MIND C.T.I. Ltd. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP; amounts below are in U.S. dollars unless stated otherwise.
Business context
MIND develops and implements billing and customer-care software for telecommunications providers, and call-management software for enterprises. In 2018, billing and customer-care products accounted for 82% of revenue and enterprise products 18%. Services represented 88% of revenue, with license sales accounting for 12%. Two customers contributed approximately 15% and 12% of total revenue.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $18.135 million | $18.062 million |
| Gross profit / gross margin | $11.989 million / 66.1% | $11.029 million / 61.1% |
| Operating income / operating margin | $5.350 million / 29.5% | $4.686 million / 26.0% |
| Net income / net margin | $5.134 million / 28.3% | $5.612 million / 31.1% |
| Diluted EPS | $0.27 | $0.29 |
| Cash provided by operating activities | $4.466 million | $2.746 million |
| Cash and cash equivalents, year-end | $2.739 million | $5.014 million |
| Working capital, year-end | $15.272 million | $14.921 million |
| Total assets / shareholders’ equity, year-end | $25.978 million / $20.982 million | $27.378 million / $21.022 million |
At year-end 2018, the company also held $8.714 million in short-term bank deposits and $4.352 million in short-term marketable securities. The filing reports no material debt or off-balance-sheet arrangements. Cash flow from investing activities was a use of $0.917 million; financing activities used $5.760 million, principally for $5.799 million of dividends. Capital expenditures were $46,000.
Changes versus FY2017
- Revenue was nearly flat. Billing and customer-care revenue rose to $14.923 million from $14.722 million, while enterprise-product revenue declined to $3.212 million from $3.340 million.
- License revenue fell to $2.151 million from $2.441 million; services revenue increased to $15.984 million from $15.621 million. Management noted that ASC 606 classification of managed-services revenue as services contributed to this mix shift.
- Cost of revenue declined 12.1% to $6.146 million, which management attributed mainly to efficiency measures and lower third-party license costs. Gross margin increased five percentage points.
- R&D expense increased 8.8% to $3.747 million, mainly due to labor costs; selling and marketing expense was $1.268 million, and general and administrative expense was $1.624 million.
- Net income declined from $5.612 million to $5.134 million. FY2017 included a $0.893 million gain on disposal of a subsidiary and higher net financial income ($0.630 million versus $0.222 million in 2018).
- Operating cash flow increased by $1.720 million. Cash and cash equivalents fell, in part as the company allocated funds to deposits and investments and paid dividends.
Outlook, commentary, risks, and unusual items
- Management said telecom markets remained active but cited lengthy, frequently delayed sales processes, consolidation, and fewer deals in recent years. It expects challenges maintaining revenue levels in the near term and did not provide numerical guidance.
- The company planned continued investment in technology and cloud solutions and efforts to enter new markets. MINDBill Version 8 was released in 2017, operating at four customers, with deployments at four additional customers expected to be completed in 2019.
- Key risks include intense competition, customer concentration and possible customer loss, variable timing of orders and implementations, fixed-price project overruns or penalties, cybersecurity and service outages, privacy regulation, and dependence on skilled personnel.
- Currency exposure is material: management said approximately 39% of expenses were incurred in NIS and 48% were linked to the euro. A 1% increase in the NIS against the dollar was estimated to raise annual operating expenses by approximately $52,000.
- The company received Israeli Preferred Technological Enterprise status, providing a 7.5% tax rate on qualifying technological income from 2017 through 2021, subject to conditions. Management warned that eligibility and tax benefits could change.
- ASC 606 adoption on January 1, 2018 resulted in a $435,000 cumulative adjustment to accumulated deficit. The filing states FY2018 revenue would have been $17.959 million under the prior standard.
- The company declared a $0.26-per-share dividend in March 2019, approximately $5.0 million in total. Dividends remain subject to board approval and future cash needs.
- No significant legal proceedings were reported. Goodwill impairment testing in 2018 identified no impairment; goodwill was $5.430 million at year-end.
Important facts for investors to verify
- Whether revenue can be sustained given management’s near-term concerns, delayed sales cycles, telecom consolidation, and dependence on a small number of customers.
- Whether the improved gross margin and operating cash flow are repeatable, and how much cash generation is affected by receivables and deferred revenue movements.
- The composition, liquidity, and valuation sensitivity of the $4.352 million short-term securities portfolio and the company’s broader cash and deposit balances.
- The conditions and duration of the Israeli tax ruling, and the potential effect if qualifying status or benefits are reduced or lost.
- Progress and costs of Version 8 deployments, cloud initiatives, and expansion into Germany and other markets; the filing provides no quantified revenue outlook.
- Dividend sustainability relative to earnings, cash needs, and the board’s discretion.