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MIND C.T.I. LTD. (NASDAQ:MNDO)

Q4 2011 Earnings Call

March 1, 2012 9:30 a.m. ET

Executives

Andrea Dray - Investor Relations

Monica Iancu - President and Chief Executive Officer

Operator

Good day and welcome to the MIND C.T.I Q4 2011 Earnings Conference Call. Today's conference is begin recorded. At this time I would like to turn the conference over to your Andrea Dray. Please go ahead Ms. Dray.

Andrea Dray

Thank you, Rovina. Thank you and good morning everyone and welcome to MIND’s conference call. Before we begin I would like to point out that this call includes information that constitutes forward-looking statements. Although we believe that expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations will not be material. Such statements involve risks and uncertainties that may cause future results to differ from those anticipated.

These risks include, but are not limited to, the effects of general economic conditions and such other risks as discussed in our earnings release and at greater length in the Company's filings with the SEC. MIND may elect to update these forward-looking statements at some point in the future. However, the Company specifically disclaims any obligation to do so.

Yesterday, MIND reported the results of its fourth quarter and full year 2011. The full financials can be found in our Form 6-K and on our website. On the call today from MIND is Ms. Monica Iancu, MIND’s CEO, who will summarize our major achievements in 2011 and discuss our business. I would now like to turn the call over to Monica. Monica, please go ahead.

Monica Iancu

Thank you, Andrea. Good day ladies and gentlemen. Thank you for your interest in MIND and for joining us today. I would like to start the call today with a short reminder of MIND’s history, business strategy and goals. MIND was incorporated in Israel in 1995 and starting providing our call accounting solutions in that year. In 1997, we introduced our billing and customer care software for voice over IP. We have enhanced our billing solutions since then to support all types of service providers. We make three acquisitions through the years. In 2001, 2005 and 2007.

We supply billing and customer care solutions for tier 2 and tier 3 carriers around the world, enabling them to offer all types of wireless, wireline, voice over IP and broadband services. Our convergent billing and customer care solutions supports multiple services, including voice, data and content services, as well as both prepaid and postpaid payment models in a single platform. Prepaid subscribers can enjoy the full range of services offered by the provider with their special bundles, rating plans and limits.

The prepaid solution authorizes its service and controls each session in real-time taking care that the balance is not exceeded. Postpaid subscribers, whether retail or business customers including credit limited and unlimited are fully supported in one single system from the sale of the services and collection. All services used by a postpaid customer appear in a single bill which consists of all charges. Our solution uniqueness is driven by the fact that the rating real time engine is one engine for both postpaid and prepaid. And because it includes not only the expected customer care and billing but also additional modules developed on the same platform.

These modules include our own integrated real-time mediation product that provides interfaces with IP, meaning internet protocol, and IN, meaning mobile intelligent networks, and traditional telecommunication as well as our own point of sales solutions. Our billing and customer care solution includes a powerful workflow engine to support the creation and execution of business processes, such as order management, travel ticket and debt collection. The MIND solution supports real-time distributed processing achieving performance, scalability and high availability. It uses and open architecture thus enabling easy integration with other systems and applications.

We also provide professional services consisting of installation, turnkey projects, implementation services, customer support, training and maintenance services, customization and project management. Our professional services also include enhanced support options known as managed services, which are mainly offered to customers in the United States and are performed from our offices. These managed services include performing day to day billing operational tasks.

In addition to our billing solutions, we offer call management systems used by organizations for call accounting, telecom expense management, traffic analysis and fault detection. Our enterprise software product has been installed on about 20,000 switches around the world. Our high-end product PhonEX ONE, delivers one unified solution for all voice communication expenses including tradition IP and mobile telephony. The flexible and scalable architecture of PhonEX ONE meets the needs of large enterprises supporting and unlimited number of extensions and sites.

We primarily use two business models when we sell our solutions. The license model and the managed services model. In the license model the customer pays a onetime implementation fee, a onetime license fee for a perpetual license limited by the traffic metrics chosen by the customer and additional fees to expand above the limitation. In addition, we are paid maintenance fees to renew periodically the maintenance agreement at the customer’s discretion. In the managed services model, the customer pays a onetime implementation fee, and then a monthly fee that includes a periodic license or right to use, maintenance and service fees, calculated by the metrics chosen by the customer, mainly by number of subscribers.

2011 was an eventful year with exciting new wins and follow-on, including our first billing deal in Israel and our first full MVNO deal, an unfortunate loss of a few customers either with managed services agreements in UK or consolidating niche solutions, exchange rate fluctuations and towards the year-end, the decision to increase the company size during 2012. In general, we are pleased with our results for 2011, especially with the new wins and with the rising interest in our solutions. The most important metrics in our view are customer satisfaction, margins, visibility and especially the cash flow from operations.

We executed on this metrics and we will continue to focus on them. At MIND we believe that whatever the market conditions are, we need to execute our strategy. We believe that we have proven since inception, that we are effective in planning the steps to overcome crisis conditions, and at the same time we are ready to show growth in positive market sentiment and improved economy. We support mission critical activities for our customers around the world, including managed services with long-term contracts and this drives strong recurrent revenue with high visibility and strong backlog.

Now something about our competition. In the market for billing and customer care, competition is intense. And we expect competition to continue to be strong. We compete with many local companies and lately more than before, with the largest billing vendors such as Amdocs. We believe that our competitive advantage is based on our education of on-time and within budget delivery combined with the committed support on our ability to deploy a complete turnkey product based solution, thus offering a lower total cost of ownership on our solutions functionality which includes billing, customer care, point of sale, mediation, provisioning, rating for multiple services, and prepaid IN and IP functionality, and on our flexibility to meet customer requirements.

Some of our competitors have a larger customer base and greater financial, sales, marketing and other resources. And greater name recognition than we do. Other competitors have a limited product and lower cost structure and compete with us on pricing. We continue to invest in enhancing our solutions with new functionality, releasing new modules every year. During the last three years, we added to our IP, voice and data prepaid capabilities, the IN prepaid solution for mobile carriers. We added among many other small features, some large enhancements, such as the point of sale solution, the business intelligence, reporting and the online store solution.

In 2011, we focused our development towards the end-user experience, enhancing both customers access and notifications either by IVR, VoIP, mobile or the online store. We believe that these additions were crucial to winning new business, mainly in the U.S. We continue to focus on our targets. Satisfied customers, successful project implementations, winning new business and positive cash flow. We continue to believe that as always these targets built our great company culture and the unprecedented spirit and team effort drive towards a successful future.

For the full year of 2011, revenues were $18.9 million compared with $19.9 million in 2010. The operating income was $3.9 million or 21% of revenue, compared with $5 million or 25% of revenue in 2010. Our net income was $4.3 million or $0.23 per share, compared with $4.9 million or $0.26 per share in 2010. Cash flow from operating activities was $4.4 million. Our balance sheet continues to be strong with total cash position of $19 million at the end of the year, including available for sale securities.

In 2011, we succeeded to secure five new customers. As well as several multiple follow-on orders. The two wins in the first quarter are with rural telephone carries based in the United States. One carrier chose MIND to supply the proven fully convergent postpaid and prepaid MIND platform to support wireless, both CDMA and LTE infrastructure, wireline broadband and IPTV services. The other selected MIND to replace its existing postpaid solution in order to better support the carrier’s wireless services over a CDMA network.

Additional wins this year include Pelephone, the first Israeli mobile operator with over 2.8 million subscribers. MIND provides Pelephone with an integrated end to end convergence billing and customer care solution for full support of its MVNE, mobile virtual network enabler operations. The second is a provider of wireline and wireless in the U.S. region, who has selected MIND to provide a complete prepaid billing solution. This customer is operating both GSM and CDMA network and is also a provider of data services using multiple network elements.

The third is an Israeli MVNO that selected MIND to supply a complete MVNO in a book solution including the platform required as well as all the integration and implementation services, where MIND will deploy a full network implementation and business support system for the MVNO. The multiple follow-on orders we announced in 2011 include five significant orders from U.S. customers, regional mobile operators for either additional functionality, systems enhancements including an ecommerce portal, or upgrades to a newer product release. And an additional one is an upgrade to a major of release of MINDBill, our billing solutions, with a provider of fixed voice and data services in Turkey, who has been a customer of MIND since 2004.

Migrations to new MIND releases enabled the carrier to benefit from advanced trading schemes and product catalog offerings to achieve a competitive advantage of convergent services offerings. In addition, the technological improvements would provide operational efficiencies and cost savings.

Regarding the dividend distribution. Based on our dividend policy and taking into account the strong cash flow in 2011 and the remaining cash after the distribution, the board at MIND declared on February 29, 2012, a cash dividend of $0.24 per share, before withholding tax. We continue to believe that our dividend policy enhances shareholders value and that we are well positioned and have the required resources to respond to potentially increasing market needs. The record date for the dividend will be March 14, 2012, and the payment date will be March 28, 2012. Tax will be withheld at the rate of 25%.

To summarize, we plan to increase the company size in the first half of 2012 to support the new projects and the multiple requests of engineering resources we receive from our growing customer base. We expect the latest important wins to have a positive impact on our 2012 results. At the same time, mainly due to consolidation of platforms at large existing customers where we supplied niche solutions, some maintenance agreements will be not be renewed in 2012. And we expect that will bear some negative impact on our 2012 revenues and profitability.

We are proud of our execution in 2011 that includes the completion of important milestones in different projects that are in the process of implementation and completion of some as well. We are extremely pleased with the enhancements we win with our customers. We believe it is the best proof of customer satisfaction and that it strengthens our ongoing relationship. Our technical teams, both development and support, are to be praised for their great work.

We feel that we reached many of our targets. Very high visibility, increased average deal size, significant recurrent revenue, and fully convergent technology. We believe that now, with our highly qualified team, our proven methodology and technology, we can aim to the next long term target, internal growth. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from [James Lee from Potroreel Capital Research]. Please go ahead.

Unidentified Analyst

Great. Thanks for taking the questions. On the customer loss, how much revenue contribution were they in 2011?

Monica Iancu

The different maintenance agreements -- you are asking about the maintenance agreements that have no....

Unidentified Analyst

Right. (inaudible) to lose.

Monica Iancu

I can't tell you a definite number because there were small ones and on the other hand maybe there was one or two larger ones. But on the other hand the reasons are clear cut. Like it’s not that is going to end January 1, so I can't give a real number but we really hope that the new projects will compensate for those losses.

Unidentified Analyst

But in aggregate, were they more like 5% of revenue, were they 10% of revenue? What’s the range -- you know I understand you may not have the exact number, but is it more like 5% or 10%?

Monica Iancu

I would say that somewhere between 5% and 10% but closer to the 5%.

Unidentified Analyst

And that you expect those to be eventually they’ll be gone. May not be happening January 1 but it will be -- maybe gone, those revenues?

Monica Iancu

This is how things looks at this point in time.

Unidentified Analyst

Okay. And then in terms of increasing the size of the company. How much operating expenses are you planning to bring on and how many employees to do -- or is it more operating expenses, are you planning to add on in 2012?

Monica Iancu

We plan to add around 10%. So if we are now at 320 people, we will take that, gradually will enlarge the workforce with -- hopefully we will find those experts that we are looking for, but we expect to add something like 20 people by the end of Q2 and maybe ten more during Q3, something like this.

Unidentified Analyst

Okay. So 10%, (inaudible) about 10% increase in OpEx in 2012?

Monica Iancu

Not exactly. Because OpEx is not only salaries, it’s also third party hardware or software or services, and travel and offices and so on. So, again, we plan to increase but we do not think that we will have -- it will be less than 10%.

Unidentified Analyst

Okay. And these increases, obviously you guys are anticipating increase in revenue, right. So that given the, both the positive factors and the negative factors you talked about, what's the overall impact you think on your revenue, your operating margin and cash flow in 2012?

Monica Iancu

First of all we always plan for the future. So if we see now that there is more interest in our solutions, if we see that there are prospects that are moving forward to the next steps, even if they are not deals that closed already or if we get from our existing customer base the budgets that they project for 2012. And in order to enable, to maintain our reputation of on time delivery and excellent support, we need to increase both the professional team and the development team in order to be able to support those needs of both existing customers and customers that we expect to close.

I am not going to give you any real, exact kind of expected number. But I think that even the fact that we talk about planning to increase the company, because we expect more action.

Unidentified Analyst

But do you, on a directional basis, you anticipate revenue and cash flow to be up this year versus last year?

Monica Iancu

I will not give any estimates.

Unidentified Analyst

Okay. And lastly, on gross margins, it looks like in Q4 it was a bit lower than what you guys typically have done. Is there anything between there or is it the new gross margin level we should expect or is there -- do you anticipate it to be able to turn back to what you guys typically had in the past?

Monica Iancu

We think that the normal -- you are talking about gross margin or operational...?

Unidentified Analyst

Yeah, gross margin, your gross margin. I believe it’s 53% this quarter versus I believe 73% a year ago.

Monica Iancu

I think that’s somewhere between 60% and 70%, is the range that we expect to be.

Unidentified Analyst

Okay. All right, thank you.

Monica Iancu

Thank you.

Operator

(Operator Instructions) Ms. Iancu, we currently do not have any questions in the queue.

Monica Iancu

Okay. So, I, thank you.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen you many now disconnect.

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