Veidan Conferencing Solutions
Cimatron Ltd.
Q1/2011
May 12, 2011
Operator:
Ladies and gentlemen, thank you for standing by. Welcome to Cimatron's
first quarter 2011 results conference call. All participants are 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 yet received a copy of today's earnings release and would like to so,
please download it from the company's website at the Investors' page at
www.cimatron.com. As a reminder, this conference is being recorded
May 12, 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 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, 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 the call over now to Mr. Danny Haran, Cimatron's
president and CEO. Mr. Haran, would you like to begin?
Danny Haran: Thank you. Good morning and welcome to Cimatron's first quarter 2011
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results conference call. As you can imagine, we are very pleased with the
first quarter results. The recovery is well underway, and is reflected in
the significant year-over-year growth of new license sales as well as in
solid growth in recurring revenues from maintenance contracts. As
revenues continue to grow, our high operating margin allows us to
present a much higher bottom line. In fact, in terms of operational and net
profit, this has been the best Q1 since 1997. I would like to remind
everyone of the strong quarterly seasonality in our market, which means
that the most meaningful comparisons are always to the same quarter of
previous years. Following our continued improvement in profitability,
and the strong cash flows in recent years, that resulted in the highest cash
balance in more than a decade, we are pleased to announce our first cash
dividend since 1999, in the total amount of $1.2 million. In April we had
a very successful reseller conference in Orlando, with over 100
participants from all over the globe. Our upcoming versions were
presented, both for CimatronE and for GibbsCAM, and were received
with enthusiasm. I believe we have a lot to expect when these new
versions will be officially released by midyear, together with the
commercial release of our patent-pending NC SuperBox. Ilan Erez, our
CFO, will now review the financial statement. Ilan, please.
Ilan Erez:
Thank you, Danny. Hello everybody, and thank you for joining us. The
result 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 the reconciliation between results on
a GAAP and non-GAAP basis, and those can be found in our press
release issued earlier today.
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Revenues for the first quarter of 2011 were $8.9 million, compared to $7.9
million in the first quarter of 2010, an increase of 13% on a constant
currency basis. Moreover, new licenses revenues in the quarter increased
24% on a constant currency basis, from the first quarter of 2010,
representing the continued recovery in our target market, and allowing us
to maintain and further increase by 5% the recurring revenues from
maintenance contracts. The revenue breakdown in the quarter 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 50%; North America
43%; Asia-Pacific 13%; and the rest of the world, 4%.
Gross margin for the quarter was 87% of revenues, compared to 86% in the first
quarter of 2010.
Operating expenses in the quarter amounted to $7 million, compared to $6.7
million in the first quarter of last year. Approximately $150,000 of the
increase in expenses was attributed to the weakening dollar versus the
Israeli shekel.
Operating profit in the quarter was increased 370% to $672,000 compared to an
operating profit of $143,000 in the first funding period of 2010.
Net profit for the quarter increased to $759,000, or 8 cents per diluted share,
compared to a net profit of $55,000 or 1 cent per diluted share, recorded
in the first funding quarter of 2010.
Our cash and cash equivalents balance at the end of March 2011, increased to
$13.0 million, compared to a balance of $10.2 million at the end of 2010,
with positive cash flow from operating activities of $1.3 million in the
first quarter of 2011, as compared to $700,000 of positive cash flow from
operating activities in the corresponding quarter of 2010, an increase of
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94% year over year. We will now open the call for questions and
answers. Operator, please.
Operator:
Thank you, sir. 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 David
Starkey of Smith Barney. Please go ahead, sir.
David Starkey:
Yes, hi, guys. I wish you could give us a little bit of color on the
current bidding activities that are out there, how your business is
progressing? Do you expect it to be, you said in the press release that you
expect a good year this year; but are you seeing a quarter-by-quarter
strength, or are you going to have, you know, a stronger first half versus
second half? How do you sense the year is going to go?
Danny Haran: We do see continued momentum. We see, I would say, a very strong
result in North America. The automotive market is going strong. You
know that quarter after quarter we have that strong seasonality, which
always gives us very strong Q4, and correspond, and hence, Q1 always
looks weaker than Q4. But actually, we compare it to the first quarter of
2010, and we actually see nice progress there as well. We have good
results from Europe. Overall, we see the, the recovery continuing. No
signs of weakness anywhere. And we're quite optimistic. As we go with
new releases, usually there's more momentum, later on this year, more
professional services and so on. So, so far, yes, we believe that will, this
trend will continue.
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David Starkey:
Okay. Very good. And can I ask a quick question on the balance
sheet? You've got around 14, I'm sorry, about $13 million in cash. I also
noticed you've got about 14 million in current liabilities, though. What do
those entail, and is that going to eat into some of that cash over the next
quarter?
Ilan Erez:
Well, actually, a big portion of the current liabilities is deferred revenues,
$5 million, which is a relatively expected number. As we've said many
times in the past, we collect most of the cash from our maintenance
contracts during the first half of each year. So there is nothing unusual
here. And we expect to show another increase in cash during the second
quarter.
David Starkey:
Okay, great. Thank you, guys.
Danny Haran: Thank you.
Operator:
The next question is from Don McKiernan of Landolt Securities. Please
go ahead, sir.
Don McKiernan: Thank you. Did you say that the Asia Pacific area was about 13% of
your revenue?
Ilan Erez:
Yes, I did.
Don McKiernan: Okay. And what's been the trend over the last couple of years? Has
there been a lower percentage of revenue, and is the trend higher? And
can you provide some more color on your expectations going forward
there?
Danny Haran: I guess we should actually divide it into several areas, and not treat Asia
Pacific as one unit, which obviously it isn't. Like we know that Japan has
been struggling, and that is true for the last several years. The economy
has been weak. Obviously, the recent events and the disasters have not
helped. So I expect Japan to take even longer to recover. On the other
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hand, we had nice results in South Korea, in China, in some other parts of
Asia Pacific, to compensate for that. Overall, we also see a high level of
seasonality and volatility in Asia Pacific. Some of that comes from the
fact that we have lower maintenance revenues coming from Asia Pacific.
In places like China, it is not so common to have customers on
maintenance. And that's why we have more fluctuations in the revenues
and higher changes quarter over quarter. Also, in China, we recognize,
based on cash received and sometimes just payments are being delayed
by some days, and they go from quarter to quarter. So we see more
volatility. But overall, even with the continued weakness in Japan, we
expect Asia Pacific to continue to grow this year, and in the coming
years.
Don McKiernan: And you signed a large deal here recently, didn't you, with China or
some company over there?
Danny Haran: Yes. It was a very significant deal. It was signed last year. We expect
more revenues from that deal to be recorded this year as well as next
year. It was a multiyear project. We see more opportunity even in that
account, because it really is very large, and there could be additional
parts where we could penetrate. And we're also active right now in
several other similar accounts, some of them almost comparable, some
are smaller, trying to leverage on our success. But these are large, large
shops, large corporations, and the selling process is relatively long. But
definitely, we're trying to leverage on that. It was a very significant deal.
We're still in the process of implementing there, because we're talking
about hundreds of seats. And the process goes on.
Don McKiernan: And on the SuperBox, that's still in beta testing. Is that correct?
Danny Haran: Yes, it is in beta testing. Mostly for the, because the simple reason it is
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related to CimatronE version 10. It will not work with earlier versions.
And just as CimatronE version 10 is now in beta testing, so is the
SuperBox, and they work together. We expect version 10 and the
SuperBox to be officially released by the end of Q2, like in two months,
give or take. And then we expect it to start being offered and shaped, and
we expect and we hope to see larger numbers of boxes as well.
Don McKiernan: And when it is released, the CimatronE version 10, do you expect a
noticeable increase in your license revenues, or will that just be offered to
your maintenance customers, and you won't see a bump in revenues.
Danny Haran: Well, it's hard to tell. We believe it's a very strong release. We know
there are some very significant improvements, things like background
calculations for NC, a lot of mold design improvements. It's a very
significant release. And obviously we expect that to bring more sales and
more interest. We're getting very good feedback from beta customers.
But this will not be immediate. Sometimes we release a version but it still
takes some more time to localize it to languages like Chinese or Japanese
or Korean. Germany is a bit ahead here, and Italy. The SuperBox will be
offered first and foremost to customers on maintenance. This is the
easiest thing to just bring one for testing. We expect, we intend to put a
box almost everywhere we can just for testing, and hopefully the
customers will appreciate the benefit and the value and will want to keep
it. But we also intend to use it as a leverage for new sales. You know,
you buy a couple of NC seats, we can throw in SuperBox for a year,
maybe free of charge, and then get some additional leveraging. So we'll
have to really test the water and see how we make the best value and
return on that. But overall, feedback is good.
Don McKiernan: Well, and you said you want to put a SuperBox everywhere. So to
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offer it to a customer for a couple of months and then if they like it they
keep it and then they rent it from you, or is that correct?
Danny Haran: Yeah, that is correct. Except that we think that a couple of weeks should
be enough. It is something that as soon as you put it in, you feel the
difference. And if you don't feel the difference, then obviously you're not
the kind of customer that has a need for a SuperBox. Maybe you're not
doing serious NC calculations. You don't feel the difference, there's just
no point. But customers who do, and we think many of our NC customers
actually do have that need and do feel the time it takes for NC
calculations, then it should be obvious within a few weeks if you want to
keep it or not. But this is basically our plan. And we're limited by the
number of boxes. We cannot just go in and ship 10,000 boxes
immediately and have them tested. So we'll do it in a gradual process.
Don McKiernan: And to put a box in every customer, how many boxes would you
need?
Danny Haran: I don't know. We'll see, we'll see, we're really, this is so new and so
innovative and something that was not done before in our market, it's
difficult for us to really estimate the percentage of acceptance and how
many people would like to keep that. So, you know, we'll start with the
dozens and then hundreds, and we'll just see how well they're accepted.
And we can always accelerate the production or just keep it lower, as we
progress.
Don McKiernan: So you have no idea of the addressable market for the number of
boxes, if everybody wanted one?
Danny Haran: Oh, no, no. If everyone wanted them, then we're talking about maybe
10,000 boxes. But I don't want you to think that we can actually install
10,000 boxes and have them running and generating revenues soon.
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Because some of our customers do not have extensive NC calculation
jobs and will not need that. And some of our customers maybe have other
views on the subject.
Don McKiernan: Right, right.
Danny Haran: We'll just have to see. You know, I'll be happy, and I said this before,
I'll be happy to have 1,000 boxes working and generating. We think
every box deployed in the field should generate about $2,000 a year, give
or take, bottom line. So I'll be very happy with 1,000 boxes. If we can
have more, great.
Don McKiernan: That would add, you know, 2 miliion,
Danny Haran: Yeah.
Don McKiernan: To your operating profit per share. So that would be terrific.
Danny Haran: That will be terrific. So again, we have to start and see how it is
accepted.
Don McKiernan: Okay. Great. Well, thanks for taking my questions.
Danny Haran: Thank you.
Operator:
The next question is from David Cohen of Athena Capital Management.
Please go ahead, sir.
David Cohen: Good afternoon, guys.
Danny Haran: Hello.
David Cohen: Two questions for you. First of all, with regard to the new releases, when
should we expect them to start affecting the top line? I assume it's
sometime middle of the year. Is that correct?
Danny Haran: Yeah. I would say they are planned to be both CimatronE and
GibbsCAM about mid-year, like end of June. But since we're exactly
entering Q3, which is typically, you know, a slower quarter because of
the vacations in Western Europe and the USA, then probably the biggest
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or the higher effect will be later this year. But they should be out by the
end of Q2.
David Cohen: Okay. And then the other question is with regards to the announcement
about the dividend. How should we view the board's perspective on
dividend policy going forward? Have you now sort of reached a magic
number in terms of the amount of cash on the balance sheet, or are you
planning on paying out roughly some percentage of income? How's the
board looking at those issues?
Ilan Erez:
Well, basically there is no new dividend policy for the moment. There
are some taxation issues related to dividend distribution of Israeli
companies that are paying dividends from what is called approved
enterprise. I don't want to get into it. It's all in our public filings with the
SEC. But all in all, what we are going to pay now is the part of the cash
that we can pay without any tax implications on the company level.
Having done that, for every dollar on top of that, that we would like to
pay as dividend, we will get into a questionable area with the tax
authorities, for which we might, and we are trying to have a solution with
the tax authorities, but at the moment, we cannot say what will be the
result of that effort that we do with the tax authorities. So all in all, this is
a special one-time dividend for the moment.
David Cohen: Okay. So just to try and summarize the implication of the Israeli rules, if
at this time next year, you have let's just say $2 million more of cash on
the balance sheet than you had this year after paying the dividends,
would that mean that you would be able to pay out those $2 million
without there being corporate tax implications, or is it not that simple?
Ilan Erez:
Not necessarily. It's not that simple. It's more complex. It depends how
we and the tax authorities define exactly what kind of a retained earnings
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we are paying from. And the fact that we will add more retained earnings
in the next year would not change significantly the position of the tax
authority, if at all. So we are trying to find other solutions, really too
complicated to start discussing them at the moment or here at that call.
And if we get to that solution, it would be a solution regardless, almost
regardless of how much we make in the next year, how much profit we
make in the next year, because it's all about what is the historical profit
that we are paying from.
David Cohen: Got it. Thank you.
Ilan Erez:
You're welcome.
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. There are no further questions at this time. A replay of
the call will be available on Cimatron's website at www.cimatron.com,
starting tomorrow. Mr. Haran, would you like to make your concluding
statement?
Danny Haran: Thank you. I would just like to thank the participants, thank you for
joining, and we look forward to being with you again on next quarter.
Thank you very much.
Operator:
Thank you, sir. And thank you ladies and gentlemen. This concludes the
Cimatron first quarter 2011 results conference call. Thank you all for
your participation. You may go ahead and disconnect.
(End of conference call)
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