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Cimatron, Limited (NASDAQ:CIMT)

Q3 2013 Earnings Conference Call

November 12, 2013, 9:00 AM ET

Executives

Danny Haran - Chief Financial Officer and President

Ilan Erez - Chief Financial Officer and Vice President Operations

Analysts

Jay Srivatsa - Chardan Capital Markets

Anya Shelekhin - Sidoti & Company

Operator

Welcome to Cimatron's third quarter 2013 results conference call. (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, November 12, 2013.

With us on 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 contain 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 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 U.S. 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 now like to turn the call over 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 third quarter 2013 results conference call. We're excited to report our best third quarter ever with record revenues and record profits for the third quarter of any calendar year.

Moreover, we are encouraged by the year-over-year revenue growth in the third quarter of this year, which was higher than the growth in the first and second quarters of the year. In the third quarter, 48% of the year-over-year revenue growth reached the operating profit line.

We recently announced a new agreement with our long-time partner, MachineWorks, by which we incorporate a new software package, Polygonica, into the CimatronE software. This is a prime example of our product strategy, where we attempt to mix in-house development with select third-party products to bring added value to our customers.

Polygonica, with its strong mesh-based design capabilities will be incorporated into several tools and functions inside CimatronE, with first delivery planned for the next version of CimatronE in mid-2014. In addition, we continue to explore several potential acquisitions, which can help us extend our product portfolio and/or distribution channels even further.

With ever increasing customer base and enhanced sales and marketing and R&D efforts, we believe we can continue growing our revenues and profits going forward.

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

Ilan Erez

Thank you, Danny. Hello, everybody, and thank you for joining us. Revenues for the third quarter of 2013 were $10.3 million compared to $9.5 million in the third quarter of 2012, an increase of 6% on a constant currency basis. In the first nine months of 2013, revenues were $31.5 million compared to $30 million in the corresponding period of 2012, an increase of 4% on a constant currency basis.

The revenue breakdown in Q3 2013 was as follows; license revenues 41%, maintenance revenues 52%, and other professional services revenue 7%. The geographical revenue breakdown for the quarter was as follows; Europe 51%, North America 31%, Asia Pacific 15%, and the rest of the world 3%.

Gross margin for the third quarter was 88% of revenues as compared to 89% in the third quarter of 2012. In the first nine months of 2013, gross margin was 88%, the same as in the parallel period of last year. Operating expenses in the third quarter amounted to $7.6 million, compared to $7.4 million in the third quarter of last year.

In the first nine months of 2014, operating expenses were $23.9 million compared to $22.7 million in the corresponding period of 2012. The $1.2 million year-over-year operating expense increased in the first nine months of 2013, mainly reflects our increased level of activity that accompanied the greater demand for our products as well as our increased investment in R&D, selling and marketing, yet $0.5 million of differences was also as a result of the weakening U.S. dollar versus the euro and the Israeli shekel in the first nine months of 2013 compared to the same period in 2012.

Operating profit in the third quarter increased 45% to $1.4 million compared to $1 million in the corresponding quarter of 2012. In the first nine months of 2013, operating profit increased 6% to $4 million compared to $3.8 million in the corresponding period of 2012. Net profit for the third quarter increased 62% to $1.1 million dollars or $0.11 per diluted share compared to net profit of $700,000 or $0.07 per diluted share recorded in the corresponding quarter of last year.

In the first nine months of 2013, net profit increased 11% to $3 million or $0.32 per diluted share, compared to net profit of $2.7 million or $0.29 cents per diluted share recorded in the corresponding quarter of last year. Income tax expense in the first nine months of 2013 was 24% of income before taxes. We expect income tax expense in full 2013 to be around 25% of income before taxes.

Following the share offering we made in August this year, our net cash and cash equivalents balance increased during the third quarter by $5.8 million to $12.9 million as of the end of the quarter.

We will now open the call for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Jay Srivatsa of Chardan Capital Markets.

Jay Srivatsa - Chardan Capital Markets

Danny, I know you don't provide guidance for the upcoming quarter, but qualitatively can you talk about how the quarter is tracking and what you're sensing in terms of demand as you look at Q4?

Danny Haran

Generally, and this has been true almost every year. Q4 is the strongest quarter of every year. We expect this year to be no different, and we expect it could be stronger than the other three quarters. However, it is too early in the quarter to give more qualitative guidance, as you know, our quarters in general are back-ended. We see much of the activity coming towards the end of the quarter, so I cannot say much more beyond that we again expect it to be the strongest quarter of the year.

Jay Srivatsa - Chardan Capital Markets

One of your competitors got acquired earlier this week, what does that do to your business model, and looking ahead do you see further consolation in your industry?

Danny Haran

Well, in generally, we believe consolidation should happen, is happening, and will continue to happen in this market. Anyway, you look at our market, consolidation seems logical, and I don't think we're surprised to see it continue. This is not the first acquisition of this year, definitely not in the last couple of years.

The fact that the recent acquisition of Delcam was definitely news this week. We do not expect this to have any immediate impact on our business. We are yet to see how this will evolve from their side, and of course I cannot comment on that. But we will definitely try to take advantage of any opportunities as such a change in ownership or maybe direction, we don't know, any opportunity that this will open to us. So, we will keep our eyes open and be focused in what we do.

Jay Srivatsa - Chardan Capital Markets

In terms of 3D printing, there has been a lot of interest in that market, how do you see that market developing as you look at 2014, and how do you see Cimatron playing in that space?

Danny Haran

Well, as we said before, we are starting to work and develop products and solutions for the software side of 3D printing. We don't have any intentions to go into the machines or materials, but we do see some opportunities in the software side of that market. We will come with the first solution or what's known as conformal cooling for molds in the next version of CimatronE, which as I mentioned is expected about mid-2014.

We do talk to customers. We see them starting to get interested whenever they need specific cooling for specific inserts and difficult to cool molds, so overall there is interest in that, but as we said before we don't want to give any wrong impression here. This is just a starting move in that market. We expect it to continue and grow. How fast, how far exactly, it's too early to know, but we definitely intend to be there as that happens.

Jay Srivatsa - Chardan Capital Markets

Last question in terms of Q4, you said the strongest quarter for the year. Do you expect both your licensing and maintenance revenues to go up or is it one or the other. Can you give us a little bit more color there?

Danny Haran

Well, usually maintenance is much more flat across quarters, because in many of our customers, we actually collect the maintenance contract at the beginning of each year, and then we recognize them quarter-by-quarter. So in terms of maintenance, we have higher visibility, and I can say that the differences in maintenance are not that large between quarters. The main differences are in product revenues. That's where we see Q4 by far overshadowing the other quarters, at least as far as history can tell us. And again, we expect the same to happen here. Maintenance is much more stable of course.

Operator

The next question is from Anya Shelekhin of Sidoti & Company.

Anya Shelekhin - Sidoti & Company

My first question is about the big drop in SG&A expense in this quarter. I was wondering is that related to the exit of DBSI, the private equity firm, or are there other reasons to the decrease such as the new cost management strategy?

Ilan Erez

No. First of all, there is a very small impact of us stopping to pay the management fee for previous major shareholder as it happened towards the end of the quarter. So we will see a more, a greater impact of that starting in the Q4 of this year. Other than that, there was probably some shifting between quarters in expenses, but it's not that there is any change in the expense level as we see it from the beginning of the year. Definitely, we have not reduced any kind of expense on our side.

Anya Shelekhin - Sidoti & Company

And second question is about sales initiatives into Brazil and Southeast Asia, how are those going? And in what geographic areas going forward do you expect to see the highest growth rate?

Danny Haran

Well, I can say, Southeast Asia is doing well. One thing, we’ve – we say cautiously also Japan is showing signs of life, and the reason I'd say cautiously, because we've seen Japan showing signs of life like five times in the last 10 years, and it has not always continued for a long period of time. Definitely, we hope this will continue. But definitely Southeast Asia presents a new opportunity for growth, but it is not really the only place. We actually see good business in some other areas, Germany actually had a strong quarter and we expect other places as well.

Ilan Erez

And also Brazil is ramping up slowly but surely. We started there like a couple of years ago, but we do see the growth and the potential is there and we are working on it.

Operator

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

Danny Haran

Yes. Thank you. On behalf of management, I would like to thank you for your continued interest, long-term support for our business. And we do look forward to speaking with you and updating you again next quarter. Thank you very much and have a good day.

Operator

Thank you. This concludes the Cimatron’s third quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.

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