Cimatron Ltd.
Q3/2010 Results Conference Call
November 10, 2010
Conference Coordinator:
Ladies and gentlemen, thank you for standing by.
Welcome to Cimatron's 3rd Quarter 2010 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, 2010.
With us on the line today is Mr. Ilan Erez, Cimatron's CFO. Unfortunately, Mr. Danny
Haran, Cimatron’s president and CEO, has been unexpectedly delayed by traffic jam near
the office, and will hopefully join us for the Q&A session.
Before I turn the call over to Mr. Ilan Erez, 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 over the call to Mr. Ilan Erez, Cimatron's CFO.
Mr. Erez, would you like to begin?
Ilan Erez:
Yes, thank you, and apologies for the absence of Danny, this is due to a car accident just
near the office. I hope he will be here for the Q&A session.
Good morning and welcome to Cimatron’s third quarter 2010 results Conference Call.
We are very pleased with the strong Q3 2010 results. Those of you who follow Cimatron
over the years know that, traditionally, the third quarter of each year is the weakest, the
main reason being the long summer vacation in Europe, and, to a lesser extent, in North
America.
This year we are seeing an interesting and rare phenomena, with Q3 being stronger than
both Q1 and Q2. We believe this is an indication of more and more confidence in our
markets, as the recovery seems to be taking hold and gathering strength. The best
indications of such market trends were sales of new software licenses, which were 51%
higher in Q3 of 2010 than in the corresponding quarter of 2009, on a constant currency
basis. Furthermore, the recovery and growth were evident in all territories and in both of
our product lines, CimatronE and GibbsCAM. North America showed the most dramatic
growth in Q3 2010, where it seems that pent-up demand from several weak and cautious
quarters finally turned into real business activity.
We are now almost half way into the fourth quarter. While we do not publish any quarterly
forecasts, it is fair to say that initial indications suggest that the recovery trend has
continued into the fourth quarter.
As can be seen from the results, the bottom line was dramatically better in Q3 of 2010
than in the third quarter of 2009. As we have indicated many times in the past (when
analyzing profitable fiscal periods), our profitable results may be attributed not only to
higher revenues (as was the case in Q3 of 2010), but also to our tight budget control
(which has been a constant theme for us since the outbreak of the global recession). We
intend to maintain prudent budget planning in the coming quarters, as we believe that
uncertainty remains, in our market, and in the global economy in general.
Despite our budgetary prudence, we keep investing, both in our product portfolio and in
our distribution network. We have recently announced a new country manager for Brazil,
and we expect to nominate several new resellers in that important market shortly. We are
also looking to expand our presence and activity in some Asian countries.
During the third quarter, we participated in the IMTS exhibition for manufacturing, held
every two years in Chicago. It was a good show for us, and overall the show felt busier
than the previous IMTS two years ago. I would just like to mention the introduction of the
CimatronE SuperBox, a unique productivity enhancement network appliance for NC users.
This patent-pending plug-and-play solution combines hardware and software that offload
toolpath calculation from the user’s PC to the SuperBox, dramatically improving user
experience and productivity. Best of all, it is rented for a small monthly fee, making it
readily available to all of our NC users! We got excellent feedback from users and
prospects on this innovation, and we are eager to see its impact on the market when
officially released with CimatronE version 10.
I will now review the financial statements, just when Danny came in.
Danny Haran: Hello everyone, sorry for being late. My apologies. Ilan go on.
Ilan Erez:
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 a 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 2010 were 8.7 million Dollars, compared to 7.2 million
Dollars in the third quarter of 2009, an increase of 26% on a constant currency basis.
In the first nine months of 2010, revenues were 25.1 million Dollars, compared to 23.2
million Dollars in the corresponding period of 2009, an increase of 10% on a constant
currency basis.
The revenue breakdown this quarter was as follows - License revenues: 39%,
Maintenance revenues: 52%, other professional services revenues: 6%, and hardware
revenues: 3%. The geographical revenue breakdown for the quarter was as follows:
Europe: 47%, North America: 31%, Asia Pacific: 16%, and Rest of the World: 6%.
Along with the increases in revenues, we also show increases in profit margins relative to
the corresponding periods of 2009.
Gross Margin for the quarter was 85% of revenues, compared to 82% in the third quarter
of 2009.
In the first nine months of 2010, Gross margin was 85% of revenues, as compared to 83%
of revenues in the first nine months of 2009.
Operating profit in the quarter was 725 thousands dollars, compared to an operating loss
of (654) thousand dollars in the corresponding period of 2009.
In the first nine months of 2010 operating profit was 1.46 million dollars, compared to an
operating loss of (989) thousand dollars in the corresponding period of 2009.
Net profit for the quarter was 874 thousand Dollars, or 10 Cents per diluted share,
compared to a net loss of (575) thousand Dollars, or (6) Cent per diluted share recorded in
the corresponding quarter of 2009.
In the first nine months of 2010, Net profit was 1.36 million Dollars, or 15 Cents per diluted
share, compared to a net loss of (907) thousand Dollars, or (10) Cents per diluted share
recorded in the corresponding period of 2009.
Financial income in the quarter was 236 thousand Dollars, most of which can be
attributed to the weakening of the Dollar against the Euro. As expected, this financial
income more than offset our financial expenses in the first half of this year, that were
mainly attributable to the opposite trend in the exchange rate between these two
currencies.
Our cash and cash equivalents balance at the end of September 2010 was 10.2 million
Dollars, with positive cash flow from operating activities of 4.3 million Dollars in the first
nine months of 2010, as compared to 2.3 million Dollars in the first nine months of 2009,
an increase of 86% year over year. This increase primarily reflects the improvement in our
overall profitability.
We will now open the call for Questions and Answers. Operator, please.
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 David Cohen of Athena Capital
Management. Please go ahead.
David Cohen: Good afternoon, guys. Congratulations particularly on the license growth.
That's terrific to see. Could you talk a little more about your differing
experiences in various geographies? Are you seeing pretty much across the
board strength, or are you seeing the U.S. business lagging? That's the first
question. And then the second question is just with regard to subsequent
releases of software. What does the calendar look like in terms of when
there will be new releases? Thanks a lot.
Danny Haran: Thank you. We can say that the improvement and the recovery are evident
worldwide. We see strong results in pretty much all areas and territories.
The U.S.A. is actually ahead of the pack. We had a very strong quarter in
the Detroit area, I guess reflecting significant recovery in the automotive, in
the American automotive industry. But we had also good results from the
manufacturing segments where we sell mostly GibbsCAM, which is all
across the U.S.A. So definitely, the U.S.A. is ahead. Japan, which used to
be lagging behind most of the countries in the last maybe two or three
years, is showing some strength now, growing revenues in most areas, both
Cimatron-E and GibbsCAM. Overall, I don't think I can point out any weak
region. They all seem to be doing well and better than 2009. We're not yet
at the level of revenues and business activity that we saw in 2008, but then,
we did not expect to. I mean, the recovery is slow. But as long as it's
steady, and even picking up pace, we're very happy with that. Regarding
the second half of the question, product releases. We try to release
software versions, major versions every one year or a year and a half,
depending on specific content. And it's not exactly the same with
GibbsCAM, which go on a more regular basis of once a year; and CimatronE where we sometimes choose to do it over 18 month period, because it is
more aligned with the kind of project we want to introduce into these
versions. We expect Cimatron-E version 10 to be released within Q2 of
2011. The exact date is yet not finalized, but we want to make sure it is
stable and thoroughly cleaned out before we put it on the field. It's a major
version. We have some fantastic developments in that version. We
mentioned one of them, the SuperBox, but it's really just one out of almost
300 projects that were put into that. The GibbsCAM, the corresponding
version, will also be released in a similar timeline, and they also have quite
a lot of developments. So we try not to put specific concrete deadlines so as
not to disappoint anyone, but this is the overall roadmap. This is our overall
planning for the next releases. And it will continue.
David Cohen: Thanks a lot.
Operator:
The next question is from Manoj Nadkarni from Chip Investor Group. Please
go ahead.
Manoj Nadkarni:
Yes. Good afternoon and congratulations on solid results.
Danny Haran: Thank you.
Manoj Nadkarni:
Can you please tell us more about your SuperBox, what kind of
market acceptance you are seeing and what should we expect its
contribution to revenues?
Danny Haran: Okay. The SuperBox is, well we believe it's an innovative approach to
productivity enhancement within NC programming, where people today
spend a lot of time in all software and all products, spend a lot of time
waiting for results, long tools, take a long time to develop, to program and
calculate. And the SuperBox is a scalable device that combines software
and hardware, that you just plug and play. You put it in the room in the
network, just all we need is a network connection and power, and all the
systems, the Cimatron-E system will identify it automatically and will start
using its resources and throwing 1, 2, as many NC programmers that you
have. It is relevant and useful for practically every NC user, which
constitutes about half, give or take, of our install base. We're talking
thousands, many thousands of users, over 10,000 probably. We're also
introducing a unique business model here where we say we don't want to
sell you this box, we want to rent it to you. So you get it for no big downpayment. There's no initial investment. It should be very easy for anyone to
afford. We just give it to you for several hundred dollars or euros a month,
and you can go ahead and use it. If it breaks, we'll replace it. It's like your
TV cable box that you rent, you lease from the cable company, and you
don't have to worry about it. You want another one, we'll give you another
one. You want one less, fine, we'll take one. So we expect that will actually
help us a lot in introducing that to the market. How exactly it will affect our
revenues and our contribution, it's a bit early to assess. And as usual, we're
trying to be careful and err on the careful side. We think there should be a
market for hundreds or even thousands of those boxes. But it will take time.
We can't even manufacture them that quickly. And we want people to use
them. Again, the best marketing strategy would just be to come to a
customer, put the box in the corner, connect it and go home. And after one
month that he's seen the benefits and he likes it, he'll probably want to keep
it. So again, we'll need many boxes for that. First reactions are very
positive. And we'll just have to see.
Manoj Nadkarni: Okay. Now, in terms of your licensing revenue, by the way, it's nice to
see your licensing revenue is growing, what connection, if any, do you see
between licensing revenue and maintenance revenues, subsequently?
Danny Haran: As you said, subsequently, license revenues translate to higher
maintenance. We see about 50% of new licenses. But that really depends
on territory, going into maintenance, and going into long-term maintenance
contracts. On the other hand, we always see a little bit of return from
existing customers, shops that go out of business, things like that, or go into
financial difficulties. So we can expect, I think, if license revenues will stay
strong, we can expect a moderate growth in the maintenance. The good
thing about the maintenance, is that it's held well, even during the very
difficult year of 2009. And this year, we actually see an increase of
maintenance revenues of several percent, especially in the GibbsCAM,
where we actually see a very nice increase in maintenance. But also
Cimatron-E. So we can expect in a single-digit growth usually in
maintenance, very stable part of the business. But you know, if license
revenues will continue to go up nicely, maybe high single digits. We'll have
to see. It also depends a lot on the exchange rate, of course.
Manoj Nadkarni: And we see that your deferred revenues are up nicely by about $2
million. Any comments about that?
Ilan Erez:
Yeah. First of all, that increase that you see in $2 million is between the end
of last year and the end of Q3/10. As we mentioned a few times in the past,
we collect most of the annual maintenance revenues at the first half of each
year. So usually you will see the highest deferred revenues by the end of
Q2. Now, also in Q3, due to the good results. But the real comparison has
to be quarter over quarter or year end over year end. And then you should
expect seeing a lower difference, if at all.
Manoj Nadkarni: All right. And in the past, in the conference call, I think you made a
comment that you could see as much as 60 to 70% of incremental revenues
going to operating profits. Do you still see that being the case?
Danny Haran: Absolutely.
Ilan Erez:
I think that the results of Q3 are showing that this is the case and even
maybe the case is even better.
Danny Haran: Definitely. From what we said, and even better than that. And we're very
happy with that.
Manoj Nadkarni:
Excellent. Excellent. And finally one question. Do you currently have
any stock buy-back program?
Ilan Erez: We have a plan in place. This is a plan that was adopted in mid-2008. We are
buying from time to time. By now we purchased like approximately 400,000
shares in about half a million dollars. And the plan is for a buy-back of up to
$1 million, so we can still go on with that, if and when we deem proper.
Manoj Nadkarni:
Ilan Erez:
Very good. Again, congratulations on solid results.
Thank you very much.
Danny Haran: Thank you.
Operator:
The next question is from John Henderson of JBH Capital. Please go
ahead.
John Henderson: Congratulations, guys. Nice to see the turnaround in the business.
Ilan Erez:
Thanks.
John Henderson: I wanted to touch base regarding where head count was at the end of
Q3?
Ilan Erez:
Approximately 290 employees worldwide.
Danny Haran: Stable.
John Henderson: Okay. And as you guys, over the next year or so, start approaching the
2008 levels, do you foresee the need to get head count to increase too
much from here? Or I guess my question is, can you guys scale to like an
11, 12, 13 million dollar quarterly run rate without adding too much
additional staff?
Danny Haran: Yeah. The answer is yes. I'm sure if we will reach the level as you said,
like 11, 12, we will need some more sales people. We will need some more
technical support, probably at the subsidiaries, but it's a few people here
and there. Overall, we're quite happy with the level of R&D, testing, product
management, the product groups. And we intend to keep them roughly at
the same level. So yeah, we think we can grow the business quite
significantly before we even have to invest any additional headcount. And
then again, in territories where we'll see fast growth, we will add people as
required. But it will be just, you know, maybe in China next year we'll add a
couple of people. But these are relatively low costs. Overall, in the large
areas like headquarters, no major additions are expected. So we think that,
you know, if recovery continues, revenues continue to grow, we'll see again,
much of that going into the bottom line.
John Henderson: And in terms of the competitive landscape, is there any one company
that you guys are running against on a continual basis, or, I mean, who
would be your number one competitor.
Danny Haran: Nothing has changed much in the competitive landscape over the last
several years. We see pretty much the same companies. We see a lot of
Delcam, obviously, the British company. We see them a lot in the NC,
hardly anywhere else. We see Missler the French company, Visi, again,
from the UK. We see, of course, the big ones, Catia, and Siemens PLM and
Pro-E. But we're doing well. Actually had some nice successes recently
against some of the larger ones, so again, we are specializing in our
market. But overall the competitive market has not changed significantly
over the maybe three years. Nothing, same players. Pretty much the same
strengths, same geographical distribution.
John Henderson: Okay, great. Just congratulations. I've been following your story for
years, and, you know, it's nice to see you guys making headway. And I look
forward to, you know, what the model looks like, you know, once you are
able to scale a couple million more from here, it should become pretty
powerful.
Danny Haran: Thank you.
Ilan Erez:
Thank you very much.
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. The next question is
from Don McKiernan of Landolt Securities. Please go ahead.
Don McKiernan: Yeah. I'm curious about the, your growth in China. Are you still seeing
some headwinds there, or has it picked up? I don't think you commented on
that earlier in any specific way.
Danny Haran: Yeah, actually, we're having a good year in China. There have been some
significant projects that we have not completely closed, but we hope to in
the future, and then maybe we can even announce something. But overall
China is doing well. We expect to be over budget. We expect to show
growth overall, year over year. And there's even more excitement going
forward, because we've achieved some milestones there and some nice
benchmarks. So overall, China, as I said before many times, it's up and
down, but right now we seem to be in a very positive trend with a lot of
excitement, a lot of upside.
Don McKiernan: Is that with all product lines or,
Danny Haran: Mostly Cimatron-E. We're must more established with Cimatron-E in
China. We're still ramping up our GibbsCAM operation. There is some
growth, but the recent successes have been with Cimatron-E, where the
knowledge is much more entrenched and the experience is playing a bigger
role.
Don McKiernan: And I just thought of another question. With the acquisition of
GibbsCAM which is what 2 years now or 3 years, I can't,
Ilan Erez: Almost 3 years.
Don McKiernan: Almost 3. There was, you know, part of the strategy was cross-selling.
You both kind of were in separate markets and had some cross-selling
opportunities. Has that materialized like you had originally envisioned?
Danny Haran: Yes, it has. It has gone slower than we thought, mostly during the difficult
year of 2009, when everything went down. So overall, as you say, is it
exactly as I envisioned? No. I thought it would go faster. Nevertheless, it is
an ongoing process and we're seeing results, we're seeing successes. And
we're seeing cross-selling. Overall I can say, and I've said this before, we're
extremely happy with that acquisition. I think it was a very good merger. It
was from business point of view, from the people point of view, from the
synergies, from pretty much everything, the job Bill Gibbs is doing in North
America in general, so overall we’re very pleased with the merger and the
aftermath of the merger.
Don McKiernan: And one last question. And thanks for taking my questions. The new
appliance, is there any opportunity outside of your current customer base or
is it strictly just customized for your technology?
Danny Haran: It's customized to the technology. No, it's very specific to Cimatron-E and
works very closely with that technology. Unfortunately.
Don McKiernan: Yeah, right, right.
Danny Haran: But still, we're optimistic.
Don Mcurnin; Okay, great. Thanks a lot. Good luck.
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, I'd like to apologize once more for being late today, terrible traffic.
And thank you very much for joining us. And we look forward for the
upcoming quarters, and hopefully you'll join us again. Thank you very much.
Operator:
Thank you. This concludes the Cimatron third quarter 2010 results
conference call. Thank you for your participation. You may go ahead and
disconnect.
(End of conference call)