Earnings Transcript for MNDO - Q4 Fiscal Year 2008

Executives: Andrea Dray – Investor Relations Monica Eisinger – Chairperson of the Board, President & Chief Executive Officer Itay Barzilay – Chief Financial Officer

Analysts: Hugh Cunningham – Oppenheimer & Company [Dan Westin – West Cap] Richard Maguire – Delta Equity

Operator: Welcome to MIND’s Q4 and yearend 2008 earnings conference call. My name is Wendy and I’ll be your coordinator for today’s conference. Throughout the presentation you will be in listen only, however, at the end of the call there will be an opportunity to ask any questions. (Operator Instructions) I am now handing you over to Andrea Dray.

Andrea Dray: 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 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 analysis 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 including 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 fourth quarter and full year of 2008. The financials can be found in our Form 6K. 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 Eisinger : Thank you for your interest in MIND and for joining us today. Yesterday we reported our business results for the last quarter and full year of 2008. We are pleased with our results given the existing market conditions and we are very satisfied with the fact that we anticipated the market deterioration and planned accordingly way ahead. The most important metrics in our view for our company are margins, backlog and especially the cash flow from operations. We improved our non-GAAP operating margins and reached our annual cash flow target. We executed on these metrics and will continue to focus on them. In our previous call I mentioned that the unique market conditions and the credit market situation is expected to impact economic activity around the world. The effects on our potential customers’ decision timing and our existing customers’ spending decisions is already seen. Our plan to act in this period of global confusion is clear. We continue to execute our strategy of focus on profitability and cash flow. We believe that we are effective in planning the steps to overcome this ongoing crisis and that we will overcome it. In the last six months we see delays in signing new deals and even in enhancing from existing customers. We support mission critical activities for our customers around the world including managed services and the long term contract and this drives strong recurring revenue with high visibility and strong backlog. We offer billing and customer care solutions as well as call management systems used by organizations for telecom expense management and internal billing. We expect that this line of business will suffer less from general slowdown and we focus on expanding it. Itay will now review some financials.

Itay Barzilay : I will start with the financial highlights of the fourth quarter and then I will move on to the full year. In the fourth quarter revenues of $4.6 million remain flat compared with the third quarter and down from $5.6 million in the fourth quarter of 2007. During the fourth quarter we recorded a non-cash goodwill impairment charge of $2.2 million following an impairment test trigged by the adverse global economic environment and the decline in our stock price. Excluding the goodwill impairment charge, amortization of intangible assets and equity based compensation expense, our non-GAAP operating income was $640,000 or 13.8% of revenue. GAAP operating loss was $1.6 million. During the fourth quarter we recorded an additional impairment to the auction rate security investment in the amount of $1.3 million. The decline in the model based valuation was driven primarily by the increased risk of default as implied by credit default swap spreads and by the decline in LIBOR forward rates. Moving on to the full year financial results, revenue in the full year was $19.5 million compared with $18.4 million in 2007. The total non-cash impairment charge of goodwill and other intangible assets in the year was $3.7 million. Excluding these impairments, amortization of intangible assets and equity based compensation expense, our non-GAAP operating income amounted to $2.1 million or 10.8% of revenue. GAAP operating loss was $2.3 million compared with operating income of $1.3 million in 2007. During the year the total impairment of auction rate security investments was $4.2 million. The value of the auction rate security investment in our books was approximately $900,000 as of December 31, 2008. For the year 2008 our GAAP net loss was $6.4 million or $0.30 per share compared with GAAP net loss of $12 million or $0.55 per share in 2007. At the same time, during the year 2008 we generated cash in the amount of $4.1 million from our operating activities. Our cash position as of December 31, 2008 was $9.7 million after a $1.6 million expenditure for the buyback of 2.1 million company shares in the fourth quarter. As of December 31, 2008 our long term backlog was $17 million of which $8.7 million is expected to be billed by 2009 year end. I will now talk a little about revenue distribution in the fourth quarter and for the full year. In the fourth quarter of 2008 revenue from our customer care and billing software was $3.9 million and revenue from our enterprise call accounting software was approximately $700,000. For the full year revenue from our customer care and billing software was $16.2 million and revenue from our enterprise call accounting software was $3.2 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 2008, the geographic revenue breakdown was roughly 44% from the Americas, 48% from Europe and the rest divided between Israel, Africa and Asia Pacific. Geographic revenue for the full year was roughly 40% from the Americas, 51% from Europe and the rest divided between Israel, Africa and Asia Pacific. I will now turn the call back over to Monica.

Monica Eisinger : I wish to update you on the company’s buyback. In September, 2008 MIND announced its intention to execute for the first time a buyback program. At that time the board of directors authorized the plan for the repurchase of up to 2.1 million of the company’s shares in the open market in an amount in cash of up to $2.8 million. The buyback started in November, 2008 and the company has purchased 2.1 million ordinary shares for a total of approximately $1.6 million. In order to execute the plan the company received court approval as requested by Israeli law for the amount of $2.8 million. Yesterday, the board of directors at MIND approved an increase in the number of shares in the buyback up to the original dollar amount which was previously approved and that the repurchase program share purchase may be made from time-to-time depending on market conditions, share price, trading volume and other factors. The repurchase may be suspended from time-to-time or discontinued. We continue to believe that in light of current share prices, the history of positive cash flow from operations and the company’s resources, the purchase of the company’s shares is a good investment and is in the best interest of the company. We continue to believe that at this time the repurchase of our stock at these prices will deliver value to our shareholders and it is the most appropriate use of our resources. Now, an update regarding the auction rate investments; as previously announced on February 20, 2008 we filed a statement of claim with FIRA and commenced arbitration proceedings against Credit Suisse. We intend to pursue the arbitration vigorously. The arbitration hearing is now scheduled for 2009 but no predictions of the timing of a resolution or possible outcome can be made at this time. Meanwhile, we continue to receive interest payments every month on the held securities. To summarize, we believe that our results reflect the existing market conditions and we are pleased that we have the skills, experience and understanding to react quickly to any change. We remain confident in our long term strategy, prospects and future and in the meantime we are pleased with our backlog, our margins and our cash flow.

Operator: (Operator Instructions) Your first question comes from Hugh Cunningham – Oppenheimer & Company.

Hugh Cunningham – Oppenheimer & Company: You’ve given us some sense of what you’re seeing in the marketplace, can you elaborate and give us some insight in to the mindset and behavior of your customers? I also have a follow up.

Monica Eisinger : First of all what we see that companies that depend on financing, of getting new rounds of financing, or companies that want to start a new operation find it at this time difficult to do so. But, at the same time we see that in the US especially there is a growing interest, especially in the mobile world, the mobile subscriber base is growing especially for those carries that go for the pay-in-advance model and in the rural market. So, in those markets we see our existing customers, the rural mobile carriers or the [NV&Os] that are our customers, we see most of them growing and this is one way that we increase our revenues from this existing customer base. At the same time we also see that there are some new companies in this field especially as I said in pay-in-advance model that did get financing earlier in 2008 and are now growing their customer base. At the same time everybody is very resistant on ordering new functionality, on further increasing their presence in new markets and we see that people that have very old systems and are willing to replace now for a long time really hesitant about really making the move. So, we have a very long pipeline with lots of potential enhancements of existing customers and also many new customers but we don’t have any definite timeframe from either of them.

Hugh Cunningham – Oppenheimer & Company: In terms of geography globally what’s your sense of differences on a geographic basis?

Monica Eisinger : First of all we mainly concentrate on West Europe and in the US markets. This is over 40%, between 40% and 50% comes from each of these markets and only a very small portion comes from other parts of the market. But, if you look at the whole world that is talking about growing China, I wouldn’t suggest to any software company to try and sell software in China because they have a lot of local solutions. So, the growth of the Far East, of the Asian markets it’s something that although in networking or other kind of product you might see growth but most of that growth goes in to local solutions. This was the reasoning for us to move more in to the markets that are more interesting, that are willing to pay the right price for the right solution and they appreciate the fact that we are a global company and we have the ability to support them from our locations both in Europe and in the US. So, if we look globally I think that most of the action is happening now in the Americas in both North and South America but most of it is happening in the Americas. Although, the slowdown is also very strong there.

Hugh Cunningham – Oppenheimer & Company: Just to clarify one final question, when you talked about potential customers or existing customers who have not yet upgraded their systems you’re saying this is a particularly promising opportunity for you?

Monica Eisinger : What I am trying to say is kind of the opposite. We don’t have a definite timeframe for anything to close. So, it is a positive for us because these deals we’ve been in touch with all these potential customers and with our existing customers certainly and it is a good sign when you have a long pipeline but it isn’t a good sign when you can’t put a final date for a decision of a customer. So, eventually they will be some release of some either attitude optimism or financing in to these markets, we do expect at that point we’ll be very well positioned to get some of these deals and to see a major change. But, unfortunately I believe that none of us knows when this will happen.

Hugh Cunningham – Oppenheimer & Company: So you’re saying there’s a pretty substantial pipeline there but because of the macro environment there’s some uncertainty in terms of when these potential revenues might be realized.

Monica Eisinger : Yes.

Operator: Your next question comes from [Dan Westin – West Cap].

[Dan Westin – West Cap]: I had a couple of questions, first Monica could you clarify your comments on the buyback program? I couldn’t hear it properly.

Monica Eisinger : When we decided to go for the buyback we needed to approve the dollar amount in to a court in Israel because of some Israeli regulations and we got the approval for $2.8 million. Out of that amount me meanwhile used $1.6 million and repurchased 2.1 million shares. What the board decided yesterday was to use the remaining $1.2 million and to continue the buyback until we reach the dollar amount of $2.8 million.

[Dan Westin – West Cap]: How soon do you anticipate that you are allowed to be in the market again and buying stock?

Monica Eisinger : Probably within a week because we are now in a quiet period so there are some days that we cannot do anything and then we have to [inaudible] with some paperwork. So probably within around a week.

[Dan Westin – West Cap]: Your backlog, if I heard you right it was $17 million in total, $8.7 of which you expect in 2009?

Monica Eisinger : Yes.

[Dan Westin – West Cap]: Is there a way you could tell us where your backlog stood a year ago end of year 2007?

Monica Eisinger : It was around $1 million higher for each of the numbers.

[Dan Westin – West Cap]: Itay, do you have depreciation and amortization for your fourth quarter?

Itay Barzilay : I can tell you that the non-GAAP adjustments for the fourth quarter were $2.3 million out of which we had $2.2 million of impairments of goodwill and the rest is equity based compensation and amortization.

[Dan Westin – West Cap]: Do you just have what the depreciation was in the quarter?

Itay Barzilay : The depreciation was $213,000.

Operator: Your next question comes from Hugh Cunningham – Oppenheimer & Company.

Hugh Cunningham – Oppenheimer & Company: One other question in terms of your products, you mentioned previously that you were working on or had developed an intelligent network prepaid solution. Could you give us an update on that?

Monica Eisinger : First of all thank you for this question and yes, we did develop it and we are negotiation one or even more of the potential deals for an enhancement for an existing [prepaid] customer that is willing to replace the existing platform that he has for prepaid with our platform. But, as I said timing now, financing and the pricing of the solutions is something that is more difficult to kind of get to an agreement. But, as we speak we are trying to close this deal and to get both sides to be more flexible. As I said, this is a replacement of an existing solution that the customer has so hopefully it will close but again, timing is not really very clear.

Operator: Your next question comes from Richard Maguire – Delta Equity.

Richard Maguire – Delta Equity: You haven’t touched on the dividend which would normally be talked about being paid sometime in the near future. Have you guys made a decision on what you’re doing about a dividend this year?

Monica Eisinger : At this point in time we have the buyback plan that we started and we continue with the buyback plan. I expect that the dividend issue will not be raised in the near future.

Richard Maguire – Delta Equity: Second of all, about the auction rate securities, I think obviously you’re aware that there was an arbitration ruling against Credit Suisse with STMicro last week.

Monica Eisinger : Yes, of course.

Richard Maguire – Delta Equity: I’m just wondering, it seemed like you guys were ahead of the curve when it came to this. Do you know at all where you are in line with the arbitration schedule with them? I know you have a date but is there any sense of how many people have arbitrations before you and are you at all concern about Credit Suisse’s ability to take care of any arbitrations that they have ruled against them?

Monica Eisinger : I think that Credit Suisse being one of the largest banks in the world and if you look at their financial reports and you see how much money they did make in the past, although they loss the last quarter but I don’t think we need to worry about that and about their liquidity. Yes, we are aware that in March there is a second arbitration that starts in March and then we are the next one in turn from what we know. But, in any case it’s different panels, different teams of people that deal with each case so it could have been done in parallel but it doesn’t happen. You are right there is a pipeline of arbitrations against Credit Suisse.

Operator: We have no further questions in the queue at this time. I will now hand you back to your host to conclude today’s conference.

Monica Eisinger : Thank you all for being with us and for your interest in MIND.

Operator: Ladies and gentlemen thank you for joining today’s conference. You may now disconnect.