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Attunity Ltd. (NASDAQ:ATTU)

Q1 2006 Earnings Conference Call

May 4, 2006 10:00 a.m. EST

Executives

Aki Ratner - CEO

Ofer Segev - CFO

Analysts

Ken Wynn - Alton Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2006 Attunity Limited Earnings Conference Call. (Operator Instructions.) I would now like to turn the presentation over to your host, Mr. Aki Ratner, CEO. Please proceed, sir.

Aki Ratner

Thank you. First of all, welcome everyone to the Attunity First Quarter Fiscal Year 2006 Results Conference Call. Before we get started and since this call will very likely contain forward-looking statements, I'm going to ask Ofer Segev, our CFO, to read the following Safe Harbor statement.

Ofer Segev

This conference call may include forward-looking statements that are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to: general business conditions in the industry; product technology development; market acceptance of our products and continued product demand; the impact of competitive products and pricing; changing economic conditions; release and sales of new products by strategic resellers and customers; changes in demand for products; the timing and amount or cancellation of orders; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, including our Form 20-F Annual Report.

These documents contain and identify other important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Stockholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements. Now I will pass the call to Aki to provide the highlights of our first quarter.

Aki Ratner

Thanks, Ofer. As we reported today, for the first quarter of 2006, total revenue was $4 million, representing an increase of 4% compared with the first quarter of 2005; a quarterly record for Q1 results.

Our first quarter license revenue increased by 3% in relation to the same quarter a year ago, an increase that I am pleased with, given the significant change in the Company's focus that was initiated this quarter.

With some major customer wins and the first full quarter of selling our new flagship product, Attunity InFocus, we are on track with our plans to position the Company from selling enabling technology to technical people, to selling business solutions to business people.

We have continued our investment in expanding our strategic relationships with channel partners, OEM partners, and alliances. For example, this quarter saw three new business intelligence partners choosing Attunity AIS for legacy connectivity and change data capture.

We have also continued to further build and extend our relationship with Microsoft this last quarter, supporting their announcement of BizTalk 2006 with our own announcement of extended support for the product with Attunity Connect and Attunity Stream.

We have also been furthering our relationship with Oracle, exemplified by our announcement this last quarter of our validated Attunity Stream for Oracle's Business Intelligence Warehouse Builder 10g, Oracle's extraction, transformation and load tool. The combined offering will deliver a data integration solution to customers with mainframe connectivity and real-time CDC requirements.

We believe that this and other partner relationships will play a significant contribution to our future growth. The release of Attunity InFocus at the end of last year was the first and very meaningful step in implementing our vision. As an exciting new breed of management application, Attunity InFocus is targeted at improving the way business and operational management perform their daily business activities.

This first quarter has been the first full quarter of activity of actively selling the product since its announcement, and has resulted in significant customer input and growing pipelines. Now having also secured one of our first strategic customers in financial services during the quarter, and ongoing opportunities in several other sectors, I believe that we are on track and well positioned to turn that interest into further customer engagements in the coming quarters.

As a business application that focuses on improving the complex management interaction of business executives at all levels, Attunity InFocus represents an exiting and potentially large and untapped market for us; drawing on our heritage as one of the leading providers of enterprise class real-time data access and integration platforms, critical for the timely action that high performing managers must take. Attunity InFocus represents an increasingly important focus for Attunity as we move forward.

To better understand how Attunity InFocus is used and the benefit it brings, I would like to give an example from the financial services sector. Our customer, an American service provider to the banking sector, provides outsourced transaction settlement services. You will appreciate that there are some very significant regulatory and compliance constraints around the time taken to settle such transactions with very steep penalties imposed when breached.

These penalties translate into service level agreement and potential fines for our customers. They have chosen Attunity InFocus as a proactive application to monitor, assess, and take action on settlements that are nearing those thresholds, before they become a problem.

This now allows them to see potential problems before they appear, appropriate warnings to be raised, relevant staff to be informed, and actions to be taken to resolve the issues before deadlines are exceeded; therefore saving huge sums in possible fines.

This example for regulatory and compliance purposes is just one of several typical use cases. Others include customer-related activities such as [trial] management or issue management and resolution; supply chain activity such as procurement; or general operation activity such as branch management or [cash incentives].

On the integration side, Attunity Stream, our real-time change data capture solution, continues to generate significant interest and demand. With record volume of most large enterprises increasing at around 60% per annum, it is becoming more and more difficult and often impossible to manage large data loads and transfers in the available batch windows. Attunity Stream is now increasingly being seen as the only reliable and robust solution to eliminating this batch windows constraint and this ever-growing problem.

As part of our transition to selling business solutions, we have appointed a new VP of Worldwide Marketing, Andy Bailey, who comes with a wealth of experience from the enterprise software world, having worked previously for Oracle Corporation, i2, a supply chain software company, Metastorm and CommerceQuest in a variety of senior sales and marketing roles.

As part of our continued focus on developing our EMEA operations, we have also appointed a new Vic Perez: of EMEA, Mr. Kim Lewin, who again brings with him a wealth of experience in selling business solutions, having run European operations for companies such as Ardent, Informix and CommerceQuest.

I would like to hand over to Ofer to discuss the first quarter financial results in more detail.

Ofer Segev

Thank you, Aki. Total revenues for the first quarter of 2006 were $4 million, an increase of 4% from $3.9 million in the first quarter of 2005. License revenues were $2.3 million, an increase of 3% from the first quarter of 2005. Operating loss for the first quarter of 2006 increased to $814,000 from an operating loss of $483,000 in the first quarter of 2005, mainly as a result of our development of Attunity InFocus and the effect of stock-based compensation, which were not included in the first quarter of 2005.

Non-GAAP operating loss, which does not include stock-based compensation, was $564,000. Financial expenses include $175,000 of non-cash expenses related to amortization of deferred expenses and net discount from convertible debenture.

Net loss from continued operations for the first quarter was $1 million, or $0.06 per share; and $783,000, or $0.04 per share, not including stock-based compensation.

Cash balances were on plan at $3.1 million. In the first quarter, we replaced our credit line, which was due to end in June 2006, with a $2 million short-term loan maturing on December 31, 2006.

In addition, as they continue to support Attunity, in February and April, a shareholders group headed by Shimon Alon, our Chairman, and Aki Ratner, our CEO, have all exercised previously purchased warrants to purchase 1 million ordinary shares of Attunity for an aggregate consideration of $1.75 million.

DSO at 60 days remain on target.

Aki Ratner

Thank you, Ofer. As I've said previously, 2006 will be the transition year for Attunity. Q1 has seen the first full quarter of that ambition. We continue as planned with further activities and investment around Attunity InFocus as we work towards becoming the de facto leader in the exciting new space of high performance management applications.

To summarize, let me emphasis that we will continue to remain diligent in our execution and focus on the vision that we have laid out for the Company.

As always, I would like to take this opportunity to thank our customers for their continued support of our products and services, and our partners for their significant contribution to our success.

I would especially like to thank our shareholders for their confidence in our future. Finally, I extend our thanks to our employees for their hard work, dedication, commitment, and achievement. I will now open this conference call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes the line of Ken Wynn of Alton Capital.

Ken Wynn - Alton Capital

Good afternoon. I was wondering, when you talk about a vision, does that vision include a certain growth rate, or does it include a critical mass? When you talk about possibly trying to become the de facto leader, who do you have to replace in that space to do that?

Aki Ratner

Thank you, Ken. First of all, regarding the vision. The vision is associated with ability and focus; that is the first step to achieving this. This is to become the de facto leader in applications for high performance management. The way, of course, is to start establishing ourselves, and that's what we've started to see in Q1 in the market; to create the expected growth that all of our shareholders and all of us in the Company would like to see.

Regarding the second question, we haven't found any major vendor that is offering the same vision or the same product to the market. Because of that we believe that we have a great opportunity. We are going to be first in this market. We see the need already and we see the missing product to this market as well.

So those opportunities and customers that we have, they didn't consider us as a replacement to something else; but rather fulfillment of a certain need or resolving a certain pain they currently have and there is no fulfillment in the market for it.

Ken Wynn - Alton Capital

Is there an estimate of the size of the market?

Aki Ratner

We had discussions with analysts like Wagner and IDC, and I'm afraid to say the size of the number that they gave me regarding the size of the market for us, because we are so small right now. But we are talking about a trend that everybody believes is going to be the future. Because of that, we are talking about billions of dollars going forward. We look at this as the new generation for applications and BI's as well.

Ken Wynn - Alton Capital

Now when you make a deal with someone like Business Objects, are you involved in the legacy platform for every deal they're involved in, or how does that work?

Aki Ratner

That's a very good question. When we are making a deal with Business Objects and now we are talking about our legacy products, not the Attunity InFocus, of course. They presented us as their solution to the legacy world; meaning they have their own way to get information from the open system, and to the legacy they offer us as the solution. It's the same with other BI or EPL vendors.

Ken Wynn - Alton Capital

I see. The other thing I was curious about, if you don't mind, is you've had a fairly long-term relationship with Oracle. Is that correct?

Aki Ratner

Yes, it is.

Ken Wynn - Alton Capital

I was wondering, based on the size of Oracle and based on the importance of your product, I was wondering why the sales with Oracle don't ramp up?

Aki Ratner

It's not that the sales of Oracle are not ramping up. We have a couple of agreements with Oracle; two, to be more accurate. One of them is more, because it's a very point-type solution was established as a fixed price that we are getting every year. So this one will not change year-over-year.

The second one that we announced not long ago is still in the process of establishing what is being called the OEM product. So we are expecting to see the growth when the OEM product will be introduced to the market.

Ken Wynn - Alton Capital

I see. When is that expected?

Aki Ratner

Probably very late '06 or early '07.

Ken Wynn - Alton Capital

At this point in time, is your sales force in place the way you want it? From listening to you, you just made a couple of new hires. Your proportion of revenue to sales is somewhat high, I think. I was wondering, at this point do you have the sales force that you need in place or is it a revolving or changing kind of situation? Are you adding people? Are you set up the way you want to be set up?

Aki Ratner

No. We are adding people all of the time and we have accelerated a little bit. Actually, our plan for Q1 was to have a dedicated salesperson in the U.S. and a dedicated salesperson in EMEA to start selling the new product. The rest of the sales team was supposed to sell the old products or the legacy products only, just to make sure that the new product will not affect the results of the old products.

However, when we've seen the reaction of the market, we have decided to add. We did it already in Q1 and we still have space for more additions, more InFocus salespeople. Currently we are a little bit ahead of our initial plan for them because of the market reaction.

Ken Wynn - Alton Capital

I see. The last question, if you could be so kind. I read an article that they interviewed you and you spoke about certain limitations, the difficulties of being a small company where basically it's large companies buying from large companies. That's something you spoke about, correct?

Aki Ratner

Yes, I did.

Ken Wynn - Alton Capital

I was wondering, how much of that is a limitation on your ability at this point in time? How much is the fact that you don't have all the resources that you would probably hopefully have at some point in time to expand?

Aki Ratner

Okay. First of all, I would like to distinguish between the two lines of products that we have: the enabling technology that we have, and those other legacy products and the Attunity InFocus. Regarding the enabling technology, right now the majority of the sales that we are doing is involved with a big vendor of the BI or EPL.

So in a way, they are creating for us the environment where, because they are recommending us, the customer will not say no. So we are overcoming it by that, but it's still a challenge.

Regarding Attunity InFocus, because of the uniqueness of the solution and because there isn't another option currently available in the market, I don't think that it's going to limit us. Again, the growth that we plan for the Company is based on the quick results that we expect to get from the Attunity InFocus side.

Ken Wynn - Alton Capital

Well, I thank you very much for your time. I just want to mention that I was a Precise stockholder and I have a lot of confidence in your abilities.

Aki Ratner

Thank you for your questions.

Operator

(Operator Instructions.) At this time, you have no further questions.

Aki Ratner

I would like to thank everybody for participating in our call, and I wish to see you or hear you again three months from now. Thank you, and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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