Ness Technologies Inc. Q4 2008 Earnings Call Transcript

| About: Ness Technologies, (NSTC)

Ness Technologies Inc. (NASDAQ:NSTC)

Q4 2008 Earnings Call

February 4, 2009 8:30 am ET


Sachi Gerlitz - President & Chief Executive Officer

Ofer Segev - Executive Vice President & Chief Financial Officer

Drew Wright - Senior Vice President, Financial Operations & Investor Relations


Manesh Tamarijine - Oppenheimer

Ziv Tal - Oscar Gruss

Kevin Wenck -Polynous Capital Management

James Friedman - Susquehanna Financial

George Milos - MKH Management


Good morning. My name is Barbra and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Ness Technologies fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

I’d now like to turn the call over to Mr. Drew Wright, Senior Vice President, Financial Operations and Investor Relations. Sir, you may began you conference.

Drew Wright

Thank you, Barbra. Good morning everybody and welcome to the Ness Technologies fourth quarter and full year 2008 earnings call. In this call we’ll discuss our results for the quarter and year ended December 31, 2008. Before we start I’ll read the Safe Harbor statement.

Except for historical matters discussed herein, the matters discussed on today’s conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by words such as believes, expects, may, anticipates, plans, intends, assumes, will or similar expressions.

Forward-looking statements are based on management’s current expectations and beliefs about future events as of the date of this conference call and involve certain risks and uncertainties. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances and Ness’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors.

Some of the factors that could cause future results to materially differ from recent results of those projected in forward-looking statements are the risk factors described in Ness’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2008 and Ness’s quarterly report on Form 10-Q filed with the SEC on November 6, 2008. Ness is under no obligation and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise.

The audio from today’s call is being webcast live on the internet. A replay of the call will be available online at the Ness Technologies website under Investor Relations. Also available on the Ness Investor Relations website are today’s press release and the related 8-K filing.

Our call today will be led by Mr. Sachi Gerlitz, President and CEO and by Mr. Ofer Segev, Executive Vice President and CFO. Sachi, please begin.

Sachi Gerlitz

Good morning. 2008 was a year of growth and further implementation of our business strategy. We did well considering the tremendous market economic climate; thanks to the solid fundamentals of our core business units and our beneficial geographic diversification. We met our non-GAAP EPS expectation in the fourth quarter and we were also in range with our revenues, except for $7 million of currency headwinds to our top line.

This was a result of hard work by each of our business units, coupled with attention to the expense line. As Ofer will be telling in a minute, our software product engineering segment did very well in Q4 as did our system integration and application development segment, except for our North American financial services vertical, which had a loss in which we have recently restructured to adjust to the changing demand.

Our software distribution segment did much better in Q4 than in Q3. I don’t need to elaborate on the challenges of the economic environment for us and everyone else. Nevertheless, the changes in the environment did not erode our value proposition to our customers and therefore we believe that we’ll continue to grow our market share following the demand for our services.

Ofer, will you take us through the numbers please.

Ofer Segev

Thank you, Sachi. Good morning everyone. First, I should point out that we reorganized our reportable segments. Starting with the just completed fourth quarter, our segments are now aligned exactly with the company’s free service line that we’ve been talking about for a long time; software product engineering, system integration and application development and software distribution. Our earnings press release today breaks down our revenues and operating income by these new segments and also provides this data by quarters for the last two years.

Second, I’d like to remind you about the non-GAAP metrics we use which we’ll refer during this call. To help understand the underlying performers of the company we calculate non-GAAP P&L metrics that exclude onetime gains, onetime expenses and two recurring non-cash items, stock based compensation expenses, and amortization of intangible assets, net of taxes.

Today’s earnings press release contains a non-GAAP reconciliation table that details these amounts. The item excluded from the current and comparative periods are a non-cash write down of $2.9 million in the value of our externally managed Israeli severance pay fund due to low asset value in the portion of the funds invested in capital market; the gain from our third quarter SAP sale net of related and other expenses and arbitration charge we recognize in Q4 of ’07, included related in other expenses. So, let’s see what the numbers are.

Revenues for the fourth quarter were $170 million, essentially flat year-over-year compared to exceptionally strong Q4 ’07 and effected by top line currency headwind for about $7 million in Q4, compared to the exchange rate of Q3 of ’08. Full year revenues were $665 million, compared to $560 million in ’07, up 18.7% year-over-year. Organic growth in constant currencies was 7.4%.

Backlog at the end of the quarter contracted slightly to $736 million, down 3.7% sequentially and flat year-over-year. Two factors affecting backlog were currency headwinds due to the stronger dollar which accounted for $26 million of the decline compared to Q3 and the two business units we divested during 2008.

Our backlog for the next 12 months is 57% of total backlog, well within our normal coverage range of 55% to 60%. Revenues by customer geographic region for the quarter were Europe 39%, Israel 31%, North America 26% and the rest of the world 4%.

Gross profits for the quarter was $48.6 million or 28.5% of revenues compare to $49.8 million or 29.3% of revenues in the fourth quarter of last year. Gross profit for the year was $119 million of 28.5% of revenues compare to $161 million of 28.7% of revenues in ’07. Once again we maintained our gross margin almost flat, despite the lower than expected high margin, software sales and the loss in our U.S. based financial services vertical, largely through continued improved efficiencies.

Operating income for the quarter was $5.5 million. On a non-GAAP basis operating income was $12.2 million of 7.1% of revenue, down 30% compared to a strong $17.5 million open 10.3% of revenues in Q4 of ’07. Operating income for the year was $49.8 million. On a non-GAAP basis operating income was $50.3 million or 7.5% of revenue up 18.9% compared to $42.3 million or 7.6% of revenues in ’07.

EBITDA for the quarter was $12.3 million. On a non-GAAP basis, EBITDA was $15.2 million or 8.9% of revenue, down 25% from $20.3 million or 11.9% of revenues in the fourth quarter of ‘07. EBITDA for the year was $71.4 million. On a non-GAAP basis, EBITDA was $61.6 million or 9.2% of revenues up 20% from $51.3 million or 9.2% of revenues in ’07.

Net financial expenses was $2 million in quarter compared to $0.5 million in Q4’07. For the full year, financial expenses were $5.7 million compared to $50,000 in 2007. These financial expenses are primarily from the interest expenses on the long term loans we took for prior acquisition.

We experienced a tax benefit in the quarter of $900,000 through the use of tax loss carried forward. For full year, our tax loss was approximately 19% slightly below our normal tax range.

Quarterly GAAP net income was $4.3 million. On a non-GAAP basis net income was $9.3 million, down 32% compared to $13.8 million in the fourth quarter of ’07. Full year GAAP net income was $35.5 million. On a non-GAAP basis, net income was $37.2 million, up 9% year-over-year.

Quarterly GAAP EPS were $0.11. On a non-GAAP basis diluted EPS was $0.24 compared to $0.35 in the fourth quarter of ’07. For the full year, diluted GAAP EPS was $0.89. On a non-GAAP basis, diluted EPS was $0.94 compared to $0.87 in ’07.

At end of December, cash and cash equivalents, restricted cash and short-term deposits was $58.7 million compared to $46.1 million at the end of ’07. We had about $18 million of short-term debt and about $68 million of long-term debt, of which only about $7 million is due before the end of 2009.

Most of the long-term debt is five year loans taken over the last year or so to fund acquisitions. These long-term loans typically are fixed to variable interest rates in the range of 4% to 6%. Bottom line, we remaining our comfort zone regarding liquidity.

Credit receivables were $200 million compared to $183 million on September 30, while unbilled receivables were $44.8 million, down $14.9 million sequentially. Unbilled receivables as a percentage of total trade receivables were 18% at the end of the quarter, down from 20% at the end of ’07.

Day sales outstanding at the end of the year was essential flat versus the prior quarter and prior year at 80 days. Please remember that in calculating DSOs, we exclude VAT and software vendor pass through from our trade receivables, since these amounts don’t represent revenues for Ness. We continue to focus on improving our DSOs going forward. We expect or we target DSOs to be between 70 days and 80 days.

We delivered strong operating cash flows of $12.6 million in the fourth quarter and a sell operating cash flow was $31 million in the full-year. Excluding the non-recurring $9.5 million paid in Q1 ‘08 related to our Q4 ’07 arbitration settlement the business generated $40.4 million of operating cash in 2008. We will continue to push for positive operating cash flows every quarter.

Under the circumstances, the collection environment in Q4 was okay. Some clients are paying slower than historically, but most are using normal parameters. This is something we’re watching closely for obvious reasons. Overall these roles are steady or inching down.

Our top 20 clients in aggregate represented 30% of our revenue in Q4, with our largest single client under 4%. Revenue from existing clients continued at over 85%. Approximately 30% of for revenue was from fixed cost project in Q4, inline with historical loans. Our headcount increased to 8,425 versus 8,280 last year and our percentage of billable employees ticked up to 88%.

Now I’ll give you quick summary of our segment results. Our software project engineering segment delivered a very strong operating margin of 15% in the quarter, up from 12.2% in Q3 and mid single digits in the first half of the year.

Year-over-year organic growth was 30% for the quarter and 24% for the year. Our system integration and application development segment turned in a non-GAAP operating margin of 6.4% for the quarter and 7.8% for the full-year, with year-over-year organic constant currency revenue decline of 7.5% for Q4 and revenue growth of 2.7% for the full year. This segment is on track with its operating margin improvement target of 10% though it was affected in Q4 by a loss in the U.S. financial services vertical.

Our third operating segment, software distribution was presented by our NessPro business units to leaver the non-GAAP operating margin of 23.2% for the quarter and 16.2% for the full year, with year-over-year constant currency revenue growth of 12.1% for the Q4 and 25.8% for the full-year, net of acquisitions and divestitures. Revenues were down substantially and operating margin softened year-over-year due to the sale of our SAP distribution division last August.

At the end of the day we delivered quarterly revenues of $170.4 million, a little below our guidance range of $175 million to $185 million, largely due to the $7 million currency headwinds from the strengthening of the US dollar. On the bottom line we delivered $0.24 of non-GAAP diluted net earnings per share in Q4.

As you recall, our Q4 non-GAAP guidance was $0.24 to $0.31, based on whether we had collected any 2008 commissions from SAP related to the division we sold them. Since we haven’t collected any commission yet were exactly on target with our expectation. These commissions are amounts stable to us by SAP through the end of 2009 based on sales of licenses by our formal license sales team and are payable only following the end of each calendar year. In light of SAP statement it’s vibrant and considering the economy, we will recognize the commission only when they are actually paid.

That concludes the financial overview. Over to you Sachi.

Sachi Gerlitz

Thank you, Ofer. As a global player, our competitive advantage is very small in service line than geographies. It’s based on sharing best practices intellectual asset mobility between businesses with similar characteristic across different geographies, which is the reason we restructured our segment by service line.

I’d like to give you some business highlights for each segment, including an update on the economy in each market. Our software product engineering segment did well in Q4, as Ofer mentioned. We experienced contraction in some labs, based on client economics and the onetime ISD customer went out of business, but this has been counterbalanced by growth in other labs. Some of these growing labs are the newer larger deals we’ve announced over the last year and a half.

We have experienced rate pressure for some clients, at the same time we’ve taken annual rate increase with others. As we seek to meet the needs of clients who are experiencing budget pressure of their own, we are using the opportunity to deepen relationships, showing consideration where we can and at the same time also lengthening the engagement and increasing volume.

The bottom line as you heard earlier was healthier year-over-year revenue growth with sequentially improving margin. The pipeline remains fairly healthy and we have begun an innovative proof-of-concept based and event-based marketing and sales campaign and a focused targeting of our clients software product engineering ecosystem, both of which are generating leads.

I’d like to mention four new leads, a technology based provider of solutions, supporting clinical trial have selected Ness to help build and maintain their technology platform, which integrate patient in directions throughout the drug development process in a multi-million dollar agreement.

Stock assistant, which builds leading global quality and compliance management systems, has chosen Ness in the multi-million dollar agreement as part of the growth strategy to enhance their software as a service technology platform and contribute over the next generation platform.

Ness signed a comprehensive multi-year master service agreement with a top five global financial institution to help and build solid software and service enterprise solution as an expansion of the product Ness developed in the labs for other customer. We’ve been retained by a German Bank for a small lab to provide my staff banking and front arena platform engineering services for their customers. We also renewed a large long term SPL client for a new term and we have achieved headcount milestone in three labs.

During the year we fixed our delivery and recruiting problems in India and operations there are running smoothly. Attrition rates in India are trading somewhat lower due to the economy and wage inflation has eased somewhat. Backlog in this segment grew about 29% year-over-year. We have over 55 software products to date.

Our system integration and application development segment did well and by large we’ve hopefully transitioned a loss in our financial services vertical in North America. Let me quickly mention a few highlight from each market within the system integration segment. We are starting to feel the macroeconomic pressure in our Central and Eastern Europe trading market. It wasn’t too bad in Q4, but it will probably intensify in Q1 and Q2 as financial services deals are slowing significantly.

We are aggressively marketing in the region and we closed over 15 deals in Q4 including a multimillion dollar expansion with a large media company, a significant expansion with a large steel manufacturing company, a new multimillion dollar engagement with a large regional electric power company and a multimillion dollar engagement with the public sector transportation agency. We have a number of large deals in the pipeline, including our growing public sector business in the region.

Our business in the Defense and Homeland Security market did very well in Q4. We had a number of nice wins in the quarter, including $7 million government-to-government, Special Forces Command and Control contract in Latin America and over $10 million expansion to existing contracts with a foreign air force and a new contract with another foreign air force. We have numbers of other deals in the pipeline and in fact, this is the most futile period for our Defense and Homeland Security pipeline that we have seen in years. We have not seen any effects of the macroeconomic slowdown in this market.

Our commercial market in Israel saw some changes in 2008. The Israel commercial economy is feeling the pinch of the worldwide economic metric. We are feeling great pressure from some clients, mostly in the financial service vertical and some projects has been slowed or suspended. We reorganized the units from a service line model to industry vertical to improve our competitive advantage in a more difficult market, keeping in mind also that we no longer have the benefit of selling SAP licenses in Israel.

We are managing expenses in this business unit and we’re continuing to monitor and address projects with less than target profitability. During Q4, we had a number of win including six expansion of existing deals in the range of vertical and several smaller new wins. We went live in the quarter on four major implementations.

In our North American system integration business, we had a loss in Q4. As I mentioned, our U.S. based financial services business is under strong economic pressure. Our customers are not going anyway, they’re just slowing down. In addition we are experiencing some rate pressure. This reduced stock in the U.S. and in India in response and we have also taken this opportunity to restructure our North American system integration organization to better align with client demands.

Our engagement with our largest financial services client, served largely from India is doing fine and our U.S. Healthcare and Commercial group, both did well in Q4. We had significantly enhanced our sales presence in the U.S. and in Q4 we want this in all three verticals.

Our third segment, software distribution did much better in Q4 than in the previous quarter. Some big deals open up in Q4 and we hope that this indicates at least a partial redemption of the end-to-product license pipeline though of course it’s too early to really know. We are adjusting our cost in this segment, inline with the demand, without losing our ability to sell into the market.

A good example of benefit of managing the business by service line instead of geography is the recent corporation between NessPro Israel and NessPro Spain, in closing large licenses jointly during Q4.

As you know, our Ness India delivery organization has been managed for much of 2008 by an interim executive (Inaudible). Dom has done an exceptional job which you see manifested in our significantly improving margin for India based delivery.

In the meantime, we have identified an executive who will take the role on a permanent basis. I’m very pleased to announce that Sathyajith was appointed President of Ness India, effective in the start of the year. Sath has been with Ness for about six years and he has served in various capacities including the Chief Delivery Officer for Software Product Engineering in India and as the head of our Consulting and Practices Division in U.S.

So, how are we doing overall? We are feeling the effect of the weak economy in several of our markets. We remain upbeat about our software product mix offering and our defense and homeland security offering. Our business in other markets will probably be affected by varying degrees by the economy that we continue to believe. They are fundamentally healthy and we plan to maintain or grow our market share.

Ofer, would you present our financial guidance, please.

Ofer Segev

For the full year 2009, Ness expects to generate non-GAAP diluted net earnings per share in the range of $0.65 to $0.85 and revenues in the range of $665 million to $695 million. This represents constant currency revenue growth of 4% to 8% net of acquisitions and divestiture.

Our guidance is based on the following assumptions. We assume that our tax rate for 2009 will be in the range of 24% to 26%. This is higher than before as the tax holiday we enjoy in India will expire for our largest delivery centre in Bangalore at the end of March. Our earnings guidance assumes significant investments in sales in 2009 in Central Eastern Europe and Israel, as well as a new store delivery center in Eastern Europe. These investments will cost us about $5 million.

We assume that outstanding diluted shares will stay at the current level of around $14 million shares in 2009 and we assume average foreign currency exchange rate as of the end of December 2008. This year will be backend loaded more than normal. We believe Q1 will be weak with improvements in Q2 and much healthier Q3 and Q4.

The factors that could cause us to swing to the high end or low end of our guidance range include continued overall IT services industry contraction, especially beyond Q2 which push us towards the lower end of the guidance range. Further strengthen of the dollar would have a dual effect; reducing our top line growth and helping our operating margin and vice versa.

From a segment perspective, we believe that software product engineering will see a top line growth of 15% to 20% this year with a continued strong operating margin. Now, that operating margins for the segment will be seasonally weak in Q2 following annual salary hikes in India.

Long-term we continue to believe that this segment can deliver annualized operating margins of 15%. The system integration application development segment will experience a modest growth and the operating margin for this segment will be affected by the economy, particularly in Q1 and Q2.

On an annualized basis, we expect non-GAAP margin to increase compared to ’08. Our software distribution segment is the wildcard as this segment does not operate with a backlog of license fees of significant recurring revenue. We expect revenues in this segment to be flat with an emphasis on maintaining the margin in the business. We anticipate a very soft Q1, a stronger Q2, a soft Q3 and a much stronger Q4.

By the way you noticed I’m sure that our guidance is non-GAAP inline with our previously announced financial guidance practices. For 2009 we are providing earnings per share guidance on a non-GAAP basis only. We believe that non-GAAP guidance provides the best comparative basis for you to understand and assess our ongoing operations and prospects for the future. Back to you Sachi.

Sachi Gerlitz

We feel good about our performance in Q4 considering the unusual markets pressure and we are working hard to continue our positive growth and margin improvement. How quickly we will reach our goal will depend on the timing of the economic recoveries, but we are very confident that we will get there. Thanks, to our over 8,300 employees in 18 countries for all your hard work and commitment.

That concludes our prepared remark. Barbra let’s take questions please.

Question and Answer-Session


(Operator Instructions) Your first question comes from Manesh Tamarijine - Oppenheimer.

Manesh Tamarijine - Oppenheimer

A few questions if I may. One clarification, does your guidance for ’09 include commission payments from SAP and if so by how much do you see as SAP’s contribution?

Ofer Segev

Yes, that include. We assume that we will get something and we don’t know exactly how much, but we’ll have to wait. It’s probably going to take another month and so before we know the results of ’08.

Manesh Tamarijine - Oppenheimer

When do you see this commission payments coming in? The first quarter itself or is that going to come…

Ofer Segev

Yes, if it comes, we think its Q1.

Manesh Tamarijine - Oppenheimer

Okay. Can you also possibly breakup your headcount by region and where do you see groups driven headcounts going up during 2009?

Ofer Segev

We expect those mainly in India. That says as you saw mainly in India and somewhat in Eastern Europe in our development centers.

Manesh Tamarijine - Oppenheimer

Can you remind me again, what’s your target are for the year?

Ofer Segev

Actually, we didn’t give any targets for the year, but it’s going to be few hundreds.

Manesh Tamarijine - Oppenheimer

Okay, on a more somber note, have you seen any impact on your business from the ongoing war in Israel?

Sachi Gerlitz

I would classify the impact of the war in south of Israel in two ways; the system integration and application development segment and go-to-market that could be affected; the Israeli commission part and the defense and homeland security.

The length of the defense and homeland security has benefited from the recent development in south of Israel, by increasing demand from the initial defense in Israel and for business it was a good development. For the commercial part, I would say the effect of marginal. We had about 80 people out of the 2,700 people that where (inaudible) the utilization was effected marginally. So that part of the market, I don’t think that there was any significant effect.


Your next question comes from Ziv Tal - Oscar Gruss.

Ziv Tal - Oscar Gruss

Could you please discuss the pricing pressures in separate geographies and some color about the competitive landscape?

Sachi Gerlitz

I would not make any much differentiation in different geographies regarding price pressure and I would say that customers are divided into two groups, though they got into some sort of a budget constrain of their loan and the rest are jumping in the same train and using their opportunity to put pressure on the vendors. We see price pressure coming in Israel and Eastern Europe, as well as in North America. So, we do not distinguish between any of the geographies and what’s your second part of your question?

Ziv Tal - Oscar Gruss

It is the competitive landscape.

Sachi Gerlitz

I didn’t see any major shift in the competitive landscape in Q4. Almost in every market, we have different players. One could generalize that in every markets we have got the local players as well as the multinationals and the big Indian players. All-in-all, we didn’t see any big competitor emerge. We didn’t see any change in our winning ratio or we didn’t loss any major deals in the quarter.


Your next question comes from Kevin Wenck -Polynous Capital Management.

Kevin Wenck -Polynous Capital Management

What I’d like to discuss is some more color behind the guidance. I think everyone assumes that Q1 is target is challenging for a lot of companies and you’ve integrated that Q1 is going to be soft, but how fairly do you feel like you’ve gone through your customers to get an indication from them as to what the outlook really looks like for them. A lot of your customers are in such a state of disarray and uncertainty and you haven’t been able to get that kind of feedback at this point.

Sachi Gerlitz

Let me start by giving more overall color and also we’ll go back into the guidance itself. What we’ve seen with customers is capital of phenomenon. The first is that large decisions are being delayed. So, we see in the pipeline is large opportunities and the second it seems that we see people are moving into quarterly and some times monthly decisions cycle rather than annual decision cycles.

Therefore visibility at large has been reviewed, but as much as we talk to our customers, the demand has not vanished. So people are as we see it restructuring and slicing big decision into shorter term engagements and delaying what we believe in a quarter two, some of the engagement.

We believe that for many of our customers, the engagement that they had resort are quite critical for their own business that all these delays could have endured at quarter two and therefore we believe that even in this I would say, lower visibility environment eventually what we’ll see is a significant pick up by the second half of 2009. Ofer.

Ofer Segev

Yes, I think regarding Q1, historically Q1 is our slowest quarter. That’s been the case for a long time. So, there’s nothing here in the trend. I think we just know more about Q1 than we know about Q4 of this year and I think this is what we believe will happen. I think we can probably make the numbers as we anticipated for Q1 because we have a decent visibility into Q1. So there is nothing much more I can add to that.

At least we anticipate that the second half of the year, we will stop the down ride and get to some stabilization in the market and essentially the services we provide, most of it, I don’t believe we have services that we provide that I can call nice to hear, which is the first thing that people cut. All our services are essential to our customers and that’s what they will need to buy the services.

Kevin Wenck – Polynous Capital Management

Okay and then a follow-up on the Managed Labs Business. What sort of quoting activity or pipeline activity have you seen in the last three months and is that actually potentially increasing as customers are making internal budget cuts or is it kind of still (Inaudible) in the line of historical norms. So maybe you could give us a couple of more comments on that segment of the business in terms of the potential pipeline?

Sachi Gerlitz

I would like to make three comments about the booking product for the software product engineering. Some of our customers are ramping down as part of I would say the vagueness in the overall environment and cutting costs and I would say stalling business decisions. This is part of what we have seen in Q4 and this is I would say the negative part of the message.

With others, we see significant shift as their own R&D activity into outsourcing or moving business to us and we expect therefore the growth to compensate before the ramp down. We believe that this 15% to 20% growth that we expect for this segment in the year, the majority will come from gross within existing customers.

We do have a decent pipeline with people and we believe that this pipeline will increase as a result of the macroeconomic environment that push R&D organization to expand the needs for R&D with fewer dollars and therefore the offerings of offshore is more appealing these days than in before. One of the good things about this segment is that it is both offensive and defensive. So, therefore we believe that even with the headwinds of the economy, we expect decent growth for this segment in 2009.

Kevin Wenck – Polynous Capital Management

Alright thanks for you comments on that and then two quick questions. With the Satyam, hope I’m pronouncing that right, unwinding are you seeing any increased business activity from your previous Satyam clients? Then the second question is what’s the CapEx project for 2009 and projections for reducing your debt?

Sachi Gerlitz

Let me address the first question and afterwards the second. Of course, when everybody in every competitive landscape is observing any of their competitive going into some sort of trouble, your focusing sales activity for the customers of that vendor in trouble and there are few vendors in trouble, not only Satyam, in our industry and of course we target each and every one of them and naturally I cannot elaborate more than that.

CapEx will be at the same level of 2009, it’s around $60 million and regarding our debt it should be, you heard the number I mentioned for 2009, it’s not a big number; it’s around $7 million. We believe we will generate a pretty healthy cash flow in 2009 and actually I don’t see a reason to reduce debt because actually we’re in pretty good terms currently and I would rather keep the money in our bank and not give it back to the bank.


Your next question comes from James Friedman - Susquehanna Financial.

James Friedman - Susquehanna Financial

I wanted to ask first, Ofer if you share some of your thoughts about the operating margin for 2009, what are some of the leavers in the model; whether it’s pay-related or utilization related and contrast with the trends in the bill rates that you described earlier?

Ofer Segev

I think again we can talk to each segment separately, because each one is really behaving differently. If you remember I mentioned that the software engineering business is targeted to be 15%, when it was around five and not too many people believe its doing well and actually we did it within six months. I think our operations in India are doing the best they’ve ever done. We are very efficient now in India and the numbers are 15%, as you saw and I believe we can continue these trends of margin.

In the software distribution that’s advertised, that’s really up and down between the quarters, but on an annual basis it should be the same level at around that 15%, 16%, 17%, because again this is a fixed cost business and the license is guarded. The thing that is more vulnerable to changes in the market is the system integration, because this where we get most of the most of the pressure and of course if we need to give discounts and keep the people, there is a limit to how much you can reduce salaries to people and so on.

We are pushing our utilization to the best level we can have. It’s of course different by geography. I think we took most of the unnecessary expenses out of the system and we’re trying to act efficient as possible, but we don’t want to kill the business. We have to remember 2009 is going to end and it’s going to be 2010 and slowness is going to end and lastly continue.

Actually as I mentioned, we are putting $5 million of long-term investments in 2009, which we don’t expect to have a lot of effect on the top line for 2009, but we’ll have a very big effect on 2010 and forward. Actually, we look at 2009 as an opportunity for us to really gain market share and that’s why we do those investments.


(Operator Instructions) Your next question comes from Ziv Tal - Oscar Gruss.

Ziv Tal - Oscar Gruss

Thank you, my question has been answered.


Your next question comes from George Milos - MKH Management.

George Milos - MKH Management

Good morning. Thanks for taking my question. Can you talk a little bit more about Eastern Europe; somehow it seems that business is doing extremely well for the first three quarters of the year. Then you have the Logos acquisition that seems to be a strong business and now it seems like maybe the softness there is coming off faster than they expected?

Sachi Gerlitz

I think that you’ve analyzed the situation pretty well. We had an excellent three quarters at the beginning of the year in Central Eastern Europe, but the strong ness of the economy has impacted Eastern Europe as it did for the rest of the world. I would say locally it was a surprise. So, the markets are really waiting for this to happen so fast in Eastern Europe and we have seen this slowness in Q4 and we anticipate this to as strengthen in Q1 and in Q2.

The good thing about our business is that a large part of our system integration and application development segment in that region is going either to utilities or to the public sector, which are less strong to this environment and in some places we even anticipate an increased expenditure of a governmental fund as well as European community fund in order to boost the economy. So, it’s kind of mixed bag situation where we believe for us the effect will be a slower beginning of the year, but picking up at the second half of the year.

George Milos - MKH Management

Okay, so just to summarize that, you have the slow Q4, but you expect it to get weaker in the first half and then pick up in the second? Is that what you said, I wasn’t quite sure?

Sachi Gerlitz

Yes, I think this is a good summary.

George Milos - MKH Management

Okay, and then in India your salary increases are happening April 1 or at different times?

Sachi Gerlitz

Well, usually we would try to divide it between twice a year instead of once a year; it’s essentially April or October. We’ll have to see how this year plays out. Hopefully, because of the situation we can do much better and maybe not so high increases like historically.

George Milos - MKH Management

Okay, great and then one more quick question on the managed labs. On relatively flat sequential revenue, you had a big pick up in EBIT or contribution. So basically your cost must have comedown, can you explain that a little bit?

Sachi Gerlitz

I think as I said earlier, over the last six or so months, we did a lot of work to improve our Indian delivery centers and this actually came through in Q4 and it’s really just better cost management.


There are no further questions in queue. I’d now like to turn the call back over to Mr. Gerlitz for closing remarks.

Sachi Gerlitz

Thank you for joining us on today’s call. We’ll speak to you again when we report our Q1 results around the beginning of May. That concludes today’s call. Thank you for joining and have a very good day. Bye-bye.


This now concludes the conference call. You may now disconnect.

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