Matrikon Inc. F3Q08 (Quarter End 05/31/08) Earnings Call Transcript

Matrikon Inc. (MTK.TSE)

F3Q08 Earnings Call

July 8, 2008 5:00 pm ET

Executives

Nicole Sayler – Investor Relations

Nizar Somji – President, Chief Executive Officer

John Chia – Chief Financial Officer

Analysts

Tom Liston – Versant Partners

Thanos Moschopoulos – BMO Nesbitt Burns

Gabriel Leung – Paradigm Capital

Ron Shuttleworth – Jennings Capital

Richard Tse – National Bank Financial

Presentation

Operator

Welcome to the Matrikon Inc. third quarter results conference call. (Operator Instructions) I will now turn the conference over to Nicole Sayler, Investor Relations Director.

Nicole Sayler

Thank you for joining Matrikon’s conference call for the third quarter of 2008. You’ll find a copy of the third quarter news release, financial statements and management discussion and analysis on the Investor Relations section of our website at www.Matrikon.com.

In just a moment Nizar Somji, President and CEO will discuss our results and some of the factors affecting the quarter that just ended May 31.

Before we begin I’d like to point out that certain statements made during the course of this call may be forward-looking. Actual events or results may differ materially from those expressed or implied and Matrikon disclaims any intent or obligation to update or revise any forward-looking statements whether as the result of new information, future events or otherwise.

For a discussion of items that may cause actual results to differ, please refer to the risks related to our business beginning on Page 44 of our 2007 Annual Report. We report our financial results in accordance with Canadian GAAP. However, we supplement our financial results with non-GAAP performance measures. Please refer to our MD&A for definitions of these non-GAAP measures. A reminder that all figures are in Canadian dollars unless otherwise noted.

With that out of the way I’ll now turn the call over to Nizar Somji.

Nizar Somji

I’d like to first start by welcoming Jonathon Chia to the position of Chief Financial Officer and John is here with me today. He takes this position effective today. John was previously our Senior Manager of Finance and has been with us since 2005. He is a bright, talented individual who has excelled during his time with the company and I look forward to working with him in his new role. Of course after this announcement perhaps I won’t get any more questions as to when the new CFO is coming. He is here now.

Now for the results, I am happy to report that we just finished a record quarter as our new strategy and new focus continues to bear fruit. Our Q3 revenue was $20.5 million, the highest quarterly revenue we have ever had and an 8% improvement over Q3 of 2007. A large part of this growth is attributable to record product revenue which includes software licenses and support.

Product revenue for Q3 was $6.84 million and accounted for 33% of total revenue in the quarter compared to 25% of total revenue in Q3 of 2007. Year-to-date sales by our reseller partners also experienced robust growth as well, increasing by 21% compared to full year sales by partners in fiscal 2007.

The increase in high margin software license and support revenue contributed to a record quarterly net income of $2.47 million and a strong net margin of 12%. Year-to-date net income was $6.52 million or $0.21 per share compared to $0.03 million or $0.00 per share for the first nine months of 2007.

We were also able to maintain our reductions in overhead costs, another factor that had a positive impact on our net margin. Year-to-date overhead expenses are $24.17 million or 40% of revenue compared to 56% of revenue in the first nine months of fiscal 2007. With our expenses contained and profitability restored we continue our investment in R&D and sales and marketing to drive top line growth.

In Q3 we also continued to develop and deploy our industry applications including Mobile Equipment Monitor and Well Performance Monitor. Mobile Equipment Monitor achieved a major milestone in the quarter as it was implemented at its first site resulting in total revenues of $1.95 million for the quarter. Meanwhile we received a letter of intent to roll out Well Performance Monitor to 400 wells in the Middle East and we completed the implementation for an emerging oil and gas operator in the North Sea.

Cash flow generated by operations remained solid in Q3 at $1.55 million with year-to-date figures at $9.89 million. As a result, we were able to offer our shareholders a special one-time dividend of $0.30 per share declared to all shareholders of record on June 24 and paid out today. This is on top of the $0.03 quarterly dividend we announced earlier in the year. That $0.03 was also paid out today.

Looking ahead we continue to work on our next generation technology code named [Epsilon] which will integrate word processors, speed ball, visualization and knowledge with the analytical availability that is core to our technology. We released a project version of [Epsilon] this quarter and expect to release a full commercial version later this year.

After three consecutive quarters of strong revenue and net income growth I believe the implementation of our products solutions strategy has put Matrikon back on the right path and positioned us for future success. With the new strategy, the hard work and dedication of all of our employees and the many opportunities I see for our products and solutions around the world, I am confident in our outlook for the remainder of 2008 and beyond.

At this time I would now like to open the line for any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Liston – Versant Partners.

Tom Liston – Versant Partners

One of the notes says on the MEM side you reported $1.6 million in license revenue and in a later note it talked about MEM and WPM contributing $1.56 and obviously I don’t think there is negative revenue from WPM’s. Can you give us a little more color on what happened during the quarter? Was some of that $1.66 in license revenue from MEM actually deferred to a future quarter or what might be going on there?

Nicole Sayler

Actually Tom some of that revenue would be counted like when we look at how our product revenue is broken down it would be counted in other places. So it might be OPC or Manager. It is still the same amount.

Tom Liston – Versant Partners

Just along that line it talked about the total revenue versus license. Can you give us a rough ratio of what a MEM deal might look like in terms of what type of consulting revenue it will be? Obviously a little larger license revenue, maybe not as much consulting revenue on a typical install?

Nizar Somji

It is difficult to say because MEM has three components to it. MEM has what is a data logger which actually sits on the mobile equipment itself and the data logger is about 25% to 1/3 hardware and about 75% to 2/3 software which is Matrikon software. Then the second portion of that is the middle layer or consolidating layer where all the data logger is actually consolidating to a central location and all the data is archived, stored and so on. That has a license revenue component to it and then there is a visualization component.

Then there is also the services component to drive that. So depending on the extent at which we do things, it could vary between how many actual pieces of mobile equipment we are installing and how many data loggers we are putting in.

I have probably given you a little more detail than you need but it is very hard to answer your question in average terms because a smaller installation say with 10 data logger installations may have a higher software component and lower services component. 50-100 data logger installation may have a decent size services component to get all the install and commission ready to go.

Tom Liston – Versant Partners

The MEM projects tend to be generally on a higher license fee than what maybe other projects you have experienced in the past. Would that be fair?

Nizar Somji

That would be very fair.

Tom Liston – Versant Partners

On the WPM side obviously you have disclosed a couple of times here quite a big Middle Eastern deal. Can you give us a bit of scope on that project on the size and will it mainly be booked in Q4?

Nizar Somji

The hope is it will be booked in Q4 but it will all depend on getting the client signed off on the project and so on. But it is being worked on right now as we speak so we expect it to be completed before the end of the year.

Tom Liston – Versant Partners

Can you give us a size of what that type of deal would look like with the 400…?

Nizar Somji

We have not actually announced the size of it and so on so I’m not sure I can give you a feel for it. This is a fairly significant implementation and just to give you an idea the technology is well developed so something like this which a couple of years ago may have taken us many months to install would be done in a very short, 2-3 month, implementation period. That is about as much as I can share with you without giving you a lot of detail at this stage.

Tom Liston – Versant Partners

Deferred revenue I believe jumped up again to almost $2 million, a little under that. Would that delta be a lot of software license being prepaid or is that can’t be booked yet or what does that consist of?

Nizar Somji

It is mainly software maintenance that is prepaid. That is the bulk of it. There may be other things in there but the majority of it is that.

Tom Liston – Versant Partners

So it is just a seasonally stronger maintenance renewal period?

Nizar Somji

Q3 is a time where we hustle hard and there is a lot of renewals that take place. Traditionally that has been the case and you’ll see that moving on.

Tom Liston – Versant Partners

Finally, on the dividend, specifically the special dividend with an outlay of $10 million obviously it gets cash still to a fine level especially since you are continuing to grow cash. But as per a previous question that I have asked is this a signal to us that there probably aren’t material acquisitions out there to be had?

Nizar Somji

It is a signal that we think and we strongly believe that there is a tremendous opportunity for organic growth and so we are really not looking at any acquisitions. We may still do something opportunistically if there is a good deal or something that really helps us but at this stage we are very much focused on organic growth and we see tremendous global opportunity for that.

Operator

Your next question comes from Thanos Moschopoulos – BMO Nesbitt Burns.

Thanos Moschopoulos – BMO Nesbitt Burns

So we are seeing ongoing improvement on the gross margins and utilization remains strong. Going forward from here do you think there is further room for improvement or are things pretty much at the level you can reasonably expect them to get at? Any more room for efficiency or are we running at peak capacity now?

Nizar Somji

I think in terms of efficiency and in terms of cost I think there may be some minor tweaking but I think cost wise this is as good as we can get from a cost standpoint. I think the focus now really is top line growth to drive further earnings. If you look at our mix of business today which is about 1/3 product revenue and 2/3 license revenue to achieve in the 57-58% around that gross margin is about the best you can do.

We will probably get it as close to 60% as we can. For us to improve any more than that on the gross margin you would have to change the mix of software which we are working on in the solutions and so we will continue to try. The solutions actually allow us to get a higher gross margin because they are more software and license component and less services component.

But from a cost containment standpoint I think we have done well and this is probably as good as it will get. We just need to now drive top line revenue to continue to grow.

Thanos Moschopoulos – BMO Nesbitt Burns

On a longer term basis, if we just look a year or two years out, where do you think the revenue mix could go as far as software versus services? Understandably you will always have a high services component just by the nature of what you do but where do you think you can get it to as you get further traction with some of the solutions like the MEM?

Nizar Somji

Our original goal was 1/3 and 2/3, which is where we have been. I think we want to drive now our next target is a 40/60 split over the next year or two as we drive the solutions business and so on. I think if we are successful in driving that then I see us in three years or so maybe getting to the 50/50 mark in three or four years. Right now I think our next target is really to drive to a 40/60 split.

Thanos Moschopoulos – BMO Nesbitt Burns

Now you mentioned in the MD&A and in your comments that you are starting to invest more into sales and marketing. Can you talk to where you are directing that? Are you adding on more sales people at this point or is it in marketing support? What areas are you investing in?

Nizar Somji

We are adding a few sales people. We are beefing up our marketing in terms of really dividing marketing into the different ranges of products and so on. We have both for direct sales of our products as well as solutions sales and part of the solutions sales is we are driving some work in that area. We are adding sales people for direct sales of our products as well as direct sales in areas like Germany where we are very short staffed and have a tremendous number of leads.

We are beefing up the Middle East where we have a lot of leads but not enough sales people and to some extent we are going to start beefing up our sales force in England as well. So it is almost all over the place. Where we are seeing a tremendous number of leads and opportunities but not enough manpower to really go after it we are doing that.

From a marketing standpoint we are also doing a little more de-centralization of marketing so each of our individual regions are going to get a budget to really market to meet their needs in those regions so that they can be very effective in target marketing and what they key client may need and what people they are going to go after and do some of those things.

Thanos Moschopoulos – BMO Nesbitt Burns

Can you talk qualitatively about what areas you are seeing the most opportunity, particularly in the MEM and WPM side? Which products do you see the most leads and prospects coming from and which geographies as well?

Nizar Somji

I think there are opportunities in almost every part of our solutions and our products. Some of it is regional. So it is hard to say. The mining business in Australia is growing at a rapid pace. So mobile equipment monitor while it is not headed to Australia yet I think we see opportunity for it. Mine to port, which is one of our other major applications being developed in Australia, we see huge potential for that as well as Downtime Reporter.

We see a lot of opportunities in Northern Alberta that are related both to mining as well as to production management. You see a lot of growth in the Middle East and Europe in well performance especially for offshore wells. Then you are seeing a lot of growth in management and control performance monitor especially in petrochemical refining areas. Overall, there is opportunity almost everywhere. One of the things we have been able to achieve in the last several years is really to focus some of our key offices so that they work to their strengths and are able to drive what they can do well. We are seeing some of the results come out from that.

Operator

Your next question comes from Gabriel Leung – Paradigm Capital.

Gabriel Leung – Paradigm Capital

I just want to focus on your ability to accelerate the top line and drive earnings growth at this point. Clearly you have seen some good success in business for the last few deal announcements. What is really driving that?

Is it rejuvenation of your customer’s budgets given what is going on in the end market commodity prices or is it really just because you got a pipeline and the customer has gone through all the pilots and now are ready to do bigger deployments? Is that driving it? The implication being you should be able to close some of those opportunities a lot quicker than if you were addressing a green field opportunity.

Nizar Somji

It is a combination of both. I think we have seen a number of pilots. We have seen a number of things and some of which you are now seeing the results of transitioning to roll outs in product sales and so on. You are also seeing in some cases where we have done some work and are now able to convert what I call point-type solutions to more generalized solutions, where maybe we were doing a lot of management where we can carry them to a Well Performance Monitor solution.

So we are seeing those kinds of transitions happen in some of our clients. I don’t think the budget has anything to do with it. I don’t think the budgets have changed much or anything is wrong. But I think we are gaining respect if you like in some of these things and beginning to see a transition in that direction.

Gabriel Leung – Paradigm Capital

Do you think the indication would be a shorter sale cycle than you have seen in the past as it relates to license sales?

Nizar Somji

Possibly, but for newer sales the sales cycle is not going to change much but for existing clients yes, I think we are seeing shorter sales cycles. We are seeing that as we are putting the right people in front of the clients we are able to get their understanding and then get their commitments to move.

Gabriel Leung – Paradigm Capital

Just on the headcount I think we saw that increase for the first time in awhile on a sequential basis. What are you planning to do in terms of adding to that headcount and where are you prioritizing at this point? Whether it be on a geographic or departmental basis.

Nizar Somji

Geographically I think our biggest demands for people are primarily in Australia and we are looking at different alternatives of how we can supply them the people they need. We have demands for people in the Middle East, some in Europe especially in Aberdeen and then of course in Northern Alberta where I think there is tremendous growth. So we are looking at different ways of meeting those needs. But I think that you are seeing a bit of growth and you will see a little bit more.

I think we are continuing to drive the business and you will see a bit more growth but it is going to be thoughtful in terms of making sure the business is there and it is the right business so the people that are there are excited, motivated and continue to grow as well. I expect as we go forward you will see some modest growth in people for the next couple of quarters.

Gabriel Leung – Paradigm Capital

Are you comfortable providing a headcount number for the end of fiscal 2009 or would that give away what you are looking for on the top line growth?

Nizar Somji

I am not comfortable in giving you that number right now. Suffice it to say I think the opportunities are huge for us right now. We just need to make sure we are able to execute and have the people to execute.

Operator

Your next question comes from Ron Shuttleworth – Jennings Capital.

Ron Shuttleworth – Jennings Capital

I was just curious on the sales you have in terms of hiring new people. What is the lead time it takes to get a new sales person to full productivity based on your experience so far?

Nizar Somji

Remember that under the new model we only have sales people in the direct product sales groups. Most of our solutions sales are done by our senior partners. It depends on the individual you hire. Say in OPC for example a sales person can be somewhat productive in three months and fully productive in about 12 months.

In the Process Suite sales and so on it takes a little bit longer, maybe about 6 months for them to be somewhat productive and fully productive in 12-15 months. So, those are the round numbers. Many times though if we find good people they can move quite fast.

Ron Shuttleworth – Jennings Capital

Are you in the middle of the hiring process right now, as you mentioned in Germany and elsewhere?

Nizar Somji

We are, yes. Germany already hired two people. The Middle East we are moving someone from here. So they are all finding people. A lot of the hiring for the sales people that is being done was already done this quarter.

Ron Shuttleworth – Jennings Capital

So then we should start seeing productivity from those new folks some time during 2009?

Nizar Somji

Yes. They are being hired in preparation for 2009.

Operator

Your last question comes from Richard Tse – National Bank Financial.

Richard Tse – National Bank Financial

Just a quick question here on the employee retention, it is one of these things that was not on track in your MD&A here. Why are you losing some of the employees here and which groups is this happening in? What are you doing to try to retain them or do you even care about retaining them in terms of the ones that you have lost?

Nizar Somji

Of course I care about retaining them.

Richard Tse – National Bank Financial

Some you may not. But in any event why is this happening? Is it because of the labor rates? Are they moving up? Better opportunities elsewhere?

Nizar Somji

That is one of the things that keeps me awake in terms of thinking. I think the market in Australia, Eastern Australia, the boom in Eastern Australia and the boom in Northern Alberta has been absolutely phenomenal. Coupled with growth in Scotland and so on. It has been tough from a cost perspective and different opportunities to keep people. In Alberta I think we have seen a bit of a slow down and so as a result we are seeing better traction.

I also think we are also working harder in terms of understanding what it takes and creating the right opportunities and getting the right projects for these people to work on so they are excited and so on. That is happening and I think we are seeing a bit of a decline. But it has been an almost unbelievable market in Australia and so we are seeing a bit of loss there for the first time in the past year and we are working to see what we can do to retain them.

Richard Tse – National Bank Financial

Has it been happening from the sales side, the development side? What parts of the business is the attrition?

Nizar Somji

The largest are in Australia is in the consulting side. A little bit in the other parts but mostly in the consulting side. The same I think here in North America as well. It is a battle that every company in the technology sector and almost any company in any sector in Alberta in particular and elsewhere are facing. It is just a challenge that we need to work at and I think we are getting better at it. I am hoping to show some good results in 2009 in terms of the retention portions of that.

Operator

There are no further questions at this time.

Nicole Sayler

I’d like to thank everyone for joining us today. I hope you all have a very safe and happy summer.

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