communication and not traditional IN, mobile IN.

And we have partners in the prepaid IN field, but in the last year or so, we decided that the same, that in the past we partnered in the Point of Sale, in the end we developed towers and we believe that a solution that is a comprehensive solution that is fully integrated is what our customers are looking for more and also it helps us compete in many cases. And we have developed this prepaid IN platform that, as I said, we started marketing only recently and we hope that we will shortly close one first deal.

So afterwards, we will have a reference for the prepaid IN integrated into our solution platform and we will be able to afterwards send customers, use this as a reference item and sell more. At the same time, we will probably look into future developments of future modules. At this point in time, we first want to see that this model goes into deployment as well.

Okay. So you said prepaid IM as in instant messaging?

No, IN. As in intelligent network.

Oh, oh, oh. I see. Okay. Okay. Oh, got you. All right. Thanks very much, Monica.

Thank you, Kevin.

Thank you. We have no further questions in queue. So I'll hand back to your speakers today to wrap up today's conference call.

Thank you all for being with us.

Thank you. That concludes today's conference call. You may now replace your handsets.