Veidan Conferencing Solutions
Cimatron Ltd.
Q3/2011 Results Conference Call
November 10, 2011
Conference Coordinator:
Ladies and gentlemen, thank you for standing by.
Welcome to Cimatron's 3rd Quarter 2011 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. For operator assistance during the conference, please press * 0.
If you have not received a copy of today’s earnings release and would like to do so,
please download it from the company website at the investors' pages:
www.cimatron.com
As a reminder this conference is being recorded, November 10th, 2011.
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 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 involves 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
globally and 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.
I would like to turn over the call to Mr. Danny Haran, Cimatron's president and CEO.
Mr. Haran, would you like to begin?
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Danny Haran:
Good morning and welcome to Cimatron’s third quarter 2011 results Conference Call.
Once again, I am happy to be here and report a strong quarter. As you may know, the
third quarter is typically our weakest of the year. Yet, it was stronger than the first
quarter of 2011, and at $9.6 million in revenues, this is the second best ever third
quarter in terms of revenues, second only to Q3 2008, and a record-best third quarter
in terms of non-GAAP operating profit. Furthermore, this is the seventh consecutive
quarter where we have shown growth compared to the same quarter of the previous
year – in terms of revenues and non-GAAP operating profit.
These are interesting times. On the one hand, economic uncertainty is very high, and
news from Europe and the USA continuously shake the markets; on the other hand,
business seems to be strong and healthy in all of our markets. While we remain
cautious and prudent regarding our expenses, we continue to push forward with the
new software versions of CimatronE and GibbsCam that we released in 2011.
Looking at the first 9 months of 2011, it is very satisfying to see the growth in our nonGAAP net profit, as we more than doubled the figures of the first 9 months of 2010, and
have already equaled our non-GAAP net profit for the entire year of 2010. And as you
likely know, the fourth quarter is typically the strongest of each year.
Early indications for the fourth quarter suggest the continuation of the momentum in
global manufacturing activity, although these indications are very preliminary and
partial in nature.
Ilan Erez, our CFO, will now review the financial statements. Ilan, please:
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Ilan Erez:
Thank you, Danny. Hello everybody and thank you for joining us.
The results we will present on this call are on a non-GAAP basis, as we believe they
better represent the actual state of our business, and make comparisons to previous
periods easier. We have also published our results on a GAAP basis, as well as
reconciliation between results on a GAAP and non-GAAP basis, and those can be
found in our press release issued earlier today.
Revenues for the third quarter of 2011 were 9.6 million Dollars, compared to 8.7 million
Dollars in the third quarter of 2010. New licenses revenues increased 15% on a
constant currency basis in Q3/11 from the third quarter of 2010, reflecting the
continuing momentum in our target markets.
In the first nine months of 2011, revenues were 28.5 million Dollars, compared to 25.1
million Dollars in the corresponding period of 2010, an increase of 14% year-over-year.
The revenue breakdown in Q3/11 was as follows – License revenues: 42%;
Maintenance revenues: 51%; and other professional services revenues: 7%. The
geographical revenue breakdown for the quarter was as follows: Europe: 48%, North
America: 30%, Asia Pacific: 17%, and Rest of the World: 5%.
Gross Margin for the third quarter was 88% of revenues, compared to 85% in the third
quarter of 2010.
Similarly, gross margin was 88% of revenues in the first nine months of 2011, as
compared to 85% of revenues in the first nine months of 2010.
There are two main reasons for the improvement in gross margin from 2010 to 2011: 1.
Towards the end of 2010 we stopped selling in Italy a hardware-based measurement
product, the profitability of which was negligible, whereas management and personnel
attention required for selling it were significant; and 2. Because part of our cost of sales
consists of fixed costs, gross margins grow when revenues grow.
Operating expenses in the quarter amounted to 7.5 million Dollars, compared to 6.7
million Dollars in the third quarter of last year.
In the first nine months of 2011, operating expenses were 22.1 million Dollars,
compared to 19.8 million Dollars in the corresponding period of 2010. Over 800
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thousand dollars of the increase in expenses in the first nine months of 2011 was
attributable to the overall weakening of the Dollar relative to each of the Euro and the
Israeli Shekel in that period (which increased the Dollar value of our Euro and Shekel
denominated expenses), while most of the remainder of the increase in operating
expenses reflected our increased level of activity that accompanied the greater
demand for our products, as shown in our increased revenues.
Operating profit in the quarter increased by 37% to 1.0 million Dollars, compared to
an operating profit of 700 thousand Dollars in the corresponding quarter of 2010.
In the first nine months of 2011, operating profit increased by 102% to 3.0 million
Dollars, from 1.5 million Dollars in the corresponding period of 2010.
Net profit for the quarter was 818 thousand Dollars, or 9 Cents per diluted share,
compared to a net profit of 874 thousand Dollars, or 10 Cents per diluted share
recorded in the corresponding quarter of 2010. The contrast between operating profit
(which rose in Q3/11 compared to Q3/10) and net profit (which declined in Q3/11
relative to Q3/10) was mainly attributable to financial expense that we incurred in
Q3/11 due to the weakening of the Euro and the Israeli Shekel versus the US Dollar,
which caused a decline from our operating profit to our net profit, while the opposite
trend in Q3/10 resulted in an increase from operating profit to net profit.
Overall, in the first nine months of 2011, net profit increased 110% to 2.9 million
Dollars, or 31 Cents per diluted share, compared to a net profit of 1.4 million Dollars, or
15 Cents per diluted share, recorded in the corresponding period of 2010.
After we made two dividend payments in a total amount of 3.2 million Dollars during the
first nine months of this year, our cash and cash equivalents balance as of the end of
September 2011 was 11.5 million Dollars, representing approximately 1.24 Dollars per
share, with positive cash flow from operating activities of 4.1 million Dollars in the first
nine months of 2011.
We will now open the call for Questions and Answers. Operator, please.
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Operator:
Thank you. Ladies and gentlemen, at this time we will begin the question
and answer session. If you have a question, please press *1. If you wish
to cancel your request, please press *2. 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. The first question is from John
Henderson of Inflection Point. Please go ahead.
John Henderson: Hi guys, how are you?
Danny Haran: Good, how are you?
John Henderson: Doing well. I was wondering if you can talk about the uptake of the
new upgrades of software and how the Superbox transition is going?
Danny Haran: Sure. The Superbox is related to Cimatron-E version 10, so let me
focus on that. We have version 10 already, I would say, installed and
working at about 50%, maybe more, of our users on maintenance. It's a
process that takes time, because some of them are waiting to get their
training on version 10. And have not yet fully went into production with
version 10. Responses regarding version 10 are very encouraging.
People like the release both in terms of content, features and the quality.
So the field seems to be happy. The Superbox, which went, you know,
hand in hand with version 10, is starting to pick up. We have about 70
trial installations right now around the world, and already 9, 9 or 10
contracts closed for the Superbox. So it's all very preliminary. And we're
waiting to see how these 70 trial sessions that are going on right now,
and probably will take a few weeks, or several weeks, we still need to
see what is the uptake percentage, like how many do we get on the
average. But overall, responses are well. The thing is working. It's
actually performing as expected, accelerating work, offloading work from
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the computers. People are surprised, pleasantly surprised to see that
this actually does work. We'll just have to see how the commercial
aspect of it develops. So it's a little bit early in the game, but so far, so
good.
John Henderson: And in terms of the typical uptake, you know, when you guys
released, I think you last software release was 18, 24 months ago, how
long does it typically take? Is it usually that second, third quarter after a
release where they have the ability to be trained and be comfortable,
where you'll see licensing growth pick up?
Danny Haran: I think, again, there's two different things here. The licensing revenues
are different, because this is new customers and new orders. On the
existing customers, I would say that a full implementation probably takes
between one and two quarters. We do not have the exact figures with
the previous versions. But we know it’s a process that takes time. First of
all, there is the localization that takes time. You know, we have the
English version coming out first. And then the resellers localize it to
German and Italian and Japanese and Korean and Chinese and so on.
So that, on its own takes some time. And then they start to send out the
DVDs and make the user meetings, and actually train people. So overall
it's a process. It takes probably between 3 to 6 months.
John Henderson: Okay. And historically, is it safe to say that there's typically a 20%
increase from your Q3 to Q4 in terms of revenues? You know, last year
you guys went from 8.8 to 11 million. You know, how do we look at Q4
this year?
Danny Haran: Well, we don't know that this is 20%. It really varies year, from year to
year. We can say safely that so far, if you look at all the previous recent
years, Q4 has been stronger than Q3. By how much, we do not know.
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And we try not to forecast, at least not to give expectations and
guidance. Again, this is, as I said in my previous words, we have early
and partial indications showing continuation of momentum. But, you
know, we listen to the news, we see what's going on. This market can
turn on a dime. I don't know when and what will happen in terms of the
economical uncertainty.
John Henderson: Okay. Thank you.
Danny Haran: You're welcome.
Operator:
The next question is from Michael Brcic of Oppenheimer & Company.
Please go ahead.
Michael Brcic: Yeah, hi. Good morning. I just want to follow up a little bit on that last
question. And I know it's very hard to predict what's going on. Everything
is up in the air. But can you maybe break it down into what you're seeing
in different areas whether it's, you know, India, China, Brazil or Europe
or, are you seeing any differences there, or is everything across the
board, you know, similar? Thank you.
Danny Haran: If you're looking for, again, going forward indications about Q4 and
what's going on, if I understand you correctly, then so far so good. I
mean, it's not like we're seeing any slowdown anywhere. So that's what I
said, that it seems to be like a disconnect between what you read in the
newspapers and the level of uncertainty on one hand, and the ongoing
business, which seems to be doing quite well. We're doing well in the
USA, we're doing well in Europe, we're doing well in Asia. Even Japan
has come back a little bit from the previous quarters, like Q3 is actually
nice in Japan. And that is encouraging. But our visibility going forward is
not great. I mean, it's never great, because we don't have a backlog,
significant backlog. But now with, again, what's going on in the markets,
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I would say overall economic visibility is very limited.
Michael Brcic: Got it. Thank you.
Danny Haran: You're welcome.
Operator:
The next question is from David Starky of Smith Barney. Please go
ahead.
David Starky:Hi, guys. Can you just explain what happened with your tax rate this
quarter? It looks like it gobbled up all your earnings this time around.
Ilan Erez:
Yeah, you're right. When looking at the GAAP results, you're absolutely
right. Actually, out of the $566,000 of tax expenses that you see in Q3,
325,000 is related to a one-time noncash provision that is related to the
dividend that we distributed this September.
David Starky:Okay. Can you explain that a little bit more detail?
Ilan Erez:
Yeah, well in certain cases in Israel, without getting into too much
complexities, in certain cases in Israel, the tax authorities may claim that
the dividend that was distributed was distributed from certain tax exempt
earnings, which, and once distributed, should result in tax expenses on
the company level. We believe that we did not pay the dividend from
such sources. Nevertheless, accounting principles require us to make a
certain provision, and this is the provision that we see this quarter.
David Starky:Are you challenging that so that there might be a reversal of that at
some point down the road?
Ilan Erez:
Again, our position is that no tax should be paid. And obviously, once
and if we are having tax assessments in Israel and the tax authorities
accept our position, we could reverse that, of course.
David Starky:Okay, great. And I know, I just wanted to go back on to your last press
release for the last quarter. You said the second half of the year is
usually stronger than the first half of the year. Now, this morning you
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said the third quarter is typically your weakest quarter of the year. So the
fourth quarter is stronger by my more than the third quarter is weaker? Is
that what you're trying to say in the last press release?
Danny Haran: Yes, typically this is exactly the case. We see the fourth quarter, if you
go back and look at some of the historic information, you'll see exactly
that, that the fourth quarter is by far stronger than the others. We have
some extreme cases. In China, for instance, this is like overwhelmingly
stronger than everything else. And yeah, so usually, the decline in Q3 is
more than offset by the increase in Q4.
David Starky:Very good. And one question regarding the product releases this last
quarter. Are you, are these upgrades from existing products or are you
going to be getting a lot of renewal kind of business, or how is that going
to work?
Danny Haran: No, typically, these are upgrades of existing products, and customers
on maintenance contracts get them without any special payment. We
have like 50% of our revenue coming from such maintenance contracts.
We do see some additional revenues from mainly two sources. One of
them is more training. Typically when we issue new releases, there's a
tendency for people to come back for training. And we charge for that
training in some of the territories. And the other thing is that some
people that were not on maintenance, can be lured to come back and
actually join maintenance or buy upgrades, because the new version is
so exciting. And it is, by the way, exciting. And they find more reasons to
go back and pay for the maintenance. So these two effects tend to get
us some more revenues on top of the recurring and very steady
maintenance revenues that we have year over year.
David Starky:Okay, great. Thank you.
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Operator:
The next question is a follow-up question from Michael Brcic of
Oppenheimer & Company. Please go ahead.
Michael Brcic: Hi. On the question of the dividend, in future, if you're in such a
situation, would a share buyback make any sense, even though,
obviously, the stock doesn't create a hell of a lot? Thank you.
Ilan Erez:
Well, actually we have a share buyback plan in place, the one that we
started to implement in mid-2008. This was a plan for a purchase of up
to $1 million of which we used approximately half a million dollars. But
for some quarters now, we are not buying under this plan. Once we
found ways to pay dividends without paying taxes on the company level,
we preferred this way of course. And we are looking for more ways, but
for now, nothing that we can declare as a company policy, of course.
Michael Brcic: Okay. So but you still have it available in case, you know, the market's
really bad and the stock goes to $1.50 or something, you have the ability
to buy it back?
Ilan Erez:
Yes.
Danny Haran: Absolutely. God forbid. We don't want that.
Michael Brcic: All right. Thanks a lot. I appreciate it, fellows.
Operator:
If there are any additional questions, please press *1. If you wish to
cancel your request, please press *2. Please stand by while we poll for
more questions. The next question is from John Henderson of Inflect
Point. Please go ahead.
John Henderson: As you guys look at your business, what's going to be the catalyst
that gets you guys to become a $50-60 million company? I mean, what
are you guys doing to expand your client base, your addressable
markets? I mean, how should we think about that?
Danny Haran: Okay. I guess it's a very broad question. First of all, there is the M&A
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activity. We're still looking for merger/acquisition opportunities. Not
there's like too many, and we're looking for something right for us. Like
the Gibbs was very successful. That will definitely be a significant boost.
If you look from the organic growth point of view, we are trying to get
more market share. I can't say this is like, you know, in one year it can
grow us to 50 or 60 million, but we're trying to both expand the
distribution network like we did in Brazil early this year, like we're doing
in Southeast Asia, where we have added some distributors, like we're
looking now seriously to add a reseller for GibbsCAM in Japan. And
hopefully, we'll be able to do that at some point. So on one hand,
enlarge the distribution effort; on the other hand, get the product to be
more and more competitive. Look for creative ideas like the Superbox,
which should be able to generate hopefully several million of recurring
revenues each year. And a little bit from here and a little bit from there.
Other than a big merger, that will make us jump.
John Henderson: So I mean, when you look at your markets, are your markets not
really growing? I mean, what's the growth rate year over year in terms of
the market opportunity that you're eating into?
Danny Haran: Okay. Well, the market overall are growing at a modest pace of 6, 7,
8% a year, depending on the year. We've had some declines too. I
mean, these are mature markets, and we cannot expect any two-digit
growth in the market for the long-term. This is not happening in the
manufacturing market. However, we do see opportunity for faster
growth. And that from places, and I should have mentioned that, like
Germany or Italy where we have introduced just a couple of years ago
the GibbsCAM product, where we have very little footprint at that point of
GibbsCAM. But we can expect, if we're smart about what we do, to
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significantly enlarge our presence with GibbsCAM at the discrete
production market. So although that market is not really growing by
much, only several percent a year, from our point of view, this is almost
complete new entry into very significant markets, for GibbsCAM. So
again, as long as the economy holds and the markets continue to be
healthy, we should be able to generate faster than market growth,
internal growth for GibbsCAM in those markets. Korea and China are
also good examples for that.
John Henderson: Okay. Thanks.
Danny Haran: Sure.
Operator:
The next question is a follow-up question from Michael Brcic of
Oppenheimer & Company. Please go ahead.
Michael Brcic: Hi. I just want to follow up on this last question. Can you give us some
idea of how big your addressable market is, sort of like how much
market share you have? I'm trying to figure out how 5 years down the
road, you know, are we addressing a really small market or can this be,
you know, $100-200 million revenue company in a few years? Is the
market big enough?
Danny Haran: Okay, sure. I'm basing my answer mostly on annual reports we receive
from Cimdata, the American market research company that has been
following our market for many years now. And they have several reports,
one of them which is most relevant is the CAM market, manufacturing
software market. And according to Cimdata, the addressable market for
us is in the range of $1 billion, one thousand million dollars. Out of that
market we have roughly 4%. Now, in some countries we feel we
probably have a higher market percentage, like in Germany and Italy, we
think we're actually a bit bigger; whereas in some countries like the UK
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or France we're practically nonexistent, or almost negligible. Out of that
market, how large we can become is hard to say. The biggest players in
the market, again, from this report, are Dassault Systems with the Catia
product line, the PLM products, and Siemens PLM, with the UG, the
UniGraphics product, and these are in the area of $120 million, give or
take, each year. So we think there's still room to grow. Probably not to
anywhere around $200 million. I mean, that would be excessive, unless
some consolidation of several medium-sized companies can be put
together. But there's still room to grow.
Michael Brcic: Are there a lot of small players there or, what is it made up of? Go
ahead.
Danny Haran: Yeah, well, if you look at the top 20 players, then you'll see, I think it
comes down to $15-12 million. So there's bound to be quite a lot of small
companies, some of them operating in niche markets, either
geographically or very specific CAD/CAM applications that they support.
We actually see consolidation taking place in our market. Whereas
companies like Cimatron, like Vero, like Delcam, have been buying
companies over the last several years. So there's some process of
consolidation taking place. And there's still quite a lot of small
companies, yes.
Michael Brcic: Great. Thanks again.
Operator:
There are no further questions at this time. A replay of the call will be
available on Cimatron's website: www.cimatron.com, starting tomorrow.
Mr. Haran, would you like to make your concluding statement?
Danny Haran: Yes, thank you. Thank you very much for joining us for the 3rd quarter,
and we look forward to see you on the next conference call for the 4th
quarter 2011. Thank you very much.
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Operator:
Thank you. This concludes the Cimatron third quarter 2011 results
conference call. Thank you for your participation. You may go ahead and
disconnect.
(End of conference call)
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