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Cimatron, Limited (NASDAQ:CIMT)

Q4 2013 Results Earnings Conference Call

February 27, 2014; 09:00 a.m. ET

Executives

Danny Haran - President & Chief Executive Officer

Ilan Erez - Chief Financial Officer

Analysts

Jay Srivatsa - Chardan Capital Markets

Anya Shelekhin - Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Cimatron's fourth quarter 2013 results conference call.

All participants are present in a listen-only mode. Following managements formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions).

If you have not received a copy for 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, February 27, 2014.

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 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 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 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 fourth quarter 2013 results conference call. We're happy to end our best year ever with another record quarter. With record revenues and profits, strong cash flow and a solid balance sheet, we remain confident in our ability to continue and grow our business in the coming quarters and years.

The significant part of our product strategy has always been to extend our exposure to new markets and market segments. 2014 will mark our first release of software solutions for the Additive Manufacturing markets also know as 3D printing.

CimatronE version 12 scheduled for release in mid-2014 will offer conformal cooling and AMF support, both directly targeted towards Additive Manufacturing. Additional work is also underway on providing additional Additive Manufacturing solutions.

As we expected, we keep discovering new uses and applications of our software in this exciting field. We believe Additive Manufacturing, both from metal and plastics will become a more significant part of our business in the coming years.

In addition we keep investing in our traditional markets and products, where we see additional growth opportunities. The upcoming version of CimatronE will bring multiple productivity enhancements to our traditional uses in the areas of mold and die design and some machining and EDM electrodes.

With a strong and evolving product portfolio, continued investment in R&D as well as in sales and marketing and a strong balance sheet, which will allow us to explore additional growth opportunities, we believe we have a lot to look forward to in 2014 and beyond.

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

Ilan Erez

Thank you Dan. Hello everybody and thank you for joining us. Revenue for the fourth quarter of 2013 was $12.7 million compared to $12.4 million in the fourth quarter of 2012, an increase of 1.2% on a constant currency basis. In 2013 revenues were $44.2 million, compared to $42.3 million in 2012, an increase of 3.2% on a constant currency basis.

The revenue breakdown in 2014 was as follows: license revenue 44%, internal maintenance revenues 49%, and other professional services revenue 7%. The geographical revenue breakdown for 2013 was as follows: Europe 48%, North America 32%, Asia Pacific 16%, and the rest of the world 4%.

Gross margin for the fourth quarter was 88% of revenue as compared to 89% in the same period of 2012. In 2013 gross margin was 88%, the same as in 2012.

Operating expenses in the fourth quarter amounted to $8.8 million, compared to $8.7 million in the fourth quarter of last year. In 2013, operating expenses were $32.7 million compared to $31.3 million in 2012.

Out of the $1.4 million operating expenses increase in 2013, approximately $800,000 were attributable to the weakening of the U.S. dollar versus the euro and the Israeli shekel in 2013 relative to the effective rates of these currencies in 2012, while most of the remainder of the increase in operating expenses reflected our increased investment in R&D, selling and marketing.

Operating profit in the fourth quarter was $2.4 million, compared to $2.3 million in the fourth quarter of 2012. In 2013 operating profit was $6.3 million compared to $6.1 million in 2012.

Net profit for the fourth quarter was $1.7 million dollars or $0.16 per diluted share compared to net profit of $1.7 million or $0.18 per diluted share recorded in the corresponding quarter of last year. In 2014 net profit increased to $4.7 million or $0.48 per diluted share, compared to net profit of $4.4 million or $0.47 per diluted share recorded in 2012.

Income tax expense in 2013 was 25% of income before taxes, compared to 26% in 2012. We expect income tax expense in 2014 to be in the range of 20% to 25% of income before taxes. Our net cash balance at the end of 2013 was $13 million, approximately $1.21 per share and cash flow from operating activities in 2013 was $3.5 million.

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

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa - Chardan Capital Markets

Yes, thanks for taking my question. Danny as you look towards 2014, typically Q1 tends to be seasonally soft. Can you expand on and tell us, do you expect it to be any different or do you expect similar seasonal patterns in 2014?

Danny Haran

As far as we can tell we expect similar seasonality. Q1 actually is only soft if you compare it to Q4, which tends to be the strongest of every year. Usually Q1 and Q2 stay relatively strong like the mid-quarters of the year in terms of revenues and Q3 tends to be weaker, because of the vacations mostly in Europe and North America.

Right now we have no indication of anything different. As you know our quarters are back loaded and much of the activity takes place towards the end of the quarter and its hard for us at that point to say, we don’t see any difference in long term patters.

Jay Srivatsa - Chardan Capital Markets

All right, and in terms of your 3D printing product, you mentioned a potential launch in the second quarter. When do you expect material revenues to start creeping in after the introduction of that product?

Danny Haran

It’s hard to say at that point. We believe it will take probably a couple of months to actually, actively start selling this. We should expect something in Q4 probably. But, how much again? This is conformal cooling and AMF support. We expect to provide AMF support with no charge, its relatively small addition as we make the product attractive to use this for 3D printing in the long term. Conformal cooling is something that we could not establish yet, any solid estimates of how much we can make with that.

Jay Srivatsa - Chardan Capital Markets

Okay, Ilan in terms of the OpEx, do you expect the OpEx to decline in Q1 or are you seeing similar type of run rate going forward?

Ilan Erez

First of all the main decline in Q1 is due to bad seasonality that we discussed and are obviously part of the expenses and related to the revenue level. But other than that we are not expecting any major move upwards or downwards in the future.

Jay Srivatsa - Chardan Capital Markets

Okay and then last question from me, in terms of the shekel versus the dollar, what’s your sense in terms of how it looks going forward? Do you expect it to stabilize or are you hedging yourself for future increases in the shekel?

Ilan Erez

Obviously we cannot tell for sure, but it seems at the moment that the current rate of 3.5 shekels to $1 is relatively stable and it’s a kind of a measure that (inaudible) is trying to support and this is our worst assumption for the remainder or the year.

Jay Srivatsa - Chardan Capital Markets

Okay maybe one more question from me. Geographically as you look at 2014, where are some of the areas that you are looking to strengthen and where do you feel comfortable in terms of your own market position?

Danny Haran

It’s hard to say. We expect Germany to continue on strong. But really we expect again good results everywhere. We don’t see any specific area where we are concerned, expect that just like in the last couple of years Germany is doing better than the rest of Europe. North America, some of it is doing well. We expect it to continue to do well plus with Asia overall fine, Japan picking up to some extent. So overall we have good expectations worldwide.

Jay Srivatsa - Chardan Capital Markets

Thank you. A good quarter.

Danny Haran

Thank you.

Operator

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

Anya Shelekhin - Sidoti & Company

Good morning. My first question is, could you comment on any other plans or projects that you have in the works and more through the printing capabilities for the new software release?

Danny Haran

Yes, well we, at that point we are working on additional solutions, which we have decided not to disclose yet. It relates to some partnerships we’re trying to establish and we are working on more solutions, which we will detail, elaborate on later on, but definitely it’s really what we expected. The more we go into that area, we find more solutions.

It’s a long term process like a marathon, but there are more needs for use of 3D printing and software to support the 3D printing and we expect to have probably another module or application or kind of a combination of the next version of the software, which is like one year after that version, but for now we prefer to keep it, not to disclose the details.

Anya Shelekhin - Sidoti & Company

Okay, and are you looking at any acquisitions still in the future?

Danny Haran

We are all the time trying to find something with synergy and so far regrettably as you know we were not successful. The last acquisition we were able to do was 2008. We keep looking for opportunities. We think there still are some opportunities, but again regrettably we are not able to close any yet.

Anya Shelekhin - Sidoti & Company

Okay, what about the cloud, does it make sense to look into entering this space. I think, I see other software companies…

Danny Haran

We did look into cloud-based solutions. It seems that our customers are mostly reluctant to use cloud-based solutions for their files or solutions. There are some technical details that make this a little bit less, lets say less simple or less attractive to our industry than others. Things like file size, some of the files that are using the projects could be hundreds of megabytes and bandwidth could be initial. Other issues we keep hearing is people are concerned about the security of their designs or their customers’ designs if they are not held closely at the place.

Our industry and the kind of applications people use do not lend themselves easily to use lets say on mobile devices, because the clients are using very high definition displays, extremely powerful graphic cards to have a big part or assemblies. So overall we’re looking at opportunities, maybe to do some licensing over the cloud, maybe to do some limited applications, just to use this as a distributed storage.

We’re moving some of our update, the tax distribution to cloud-based technology, but these are like in the fringes of what we do. The core business of CAD/CAM from the facturing at that point remains let’s say on the ground.

Anya Shelekhin - Sidoti & Company

Okay, and final question, what new efforts have you been making to expand internationally and what are your plans you see going forward?

Danny Haran

I’m sorry, can you repeat the question?

Anya Shelekhin - Sidoti & Company

Sure. What new efforts are you making to expand internationally?

Danny Haran

Okay, overall we think we’re well positioned as it is in most of the global market. We keep investing in Brazil. We think we’re under represented in Brazil and we hope to get some more resellers onboard. We’re in the process of establishing more presence for GibbsCAM lets say in Japan, where we think, again we can do with GibbsCAM.

Some more work is being done on South East Asia, which is a more dynamic market, so we see more resellers in Asia, Malaysia, more working in Vietnam. These are the main markets where we actually actively invest, other than our traditional markets in Western Europe, North America.

We’re working Korea with sub-dealers, but overall it is, its not like totally new territories, because pretty much we are represented in all the places where manufacturing takes place. Its more specific sub-dealer, resellers, associated resellers, all getting one product like Gibbs to be represented in more areas in Japan.

Anya Shelekhin - Sidoti & Company

Okay great, thanks. That’s all for me.

Danny Haran

Thank you.

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, we would like to thank you for your continued interest in Cimatron and long-term support and we look forward to meeting you again on the next conference call. Thank you very much.

Operator

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

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