Keeping Tab on MIND CTI

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

Notice

This posting tracks events related to Mind CTI Ltd., a company that I have a substantial and sustained interest in, and MNDO, its equity.

The posting is dynamic, which is a fancy way of saying that it will be be updated from time to time. The last update took place on February 28th, 2014, and the prior update took place on November 12th, 2013.

Mind CTI Ltd. is an Israeli company that I follow with a lot of interest – primarily because I think that MNDO, the company’s equity, yields a significant earnings opportunity for myself, but also because the trading patterns that were found around MNDO in relation to the annual dividend payouts by MIND CTI during the period from 2009 through 2012 (but, I hasten to say, may no longer be in effect) are intellectually interesting.

You can learn more about Mind CTI on the company’s excellent Wikipedia entry page (here) or via a localized PDF version of the same page (here) or you can visit the company’s web site (here.)

As this is an evolving posting, I include a (somewhat crude) table of content below, making it possible for you to jump back (and forth) in the posting. If you want to be kept updated when this posting changes, sign up to follow us using Twitter (.)

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At a glance

Overview — February 2014

Mind Wikpedia Summary 2-24-2014

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Dividend History — February 2014

Mind CTI Dividend -- 2014

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Wikpedia Statistics — February 2014

Mind Wikipedia 02-2014

Wikpedia Statistics — November 2013

Wikpedia Statistics — November 2013

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Wikpedia Statistics — August 2013

mind cti stat August 2013

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Wikpedia Statistics

Wikpedia Statistics — March 2013

Mind CTI - Wikipedia - March 2013

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Company Presentations and Transcripts

Q3, 2013 investor presentation → here

Q4, 2013 and full fiscal year 2014 earnings conference call transcript → here

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Results for fiscal year 2013 — 4th quarter and full year

The combined results for the fourth quarter of fiscal year 2013 and full fiscal year 2013 were released on Tuesday, February 25th, 2014.

After several quarters of re-gearing, with added expenses and headcount and lowered operating income, the company ended its fiscal year with a bang, turning in a fourth quarter that was way better than expected, establishing a significant foothold for the 2014 fiscal year, and paying its patient shareholders a significant dividend.

As usual, the company recorded no debt, no material commitments for capital expenditures, limited financial income, strong operating income, a strong working capital position, and a very clean balance sheet.

Revenues for the fourth quarter were $5.1 million, compared with $5.0 million in the fourth quarter of 2012 and $4.5 million in the third quarter of 2013.

Gross profit was $3.2 million, compared with $3.5 million in the fourth quarter of 2012 and $3.5 million in the third quarter of 2013.

Operating income was $1.0 million, compared with $1.4 million in the fourth quarter of 2012 and $604 thousand in the third quarter of 2013. Net income was $1.4 million, or $0.07 per share, compared with $1.3 million, or $0.05 per share, in the fourth quarter of 2012, and $1.3 million, or $0.07 per share in the third quarter of 2012.

Fiscal year 2013 yielded revenues of $18.5 million, considerably down from the $20.2 million in revenue recorded in fiscal year 2012, operating income of $2.2, half of the $4.4 million in operating income recorded in fiscal year 2012, and net income of $2.2 million, almost half of the $4.3 million recorded in net income in fiscal year 2012.

R&D expenses and sales marketing expenses were up approximately 10% compared to previous years, while SG&A expenses were relatively stable. The cash position was $19.8 million on December 31th, 2013, compared to $19.4 million the year before. Goodwill remains static at $5.4 million.

Headcount as of December 31st, 2013, was 352, up from 339 as of December 31st, 2012, but down from 359 at the close of third quarter of fiscal year 2013.

Cash flow from operating activities were very good, at $5.2 million, compared to $4.9 million in fiscal year 2012.

During the year, the company secured five new wins and a number of upgrades. Two of these deal were considered material and one of these deals will play out over three years.

The ongoing legal action against PwC was not discussed, and at this point is it not clear if the matter is still being pursued.

The revenue distribution for the year followed the normal pattern with the amount of revenues received from the Americas being significantly higher than the amount of revenues received from Europe, which, in turn, was significantly higher than the amount of revenues received from Israel.

Again, this quarter, I was encouraged by the progress on a quarter-over-quarter basis. Clearly, the company continue to execute well on its plan for restoring the bottom-line and boosting the top-line.

On the back-end of significant wins in the fourth quarter of fiscal year 2013, the company appears very optimistic about fiscal year 2014 and it backed this confidence up with a $0.24 dividend, payable in the first quarter of fiscal year 2013, and constituting a 10% yield or better.

On the conference call, in her prepared remark, the company’s CEO commented on fiscal year 2013, fiscal year 2014, the future plans, and the dividend. A couple of comments stood out:

MIND has maintained an extremely strong cash position throughout the years, with a history of positive cash flows and annual dividends since 2003. We made 3 acquisitions through the years, in 2001, 2005 and 2007.

We continue targeting potential acquisitions. We pursue acquisition targets at reasonable valuations that satisfy the criteria we defined: proven revenue generation, complementary technology and geography and expected accretion to earnings within two to three quarters – similar to the 2005 Sentori acquisition that provided company growth and strengthened our presence in the US mobile market. In 2013 we did not find any target that fulfills all these criteria and although we keep looking, we believe that such targets are scarce nowadays

Since we released our first billing platform for VoIP in 1997, we have invested heavily in R&D, enhancing our solutions to cover all communications fields and all aspects of billing and customer care, releasing major new versions and new modules every year. We present now the most comprehensive offering and in 2013 we focused our development towards the end-user experience and enhanced scalability and performance.

We will continue to maintain an up-to-date technology and intend to continuously improve our solutions, but we expect the R&D expense to decrease. In the next few years our engineering efforts will be dedicated more to customizations for new and existing customers and to other service related tasks.

In the Q&A session the company’s CEO commented on this year’s dividend, noting that the payment of the dividend, which considerably exceeded the years net income, was consistent with the wishes of the company’s shareholders.

Overall, this appears to have been a great year given the necessary changes, and I applaud the decision to pay a strong dividend. It was, of course, disappointing that no good M&A candidates were found, but I agree with the criteria put forward for the search and clearly prefer to make no acquisition rather than straying from the course set out in the criteria and risking to take on a bad acquisition.

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Third quarter results for fiscal year 2013

The results for the third quarter of fiscal year 2013 were released on November 5th, 2013.

For the third quarter, revenues were $4.53 million, slightly down compared with $4.71 million in the third quarter of 2012, but up from revenues of $4.42 million in the second quarter of 2013; operating income was $587, considerably down from $1.15 million in third quarter of 2012, but up from $454 thousand in the second quarter of 2013, and net income was $604 thousand or $0.03 per share, considerably down from $1.25 million or $0.07 per share in the third quarter of 2012, but strongly up from $402 thousand or $0.02 per share in the second quarter of 2013.

Overall, strongly down on a year-over-year basis, but up on a quarter-over-quarter basis.

Cash flow from operating activities was $728, down from $1.1 million in the second quarter of 2013. Headcount is now 359 employees, compared 340 as of September 30rd, 2012. The cash position was 18.4 million, compared with $17.5 million as of June 30th, 2013.

As usual, the balance sheet is stellar with ample cash, no debt, and very limited intangibles.

Again, this quarter, the results were not in line with the stellar results of the last fiscal year, but, overall, they were not really bad. This quarter brought nice bumps in revenues, operating income, and net income compared to these of the last quarter.

The company continues closing business at a moderate to fair pace, adding one net-new customer and several follow-on orders this quarter.

The growth in the company’s staffing level and associated expenses continue, reflecting the challenge of increasing the number and size of customer engagements to make up for the recent loss of high-margin revenues. The company’s Chief Executive Officer commented on this trend, saying that:

[o]ur increased expenses, when compared to the third quarter of 2012, are mainly due to the planned increase in our workforce, that we believe has reached the size we need in order to support our growing customer base, and to detrimental exchange rates, that had some impact on our lower than targeted margins. We are pleased as always with the follow-on orders that reconfirm our customer satisfaction. … Medium term, the net income is expected to be lower than in previous years, but we focus on increasing our operating margins in the long term through revenue growth and increased efficiencies.

Surprisingly, the company made a tentative commitment to the yearly dividend, announcing that the company would seek court approval for a possible distribution for the year 2013 in the amount of up to $4.6 million, or +$0.20 per share.

Finally, the company’s CEO commented on the company’s intent to undertake acquisitions:

“We are well positioned and have the required resources to respond to potentially increasing market needs and at the same time target potential acquisitions that could benefit the company results.”

The progress on a quarter-over-quarter basis is encouraging, and the promise of one or more acquisitions is exciting. Clearly, the company is executing on a well thought-out plan for restoring the bottom-line and boosting the top-line, and the dividend announcement is, I think, a strong indicator of the company’s confidence in its operations and sales.

Second quarter results for fiscal year 2013

The results for the second quarter of fiscal year 2013 were released on August 7th, 2013.

For the second quarter, revenues were $4.42 million, down compared with $5.29 million in the second quarter of 2012, but on par with revenues of $4.44 million in the first quarter of 2013; operating income was $454 thousand, considerably down from $710 thousand in second quarter of 2012, but strongly up from $140 thousand in the first quarter of 2013, and net income was $402 thousand or $0.02 per share, down from $549 thousand or $0.03 per share in the second quarter of 2012, but strongly up from $162 thousand or $0.01 per share in in the first quarter of 2013.

Cash flow from operating activities was $1.1 million, down from $1.91 million in the first quarter of 2013. Headcount is now 355 employees, compared with 319 as of March 31st, 2012, and 336 as of June 30th, 2012, and 350 as of March 31st, 2013. The cash position was $17.5 million as of June 30th, 2013, compared with approximately $21.1 million as of March 31st, 2013, reflecting the addition of $1.1 million and the dividend distrubtionof $4.5 million.

In its notes, the company’s CEO highlighted that the year-over-year weakening in revenues and net income was consistent with earlier heads-ups about the change in revenue mix after the loss of certain high-margin contracts and the delay in deals from the first quarter of 2013 to the second quarter. Furthermore, the company’s CEO highlighted two new deals and a number of follow on-order, with the new deals being centered around the company’s unique unified offering.

As usual, the balance sheet is stellar with ample cash, no debt, and very limited intangibles.

Again, this quarter, the results were not in line with the stellar results of the last fiscal year, but, overall, they were not really bad. For this quarter I had hoped for a nice little, mostly symbolic, bump in revenues from the first quarter delayed deals, but that did not work out as the wins were picked up late in the quarter. Moreover, although their contribution will for sure be notable, they are probably not enough to offset the loss of the high-margin contracts. As the company’s CEO stated:

The new wins that we closed this quarter, one by mid quarter and one at the very end, are expected to have a positive impact on our results as they translate into revenues and we thrive to achieve higher operating margins through improved efficiencies. At the same time, in the short to medium term, the net income is expected to be significantly lower than in previous years.

This is what it is. The loss of the high margin margin contract will continue to have ramifications, including, of course, on the dividend, which is computed on an EBITDA basis.

For sure the reduction in net income and the resulting change in dividend will take some getting used to for the long term shareholders, but, ultimately, it will, I think, refocus the company, which in the long run will pay dividend in other forms. On that note the most interesting and, frankly, exiting piece of news came at the end of the earnings release, where the company’s CEO put a stake in the ground:

Given our strong cash position and our experienced enhanced organization, we believe that we are well positioned and have the required resources to respond to potentially increasing market needs and at the same time we will focus on targeting potential acquisitions that could benefit the company growth similar to the strategic acquisition in 2005 that strengthened our presence in the US and in the mobile market. The active pursuit will focus on acquisition targets at reasonable valuations that satisfy the criteria we defined: proven revenue generation, complementary technology and geography and expected accretion to earnings within two to three quarters.

In view of the loss of the high margin business and the anticipated impact on the dividend it is hard for me to imagine any shareholder who would have an issue with this strategic move, in particular since the target will be acquisitions that are attractively priced and can be accretive to earnings (per share, I assume) in less than a year.

First quarter results for fiscal year 2013

The results for the first quarter of fiscal year 2013 were released on May 9th, 2013.

For the first quarter, revenues were $4.44 million, down compared with $5.26 million in the first quarter of 2012, operating income was $140 thousand, considerably down from $1.14 million in the first quarter of 2012, and net income was $162 thousand or $0.01 per share, compared with $1.1 million in the first quarter of 2012.

Cash flow from operating activities was $1.91 million.

In its notes, the company explained that the low operating income was related to the previously announced discontinuation of maintenance agreements and the delay of a win into the second quarter and some revenues for work performed in 2012 that will be recognized later in 2013.

Looking at the quarter’s expense side, we are beginning to see the hit from the new hires in line with the CEO’s continued guidance warning on profitability. In its notes, the company noted that expenses were also impacted up on by salary increases in Romania and adverse exchange rate changes. Headcount is now 350 employees, compared with 319 as of March 31st, 2012.

As usual, the balance sheet is stellar with ample cash, debt, and very limited intangible liabilities.

Cash were $18.3 million, compared to $17.3 million as of March 31, 2013. If you take the current market capitalization of $34.3 million minus the cash, you get $17 million. Netting out the $17 million non-cash value over the 18.9 million outstanding shares, provide for an equity free price of $0.90 per share. With the current trailing twelve months earnings per share of $0.18 (down from $0.24 prior to this quarter,) the cashless P/E is 5, up from 4 one year ago, but, still, the per share price seems very low in relation to cash, earnings per share, and dividend yield.

The results were not in line with the stellar results of the last twelve quarters, but, also, were not really bad. Moreover, I inferred from the company’s earnings release that the second quarter would contain revenues from a new deal and possibly revenue contributions from deals completed in 2012. If so, then the next quarter could be a nice little market surprise. Specifically, the company’s CEO was quoted as commenting:

While our business remains healthy and the pipeline is strong, we are clearly not pleased with our weak results for this quarter. We expect that we will be able to announce new wins with the results of the second quarter. At the same time we believe that the marketplace is affected by competitive pricing requiring us to accept changes in our pricing policies, mainly more long-term managed services agreements and fewer license deals, which is expected to affect our current results. We expect gross margins to remain between 50% and 60% due to competitive pressure and to an increasing rate of professional services, mainly additional functionality for our existing customer base. We expect that we will improve our operating margins towards our target level as the new wins translate into revenues.

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Results for fiscal year 2012 — 4th quarter and full year

The combined results for the fourth quarter of fiscal year 2012 and full fiscal year 2012 were released on March 6th, 2013.

As usual, the company recorded no debt, no material commitments for capital expenditures, limited financial income, strong operating income, strong working capital position, a very clean balance sheet with only one set of material contractual obligation (lease obligations,) and dominance of sales in the Americas.

Revenues for the fourth quarter were $5 million, compared with $5.3 million in the fourth quarter of 2011 and $4.7 million in the third quarter of 2012. Gross profit was $3.5 million, compared with $3.3 million in the fourth quarter of 2011 and $2.5 million in the third quarter of 2012. Operating income was $1.4 million, compared with $1.2 million in the fourth quarter of 2011 and $710 thousand in the third quarter of 2012. Net income was $1.4 million, or $0.07 per share, compared with $1.3 million, or $0.05 per share, in the fourth quarter of 2012, and $1.3 million, or $0.07 per share in the third quarter of 2012.

Fiscal year 2012 yielded revenues of $20.2 million up from revenues in 2011, operating income of $4.4 million, up from operating income in 2011, and net income of $4.3 million up from net income in 2011.

R&D expenses were up compared with earlier years, but offset by a reduction in SG&A expenses. Cash position was $19.4 million on December 31, 2012, up from $17.9 million on September 30, 2012. Goodwill remains static at $5.4 million. Headcount as of December 31st, 2012, was 339, up from 319 as of December 31st, 2011.

During 2012 revenue shares from the Americas and Israel increased further at the expense of revenue share from Europe.

Overall, I was extremely satisfied with the results, which in all aspects reflects a company that is highly profitable and growing — something that will be needed in order to mitigate against the consequences of the terminated high-margin agreements. Moreover, I was happy to see that, in spite of the increase in headcount, earnings per share were on par with those of last year.

The robust cash provided in the quarter was a nice surprise given the last quarter’s relatively meager net cash addition. Overall, a continued clean balance sheet, strong appreciation for the importance of gross margin and revenues, and no obvious drama. Again, a solid performer, as far as I can tell.

The ongoing legal action against PwC was not discussed.

In the earnings release the company announced a dividend of $0.24 per share for a yield of 10%, or so.
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Third quarter results for fiscal year 2012

The results for the third quarter of fiscal year 2012 were released on November 7th, 2012.

Revenues were $4.71 million, compared with $4.63 million in the third quarter of 2011 and $5.29 million in the second quarter of 2012. Gross profit was $2.51 million, or 47% of revenue, compared with $2.88 million, or 63% of revenue, in the second quarter of 2011. Operating income was $710 thousand, or 13.4% of revenue, compared with $843 thousand, or 18.5% of revenue, in the second quarter of 2011. Net income was $1.25 million or $0.07 per share, compared with $891 thousand or $0.05 per share in the third quarter of 2011, and $549 thousand or $0.03 per share in the second quarter of 2012.

Cash position was $17.93 million on September 30, 2012. Cash flow from operating activities was $181 thousand, down considerable year-over-year and quarter-over-quarter.

Goodwill remained static at $5.4 million. Dilution increased by a very modest ratio, and earning per share is now $0.15, compared to $0.16 at the same point in time last year.

There were no indications of the headcount for the quarter. However, MIND CTI website’s career section still lists 9 position description (2 in Romania and 7 in Israel.)

The revenue share from Israel declined, reflecting, I think, the life-cycle of the MVNO-in-a-box project in Israel.

I saw no indications of activity related to the expiry of the warrants issued to the Canadian customer (but then I am not entirely sure if I would see something,) and I saw no indications of an impact related to the lawsuit around the company’s former accountant and financial advisor.

Overall, I was satisfied with the results, including the revenue, which held up well given the much-discussed decline in revenues from terminated maintenance agreements. Moreover, in spite of the increase in headcount, earnings per share appear to be on par with those of last year. The relatively meager net cash provided in the quarter was unfortunate, and appear to relate to relative large increases in the trade account, the accounts payable account, and the deferred revenues account.

In closing, the company appear to continue to operate well in the face of an adverse economy, and, in my view, the company’s shares continue to be significantly undervalued. Needless to say, I would like to see an acceleration in sales, but I am sure that the management team is working on this.

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Second quarter results for fiscal year 2012

The results for the second quarter of fiscal year 2012 were released on August 1st, 2012

Revenues were $5.29 million, compared with $4.55 million in the second quarter of 2011 and with $5.26 million in the first quarter of 2012. Gross profit was $2.51 million, or 47% of revenue, compared with $2.88 million, or 63% of revenue, in the second quarter of 2011. Operating income was $710 thousand, or 13.4% of revenue, compared with $843 thousand, or 18.5% of revenue, in the second quarter of 2011. Net income was $549 thousand, or $0.03 per share, compared with $967 thousand, or $0.05 per share, in the second quarter of 2011.

Cash flow from operating activities was $1.6 million.

Headcount grew by 5% in the quarter, and the company re-instated its share buy-back program.

Overall, I was satisfied with the results — in particular with the increase of revenues (on a six months basis, the revenues for fiscal year 2012 are superior to those of fiscal years 2010 and 2011) in spite of the decline in revenue from terminated maintenance agreements and the overall difficulties in U.S. and Europe. Consistent with its earlier announcements, the company is clearly investing heavily in human resources to drive increased revenues, which is needed to offset a reduction in gross margin, but, also, a decision that I hope will be the first step in a significant increase of the top-line over the next years.

The significant revenue share from Israel (27.5% of total revenues) was interesting in view of the company’s management’s comment that a significant percentage of the work for the MVNO-in-a-box solution sale was recognized in this quarter. It will be interesting to see what the consequence is in the next quarter.

I was very pleased to see that the company re-instating the share buy-back program. Given the intrinsic value of the company, any share buy-back for up to $2 per share will, in my opinion, constitutes a bargain for the shareholders and is an appropriate use of the company’s resources.

In closing, the company appear to continue to operate well in the face of an adverse economy, and, in my view, the company’s shares are still significantly undervalued.

Overall, the stock price still seems too low relative to the company’s financial metrics.

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First quarter results for fiscal year 2012

The results for the first quarter of fiscal year 2012 were released on May 9th, 2012.

For the first quarter, the $5.26 million in revenues was good — about the same as in 4Q 2011. This was approximately tied with the highest quarterly revenues over at least the last 11 quarters. Similarly, operating income of $1.14 million was about the same as in the prior quarter.

Looking at the quarter’s expense side, I don’t see a significant hit from the new hires yet, but I did pay attention to the CEO’s continued guidance warning on profitability.

There were a couple of new things and changes on the liabilities side of the balance sheet that I generally did not like and, in at last one case, did not understand (without notes it can be quite difficult to decode the balance sheet.) I am hyper-sensitive to balance sheet changes because it – to date – Mind CTI’s completely uncomplicated balance sheet has been very attractive to me.

Cash of $17.3 million was good. If you take the market cap of $33.7 million minus the cash, you get $16.4 million. This is a cashless p/e of about 4. So, the stock price still seems very low in relation to cash, earnings per share, and dividend yield.

The CEO and Chairperson role were split. I was not happy with this split. Generally, I am in favor of this sort of split (and, as we are increasingly seeing in the market, in most cases not having the split leads to serious issues down the road,) but in this case and for at least a year while Mind CTI transitions some of the maintenance revenue, I think shareholders could benefit from having centralized powers and from having Ms. Iancu, the CEO, feel that the entire shareholder group is supportive. Reading the company laws in Israel, the bar for approving the joining of the two roles is quite high, and, so, I don’t think that the split – by any stretch – is a vote of no confidence.

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Results for fiscal year 2011

The combined results for the fourth quarter of fiscal year 2011 and full fiscal year 2011 were released on February 29th, 2012.

As usual, no debt, no material commitments for capital expenditures, limited financial income, strong operating income, strong working capital position, a very clean balance sheet with only one set of material contractual obligation (lease obligations,) a slight increase in headcount – primarily in R&D, emphasis on sale to telecommunications providers, 30/70 mix between license and services revenue, and dominance of sales in the Americas.

In 2010 and 2011, no customer accounted for 10% or more of total revenues.

Revenues in Israel have doubled over 2 years.

R&D and SG&A were substantially on par with previous years although it was noted that there was an increase in R&D payroll, reflecting an increase in average salary (mainly in Romania,)expansion in R&D personnel, and the devaluation of the U.S. dollar in relation to the NIS or the Euro.

There were no material impairments of goodwill and intangible assets in 2011 (in 2010 the company wrote off the remaining balances of the goodwill and intangible assets related to the Omni acquisition in 2007.)

As of December 31, 2011, the company has repurchased an aggregate amount of 3,165,092 ordinary shares, for a total consideration of approximately $2.8 million. As of April 1, 2012, the company has the authority to use additional $1.8 million for share repurchases.

The ongoing legal action against PwC was not discussed.

Overall, a clean balance sheet, strong appreciation for the importance of gross margin and revenues, and no obvious drama. A solid performer, as far as I can tell.

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