ECtel Q4 2008 Earnings Call Transcript

ECtel (ECTX)

Q4 2008 Earnings Call

February 17, 2009 10:00 am ET

Executives

Itzik Weinstein - Chief Executive Officer and President

Michael Neumann - Chief Financial Officer and Senior Vice President

Ehud Helft - GK Investor Relations

Analysts

Jonathan Kreizman - Oscar Group

Presentation

Operator

Welcome to the ECtel’s fourth quarter 2008 results conference call. (Operator Instructions). I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations.

Ehud Helft

Good day everybody. On behalf of the investors, I would like to thank ECtel’s management for hosting this call. Earlier today, ECtel issued its results of 2008 fourth quarter and full year. I trust that most of you have seen by now a copy of the press release, but if not, you may view it in the Investor Relations section of ECtel’s website at www.ectel.com and on all major international wireless services.

Joining us today on the call are Mr. Itzik Weinstein, ECtel’s Chief Executive Officer and President, and Mr. Michael Neumann, Senior Vice-President and Chief Financial Officer. Mr. Itzik will begin by providing a summary of the main highlights of the quarter followed by Michael who will provide you with an analysis of the financial results. We will then turn over the call for the question and answer session.

Before we begin, I would like to point out that the Safe Harbor statements in the company’s press release issued earlier today, also refer to the content on this conference call. In addition, during this call, we will discuss certain financial information that is not prepared in accordance with GAAP. The company’s management uses this financial information in its internal analysis in order to exclude the effect of amortization of acquisition-related intangible assets, share-based compensation expenses, and the impact of the permanent impairment charges related to certain securities. We believe that these measures enable a more meaningful comparison of our business performance between the periods.

For more information regarding our use of non-GAAP financial measures including a reconciliation of these measures, refer to today’s earnings release.

With that, I would now like to turn over the call to Mr. Itzik Weinstein, ECtel’s CEO.

Itzik Weinstein

Good morning everyone, and thank you for joining us today to discuss ECtel’s fourth quarter and full year 2008 results.

During 2008, we continued to focus on growing our geographic presence and customer base directly and through our key partners. This year, we further expanded our presence in fast-growing regions such as Africa and South America, winning key first-time contracts in several new African countries as well as expanded our presence in Western Europe and signed several major upgrade contracts in Canada and former Soviet Union region. We added a total of 12 new customers to our growing customer base and successfully completed the acquisition and integration of Compwise activities.

Furthermore, as we continue to understand the importance of being close to customers, we expanded our London and Singapore sales and support business. This, on one hand, brings us closer to the customer while on the other hand enabling us to lower expenses as well as leverage the existing infrastructure and minimize travel to these regions.

We also opened a new office in Ukraine to supply professional services and postal services to the region. These activities immediately contribute to our top-line as we culminated 2008 with a 20% increase in revenue over 2007, reaching $25 million. Non-GAAP gross margin totaled 46% mainly as a result of softening as well as currency fluctuation throughout the year.

We generated a net loss on a non-GAAP basis of $7 million for the year mainly as a result of a combination of a lower gross margin as well as macro impact which I will elaborate on in a moment.

In terms of cash, a key advantage in this market, we ended the year with close to $18 million in cash and no debt. This represents roughly $1.01 cash per share.

Now, to the quarter in detail. The main trend we are witnessing in the turbulent macro environment and some thought as to where we will head in 2009. In the fourth quarter of 2008, we generated lower than expected revenues of $12.8 million in the quarter mainly following a delay in receiving acceptance of a major order causing a decline in our profitability margin with gross margin totaling 34% and the non-GAAP net loss totaling $2.9 million.

In recent weeks, we have adopted a series of proactive cost-cutting measures in order to preserve cash without compromising on our limping growth with a view to achieving break-even and profitability during 2009 and partially reducing our currency exposure. These measures included cuts in both management and employee salaries ranging between 5% to 10%, a downsizing in work force of about 8%, as well as taking a much tighter ring on all operating expenses, from car leasing and maintenance to travel and office rentals just to name a few. These measures will contribute over $4 million in savings already in 2009 compared to 2008 with initial saving expected already in the first quarter gathering speed as we move into the year. These cost savings are added to further cost efficiencies experienced in the professional services function as we shifted activities to the Ukraine office.

The current economic situation is driving clear demand for revenue assurance and cost saving products such as ECtel’s. During the fourth quarter of 2008 our book-to-bill was over 1. As telecom operators enter harsher operating environment, cutting losses and improving efficiencies are essential as operators seek a tighter control on processes, minimize leakages, and maximizing returns. Solutions like ECtel’s IRM platform offer these operators complete revenue management tools enabling them to stay on top of revenue streams minimize leakage with receiving proactive alerts on out of the normal realm.

Equally important to note is the fact that our system has been known to have a quick return on investment of only several months, a critical selling point in today’s market when returns on investment and cost saving are the essence.

Looking ahead to 2009, the tangible RI ECtel solutions offer is drawing more and more interest for operators as we stick to minimize revenue leakage and save costs. This translates immediately this quarter to the book to bill which exceeded 1 as well as growing backlog in pipeline. Despite these encouraging indications, the deepening prices call for proactive efficiency measures and tight cash management. We intend to manage our expenses for 2009 under the assumption that revenues will remain flat over 2009 while we stay focused on preserving cash and achieving break-even and profitability during the second half of the year. We remain optimistic that our firm cash position, leading product portfolio, global partnership, and strong international presence will serve as a key foundation to enable us to weather this storm in 2009 and grow the business in the longer term.

With that, I would like to turn over the call to our senior vice-president and CFO, Mr. Michael Neumann, for more details on the revenue and view of our results.

Michael Neumann

I will now review the non-GAAP results for the fourth quarter and full year ended December 31, 2008. Revenues for the fourth quarter totaled $4.8 million compared to $6.6 million in the fourth quarter of the last year and $7.1 million last quarter. Revenues for the fourth quarter and full year were lower than initially anticipated mainly due to the deeper impact of the global crisis, the delaying recognizing revenues related to a major project, and the impact of currency fluctuation against the US dollar. Revenues for 2008 increased 20% over 2007 reaching $25 million.

Geographic revenue breakdown for the quarter was as follows: Europe totaling 59%, 38% from Eastern Europe and 21% from Western Europe; 33% from the Americas and 8% from Africa, Asia Pacific, and Israel. Gross margin for the fourth quarter was 34% compared to 55% in the fourth quarter last year and 50% last quarter. Growth margin for the year totaled 45% compared to 51% in 2007. Operating loss for the fourth quarter totaled $3 million compared to $0.8 million in the fourth quarter last year and a $2 million operating loss last quarter. Operating loss for the year totaled $8.1 million compared to $7.2 million last year.

Net loss for the fourth quarter of 2008 totaled $2.9 million or $0.18 loss per share compared to $0.5 million net loss or $0.03 loss per share in the fourth quarter of 2007. Net loss for the last quarter totaled $1.6 million or $0.10 loss per share. Net loss for the year totaled $7 million or $0.42 loss per share compared to $6 million net loss last year or $0.36 loss per share.

Now, turning to the balance sheet and cash flow: Cash, cash equivalents, and marketable bonds and securities as of December 31, 2008, were $17.6 million or $1.01 per diluted share compared to $19.3 million or $1.02 per share as of September 30, 2008. During the fourth quarter, we received $1.7 million in cash in consideration for the ARS acquired from Credit Suisse. On a GAAP basis, this quarter, we recorded a $1.6 million capital gain following repayment of the Credit Suisse ARS. On the other hand, following the receipt of third party indications, we recorded a $1.8 million impairment charge on account of our two final outstanding ARS issued historically by Lehman Brothers. These ARS were ranked as AA at the time of purchase and continued to pay interest in accordance with the stated terms. However, since these ARS have experienced multiple failed auctions due to lack of liquidity, we were required to record this impairment in our statement of operations. The carrying value in our balance sheet following the impairment is $900,000.

With regard to the buy-backs today, we have purchased slightly over 400,000 shares amounting to $0.5 million. This represents an average price of $1.24 per share. Note that in the quarter cash was used for buy-back totaling $0.3 million.

And now, we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Jonathan Kreizman of Oscar Group.

Jonathan Kreizman - Oscar Group

A few questions; with book to bill now above 1 and with the economic environment not showing any reassuring signs of recovery, could you please elaborate on the demand and booking you are seeing out there and how these have changed with respect to the fourth quarter?

Itzik Weinstein

If you recall, we had book to bill below previous quarter than to the fourth quarter. So, we see this as an encouraging find for the demand and a change that we see in the market. As I said, in previous occasions, these harsher, critical times are there, pushing the operators to seek for solutions like we give them. So we do see these as encouraging going forward to 2009 and this, as we said, the amount of backlog in the pipeline, we see this as a very strong indicator.

Jonathan Kreizman - Oscar Group

With regard to that pipeline, could you say a word or two on the pipeline at that point in time?

Itzik Weinstein

We do not give the measures and numbers for the pipeline. What we do see is a stronger pipeline than we saw before. We see visibility. We see interest. We see new customers. We see many RFPs. So, we see indications going forward this year.

Jonathan Kreizman - Oscar Group

With regard to DSO, they have emerged much higher than historical levels and including the lower than expected revenue line, could you talk about the collection and where specifically are you encountering more challenges?

Itzik Weinstein

DSO, as you said, in the fourth quarter, was very high, but again in the fourth quarter, since we had a problem with the revenue and the revenue was lower than expected, the DSO is much higher. We spoke in the last conference call about the crisis and we said that collection is also becoming a problem. It is not that we do not get the money. At the end of the day, we get everything, but it takes more time. So we believe that the DSO will be better during the next few quarters, but again, collection takes more time today.

Operator

There are no further questions at this time. Before I ask Mr. Weinstein, CEO, to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin three hours after the conference on the company’s website at www.ectel.com. Mr. Weinstein, would you like to make your concluding statement?

Itzik Weinstein

Thank you all for joining us. These are very complex times though I am confident that we have strong business fundamentals, a huge experience, and the necessary cash resources to weather the storm and grow the company in the long term. I thank you for the ongoing support and look forward to speaking with you next quarter. Thank you very much.

Operator

Thank you. This concludes the ECtel’s fourth quarter 2008 results conference call. Thank you for your participation and have a nice day. You may disconnect.

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