Cimatron Limited. Third Quarter 2007 Results Conference Call. November 15, 2007

Transcription

1 Cimatron Limited Third Quarter 2007 Results Conference Call November 15, 2007 OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the Cimatron's third quarter 2007 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. As a reminder, this conference is being recorded, November 15th, 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 contained in this conference call, which are not historical facts, contain forward-looking information, with respect to plans, projections, or future performance of the company, the occurrence of which involve certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include dependence on economic and political conditions in Israel, the impact of competition, supply constraints, as well as certain other risks and uncertainties which are detailed in the company's filings with the various securities authorities. If you have not received a copy of today's release and would like to do so, please contact Commitment IR Investor Relations, at I would like to turn the call over to Mr. Danny Haran, Cimatron's president and CEO. Mr. Haran? Danny Haran: Yes, good morning. Welcome to Cimatron's third quarter 2007 results conference call. We are pleased to report another strong and profitable quarter for Cimatron. There's been improvement in all the important parameters, in terms of revenues, Page 1 of 10

2 as well as in profit. Most of the revenue growth came from new license sales, which demonstrate the good acceptance of our product by the market. As you all know, Q3 is traditionally relatively weak, due to the summer vacations, especially in Europe. Well, not this time. We had a strong quarter, with Europe actually leading the growth, both in terms of number of licenses sold, and in terms of revenues. This is the first quarter where we consolidate the results of Microsystems, our distributor in Italy. You may recall our discussion in previous conference calls, regarding the reorganization of Microsystems, and our expectations for better results in the second half And, indeed, Microsystems was profitable in Q3, and we believe this trend will continue. We are happy to see that Q shows growth and improvement, whether you measure it before the consolidation of Microsystems, or, as reported, looking at the consolidated results. We believe this is the direct result of the work and efforts invested in implementing our long term strategic plans. We see good results in all our product areas, be it mold design, die design, NC for tooling, or Five Axes NC for production. One encouraging indication is the relatively large number of deals where a fully integrated solution has been sold. The recent addition of die design to our portfolio has been an important factor in that development. Finally, machine vendor relationships have been progressing as planned. We established and strengthened relations with leading machine vendors from various countries, including Italy, Japan, Germany, India and Switzerland. Many of these companies have presented live art cutting using Cimatron's software in the IMO Exhibition in Hanover, Germany. Overall, we are satisfied with our progress. Cimatron is moving ahead, as planned, in terms of sales, marketing, and the expansion of our product portfolio. Ilan Erez, our CFO, will now review the financial statements. Ilan, please. Page 2 of 10

3 Ilan Erez: Thank you, Danny. Hello, everybody, and thank you for joining us for our third quarter 2007 results conference call. This quarter, we have consolidated Microsystem results for the first time. Therefore, all mentioned figures for the third quarter, and for the first nine months of 2007, include Microsystems figures, unless specifically said otherwise. When we discuss figures that do not include the consolidated Microsystem results, we use the term "organic". Revenues for the third quarter of 2007 increased by 58% to $7,900,000, compared to $5,000,000 in the third quarter of Organic software license revenues in the third quarter of 2007 increased by 32%, compared to the same quarter in 2006, due to the positive acceptance of our new products by the market. Organic maintenance and services revenues also increased this quarter. The revenue breakdown in the third quarter of 2007 was as follows: license revenues, 39%; maintenance revenues, 42%; other professional service revenues, 12%; and hardware revenues, 7%. The geographical revenue breakdown for the quarter was as follows: Europe, 71%; Asia Pacific, 16%; North America, 9%; and the rest of the world, 4%. Obviously, the Microsystem consolidation increased Europe's share in our revenues. For the first nine months of 2007, revenue increased by 22% to $18,800,000, compared to $15,400,000 in the same period of Organic software license revenues in the first nine months of 2007 increased by 16%, compared to the same period in 2006, and organic maintenance and services revenues also increased this period. Gross profit for the third quarter of 2007 was $6,400,000, as compared to $4,200,000 in the same period in 2006, or 81% of revenues, compared to 83% of revenues in Q As expected, the consolidation of Microsystem resulted in a slight decrease of Cimatron gross margin, due to Microsystems third party hardware sales. Nevertheless, the decrease was lower than expected, due to Cimatron's significant organic growth. In the Page 3 of 10

4 first nine months of 2007, gross income increased to $15,500,000, compared to $12,700,000 in the first nine months of Gross margin for the nine months ended on September 30, 2007 was 83% of revenues, as compared to 82% of revenues in the same period of R&D expenses in the third quarter of 2007 were $1,000,000, compared to $1,100,000 in the third quarter of In the first nine months of the year, our R&D expenses were $3,100,000, compared to $3,300,000 in the first nine months of We are keeping our R&D expenses at the same level in order to support our product development plan. Sales and marketing and G&A expenses in the third quarter of 2007 were $4,900,000, compared to $3,400,000 in the third quarter of For the first nine months of 2007, sales and marketing and G&A expenses were $11,600,000, compared to $9,700,000 in the first nine months of This increase mainly reflects the first time consolidation of Microsystems results, but also our ongoing efforts to enhance our sales and marketing activities in the target market. Operating profit in the third quarter of 2007 was $450,000, compared to an operating loss of $403,000 in the third quarter of For the nine months period ended on September 30, 2007, operating profit was $845,000, compared to an operating loss of $317,000 in the same period in Net profit for the third quarter of 2007 was $486,000, or 6 cents per diluted share, compared to a net loss of $281,000, or 4 cents per diluted share recorded in the same quarter of In the first nine months of 2007, net income was $958,000, or 12 cents per diluted share, compared to a net loss of $43,000, or 1 cent per diluted share in the first nine months of The difference between operating and net profit is mainly attributed to financial income, generated from our cash reserve, and changes in currency exchange rates, somewhat offset mainly by taxes and income. As a result of our continued profitability, our net cash reserves as of September 30, Page 4 of 10

5 2007 were $9,000,000, compared to $6,400,000 on December 31st, 2006, and $6,000,000 on September 30, We will now open the call for questions and answers. Operator, please. OPERATOR: Ilan Erez: Operator? Danny Haran: Yes, we're waiting for you to open the session, give the instructions. OPERATOR: Okay. Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the one on your touch-tone phone. If you wish to decline from the polling process, please press the star followed by a two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. [pause] The first question is from Mike Zeldis, a private investor. Please go ahead, sir. Mike Zeldis: Yes, good morning. Congratulations on a very good quarter. I actually have several questions. Maybe I'll just ask one now, and get back into the queue. I was just curious about the increase in the severance pay liability on the balance sheet from 3 to 4 million. Was that connected in any way to the acquisition of Microsystems? Ilan Erez: Absolutely and solely to the acquisition. Mike Zeldis: Is that a one time charge that we should not expect to see in the going forward? Ilan Erez: No, this is not a one-time charge, and this is not a charge at all. This is Microsystem's liability that is consolidated to our balance sheet. The same way that we have we, I mean Cimatron, the organic Cimatron has a liability for severance pay, we now consolidated Microsystem's liability. It is not related to the P&L whatsoever. Page 5 of 10

6 Mike Zeldis: Okay. So, then, related to that, could you add a little more color to the increase in the marketing and G&A, since it was quite a large quite a large increase. Were there any, like, one time charges in that, that, you know, we shouldn't expect to see in the fourth quarter, or will that level sustain itself going forward in the immediate future? Ilan Erez: Again, the increase is mainly attributed to Microsystem's addition to our report. There is no one-time charge here, and give or take, with some fluctuations that we always have between the quarters, this is the level of expenses. Mike Zeldis: Okay, thank you. I'll get back into the queue. Thank you. OPERATOR: The next question is from Michael Brcic of Oppenheimer and Company. Please go ahead, sir. Michael Brcic: Hi. Great quarter. Can you give it a little bit more color on what's happening in China and India? Thank you. Danny Haran: Yes. China had a good quarter. We're trying not to, you know, play the Chinese card all the time. It is still a small market relative to overall sales, less than 10%. They did grow in this quarter compared to last year same quarter, about 30%. And, overall, I think I mentioned that before in last quarter conference call, but China seems to be developing into a tale of two markets. Essentially, we have the commercial market in the south, near the Hong Kong and the coast area, where we sell to mold and die makers, where we see a lot of strength and growth. And, then, we have the government related market, of government owned companies, which is more production and heavy machinery, heavy industry, where we see less growth, which may be we're not sure may be attributable to efforts by the Chinese government to somewhat limit the overheated growth of the economy. But, overall, China is doing well. And, again, still small numbers. In India, similar story, except that it's one market there for us. We see growth, it's still very small numbers compared to other areas. Page 6 of 10

7 We expect this, again, to develop in the following years. This will take time. In both countries, we have not just Cimatron, but we have a quite significant issue of illegal copies. And, again, we hope that that will gradually change, as well. Michael Brcic: Thank you. OPERATOR: The next question is from David Cohen of Athena Capital Management. Please go ahead, sir. David Cohen: Good afternoon, guys. Could you, insofar as you feel comfortable doing so, talk to us a little about any specific new customers that you'd like to highlight, any new market segments that you're that you've either won business in, or that you're targeting presently? Thanks. Danny Haran: Yes. Well, there's no single customer that we would like to mention at this point, many new customers, obviously. But, I could say a few words about two market segments where we see more growth and, again, we expected, as we spoke about them in the past. One of them is die design. We sold 20 or so seats in this quarter. Another one is a 5-Axis production, where we see also nice growth, somewhat connected to the relations with machine vendors. We see that growing in all areas. But, overall, there's no, like, one significant, or one specific area, which really stands out. We see growth and good acceptance, it's good performance in pretty much all areas. David Cohen: Okay. And, without getting into specific numbers, could you give us a sense for what you see in the pipeline in terms of proposal activity versus, say, the beginning of the year? I mean, is the pipeline filled? Danny Haran: Is the pipeline what? David Cohen: Is the pipeline fuller than it was at the start of the year, in terms of proposal activity? Danny Haran: You know, overall overall, we do not give guidance and we do not have the nature of business of our business is so Page 7 of 10

8 that we do not have a lot of backlog, and we do not like to read too much into the level of activity. So, my preference would be not to provide specific information about that activity. David Cohen: Okay. Thank you. OPERATOR: We have a follow up question from Michael Brcic of Oppenheimer and Company. Please go ahead, sir. Michael Brcic: Yeah. Can you talk about the competitive environment and how fast the market is growing, and are you, like, growing with the market? Are you picking up market share? Anything on those lines. Thank you. Danny Haran: Well, most of our competitors do not are private companies or are departments within bigger companies. So, we don't really have too detailed information. We do believe, based on some of the public companies, that others have seen good growth in Germany as well as we did. I don't know if as good as we did, but definitely have seen growth. Overall, the competitive picture is not changing too much. You know, it's the same the same names, pretty much, in the same specific areas that we have seen the quarter before, and a year ago. Hard to say much more information beyond that. Michael Brcic: How about the addressable market itself, how fast do you see that growing? Danny Haran: I'll say that most of our insight into the overall market is based on the Cim Data report that we, of course, read thoroughly once a year. And, we believe the market is growing, roughly, around 7% a year. Again, it's a credible, if you ask me, but we don't have any more specific information beyond that. Michael Brcic: Thank you. OPERATOR: We have a follow up question from Mike Zeldis, private investor. Please go ahead, sir. Mike Zeldis: Yes. Actually, I have two, if I may. I noticed that in the newsletter for November, I think it's November-December, from the German, Page 8 of 10

9 I believe it's subsidiary, they talk a bit about Version 8.5. Now, my translation of German is a bit rusty. Would you care to give any any elaboration on that release, what it entails, when it will, in fact, be out? And, also with respect to that, is there anything you can give us on Version 9.0, as far as timing, when you might anticipate to give a PR on 9.0? Danny Haran: No, I prefer not to go into details. You know, we issue versions on a regular basis, usually once a year a major version. 8.5, as the name implies, is a minor version, between 8 and 9, coming to complete some things that we thought would be smart to bring to the market, and not wait for the major release of next year. And, usually, we issue information about that, first of all, to our providers, distributors, customers, and to the market, when it happens. But, we do not give, you know, forward information specifically about the release. It has many things, many projects, and I don't even think it would be appropriate to go into details in this venue. Mike Zeldis: Okay. The other the last question I have has to do with the Micro Milling module that you've offered for a while. Have you noticed any increase in Micro Milling licenses since the Five-Axes license licenses for this module have been released? Danny Haran: Actually Mike Zeldis: Is there a connection, in other word, I'm trying to get at, is, are you seeing a connection with people wanting to buy more Micro Milling licenses as a result of the Five-Axes license, or module? Danny Haran: Well, actually, no, these are quite parallel market. We do see some increase in Micro Milling, but it's still a very small niche market. Not so much related to Five-Axes, most of the work in Micro Milling is done in Three-Axes, high speed cutting. We just happen to have a seminar here, this week, in Israel, with an expert from DMG Sauer, one of our partners in that area. So, there is interest. We had, I think, over 20 participants. Some of them will Page 9 of 10

10 buy machines, will buy software. But, it's quite parallel, and not really related to the Five-Axes market. Mike Zeldis: Okay, thank you very much. OPERATOR: Thank you. If there are any additional questions, please press the star followed by the one on your touch-tone phone. If you wish to cancel your request, please press the star followed by a two. Please stand by while we poll for more questions. [pause] The next question is from Richard Bauman of Franklin City Investments. Please go ahead, sir. Richard Bauman: Yes, I was wondering, do you have any seasonality to your business? Danny Haran: Yes. There is definitely seasonality in the business. We've said this before, and it's very clear from our results. And, it's not just ours. Q4 is pretty much always the strongest in the year. Usually, although not this year, Q3, because of the summer vacations, is the weakest, and Q1 and Q2 kind of similar, someone some time this is stronger, some time that is stronger. This year, we've had Q3 stronger than previous quarters, but we cannot say if this will continue. Usually there is strong seasonality. Richard Bauman: Thank you. OPERATOR: There are no further questions at this time. A replay of the call will be available on Cimatron's website, starting in three hours. Mr. Haran, would you like to go make your concluding statement? Danny Haran: Yes. I would just like to thank the participants for joining us on this conference call. Thank you for your time. And, we'll be seeing you in the next quarter. Thank you very much. OPERATOR: Thank you. This concludes Cimatron third quarter 2007 conference call. Thank you for your participation. You may go ahead and disconnect. Page 10 of 10