Executives
Staci Mortenson - IR, ICR
Itschak Friedman - President and CEO
Chaim Friedman - CFO
Analysts
Maureen Drew - Gagnon Securities
Howard Sterling - Hudson Securities
STARLIMS Technologies Ltd. (LIMS) Q2 2009 Earnings Call August 18, 2009 8:30 AM ET
Operator
Ladies and gentlemen welcome to the STARLIMS second quarter 2009 financial results conference call on the 18th of August 2009. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).
I will now hand the conference over to Staci Mortenson. Please to ahead, madam.
Staci Mortenson
Good morning and welcome to STARLIMS second quarter 2009 Earnings Call where we will be discussing our financial results for the quarter ended June 30, 2009. On the call with me today is Itschak Friedman, President and CEO and Chaim Friedman, CFO.
During this call we may make statements related to our business that may be considered forward-looking statements under federal securities laws. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
These statements reflect our current views regarding the future are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings.
With that, I'd like to turn the call over to Itschak so he can provide an overview of our business and then Chaim will provide further details regarding our financials and forward outlook. Itschak?
Itschak Friedman
Thank you, Staci, and welcome to those of you joining us to review our second quarter 2009 financial results. For a quick high level look at the financials, our total revenue for the second quarter was $6.9 million, up 12% over the second quarter of 2008 and combination of a growing top line, improved utilization of our service organization and ongoing cost management initiatives resulted in non-GAAP operating income for the quarter of $1.2 million or 18% of total revenue. With the addition of a strong finance income this quarter, we were able to achieve non-GAAP net income of $1.7 million or $0.20 per diluted share.
We were pleased with our results during the quarter which continue to show that the investments we are making in support of our expanded product offerings and geographic presence are paying off. During the quarter business conditions began to stabilize, clients seem to know their budgets and they are spending against them.
We continue to see demand from the government at both state and federal levels, particularly in areas of public health and forensic. This was evidenced by the State-Wide Public Health Department Project we announced earlier in the quarter. Life sciences is also adopting our solutions and our integrated informatics is well suited to address their global diversified needs.
We are hopeful that in an improved economy, the need for our solutions and our value proposition becomes even more apparent and are confident in our long-term growth opportunities.
As we always like to do, let’s spend a few moments on some key initiatives within our business. Professional services is an area we’ll be investing in for several quarters and has become a key value adds to our business. Service revenue in the quarter was strong once again increasing 24% year-over-year to $3 million. For the first six months, services as a percentage of our total revenue increased to 41% in comparison to 36% in the first half of 2008.
One of the reasons for the relative growth in services revenue over the past few quarters has been the phased out projects. Phased rollout became a more prevalent part of business over the last several quarters as our customers were impacted by the weakening economy and we are trying to bridge between the target Go-Live dates and their available budgets.
We are engaged in several projects that started off with a service engagement in order to get the project defined and prototyped and believe that license orders will follow at a fairly steady phase as our teams have been very effective in meeting client's expectations throughout the various stages of such phased out deals.
In parallel, we continue to invest in improving utilization of our services organization and are very pleased with the rapid improvements of service margins. In the first six months of 2009, non-GAAP service margins grew to 21% significantly higher than the 8% margins of the first half of 2008. We believe we can achieve service margins in the high-teens for full year 2009.
Turning to our focus on geographic expansion, we continue to be pleased with our performance out of Europe. For the first six months of the year, Europe's revenues increased by 65% to 2.7 million over the prior year period. This was driven by ongoing strength in the UK, mainly in the government healthcare sector. Revenue in Europe was also positively impacted by improved capabilities to support multi-national implementations with site in the US and Europe.
We are finding that our enhanced presence is increasing the level of confidence around our solutions. We continue to see growing pipelines and are encouraged by the activity levels. Europe remains a fragmented market and we will continue to look for areas where a direct presence will increase our capabilities and positioning. We remain positive in our ability to build our market share over time.
As we have discussed with you previously, another one of our key growth strategies is expansion of our region to adjacent market, specifically the clinical laboratory information systems or LIS market, and particularly the high end or complex portion of that market.
One of the areas of focus for STARLIMS is serving the goal of getting research funding from the research lab to the medical practice and back to the research lab in the most efficient and secure manner. This is part of a general trend, sometimes coined as [bench to bench side].
One of the key issues is that LIMS systems that serve research labs have traditionally been designed to be sample centric, while LIS systems that serve the medical practitioners were designed to be patient centric. These systems rarely communicated with each other.
In the past, when there was a complete disconnect between life science research institute and clinical pathologists, this did not pose a serious issue, but today, we are actually seeing a new breed of pathologists, who work in areas of genomics and genetic testing. For them there is little gap between the clinical world and the world of medical research. This kind of pathologists whom we already serve in the UK NHS and in other institutions use sophisticated research tools, but report the results to clinicians caring for patients.
In these cases the research and medical worlds form a continuum and require a blending of the LIMS world with the LIS world. This requires a system that allows for integration, collaboration and management of information amongst its various producers and consumers in order to make it more actionable.
STARLIMS established a clinical practice two years ago. We offer a product that capitalizes on the strength of our LIMS platform, which brings flexibility, complex workflows, interoperability and web-based collaboration globally. This is combined with abilities of traditional LIS systems, which serve enormous loads of testing by automatically capturing results from clinical analyzers and communicating it all to the individual patient's record.
This opportunity opens up our customer base and widens our reach particularly within advanced healthcare labs, public health, clinical research organizations and reference labs and we are also starting to reach non-hospital clinical testing providers. We are encouraged by this emerging trend and our pipelines are building around this splendid solution.
To summarize, we are pleased with our results in the second quarter and for the first half of the year. We continue to invest in support of our platform and geographic expansion. We are seeing signs of stabilization in our end markets and are encouraged by our ability to increase our presence in the capture market share.
With that, I will now turn the call over to Chaim Friedman, our CFO to go through our financial results and provide our thoughts for 2009. Chaim?
Chaim Friedman
Thanks, Itschak. I'd like to provide details on our financial performance during the second quarter followed by discussion of our account thoughts on 2009 and then we'll open the call up for Q&A.
Let's start with the P&L. In the second quarter, we reported total revenue of $6.9 million, up approximately 12% over the last year, while down 8% sequentially. For the first six months, revenue was $14.3 million, a 9% increase over the prior year's first half.
Product revenue, which includes software licensing and the annual maintenance fees, came in at $3.8 million for the second quarter, representing 56% of our total revenue. This compared to $3.7 million in the year ago period and $4.5 million last quarter.
Please remember that product revenue may fluctuate due to the large deal nature of our business, and in the first quarter of this year, we reported a large $4 million enterprise sale, which makes for a difficult sequential comparable.
Product revenue for the first half of 2009 was $8.4 million, flat with the first half of last year. Within product revenue, our recurring revenue for maintenance increased 20% year-over-year. In the second quarter to $1.6 million and we believe maintenance revenue will continue growing throughout the rest of the year.
Service revenue in the second quarter was $3 million. This is an increase compared to $2.4 in the year ago period and $2.9 million in the prior quarter. Service revenue for the first half of the year increased 25% to $5.9 million, compared to $4.7 million in the year ago period. Our service revenue is recognized on the time and material basis or upon meeting milestones, which may create some variability from period to period.
I will now spend a few moments highlighting the few of our geographies. Before I begin I wanted to know that within our press release tables, we are providing you details of revenue by region on a quarterly basis.
As you know, we evaluate our business for the long-term and our performance for the first half of the year was strong, particularly in Europe. Revenue from Europe for the first half of the year was $2.7 million, an increase of 65% over the prior year period.
We continue to benefit from the prior investments we have made specifically in the UK. North American revenue for the first half of the year was $10 million, an increase of 4% over the prior year period.
We continue to see opportunity in the US particularly in government and life sciences and believe our expanded product offering positions us well to capitalize on opportunities in areas such as clinical, public health and forensics.
Overall our geographic expansion programs are opening up new opportunities worldwide and we continue to be focused on increasing our market share on a global basis.
Let’s now turn to costs and margins. We will review our numbers first on the non-GAAP basis and then on GAAP. Our non-GAAP results excludes stock compensation expenses and amortization of intangible assets related to acquisitions. A GAAP to non-GAAP reconciliation can be found in the tables of our press release.
Non-GAAP gross profit for the second quarter of 2009 was $4.4 million and represented a gross margin of 64%, essentially in line compare to the second quarter of 2008 and down from the 68% recorded last quarter.
For the first six months of 2009, non-GAAP gross profit was $9.5 million and represented a gross margin of 66% slightly above the 65%, we recorded in the first six months of '08.
For the second quarter, our service margin was 22%, up compared to 13% in the second quarter of 2008, and up from the 20% last quarter. In the first six months of 2009, non-GAAP service margin grew to 21% significantly higher than the 8% margin in the first half of 2008.
Over the past several quarters we have focused on improving our services margins and we are pleased with organizational changes we have put in place and they have taken effect. In addition, services revenues has been strong and this has been positively impacting our services margin.
Let's move now to non-GAAP operating expenses, which totaled $3.2 million in the second quarter. Looking into the components, research and development costs were $898,000, or 13% of total revenue, compared to 14% in the year ago period.
Sales and marketing came in at $1.4 million, or 21% of revenue compared to 25% of revenue in the prior year’s quarter. Sequentially, sales and marketing expenses were slightly down compared to the last quarter’s $1.5 million.
As far as direct sales force, we ended the quarter with 13 quota-carrying individuals, up compared to 11 a year ago and 12 in the prior quarter.
In May, we were able to add one more sale specialist that we focused on our growing clinical business in North America. Our goal is to add several more sales people to help build out our direct presence in markets, where we see opportunities for expansion.
G&A aiming at the $879,000, or 13% of revenue, same as reported in the year ago period. As a result, our non-GAAP income from operations was $1.2 million, our non-GAAP operating margin of 18%, compared to 13% in the second quarter of 2008 and 24% in the previous quarter.
For the first six months of 2009, non-GAAP income from operation was $3 million. Our non-GAAP operating margin of 21%, compared to 15% for the first half of 2008.
Financial income for the second quarter increased significantly and came in at $899,000, which was above our expectations. This was primarily due to gains on our corporate and government bond portfolio, when yield shrank during the quarter. We expect financial income to return to quarterly levels in the range of $150,000 in the third and fourth quarters.
Our non-GAAP second quarter tax rate was 18%. This resulted in a non-GAAP net income of $1.7 million, so our non-GAAP EPS of $0.20 on a diluted basis compared to $0.17 last quarter and $0.10 in the second quarter of 2008.
For the first half of 2009, non-GAAP net income was $3.2 million, for non-GAAP earnings per share of $0.37 on a diluted basis, compared to a net income of $2.3 million and an EPS of $0.27 for the first six months of '08.
Looking at the comparison of non-GAAP to GAAP, our non-GAAP expenses for the second quarter excluded $136,000 of stock-based compensation and $25,000 of amortization. Our GAAP net income for the second quarter was $1.6 million, or $0.19 per share based on 8.6 million diluted shares outstanding.
Moving to the balance sheet; cash, cash equivalents, deposits and marketable securities totaled $30.8 million, a decrease of approximately $700,000 compared to March 31, 2009. In April, we paid the cash dividend in the amount of approximately $0.32 per share, or approximately $2.7 million in the aggregate.
Our DSO for the quarter was 147 days, which was down compared to the 161 days we recorded at the end of last quarter. Collections for the quarter were strong from healthy and generated $1.3 million in cash flow from operations, compared to $937,000 last quarter and $597,000 in the year ago period.
Now, let me turn to our thought on 2009. Business conditions relevant to our market are beginning to stabilize and we are becoming instrumentally more positive on our outlook. According to a leading industry analyst, ARC, the LIMS’ market is expected to grow at low single-digit year-over-year in 2009.
Based on the solid first half results and the quality of our pipeline, we have increased confidence that we can continue to grow faster than the market and achieve ongoing growth for the full year.
Given the strength of our service revenues and margins in the first half of the year and based on our outlook, we are now targeting service margins for 2009 at the high-teen level. This will help drive additional operating leverage in our model and for 2009 our current non-GAAP operating margin goals are made it to high-teens.
In summary, we continue to expand our market opportunity by investing in our product portfolio and geographic presence, and are pleased with the progress we are making. In addition, our focus on our service organization and managing cost is enabling us to run our business with strong margins.
Operator, I think we’re ready to begin Q&A. Thank you.
Question-and-Answer Session
Operator
(Operator Instructions). The first question comes from Maureen Drew from Gagnon Securities. Please state your question.
Maureen Drew - Gagnon Securities
I have a few questions. Financial income in the quarter looks a little outsized, was there something special there?
Chaim Friedman
That included about 650,000 out of that amount is from the marketable securities, which is bonds and during this quarter, the yields really frank all over, cooperate and government bonds and that’s the result of that. We don’t see it as ongoing event, but that’s what happened during the quarter.
Maureen Drew - Gagnon Securities
So you had a one-time markup on those bonds of 650,000?
Chaim Friedman
Yes. It's helped to predict, but we’ll continue with that. That’s what happened in this quarter. It's a diverse portfolio there that was impacted by the yields going down.
Maureen Drew - Gagnon Securities
Itschak on the pipeline. It was mentioned a couple of times on the call that the pipeline was strong in a few areas. Can you discuss what you are saying and the level of confidence you are having in the pipeline?
Itschak Friedman
So, all in all, the pipeline is strong, both from government and life science opportunities. The feeling is that customers are now in a situation where they know what their budget is. They are able to start spending against those budgets. The reasons for buying LIMS are not going away, it's still meeting regulatory compliance and so forth. So we're seeing a good pipeline, especially as I said government and life sciences.
Maureen Drew - Gagnon Securities
On the forensic area or your opportunity where you are checking DNA, what are you seeing developed there please?
Itschak Friedman
So we mentioned this in prior conversations, there is a large trend in the forensic worlds to move towards a more and more DNA analysis, DNA fingerprinting from the high level, federal levels and all the way down to county and police station levels. In order to be able to participate in that process, what we have done is we have packaged what we call an appliance.
An appliance is a set of functionalities that are configured to do a particular job, and in this case, that particular job is do the DNA analysis within a very short period of time and appliance is typically a less expensive package with the idea of putting it in within the few days having it up and running. We sold a system recently and are very happy to say that within five days [bottle worked] and we were in and out and it is functioning.
We have a several quite a few more in the pipeline and this appliance business as a whole not necessarily only for the forensic, it looks to be interesting for us, say, because it is in the lower end of that market targeted as a specific function, but it definitely can use the technology that we have for the enterprise systems base.
Maureen Drew - Gagnon Securities
Well. Were you had the same sales force selling these appliances as you are larger in LIMS systems?
Itschak Friedman
No. Right now, it is the same sales force because we are at the initial stages, but we are talking to several organizations out there that will be a reselling it for us. So the idea is to sell it through a sales forces that have access to labs that sale instruments, sale other things to labs basically.
Maureen Drew - Gagnon Securities
So you'll be selling it dealers of various sorts?
Itschak Friedman
That's right.
Maureen Drew - Gagnon Securities
Good. Headcount now and where do you think it will be at year end?
Itschak Friedman
We're at 162 now, so quite flat. We have added or we are adding during Q3 a bit. So incrementally, I don't think it will be much higher than 170.
Operator
The next question comes from Howard Sterling from Hudson Securities. Please state your question.
Howard Sterling - Hudson Securities
Talk to me about LIS versus LIMS, this quarter and how you see it going please?
Itschak Friedman
LIMS and LIS traditionally just so we talk the same language, LIS has traditionally been a patient-centric while LIMS has been batch sample centric software. The blending of requirements, we are basically seeing more and more requirements for both functionalities in the same package. Many of the scientists out there, new pathologists that are doing DNA work, doing molecular diagnostic work need the functionality of both a LIMS system and a patient-centric system.
So what we believe is that that LIS, LIMS barrier is slowly but surely dissipating and really labs will be mostly focusing going on LIMS while maybe LIS will remain focused mostly on billing functionality and so forth. So back to your question, we are seeing more and more opportunities in that blended environment and believe that that is where the market is going.
Operator
There appears to be no further questions. I will now hand the conference back to Mr. Itschak Friedman. Are there any further points you wish to raise?
Itschak Friedman
Before we end the call, I’d like to thank you for joining us today. I’d also like to thank management, employees and partners for their efforts during this quarter. Thank you, again, and we look forward to speaking you with you in the near future.
Operator
This concludes the STARLIMS second quarter 2009 financial results conference call. Thank you for participating. You may now disconnect.
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