Earnings Transcript for MNDO - Q3 Fiscal Year 2010

Executives: Andrea Dray – IR Monica Iancu – Chairperson and CEO

Analysts: Manoj Nadkarni – ChipInvestor Group

Operator: Good day and welcome to the MIND's Q3 2010 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Andrea Dray. Please go ahead, madam.

Andrea Dray: Thank you, Sarah. Thank you. 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 its financial information and internal analysis in order to exclude the effects 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 2010. The financials can be found in our Form 6K. On the call today from MIND is Ms. Monica Iancu, MIND’s CEO. I would now like to turn the call over to Monica. Monica, please go ahead.

Monica Iancu: 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 third quarter of 2010 and discuss our business. The financials can be found in our press release. Yesterday, we reported our business results for the third quarter of 2010. Revenue for the third quarter was $4.7 million. Revenue from our customer care and billing solutions was $3.9 million, and revenue from our enterprise call accounting solutions was approximately $0.8 million. The geographic revenue breakdown was roughly 39% from the Americas and 48% from Europe. The license revenue was $1 million or 22% of total revenue, maintenance represented $1.9 million or 40%, services were $1.8 million or 38%. During the third quarter of each year, we perform impairment test for the value of goodwill and other intangible assets. Following the test performed in Q3 2010, we recorded an impairment charge of $586,000 for goodwill and $407,000 for intangible assets related to the company we acquired in the UK in 2007. The balance sheet as of September 30th, 2010 shows a remaining amount of $5.4 million for goodwill, related to the company we acquired in U.S. in 2005. The non-GAAP operating income, excluding the non-cash impairment of $993,000, amortization of intangible assets of $64,000 and equity-based compensation expense of $16,000 was $1.371 million or 29% of revenue. The non-GAAP net income was $1.429 million. The GAAP operating income for the third quarter was $298,000 and the net income was $356,000 and EPS of $0.02 per share. Our balance sheet continued to be strong with total cash position of $19.6 million at the end of the quarter. Our backlog as of September 30th, 2010 includes approximately $4 million, which is expected to be built by year-end compared to $4.2 million on the same date last year. We are pleased that in these economic conditions, we continue with our execution of positive cash flow, and that during the quarter, we succeeded to close additional business. In the third quarter, MIND secured one new customer as well as multiple follow-on orders. The new win is a multi-year agreement with a regional wireless carrier that is a member of the Sprint Rural Alliance. We will implement our MINDBill end-to-end convergent billing solution. This operator will utilize our convergent pay in advance and postpaid billing, rating, invoicing, roaming, customer care, web self-care, point of sale, inventory management, commissions, Web services, workflow engine, provisioning, mediation, and dashboard reporting, in order to support their wireless services. The follow-on orders were received from various customers including three wireless carriers as follows The first wireless carrier has been a MIND customer for five years and bought enhancement to rating capabilities. The second one is also a customer since 2005 and bought enhancement to customer care, point of sale, and rating capabilities. The third started its relationship with us in 2007 when they planned to start their operation. This Greenfield operator has stopped its activity in the past and is restarting it now with a slightly different business model that requires also enhancements for our order management. As previously announced, in our latest conference call, our Board of Directors reviewed lately the dividend policy. On October 25th, 2010, we have decided to further enforce the expected annual distributions and update the policy slightly. Under the old dividend policy, we declared subject to specific Board approval and applicable law a dividend distribution once per year in the amount of our net income from the previous year. The new policy changes only the amount to be distributed, the new amount being equal to our EBITDA plus financial income, minus taxes on income. The EBITDA for the first nine months of 2010 was $4.639 million. The Board of Directors also resolved that the company should seek court approval formally required in order to enable distribution for the year 2010 in an amount of up to $6 million. Under Israeli law, a company with insufficient retained earnings is required to obtain approval from the court for such a cash distribution. Prior to paying any dividend, which is still subject to specific Board approval, the company will issue a press release announcing the exact dividend amount, record date and distribution date. We continue to strongly believe that our dividend policy enhances shareholder value. Our solid cash position and our longstanding positive operating cash flow enable us to sustain it. Our strategy has been for many years now to increase the average deal size, to build strong long-term relationships with our customers, to build a strong team of motivated professionals with experience in the industry and in our products, to continuously win new business, to increase the professional services part of our business and thus increase visibility, to continuously develop new modules that enhance our offering, and of course to perform all these tasks while maintaining profitability. We regularly announce additional modules that we develop and enhance our platform. In the near future, we will announce our latest development, the BI module, for our customers, business intelligence or BI referred mainly to analyzing business data such as sales revenue by product, number of subscribers or resellers, and income per subscriber product to other chosen parameter, all over a chosen period of time. BI provides historical and current views of business operations. To achieve the common functions of BI, we are enhancing our reporting tools to better enable online analytical processing for better business performance management, and in the end, this will increase the carriers’ income. To summarize, we are pleased with the year-to-year growth and believe that the decrease in revenue compared to the previous quarter is related to timing of revenue recognition of one almost completed project. The new win this quarter increases the long-term backlog and strengthens our U.S. footprint. We are especially pleased with the vote of confidence that we get from our customers as they enhance the part of their business that is supported by our solutions. This validates our strategy of developing additional modules to further enhance our solutions of billing and full customer care, to support the carriers' point of sale, business intelligence reporting needs and much more. We believe that we have the up-to-date required technology and team that will enable internal growth if and when then market conditions improve. Operator? Sarah?

Operator: Yes?

Monica Iancu: Sarah, we will take questions if any now.

Operator: (Operator instructions) We will take our first question today from Manoj Nadkarni from ChipInvestor Group. Please go ahead.

Manoj Nadkarni – ChipInvestor Group: Hi, good afternoon and congratulations on strong results.

Monica Iancu: Thank you.

Manoj Nadkarni – ChipInvestor Group: If we look at your past results, historically your third quarter is slower than the second quarter, and we believe it's due to seasonal effect. You saw this in 2008 and 2009. And again, this year, we are seeing it, but to a lower degree than what you saw previously. And is this primarily due to summer vacations in Europe, where you have nearly 50% of revenues coming from?

Monica Iancu: First of all, you are right, and your analysis is correct. And although the reason is not 100% clear, but you are right. It is related to summer vacations in Europe and especially with deployments of solutions that almost don’t happen in the July, August month. And also, the vacations of our employees, thus, a percentage of completion of projects is somehow to a lower extent during these three months of the summer vacations.

Manoj Nadkarni – ChipInvestor Group: Yes. I mean, we have seen this with many companies, technology companies that we follow, that have a high exposure to Europe, wherein typically third quarter is their low revenue quarter. Do you or does the company have a stock buyback program?

Monica Iancu: We used to have a stock buyback program. It is not activated at this point in time.

Manoj Nadkarni – ChipInvestor Group: And if may ask, what is the philosophy behind having or not having a buyback pogrom?

Monica Iancu: It is a decision of the Board of Directors and at this point in time, the Board of Directors thinks that the dividend policy, which is another type of buyback if you want to look at this way, is the right policy for MIND. And as it is now, we have around 18.5 million shares, and we do want to keep a liquidity in the company and to be able to give – to have volumes of trading with the shares. So, this is one of the reasons that the Board considers when they look at implementing a new buyback. And as I said, discussing this subject within the Board of Directors, the decision was to reinforce and to give a strong note to the dividend policy and not to the buyback.

Manoj Nadkarni – ChipInvestor Group: And can you please give us more details on revenue distribution by geographies, Europe versus United States and Asia and where, in particular, you are seeing strength versus there is less growth in certain segments?

Monica Iancu: As we said in the press release, Europe came at around 48% and the United States at 39%. And the rest is really, the rest is not so much and something like 5% out of it comes from Israel and the other revenue comes from, some from Asia-Pacific, some from Africa, but we thought that it is not so significant if it is 2% or 3% from each of these regions to go into detail.

Manoj Nadkarni – ChipInvestor Group: Yes. My question is more so, you saw revenue increase of about 16% compared to last year's quarter. Was the growth primarily from Europe, or was it more so from U.S.? Any more color on that?

Monica Iancu: We see strong revenue from U.S., and also, if you look at the new customers that we signed in the last quarters, you can see that also the customer, the new win this quarter is from the U.S. as well. And as you are aware, at MIND, the revenue recognition will start a few quarters after the deal is signed. So, we expect also that these follow-on orders that we got, the majority of them from U.S., and the major or the more important ones are from the U.S. and the new win is in the U.S. So, we expect that, that part of the revenue will be one to increase and to continue to increase.

Manoj Nadkarni – ChipInvestor Group: Very good. And what, if I may ask, what have you seen so far in the fourth quarter, now that more than a month is over?

Monica Iancu: First of all, we do not give any estimates for the fourth quarter. What we said is that at the end of the quarter, backlog was at $4 million and we compared it to the backlog a year ago, it was at $4.2 million. So, you can kind of expect, you can do an extrapolation with Q4 of 2009.

Manoj Nadkarni – ChipInvestor Group: Okay. All right, thank you very much.

Monica Iancu: Thank you.

Operator: (Operator instructions) We will take a follow-up question from Manoj Nadkarni, ChipInvestor Group. Please go ahead.

Manoj Nadkarni – ChipInvestor Group: Yes, just one more question. You are running at operating margins of about 29% non-GAAP level. Do you think you will be able to maintain these levels or improve upon those levels if your revenues – if you can maintain revenues or do better with revenues?

Monica Iancu: Our long-term target is really around 20%, about 20%, but not – the 28 or 29 that we had in the last two quarters is above our target. And we expect that we will reinvest part of this margins into more marketing and into more development of new modules of new technology. Our long-term target, as I said, is 20-plus percent, and if you ask if the 28, 29 is sustainable, it could have been sustainable, but we think that it’s a better idea to reinvest part of it into enabling growth.

Manoj Nadkarni – ChipInvestor Group: I see, all right. Thank you.

Monica Iancu: Thank you.

Operator: (Operator instructions) We currently have no further questions in the queue.

Monica Iancu: Okay, thank you very much for attending this call.

Operator: That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.