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Cimatron Ltd. (NASDAQ:CIMT)

Q2 2013 Earnings Call

August 13, 2013 9:00 a.m. ET

Executives

Danny Haran – President and CEO

Ilan Erez – CFO

Analysts

Anya Shelekhin – Sidoti

Nathan Schneiderman – Roth Capital

Michael Brcic – Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Cimatron's Second Quarter 2013 Results Conference Call. All participants are at present in a listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions) If you have not received a copy of today’s earnings release and would like to do so, please download it from the company’s website, www.cimatron.com, at the Investors page.

As a reminder, this conference is being recorded today, August 13, 2013. With us on the line today are Mr. Danny Haran, Cimatron's President and CEO; and Mr. Ilan Erez, Cimatron's CFO.

Before I turn the call over to Mr. Danny Haran, I would like to remind everyone that statements made during this conference call that are not historical facts contains forward-looking information with respect to plans, projections, or future performance of Cimatron, the occurrence of which involves certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include economic and political conditions globally and in Israel, the impact of competition, supply constraints, exchange rate fluctuations, as well as certain other risks and uncertainties that are detailed in Cimatron's filings with the US Securities and Exchange Commission.

The results that will be presented on this call are on a non-GAAP basis, as Cimatron's management believes that such results better represent the actual state of Cimatron's business, and make comparisons to previous periods easier. Cimatron also publishes its results on a GAAP basis, as well as reconciliation between results on a GAAP and non-GAAP basis, and those can be found in the press release issued earlier today. The term “Constant Currency” relates to data, after eliminating from it the effect of exchange rate fluctuations between comparable periods.

I would like to turn over the call to Mr. Danny Haran, Cimatron's President and CEO. Mr. Haran, would you like to begin?

Danny Haran

Thank you. Good morning and welcome to Cimatron’s Second Quarter 2013 Results Conference Call. Allow me to apologize on my voice and sore throat. We are pleased to report another solid second quarter with record revenues for the second quarter of any calendar year, solid growth in operating margins and healthy increase in our net cash balance.

Revenues in the second quarter increased by 3.4% on a constant currency basis relative to second quarter of 2012 and we believe that this was in line with our market growth for that period. We are working to boost our revenues both in terms of sales effort and product offerings. In start of these efforts, we recently announced a new product operation contract with Moldex3D to offer new capabilities for cooling system stimulation. This cooperation serves two purposes. While it will become part of our new offering for 3D-printed conformal cooling, it can also be sold to users of traditional cooling systems thus generating addition revenues. At the same time, we continue to explore M&A opportunities of any kind that will make sense in terms of price and synergies.

Ilan Erez, our CFO, will now review the financial statements, Ilan?

Ilan Erez

Thank you, Danny. Hello, everybody, and thank you for joining us. Revenues for the second quarter of 2013 were $11 million compared to $10.6 million in the second quarter of 2012. In the first six months of 2013, revenues were $21.2 million compared to $20.5 million in the corresponding period of 2012.

The revenue breakdown in Q2’13 was as follows, license revenues 45%, maintenance revenue 48% and other professional services revenue, 7%. The geographical revenue breakdown for the quarter was as follows, Europe 47%, North America 32%, Asia Pacific 16% and the rest of the world 5%. Gross margin for the second quarter was 89% of revenue, same as from the second quarter of 2012. In the first six months of 2013, gross margin was 89% of revenue as compared to 88% in the same period of 2012.

Operating expenses in the second quarter amounted to $8.2 million compared to $7.7 million in second quarter of last year. In the first six months of 2013, operating expenses were $16.2 million compared to $15.2 million in the corresponding period of 2012. The year-over-year increase in operating expenses mainly reflects our increased level of activity that accompanied the greater demand for our products as well as our increased investments in R&D spending and marketing and to a lesser extent it reflects changes in currency exchange rates.

Operating profit in the second quarter were $1.6 million compared to $1.7 million in the corresponding quarter of 2012. In the first six months of 2013, operating profit was $2.6 million compared to $2.8 million in the corresponding period of 2012. Net profit for the second quarter was $1.2 million, or $0.13 per diluted share, compared to a net profit of $1 million, or $0.11 per diluted share, recorded in the corresponding quarter of last year.

In the first six months of 2013, net profit was $1.9 million or $0.20 per diluted share, compared to net profit of $2 million, or $0.22 per diluted share recorded in the corresponding quarter of last year.

Income tax expense in the first six months of 2013 was 26% of income before taxes. We expect income tax expense in full 2013 to be around 25% of income before taxes. In line with the typical seasonality in our cash flow, our cash and cash equivalents balance net of short-term bank credit increased during the second quarter of 2013 by $3.4 million to $7.1 million as of the end of the June 2013 2013. We’ll now open the call for the question-and-answer session. Operator, please.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions) The first question is from Nathan Schneiderman from Roth Capital. Please go ahead.

Nathan Schneiderman – Roth Capital

Hi, guys. Hi Danny and Ilan. Thanks again for taking my questions and it looks like you delivered this quarter with some nice balance sheet improvements, so nice job on that. I was hoping to drill down a little bit more and just begin by asking you your thoughts on Q3 seasonality. I know, often I noticed that your Q3 revenue results were maybe a little more seasonal than a lot of software companies that I covered often fall below Q1 levels, is that how you see it this year or do you think you’ll have stronger results than typical seasonality?

Ilan Erez

Well, let’s talk with the typical seasonality and indeed the typical seasonality is that Q3 is usually somewhat below Q1. We have no reason to believe that this year it would be different, but basically, first of all, we are not providing any guidance and second, in mid-August we don’t really have a good idea of how the quarter would look, but generally speaking we could expect the typical seasonality to be maintained this year as well.

Nathan Schneiderman – Roth Capital

Got it. And I know you’re not – you don’t want to give guidance for the year, but let’s say if we look at the first half of the year, you’re pleasing to call it 3% to 4% top line growth. Do you think that’s a reasonable – that kind of level mid-single digit is a reasonable way to think about the overall growth for the year or do you see something in your pipeline or business that make you feel that the second half is going to be much, much stronger than the first half and you’d end up pacing to more of a high single for the full year?

Ilan Erez

Well, again our visibility in terms of license revenues is low and it’s difficult to say how they would develop. Generally speaking, as Danny mentioned, the growth that we’re showing in the first half of this year is seemed to be the growth that we see in the market, this year. The multiyear growth in our market is mid-to-high single digit, but we can’t tell how this year would develop.

Nathan Schneiderman – Roth Capital

Got it, can you talk about – can you talk about the bigger deal environment, what can – maybe can you share with us what can you consider medium big deals for your firm, what do you consider larger deals for your firm in terms of a dollar size? And then can you share with us how the quarter went in terms of that maybe how many of those kinds of deals you booked this quarter and how that compared with the year ago period, just to help us benchmark that?

Ilan Erez

Again, let’s talk with the general statement and the general statement is that our average deal or the typical deal is around some tens of thousands of dollars. The medium size would be somewhere between 100 to 150 and the large ones would be 200 and more. We usually do not provide specific details about such deals. In the past when there were large deals, it happened twice in China. We announced that in press releases but other than that we do not want to get into specific details.

Nathan Schneiderman – Roth Capital

Okay, can you give with – maybe without getting into specific details, can you share with us is the pattern you’re seeing across typical deals, midsize deals and large deals similar to what you saw in the year ago period or do you think you’re seeing some mix shifts toward bigger deals or some mix big shift toward smaller deals?

Ilan Erez

No, it’s the same pattern give or take.

Nathan Schneiderman – Roth Capital

Okay, can you share with us maybe some – a little more discussion – a little more discussion about the environment. What do you feel is going better than plan and what have you been disappointed with, what hasn’t quite been matching up to the plan you were hoping for through the first half of the year?

Ilan Erez

Well, again usually we try to make our plans in line with what could be the growth in our market. It’s not that we have any specific disappointment or excitements on some other things, but we already know what we could see is that the growth in the U.S. that we’ve seen in the last two or three years prior to this year is getting slower and this could be one of the reasons that – reasons that the entire market is growing slower this year than last year, at least for now.

Nathan Schneiderman – Roth Capital

Got it, okay. And I have a couple of real quick ones for Ilan. I was hoping that you can get us an update on total headcount and the number of quota reps and then also share with us deferred revenue was up a good bit sequentially, was that just – was that really just support fees or did you have a chunk of license fees in there and if so can you talk about the dynamic that led to that growth in deferred?

Ilan Erez

Okay, let’s take it one by one. The last question regarding deferred revenues, the $6.2 million that we were showing at the end of June is relatively expected. We always show the highest deferred revenue balance by the end of Q2 of each year. This is, I would say, all of it is coming from maintenance, support revenue, not from license revenue in the pipeline and there is some growth relative to the end of June of last year and it is in line with the growth in the maintenance revenue that we see.

Regarding the headcount that you mentioned, our total headcount is roughly 290 people all over the world stable, maybe growing a little here and there, R&D, sales and marketing but all in all they are in the range of 290 people.

Nathan Schneiderman – Roth Capital

Okay. And quota reps --

Ilan Erez

You got another question, what was it?

Nathan Schneiderman – Roth Capital

Quota reps, sales reps.

Ilan Erez

Sales reps, it’s like direct sales people, we have just about 50 worldwide.

Nathan Schneiderman – Roth Capital

Okay, thanks very much guys. I appreciate it.

Ilan Erez

Thank you. Bye, bye.

Operator

The next question is from Anya Shelekhin from Sidoti. Please go ahead.

Anya Shelekhin – Sidoti

Hi, congratulations of the quarter.

Ilan Erez

Thank you.

Anya Shelekhin – Sidoti

I had a – so I had a couple of quick questions, first of all you mentioned an increased investment in R&D and sales and marketing. Could you elaborate on this and what efforts the spending is being directed towards?

Ilan Erez

Yeah, in terms of sales and marketing, we are increasing our efforts a little more on headcount in the U.S. for example, we increased headcount this year. We are investing in Brazil and we are investing in some smaller territories in Asia Pacific, smaller than China I mean. In terms of R&D we are increasing the headcount and wherever we see that we need to strengthen our offering, make it as a better, that’s it.

Anya Shelekhin – Sidoti

Okay, great and one more question. Could you talk about some of your recent industry trends within the mold, tool and die industry and how Cimatron has been impacted by the new trends?

Danny Haran

Well, the one thing that Ilan mentioned is that, we did see some slowdown or slower growth in the U.S. Other than that, actually the automotive industry in the U.S. was doing quite well. Other than that, we don’t see any significant trends that we could really point to in the mold and die industry. It is in that respect and we said this again and again, we work in a very mature industry and changes are slow and nothing that we can report that is making big ways in our industry right now.

Anya Shelekhin – Sidoti

Okay. And last question 3D printing, could you possibly give some more information on your plans with that, long term goals and short-term goals too with partnerships and M&A?

Danny Haran

Sure. And again, we said this before. We are exploring this. It's a fairly new area for us. It’s actually fairly new area altogether. If you look at software for 3D printing, it is really an industry in its infancy. The agreement we had with Moldex3D is actually a good example for the kind of cooperation we’re looking to, to get some technology to get us moving faster because and I think I said this also before, we are not going to develop everything. This is a combination of development that we are working on, some tools specifically for conformal cooling as well as technologies we will acquire for third parties or maybe we can find some small companies to buy altogether and get them this technology.

We can license technology, we can buy technology. So Moldex3D is actually very nice, very powerful finite element. A calculation of cooling systems and the way the heat flows through the system and through the cooling channels and this is something that you absolutely have to have if you want to go into more advanced cooling system design such as conformal cooling operating systems, because there is no point in doing this expensive cooling system when 3D printed part is doing [meso-line] and everything that is involved with that. If you don't know the results you're going to get good benefits from all that effort.

So we had some customers, we actually build recently some customers already doing conformal cooling with metals for molds or specific areas of the molds where cooling is more challenging than other smaller areas, tight areas. They’ll definitely be interested in such simulation software that we will be delivering on the next version of CimatronE and that’s April next year. So we do see interest in this, but in all fairness and again we said this, not many of our customers are already involved in that type of cutting edge technology.

So we did identify some of the leaders that’s already jumped into work, they have machines or they outsourced the work, but they used the technology. There are not too many of them and we have hope this will continue, but definitely conformal cooling is something that we are in the middle of development. Some of it will be this third party software, some of it will be developed inside Cimatron by our R&D, mostly on the [cache] side and the integration really is what brings the value. This is near term. And next year with some revenues in 2014 and I could see how that develops.

By the way, just to mention, this Moldex3D technology we actually expect to be able to generate more revenues from that because it could be appealing to some users of traditional cooling system. It doesn’t only apply to conformal cooling, so that’s like again, we hope to bring more revenues just from having that technology. Beyond that, we are looking into software to actually to do the prep processing of parts before they go on machines. This is a more long term development endeavor. We’re still studying that. We see some opportunities and it's very difficult to assess the size of the market, there is just not enough users, most people still use today software that is being delivered with the machines, working with some consultants, trying to have a better understanding of the potential and match it with the effort required to see develop a business spend around that and these are the two areas really that we are dealing with in 3D printing.

Anya Shelekhin – Sidoti

Okay. Great. Thanks. That’s all for me.

Operator

The next question is from Michael Brcic from Oppenheimer. Please go ahead.

Michael Brcic – Oppenheimer

Hi folks. I just have three questions clarifications. First one is, you mentioned visibility was somewhat low at the moment, is that lower than it has been in last few quarters, because it seems like you have pretty good visibility there for a while.

Ilan Erez

Well, it’s the same visibility. In terms of the license revenues, the visibility is always low because actually from the moment we get the purchase order to the moment we deliver it is typically the same day. Obviously, on the maintenance revenue the visibility is very high because this part of the business is roughly 50% of the business, which is practically guaranteed at the beginning of each year. But there is no change in the visibility from previous periods.

Michael Brcic – Oppenheimer

Okay. Great. This is just confirming what I think I heard. I think you said on the third quarter, your seasonality is usually lower, but you expect some growth in line with market from last year is that right, year-on-year?

Ilan Erez

Yeah, well, again in terms of seasonality, it is usually the weakest quarter of the year, but we are expecting that quarter to grow in line with how the market grows in relative to the third quarter of last year.

Michael Brcic – Oppenheimer

Okay. That’s what I confirmed. Finally, you mentioned you're seeing a little bit of slowdown with the U.S. and then you also said the order sector was strong. So in what area do you see some slowdown in the U.S.?

Danny Haran

I guess, general production, general manufacturing, the manufacturing business index seems to be lower. We also had some survey from Gartner that indicate some reduction in acquisition of machines, milling machines or metal processing machines. So again probably not in the automotive because we see actually good results from automotive, but other areas in the U.S. there seems to be some softness in production overall. Again nothing, I don't know if this is going to be a long term or just soft space or something that has to do with people concerned about three, four, and so on towards the end of the quarter, but there was some sluggishness there.

Michael Brcic – Oppenheimer

Actually, let me add on to that a little bit. There have been a lot of talk lately because of low natural gas prices that a lot of manufacturing has been coming back to the U.S., have you seen much of that trend yet or not really yet?

Danny Haran

I think we have seen restoring even in previous years especially in the mold and die industry, where people realize that some molds, especially complex ones it simply does not make sense to manufacture at low wage countries. And we did see some restoring in that respect. I’m not aware, not that I can say that it's not happening, but I do not know of similar trend in the general discrete part of manufacturing, but we did see in mold and dies but not new by the way.

Michael Brcic – Oppenheimer

Got it. Thank you very, very much. I appreciate it again.

Ilan Erez

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Mr. Haran would to like to make your concluding statement?

Danny Haran

Yes. Well, thank you for participating and thank you for the support and we look forward to seeing you again in the next quarter thank you.

Operator

Thank you. This concludes the Cimatron Second Quarter 2013 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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