Ladies and gentlemen, thank you for standing by. Welcome to Cimatron Second Quarter 2014 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 Web site, www.cimatron.com, at the Investors page. As a reminder, this conference is being recorded today, August 13, 2014.
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 that are not historical facts and contain forward-looking information with respect to plans, projections or future performance of Cimatron, are subject to 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 now like to turn over the call to Mr. Danny Haran, Cimatron's President and CEO. Mr. Haran, would you like to begin?
Thank you. Good morning. And welcome to Cimatron's second quarter 2014 results conference call. Once again, we’re very pleased to report another record second quarter with strong results in all premises. Especially noteworthy is our strong operating cash flow of $7.6 million during the first six months of the year, bringing our net cash position to $20.4 million, an all-time high for Cimatron.
Consequentially, the Board of Directors has adopted a dividend distribution policy. According to which, the Company will distribute at least 50% of its annual distributable profit. We believe, this will add value to our current shareholders and long-term investors.
The revenue growth in the second quarter of 2014 came from both product lines and from all the major geographical territories. In Q2 2014, we had 24% year-over-year operating profit growth that led to healthy 17% non-GAAP operating margin, once again demonstrating our strong operating leverage where more than 50% of the year-over-year revenue growth in Q2 was translated into operating profit growth.
As planned, CimatronE version 12 has been officially released and is starting the rollout process to retailers and customers. I believe this is a very important version for Cimatron and its customers with numerous productivity enhancement features and key competitive developments. And of course, it marks our first delivery of software for 3D printing in the form of conformal cooling thermals and support of AMF. We continue to work together with our partners on additional such features.
Later this year, we also plan to release a major new version of GibbsCAM, with key developments and the support of advanced multi-access multi-tasking machines. We will be demonstrating these features at the coming IMTS Show in Chicago. With healthy revenue growth, high operating leverage, strong cash flow and major developments in both product lines, I believe we have a lot to look forward to in the coming quarters.
Ilan Erez, our CFO, will now review the financial statements. Ilan, please.
Thank you, Danny. Hello everybody, and thank you for joining us. Revenues for the second quarter of 2014 were $11.8 million, compared to $11 million in the second quarter of 2013, an increase of 4.4% on a constant currency basis. In the first six months of 2014, revenues were $22.7 million, compared to $21.2 million in the corresponding period of 2013, an increase of 5.3% on a constant currency basis.
The revenue breakdown in Q2 ’14 was as follows; license revenues 42%, maintenance revenues 50%, and other professional services revenues 8%. The geographical revenue breakdown for the quarter was as follows; Europe 48%, North America 31%, Asia Pacific 17%, and the rest of the world 4%.
Gross margin for the second quarter was 89% of revenues, the same as in second quarter of 2013. In the first six months of 2014, gross margin was 88% as compared to 89% in the parallel period of 2013.
Operating expenses in the second quarter amounted to $8.5 million compared to $8.2 million in the second quarter of last year. In the first six months of 2014, operating expenses were $16.7 million, compared to $16.2 million in the corresponding period of 2013. Operating profit in the second quarter increased by 24% to $2 million compared to $1.6 million in the corresponding quarter of 2013. In the first six months of 2014, operating profit increased by 30% to $3.3 million compared to $2.6 million in the corresponding period of 2013. In both, the second quarter and the first half of 2014, the significant increase in operating profit was a result of increased revenues and strong operating leverage.
Net profit for the second quarter increased by 28% to $1.5 million, or $0.14 per diluted share, compared to net profit of $1.2 million, or $0.13 per diluted share, recorded in the corresponding quarter of last year. In the first six months of 2014, net profit increased by 26% to $2.4 million, or $0.22 per diluted share, compared to net profit of $1.9 million, or $0.20 per diluted share, recorded in the corresponding quarter of last year.
Income tax expense in the second quarter and first half of 2014 was 25% and 28% of income before taxes respectively. We expect other income tax expense for all of 2014 to be around 25% of income before taxes.
Our net cash and cash equivalents balance at the end of June 2014 increased to $20.4 million, or $1.9 per share, compared to a balance of $14 million at the end of 2013. This was largely attributable to the positive cash flow from operating activities of $7.6 million as reported in the first half of 2014 as compared to $3.2 million of positive cash flow from operating activities in the corresponding period of 2013, an increase of 141% year earlier.
We will now open the call for the question-and-answer session. Operator, please.
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session (Operator Instructions). The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.
Jay Srivatsa - Chardan Capital Markets
Congratulations on a good quarter Danny and Ilan. Let me ask you -- I know you don’t provide guidance. But typically Q2 tends to be the strongest quarter for you with Q3 being sequentially slightly lower. Is there any reason to expect otherwise this time around?
No, we expect similar pattern. But Q2 is not the strongest Q4 is always, or almost always, the strongest and actually by far the large margin. Q2 tends to be like Q1, slightly higher at times the same year is a little bit lower. But Q3 is usually the slow quarter of the year. The summer vacations in North America and Europe definitely contribute. So, we see the year unfolding just as a typical year.
Jay Srivatsa - Chardan Capital Markets
And then in terms of the war, is that been any negative impact to your business at all?
Not at all.
We’re okay. Ilan looked into business and…
Unanimously, it’s not so far the day. This is outside of Israel. And business in Israel everything was running as usual as far as we’re concerned, so nothing to report about it.
That is as we look from of the news.
Jay Srivatsa - Chardan Capital Markets
Last question from me, in terms of sales efforts, are there any specific geographies that you’re looking at this time around to emphasize your efforts there to improve the sales in those territories?
Nothing that is worth mentioning, we try to put efforts in many territories, developing one as well as developed ones actually. So, no, there is nothing that’s really more incentive special mention, all has been go on.
The next question is from Richard Baldry of ROTH Capital Partners. Please go ahead.
Richard Baldry - ROTH Capital Partners
Thanks. Could you talk a little bit about the decision making around dividend policy? I mean, you have done acquisitions in the past. And sort of whether you think that that signals that we shouldn’t really expecting any acquisitions. And then I don’t feel that a lot of companies that do dividend. So maybe could you talk about whether there are any sort of add-back, any changes that it really help us calculate what is distributable net income as any sort of variations from just you reported, either GAAP or total format net income? Thanks.
Okay, I will answer the second question first. Basically, distributable earnings, annual distributable earnings, should be the GAAP net profit. There are some other measures and considerations that the Board of Directors will have to take before any specific distributions. But generally speaking, annual distributable profit of the GAAP net profit for the year. And we are talking about the GAAP net profit of 2014 that will be, according to which, we will declare the dividends in 2015.
Regarding your question, the first question of M&A opportunities, basically, there is no change in our long term strategy to grow or provide, acquiring or measuring, with other companies. Obviously, if there was anything to report by now we would have reported. But we feel that with $20 million of net cash and taking into consideration that we will only start distributing in 2015 and only what we will make profit for now on, we think that $20 million should surface M&A opportunity funding, if and when, come up to the table. So, we continue looking all the times in our market in nearby market. There is no change in our strategy in this expense.
(Operator Instructions) The next question is from George Melas of MKH Management. Please go ahead.
George Melas - MKH Management Company
Good morning. I am very new to the story. Could you try to provide sort of a positioning of the two major products in your market, sort of a basic introduction about how you play in your markets, or how you position in your market, and also how those two, the Cimatron 12 and the new GibbsCAM product might change that slightly?
Okay, I will try to address that in a nutshell, because the long answer is very long. Basically, the two product lines address two segments of the manufacturing production market, which are roughly say 50%. CimatronE is targeted towards the mould and die industry, also known as tooling where people manufacture parts by creating tools such as plastic injection moulds or metal forming dies, stinting dies and design them and build them and then create parts such as plastic and high volume production of metal in CimatronE. And it is a dedicated product for that segment, highly specialized in those and that’s why we are able to win business against let’s say the generic CAD systems because we are specialized in optimized for that market.
Whereas GibbsCAM targets the other part of manufacturing market, which is discrete parts manufacturing production one part after another through milling or lace or mill-turn or multi-access multi-tasking machines. And most typically used in Aerospace, Defense, heavy machinery and medicines, all places where you actually need to make parts one-by-one, and there is quite a few of those as well. And Gibbs again is high specialized system in that respect, one of the very few systems that can actually drive the advanced machines with multi-access such as multi-tasking machines and this is a fast growing segment of this market.
And this is basically the position of the two product lines within manufacturing. I think you can find more information on our Web site with respect to specific applications, uses, features, and so on.
George Melas - MKH Management Company
Okay, thank you very much.
There are no further questions at this time. Mr. Haran, would you like to make your concluding statement?
Thank you. On behalf of management, I would like to thank you for your continued interest and long term support of our business. And we do look forward to speaking with you and updating you again next quarter. Have a nice day.
Thank you. This concludes the Cimatron second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.
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