Top Image Systems Ltd. Q2 2009 Earnings Call Transcript Introductory Remarks

Top Image Systems Ltd. (TISA)

Q2 2009 Earnings Call

August 11 2009, 9:00 am ET

Executives

Ehud Helft - GK Investor Relations

Dr. Ido Schechter – CEO

Gili Shalita - CFO

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Top Image Systems’ second quarter 2009 results conference call. All participants are at present in 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. By now you should have all received the company’s press release, if you have not received it please contact GK Investor Relations on 1 646 201 9246, or visit the company's website – www.topimagesystems.com

I would now hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft

Thank you. Good day to everyone. I would like to thank Top Image Systems’ management for hosting this conference call to discuss their second quarter 2009 results.

Before we start, I would like to remind everyone that the conference call may contain projections or other forward-looking statements and the safe harbor provision in the press release issued today also refers to the contents of this conference call.

With me today on the call is Dr. Ido Schechter, CEO,and Gili Shalita, CFO. Ido, would you like to begin?

Ido Schechter

Thank you, Ehud. Good day everyone. Thank you for joining us today.

I’m very happy with the results of the second quarter. It was a quarter in which we generated a good operating profit, coming out to $310 thousand, with good operating margins of 5.5%, and we are pleased with these results. In fact, we are well on the way to crossing our $1 million target in operating profit in 2009.

We are also especially pleased with our very strong operating cash flow of over $750 thousand in the quarter. As we mentioned in the past few quarters, our focus was and is to increase the profitability of our overall business, partially by means of ceasing low-margin hardware sales. In 2008 as a whole, around 25% of our revenues came from hardware sales while this quarter, our revenues were solely software related sales.

The improvement in our operating margins were not only driven by the shift to software sales, but also the generally improved efficiencies and lower costs across the board. In line with this strategy, we merged the European teams in the first quarter and we are now benefiting from a strong, efficient organization that enjoys full utilization of resources at reduced costs.

Talking to you now in August 2009, as we move thinking beyond the global recession, Top Image Systems’ is primed and emerges as a leaner, more streamlined and a much more profit focused company. We believe that the many changes we have made in the past year have set up our business as a renewed platform for increased long-term growth and profitability. Once market conditions do begin to improve and the world begins to recover from recession, we will be ready to benefit and thrive.

Even in the current environment, we are a profitable and cash generating company, and we expect continued improvements in the next two quarters which will close out a good year for Top Image Systems with operating income over $1 million.

Additionally, around a fifth of our revenues come from recurring maintenance revenues. These revenues are highly predicable and are ongoing over the long-term, and this portion is growing.

We are seeing a trend of larger and more secure deals, a good portion of which are more stable Governmental projects as well as banks and financial organizations looking to cut costs and expand their offering. Capitalizing on our success in the census arena over the past years and especially through the last few quarters, there are a number of national census projects coming up and we are investing a great deal of effort to win them as well.

While parts of the business have been affected by the economic environment, overall our business has emerged reasonably unscathed by this recession as our sector has been less prone to reductions in IT spending. Our projects are designed to increase efficiency, improve processes and tend to demonstrate a fast return on investment. Thus, especially in a downturn, we can help clients make savings for a small expense, and thereby take advantage of slower business to improve internal processes for the long-term.

Geographically, our revenues were driven by the very strong performance throughout Europe, making up for weaker performance in the UK and Japan, both markets we see hit particularly hard by the global recession.

Our European offices are performing very well executing on a number of solid and large projects. These include several governmental statistical offices as well as additional projects for existing customers like Deutsche Post direkt, Postlogistics and BMW Bank.

In the quarter, we established a partnership with Braintribe IT Technologies enabling us to offer high-end business processes automation. We are also looking into establishing additional similar partnerships that can bring us even closer to the worldwide active BPO market, which can further grow our pipeline.

Overall, our European team has built up a strong pipeline. Along with tight control over expenses and a high commitment for fast and competent delivery, this team’s performance has translated into a significant contribution to our profit.

Our team in Singapore also surpassed their target both on the top and bottom line. We see a steady stream of recurring revenues as well as new mid-sized projects from Singapore. We are realizing the fruits of our investments in building the pipeline over the past couple of quarters and expect the business to grow in the coming quarters.

Success in the banking arena is supported by a large project we conducted for one particular major international bank’s corporate offices throughout Asia Pacific. We are aiming to replicate our success so far with this customer into its global operation as well as other banks in the Pacific Rim region.

The UK office has underperformed our expectations in 2009 mainly due to the extent of the recession there. While we are capitalizing on leads and seeing a strong pipeline, decision making in the UK has become a slow and a tough process.

The Japanese branch also underperformed our expectations in the quarter, which was again as a result of their sharp fall into recession.

We already addressed the slowdown in business in both these two regions by refocusing our businesses and dramatically cutting our expenses.

The rest of our global operations are performing more or less in line with our plans and budget, and we are happy with their results. Overall, our pipeline and backlog across our regions remain strong and stable.

I would now like to briefly walk you through the financial results for the quarter. Revenues for the second quarter of 2009 were 5.6 million dollars, while Gross margins were 58.4%, the same as the gross margin of Q2 last year.

Our non GAAP operating income in the second quarter of 2009 reached $396 thousand dollars, reflects 7% margin, compared with an operating income of $392 thousand dollars in the second quarter 2008 reflects 5% margin. This is the figure that I focus on, in order to judge our performance in the quarter.

Finally, as I said earlier, operating cash flow in the quarter was positive, coming in at over $750 thousand dollars.

In terms of our expectations for the remainder of 2009, we expect to improve gross and operating margins by way of solely software solutions sales combined with lower fixed costs. We continue to expect our operating income in 2009 to be ahead of that of 2008.

At the beginning of the year, we were concerned with the way 2008 ended for TIS and with the deepening global recession. At the end of the first half of 2009, I feel renewed confidence in our position and success looking toward the rest of 2009 and beyond.

I believe that we have successfully navigated the current environment in order to maintain and build on our market leadership, utilizing on our strategic accounts and growing pipeline. All this, while enhancing our long-term competitive positioning and priming our business platform for long term profitability and growth. I believe 2009 will be an excellent year for TIS, and we are looking forward for long-term profitable growth beyond that.

With that, I am happy to take your questions. Operator?

Ido Schechter

I’d like to thank everyone for joining us for our conference call. We hope to speak with you again next quarter. Thank you and goodbye.

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