Optibase, Ltd. Q2 2008 Earnings Call Transcript

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 |  About: Optibase Ltd. (OBAS)
by: SA Transcripts

Optibase, Ltd. (NASDAQ:OBAS)

Q2 2008 Earnings Call

August 4, 2008 9:00 am ET

Executives

Marybeth Csaby – KCSA Strategic Communications

Amir Phillips - Chief Financial Officer

Yossi Aloni - Vice President - Marketing and President of Optibase, Inc.

Analysts

[Bob Poole - Brickalor Capital]

Operator

Welcome to the Optibase second quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to Marybeth Csaby of KCSA.

Marybeth Csaby

This is Marybeth Csaby with KCSA Strategic Communications. At this point you should have all received Optibase’s second quarter 2008 earnings press release. If you have not received the release please refer to Optibase’s website at www.Optibase.com. With me on the call today is Amir Philips, Chief Financial Officer and Yossi Aloni, President Optibase, Inc.

Before starting the call I would like to mention that the matters discussed in this conference call include forward-looking statements made based on management’s current expectations and estimates which may involve a number of risks and uncertainties. Actual results may vary significantly based on a number of factors including, but not limited to, risks related to the evolving market for digital video and IPTV, competition, our ability to manage growth and expansion, general economic conditions and other risk factors. For a detailed discussion of these and other risks that may cause actual results to differ from the forward-looking statements, see our most recent annual report on Form 20F filed with the United States Securities and Exchange Commission and other filings with the SEC.

In addition, during this call statements may be made that include financial measures that are defined as non-GAAP financial measures by the Securities & Exchange Commission. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared or presented in accordance with GAAP.

With that said, I would like to turn the call over now to Amir who will provide you with an update on the business during the quarter including a review of the financials. Following these formal remarks Amir and Yossi will be glad to answer any questions you may have.

Amir Phillips

During this call we will review the financials for the quarter as well as updates regarding company activity. I will begin the call with a review of our financial results and the increase in revenues we have experienced this quarter over the first quarter. Our revenues for the second quarter 2008 were $5.7 million, an increase of approximately 43% from the $4 million we saw in the previous quarter. The revenues were lower by approximately $929,000 compared to the second quarter of 2007. Gross margins have improved by approximately $146,000 an increase of approximately 5%.

Net loss for the second quarter of 2008 was $2.1 million or $0.15 per basic and fully diluted share compared with a net loss of $2.9 million or $0.21 for basic and fully diluted share for the first quarter of 2008 and a net loss of $2 million or $0.15 for basic and fully diluted share for the second quarter of 2007. Weighted average shares outstanding used in the calculation for the periods were approximately 14 million basic and fully diluted for the second quarter of 2008 and 13.6 million basic and fully diluted in the first quarter 2008 and approximately 13.5 basic and fully diluted for the second quarter of 2007.

Revenues for the six months ended June 30, 2008 were $9.8 million compared with $12.2 million for the six months ended June 30, 2007. Net loss for the six months ended this quarter is $5 million or $0.36 for basic and fully diluted share compared to a net loss of $3.5 million or $0.26 for basic or fully diluted shares for the six months ended June 30, 2007. Weighted average shares outstanding for the period were approximately 13.8 million and 13.5 million basis and fully diluted respectively. As of June 30, 2008 the company had cash, cash equivalents and other financial investments net totaling $12.4 million and shareholders’ equity of $39.4 million compared with $7.6 million and $36 million as of March 31, 2008.

As current economic conditions continue to decrease the amount of spending in the [inaudible] sector as a whole is hurting our top line, the continued devaluation of the US dollar against the Israeli Shekel it added pressure to our bottom line increasing our total operating expenses. I would like now to take the time and review the highlights in this quarter. Our revenues were up and back on track this quarter at $5.7 million as we continued executing on our strategy. We are very pleased with the role out of our three new products Creator Ingest Server, EZ TV and the continued business for the MGW X1000 product for IPTV for the telco, government and education market. Our continued marketing and sales initiatives backed up with our strong R&D team are bearing fruits and we are entering the second half of 2008 with a significant backlog and a healthy pipeline of sales opportunity. Though we cannot assure you of the timing, a realization of those opportunities, we believe that the growing interest in our product will eventually pay off as we remain committed to our customers and our state of the art technology.

In regard to our outstanding shares, on June 25th we announced the successful completion of a private issuance of 2.8 million ordinary shares of the company to Mr. Tom Wyler, company President, Chief Executive Officer and Executive Chairman of the Board of Directors in consideration of $5 million. Following the private issuance Mr. Wyler owns approximately 31.6% of the company’s outstanding shares. Additionally, on June 25th Optibase had filed a request to be delist its ordinary shares from trading on some of these stock exchanges, a three months process which will be concluded by the end of September. However, Optibase will continue to be listed and traded on the NASDAQ.

Earlier today we announced signing of a non-binding term sheet with Scopus Video Networks Ltd. for the sale of our digital video and streaming business to Scopus in consideration of 26 million of Scopus’ ordinary shares. Additionally, the parties have agreed on an earn-out mechanism pursuant to which Scopus may issue to Optibase up to an additional 900,000 shares subject to the achievements of sales goals. Immediately following the closing such transaction, Optibase will hold approximately 46% of Scopus’ issued share capital or approximately 49% of Scopus’ issued share capital assuming the issuance of the additional shares pursuant to the earn-out mechanism. We believe there is a great opportunity embedded within this transaction and with the right execution it will be bring added value both to shareholders and valued customers in the intent of supporting and enhancing and believe they are part of our business for the future. This transaction is subject to due diligence by both parties and is expected to close in the fourth quarter of this year. However, there is no assurance that a definitive agreement will be executed or that the transaction will be consummated at such time or at all.

All-in-all we saw a more successful quarter than last as we keep on developing our business we look forward to keeping up the expectations of our current and future customers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Bob Poole - Brickalor Capital].

[Bob Poole - Brickalor Capital]

Is the 900,000 shares that are subject to the earn-out, what do you actually have to do to achieve the earn-out?

Amir Phillips

We have to perform. We have to sell over $18 million and the cap is at $22.5 million so that’s 200,000 shares for every million of revenue we bring from Optibase products to the deal.

[Bob Poole - Brickalor Capital]

During what time period?

Amir Phillips

It’s a year from closing.

[Bob Poole - Brickalor Capital]

And you said it was from $18 million to $22 million?

Amir Phillips

Yes, meaning there is a range of revenues that we are being looked at so if we perform, first we have to do the $18 million. For the $18 million we’re being paid the $26 million. There’s no drawback but in order to compensate further, the earn-out mechanism goes from $18 million and above or like I said there’s a cap of $22.5 million and this is the range. But once we over-perform from $18 million and on, we get compensated for that.

[Bob Poole - Brickalor Capital]

I missed the $22.5 million. I needed an extra half a million to understand how 200,000 shares per million.

Amir Phillips

How the 900,000 divides into the 200,000.

[Bob Poole - Brickalor Capital]

I got it now. If at the closing of this transaction as proposed you would own something like 7.7 million shares, right?

Amir Phillips

5.1 million, I think that’s the exact number plus $2.6.

[Bob Poole - Brickalor Capital]

Yes, so about 7.7 million and you have your $12.4 million of cash. Those shares and that cash would be the only assets of Optibase at the time of closing?

Amir Phillips

No, we have a couple more assets that maybe not significant in our portfolio but we do have some holdings with Mobixcell Networks and with Vbox. These are two private companies which we hold so we are going to keep on holding to these businesses as well.

[Bob Poole - Brickalor Capital]

How are they valued on the balance sheet today?

Amir Phillips

They’re at $0.

[Bob Poole - Brickalor Capital]

They’re at $0?

Amir Phillips

Yes, because we have devaluated the value. It’s two start-ups that spun off from Optibase ages ago.

[Bob Poole - Brickalor Capital]

Okay. But they may have some value?

Amir Phillips

I don’t want to say I’m sure, but I suppose they have some value imbedded into them. Let’s say if there’s an exit down the road sometime, we’ll cash out on that exit.

[Bob Poole - Brickalor Capital]

So those will be the assets of Optibase. Are you going to distribute those assets? What do you do with those assets?

Amir Phillips

Optibase remains to be a public company traded on the NASDAQ and at this time I think it’s too early to determine. You have to realize the deal hasn’t been closed yet. There’s still the signing of the definitive agreement and then closing terms, so I think that by that time management over here at Optibase will have to define and determine what’s down the road for Optibase itself as a holding company.

[Bob Poole - Brickalor Capital]

Further questions along that line, you just don’t know at this point.

Amir Phillips

No, we don’t.

[Bob Poole - Brickalor Capital]

You guys are not having any kind of conference with Scopus together are you to talk about the transaction?

Amir Phillips

Well currently we’re working on a definitive agreement. Let’s assume there will be an agreement. At that time we will do a joint PR, etc. But at this time we’re still each on his own because an agreement is not there yet.

[Bob Poole - Brickalor Capital]

Is that definitive agreement something that you would expect to take a long time or is that pretty imminent?

Amir Phillips

We have 45 days in the term sheet we’re giving this and I think we intend to meet that deadline. I cannot assure anything about that but definitely on both parties we are intent on doing our best towards that goal.

[Bob Poole - Brickalor Capital]

Could you just talk briefly about what you can say about how the deal came together and what the rationale of the deal is from your perspective and from what you know of Scopus’ perspective on why this deal makes sense?

Amir Phillips

First of all, I must say that I cannot speak on behalf of Scopus. Yaron Simler is a very capable guy. I’m sure he can speak on behalf of Scopus. He’s the CEO of course of Scopus. I can say on behalf of Optibase this thing was thought of or consummated about a year and a half ago. The thinking was that there are many synergies and some advantages to joining the businesses in terms of the product lines, the geographical presence of the two companies. The two things, product lines and the geographical presence of the two companies were viewed as somewhat complementing one another. If you put aside the operating costs of operating two such pretty similar companies in terms of video encoding, decoding, and streaming, there is a lot of business sense behind this combination.

[Bob Poole - Brickalor Capital]

How can you quantify at all what the potential savings would be of putting the companies together?

Amir Phillips

I cannot refer to that yet because we haven’t done the bits and bytes. That’s one of the tasks that we are facing during this period of time for the final agreement.

[Bob Poole - Brickalor Capital]

Thank you. I think what you’ve done here makes some sense. I know you appeared to be renegades or something here for a while but I think you’ve brought a deal to the table that makes sense.

Operator

That does conclude today’s Optibase second quarter 2008 earnings conference call.

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