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Magic Software Enterprises, Ltd. (NASDAQ:MGIC)

Q4 2008 Earnings Call

February 18, 2009 10:00 am ET

Executives

Guy Bernstein – Active Chairman

Hadas Gazit-Kaiser – Chief Financial Officer

Analysts

Steven Silk – C. Silk & Sons

Charles Silk – C. Silk & Sons

Operator

Welcome to Magic Software’s Fourth Quarter and Full Year 2008 Financial Results Conference Call, and thank you all for holding. All participants are present in a listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded today February 18, 2009. Earlier today Magic Software issued its financial results for the fourth quarter and full year of 2008. I trust that most of you have seen by now a copy of the press release, but, if you have not, you may view it on the Investor Relations section of Magic Software’s website at www.magicsoftware.com.

On the call today, are Guy Bernstein, Chairman and Hadas Gazit-Kaiser, Chief Financial Officer of Magic Software. Before we start, I’d like to refer you to our Safe Harbor statement. Specifically, I advise you that some of the information, we are providing during the conference call may contain forward-looking informations with respect to plans, projections, or future performance of the company. The occurrence of which involve several risk and uncertainties, including but are not limited to the company’s ability to successfully execute its growth plan, ability to recognize revenue in future periods as anticipated, the unpredictability of the IT market, product and market acceptance risks, ability to complete development of new product, the impact of competitive pricing and offerings, fluctuation in quarterly and annual results of operations, commercialization and technological difficulties risk related to our operation in Israel and other risks detailed in Company’s Annual Report on the Form 20-F and other filings with the Securities and Exchange Commission. Magic Software undertakes no obligation to publicly release any revisions of these forward looking-statements to reflect events or circumstances after the date hereof or to reflect their current unanticipated events. With that, I would like to turn the call to Mr Guy Bernstein, Chairman.Guy?

Guy Bernstein

Thank you (Shera). Good morning and afternoon everyone. And thank you for joining us today. I’m pleased to report that 2008 was a good year for Magic Software. We continued to show an increase in sales and profit despite the economic climate. From a financial point of view, our revenues were up 6% to $62 million, compared with $58 million in 2007 from these sales, we delivered net income of $4.5 million for the year, which is up more than 300% compared to $1.1 million from continuing operations in 2007.

During the next few minutes, I would like to give you more details on our activities and the trend we see in our marketplace. Then, I will pass the call over to Hadas Gazit, our newly appointed CFO, and finally open the line for your questions.

One of the most important efforts during the year was the successful introduction of our newly branded core technology uniPaaS. Our existing customers and partners welcome the new application platform with a lot of excitement and real commitment. We also gained the industry recognition with excellent analyst feedbacks on uniPaaS as world-class application platform that gives customers the powerful choice 100% flexibility regarding the mixing and matching of client server and Rich Internet Application Technologies and deployment of applications.

And we have also obtained some new customers for uniPaaS. As a result of course, we achieved significant growth in licenses sales. As to our integration suite iBOLT, we have increased our penetration of high-end enterprise customers in both JD Edwards as well as the SAP market. At the level of the SAP R/3 offering. We also have a growing number of iBOLT projects that are aimed at integrating SAP with Salesforce.com, where our solution is probably the best in the industry.

In summary, we are pleased with the momentum that we have developed so far and confident regarding our future potential. Today’s market realities obviously make it hard to predict to the immediate future, still we have right products for markets in it of solutions. Our channels are expanding and we have a strong customer base.

We will continue to work in the year ahead to take full advantage of these strong assets and a favorable market positioning. With that, I will stop and turn the call over to Hadas to go with the financials, then we will both be available for your questions. Hadas?

Hadas Gazit-Kaiser

Thank you, Guy. I will be referring only to the results according to U.S. GAAP. In the press release, we’ve also included that non-GAAP results, which we believe offer additional insight in to our business.

I will start with the results for the year. Total revenues where $62 million, a 6% increase compared to $58.4 million in 2007. One of our significant achievements during 2008 was the increase in our license revenue.

License revenue grew around 20% to $17.9 million, compared to $15 million in 2007. This is inline with our business calls to achieve the healthy mix of sales, maximizing our profit while generating strong maintenance and support lines. With regard to profitability, our operating income reached $4.3 million, a 231% increase, compared to 1.3 million in 2007.

This is significant improvement was – this significant improvement was translated to the bottom-line with $4.5 million in net income compared to $1.1 million in the previous year. The improvement in profitability is mainly because the increase in license sales, as well as significant improvement in the efficiency in all our branches throughout the world.

Revenue on geographical basis for 2008 was as follows; 31% of our revenues were from Europe, North America accounted for 31% of the revenues, 16% from Japan, 8% from Israel and 4% from the rest of the world.

As for the fourth quarter results, revenues were $15.1 million, slightly down compared to the fourth quarter of 2007, the reduction is also due to the decrease in the euro dollar, exchange rates which has reduced our European sales as expressed in the dollar terms. Since a significant portion of our sales are from Europe, this is a significant factor for us.

Net income from continuing operations for the fourth quarter was up to 267% over the fourth quarter of 2007. The fourth quarter became our 8th consecutive quarter of profitability. Please note that for the fourth quarter of 2007 include one-time capital gains of $9.3 million from the sale of AAOD. This was recorded in the discontinued operations section.

If we turn to the balance sheet, as of the year our cash short-term bank deposit and marketable securities totaled $32.6 million with almost zero short-term bank credit. In terms of cash flow, we have managed to translated the net profit for the year into an operation cash flow of $5 million. The healthy balance sheet allows us to continue to pursuing our strategic goals, both organically and throughout mergers and acquisition. So, this is it for the fourth quarter and for the year 2008.

Looking ahead towards 2009, we believe the company is in good financial position and as the resources needs to carry out our business plans. I’m very excited to join Magic Software, and I’m looking forward to working you all.

Thank you for participating in the conference call. With that, we will open the lines for your questions. Operator?

Question and Answer Session

Operator

Thank you. Ladies and gentlemen at this time, we will begin the question and answer session. (Operator Instructions) The first question is from Steven Silk of C. Silk & Sons. Please go ahead.

Steven Silk – C. Silk & Sons

Good morning. I had a couple of accounting questions. The deferred revenue that is mostly made up of licensing revenue that Gazit provided – put on revenue over the year? Is that correct?

Hadas Gazit-Kaiser

Yeah

Steven Silk C. Silk & Sons

Okay, excuse me. So, last year, the deferred revenue jump from the $2.3 million on December 2007 to just over $8 million which would indicate to me that most of your revenue, deferred revenue or license renewals occur in the first quarter. Do we expect that in a large inflow of cash in the first quarter?

Hadas Gazit-Kaiser

Yeah.

Guy Bernstein

Yeah, definitely.

Steven Silk – C. Silk & Sons

Okay.

Hadas Gazit-Kaiser

Actually what happened – what happened in the fourth quarter of 2008, we invoiced the customers, but still didn’t get the cash. So this is why it’s not reflected in the deferred revenues, but it will be reflected in the first quarter of 2009.

Steven Silk – C. Silk & Sons

So, it’s comparable to last year we could – we are looking at probably an inflow of about

Hadas Gazit-Kaiser

Yeah.

Steven Silk – C. Silk & Sons

$6 million to $7 million of cash. Okay. The next question, the financial income is a loss of $34,000. I know you have $32 million in cash in the bank, what was the expense against that?

Hadas Gazit-Kaiser

It was mainly the exchange rate that was against us. I mean, euros that we had which influenced this. Euros and also pounds which we have in the branches, this was the reason. As you probably know, the interest rate is really low and we are keeping our cash in very conservative deposits and bonds. So this is why the interest rate is low.

Steven Silk – C. Silk & Sons

Okay that’s fine. I noticed in this quarter that the gross margins were lower, would that indicate that your non-core Magic CoreTech and Hermes doing better since they are lower revenue – lower margin products?

Hadas Gazit-Kaiser

Yeah they are doing better, both of them, but still the core business has really improved during all this year and also the fourth quarter, but both of the non-core CoreTech and Hermes are doing much better.

Steven Silk – C. Silk & Sons

Is there a point where you would feel comfortable breaking out the core Magic revenue and CoreTechn and Hermes the non-core so that we and your shareholders can get a view of really what, if you are looking to invest in this company as far as Magic and Magic Software, get an idea of trends as far as software sales and how that’s going instead of keep it somewhat hidden?

Hadas Gazit-Kaiser

Eventually what we plan to do is focus on the core business. This is why we actually we sold AAOD. So this is what we are aiming for, we are aiming to focus and generate more revenue profits and cash from the core business. I don’t know about revealing the numbers, but we are doing everything in our focus and what’s important to us which is the core.

Steven Silk – C. Silk & Sons

Sure, is divesting CoreTech and Hermes on the table or it’s something you are thinking about?

Guy Bernstein

During the current market not likely that we will sell it but of course if we’ll face the good opportunity to sell them of course we will.

Steven Silk – C. Silk & Sons

Okay. In the last quarter Formula paid out a pretty sizable dividend to their shareholders. Considering the uncertainty in the market, your balance sheet is one of the real strengths of the company. Could you definitively tell us that giving a dividend to Magic shareholders is something that is definitely not on the table?

Guy Bernstein

I cannot promise that. We definitely are not going to risk Magic. Okay, but I can say that there were a lot of questions from shareholders, why not to distribute something even a small thing in order to give some yield to the investors.

Steven Silk – C. Silk & Sons

Okay.

Guy Bernstein

But we are not planning to distribute like $30 million.

Steven Silk – C. Silk & Sons

Okay, that’s fine. And I think one of the things holding back probably with shareholder appreciation in this company, which is been profitable for fourth quarter is the large ownership of one entity which is Formula. Considering Formula, paid a dividend to their shareholders to increase their value. Would there will be anything of interest for Formula distributing, your shares to their shareholders so that you can get some flowed out there and some new interest, for people that I mean, you just don’t have any institutional ownership interest and I don’t see how you can get it with this really not that much shares available.

Guy Bernstein

You know, I don’t see what any for Formula because after all Formula will be decide for example to sell Magic to probably get some controlling premium. Just to distribute a dividend in kind don’t make any sense.

Steven Silk – C. Silk & Sons

Will that benefit the Formula shareholders similar to getting the cash dividend, but what do you - if you have any thoughts on what Formula’s it’s plans are for Magic, maybe it makes sense with them to attended for the rest of the shares

Guy Bernstein

Let’s say that the first step was to improve the company and to bring it into some level of comfort with the current business. I think the next step is to specifically under the current situation in the market is to look at some acquisition in order to increase the size of Magic.

Steven Silk – C. Silk & Sons

Okay, thank you very much. Good luck going forward.

Hadas Gazit-Kaiser

Thank you.

Guy Bernstein

Thank you.

Operator

There are no further questions Mr. Bernstein, please continue with your closing remarks.

Guy Bernstein

Okay, thank you all for your….

Operator

Excuse me. There is one more question, would you like to take them?

Hadas Gazit-Kaiser

Sure

Guy Bernstein

Yes sure.

Operator

Okay. The next question is from Charles Silk of C. Silk & Sons Please go, ahead.

Charles Silk – C. Silk & Sons

Hi, Guy. Things are going well and looking forward it show that our last quarter was sort of disappointment, how much of the disappointment was due to the currency?

Guy Bernstein

Most of it…

Charles Silk – C. Silk & Sons

Most of it, so

Guy Bernstein

Yeah. We suffered - assume we suffered approximately 700,000 from the euro exchange.

Charles Silk – C. Silk & Sons

Okay. So, that if you didn’t have that, you have been ahead over the last two quarters, it seems like those two.

Guy Bernstein

Kind obviously.

Charles Silk – C. Silk & Sons

Okay. All right, on Japan, there is so much that you’re looking forward and what’s happening? I know Nokia is going ahead? What about Sharp and Fujitsu and the 600 dealers that were at the user conference, how was that generally, is it generating more money, as the recession in Japan affecting the sales or deferrals?

Guy Bernstein

Principally it must be that there is a very severe recession in Japan and of course, it affect us also. Other than that I can say that both Fujitsu and Sharp in progress and for now it looks okay, I hope that the recession will not hold them back.

Charles Silk – C. Silk & Sons

Are they generating revenue are they, you’re getting revenue for them?

Guy Bernstein

Yes.

Charles Silk – C. Silk & Sons

Okay, all right.

Guy Bernstein

Not significant numbers yet, but they are moving ahead.

Charles Silk – C. Silk & Sons

All right, okay. On the new release of the - what is that the data replication at Salesforce? Could you give me an indication of what the pricing is or how you are going to market it as far as dollars go?

Guy Bernstein

If I remember correct, the pricing is the, the pricing starts at $5000 for the replication package. And from thereon of course if people, if small companies will download it and just do it by themselves then fine if it’s basically at either for people to try to see that it’s very plug-and-play product and from thereon of course to develop it to a bigger extent.

Charles Silk – C. Silk & Sons

Have you made sales on it already or when you announced that you said it was available but people stepped up to buy some of it now?

Guy Bernstein

It’s just two weeks since we launched it.

Charles Silk – C. Silk & Sons

Right, okay is there a possibility of applying this to the IBM or the Ice Systems and the JD Edwards and SAP, and they have use for this data replication?

Guy Bernstein

Data replication is specifically for Salesforce.com. We found out that the main problem with Salesforce is that big organizations usually prefer to have the data on site and they had a very big problem having the older in-house data on the web. Therefore the very specific product for specific needs it’s unlike the JD Edward or R/3 for SAP.

Charles Silk – C. Silk & Sons

Okay, I know most of the people who are Salesforce customers are very small but will that level of data replication go down to them also or?

Guy Bernstein

Yeah

Charles Silk – C. Silk & Sons

Okay, one more I have, why did the Formula stopped the buying more back of Magic Software stock?

Guy Bernstein

Good question. We were quite busy with the dividend and I believe we found quite hard to find more stock.

Charles Silk – C. Silk & Sons

Okay. All right that’s all the questions. What’s I think you have got enough going ahead and how is it affecting your business in Israel?

Guy Bernstein

Business in Israel is basically doing quite well. Q4 was quite strong for Israel.

Charles Silk – C. Silk & Sons

Okay, are there any other, how I understand that you’re starting to move into Latin America is that generating it?

Guy Bernstein

We’ve started to move to Latin America. I can say it basically in Israel, we were holding some education lessons regarding the new technology and there was huge excitement around it.

Charles Silk – C. Silk & Sons

Okay, you know, going back to the times when the day that with clever thought and have a list of move clients et cetera. You only made one announcement in the last three-months and the one out of New York. And nobody really knows who owns the stocks of what’s going on a customer basis. How it’s accelerating, it just seems like there is a lack of communications to the stockholders that still exists?

Hadas Gazit-Kaiser

And since 2008 was a good year for Magic on the customer side. I mean, there were a quite a few new customers. Most of them were not allowed to expose, but still we will do something about it. We will try to.

Charles Silk – C. Silk & Sons

Right, because, one side it was improved considerably in all of a sudden last two or three months it’s just sort of die down and the only – the thing is that biggest announcement was from outside as with four different companies were talking about the data and the data replication and because nothing else it’s just disappointing to should not see what’s going on?

Guy Bernstein

And problem was that the market did not provide us with the motivation because no matter what you release, it doesn’t do anything in the current markets.

Charles Silk – C. Silk & Sons

In the current market. Okay, I’ll turn it over to somebody else.

Hadas Gazit-Kaiser

Okay.

Guy Bernstein

Thank you.

Charles Silk – C. Silk & Sons

Thank you

Operator

There are no further questions. Mr. Bernstein, would you like to continue with your closing remarks?

Guy Bernstein

Yeah. So, thank you all for joining us, and we look forward to speaking with you again next quarter.

Operator

Thank you. This concludes Magic Software’s fourth quarter and full year 2008 results conference call. Thank you for your participation. You may go ahead and disconnect.

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