Ness Technologies Announces Second Quarter 2010 Financial Results
The Company Delivered 10% Year-Over-Year Quarterly Revenue Growth With Sequential Operating Margin Expansion
PR Newswire -- July 28, 2010
HACKENSACK, New Jersey, July 28, 2010 /PRNewswire-FirstCall/ -- Ness Technologies, Inc. (NASDAQ: NSTC and TASE: NSTC), a global provider of IT services and solutions, announced today its financial results for the quarter ended June 30, 2010.
Second Quarter 2010 Highlights:
- Quarterly revenues were $139.7 million, up 10% year-over-year.
- Quarterly operating income was $3.0 million, down 11% year-over-year. On a non-GAAP basis ([1]), quarterly operating income was $6.0 million, up 1% year-over-year.
- Quarterly net income from continuing operations was $0.9 million, down 60% year-over-year. On a non-GAAP basis, quarterly net income from continuing operations was $3.8 million, down 13% year-over-year.
- Quarterly diluted net earnings per share from continuing operations were $0.02, compared to $0.06 in the second quarter of 2009. On a non-GAAP basis, quarterly diluted net earnings per share from continuing operations were $0.10, compared to $0.11 in the second quarter of 2009.
- Quarterly operating cash flows from continuing operations were $0.4 million.
- Cash, cash equivalents and short-term bank deposits were $53.1 million as of June 30, 2010.
- Backlog from continuing operations as of June 30, 2010 was $658 million, up 3% year-over-year and 2% sequentially, in constant currencies.
- Headcount for continuing operations was approximately 7,765 as of June 30, 2010.
- The previously announced acquisition of Gilon Business Insight, Ltd., a provider of business intelligence services in Israel, closed during the quarter.
"I am pleased by our performance in the second quarter, as all our businesses did well, other than in Central and Eastern Europe," said Sachi Gerlitz, president and chief executive officer of Ness Technologies. "While the timing of the economic recovery in Central and Eastern Europe remains uncertain, we continued to improve our operating efficiency and are encouraged by the increasing demand in the public sector in the Czech Republic, where we won several deals. I am optimistic about continuing our growth in the second half of the year based on the demand that we see in our pipeline."
- Results by operating segment:
- The company's Software Product Engineering segment, which provides outsourced software product research and development services to companies that build or rely on software to generate revenues, continued to perform well in the second quarter, with higher-than-normal operating margins and sequential and year-over-year revenue growth.
- The company's System Integration and Application Development segment showed good year-over-year revenue growth and sequential non-GAAP operating margin improvement, with strong performance in the United States and Israel, and weak performance in Central and Eastern Europe.
- As previously announced, the company no longer reports a separate Software Distribution segment, as its European software distribution operations were reclassified as discontinued operations and its Israeli software distribution operations were reclassified to its System Integration and Application Development segment, effective as of January 1, 2010.
"We continued to execute on our operational plans in the second quarter, and I am encouraged by our results," said Ofer Segev, executive vice president and chief financial officer. "The restructuring steps we completed through the end of the first quarter to improve our operating efficiency have provided a good platform for our planned future growth, as we work to further drive revenues and increase operating margins in the second half of 2010."
Business Outlook
Ness continues to expect top line revenue growth and margin expansion in 2010, with third quarter results in line with second quarter results, and fourth quarter results significantly better than third quarter results.
Ness is reiterating its full year 2010 guidance of revenues from continuing operations in the range of $575 million to $585 million with diluted net earnings per share from continuing operations in the range shown in the reconciliation table below:
Full year diluted net earnings per share ($) Low High
GAAP basis from continuing operations........ $ 0.12 $ 0.16 Stock-based compensation; amortization of intangible assets; earn-out and retention expenses related to prior acquisitions; acquisition and integration costs of Gilon acquisition........................... 0.31 0.31 Non-GAAP basis from continuing operations......$ 0.43 $ 0.47
Based on the weakness of European currencies, Ness currently expects to be near the lower end of the revenue guidance range.
The company's 2010 GAAP guidance excludes any unannounced future acquisitions or stock-based compensation grants; and the company's GAAP and non-GAAP guidance further assumes that outstanding diluted shares will average approximately 39 million in 2010 and that relevant foreign currency exchange rates will remain at their levels as on July 23, 2010.
For the reasons set forth elsewhere in this release, Ness' management believes that non-GAAP earnings per share financial guidance provides the best comparative basis for investors to understand and assess the company's on-going operations and prospects for the future.
Conference Call Details
Sachi Gerlitz, president and chief executive officer of Ness Technologies, and Ofer Segev, executive vice president and chief financial officer, will conduct a conference call to discuss the second quarter 2010 results. The call, which will be simultaneously webcast, will begin at 8:30 AM Eastern Time / 5:30 AM Pacific Time / 3:30 PM Israel Time on Wednesday, July 28, 2010.
To access the Ness Technologies second quarter 2010 earnings conference call, participants in North America should dial 1-800-399-0427, participants in Israel should dial 1-80-924-5917 and all other international participants should dial +1-973-200-3375. A live audio webcast of the conference call will be available on the investor relations page of the Ness Technologies corporate web site at http://investor.ness.com. Please visit the web site at least 15 minutes early to register for the teleconference webcast and download any necessary audio software. A replay of the call will be available on the web site approximately two hours after the conference call is completed.
About Ness Technologies
Ness Technologies (NASDAQ: NSTC and TASE:NSTC) is a global provider of IT and business services and solutions with specialized expertise in software product engineering; and system integration, application development, consulting and software distribution. Ness delivers its portfolio of solutions and services using a global delivery model combining offshore, near-shore and local teams. With about 7,800 employees, Ness has operations in North America, Europe, Israel and India, has customers in over 20 countries, and partners with numerous software and hardware vendors worldwide. For more information about Ness, visit http://www.ness.com.
Use of Non-GAAP Financial Information
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Ness uses various non-GAAP measures of net income and earnings per share, including adjustments from results based on GAAP to exclude (a) non-cash stock-based compensation expenses in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718, "Stock Compensation" (formerly, FASB Statement 123R) and amortization of intangible assets, net of taxes; (b) earn-out and retention expenses related to prior acquisitions; (c) an insurance settlement in the first quarter of 2009 related to a 2007 arbitration expense, net of related expenses, net of taxes; (d) severance expenses in the first quarter of 2009, net of taxes; and (e) acquisition and integration costs of its Gilon acquisition, net of taxes. Ness' management believes the non-GAAP financial information provided in this release is useful to investors' understanding and assessment of Ness' on-going core operations and prospects for the future. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Management uses both GAAP and non-GAAP information in evaluating and operating the business internally and as such has determined that it is important to provide this information to investors.
Ness also uses these non-GAAP measures in the formulation of its financial guidance. This requires Ness management to make assumptions regarding certain factors that could affect future net income and earnings per share, such as the timing and size of future potential acquisitions (which could result in additional non-cash amortization of intangibles), the timing and size of future potential stock-based compensation grants (which could result in additional non-cash stock-based compensation expense), and the timing and size of any one-time income or expenses. The company discloses such assumptions in conjunction with its financial guidance.
Forward Looking Statement
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often are preceded by words such as "believes," "expects," "may," "anticipates," "plans," "intends," "assumes," "will" or similar expressions. Forward-looking statements reflect management's current expectations, as of the date of this press release, and involve certain risks and uncertainties. Ness' actual results could differ materially from those anticipated in these forward looking statements as a result of various factors. Some of the factors that could cause future results to materially differ from the recent results or those projected in forward-looking statements include the "Risk Factors" described in Ness' Annual Report of Form 10-K filed with the Securities and Exchange Commission on March 15, 2010. Ness is under no obligation, and expressly disclaims any obligation, to update or alter its forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise.
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME U.S. dollars in thousands (except per share data)
Three months ended Six months ended June 30, June 30, 2009 2010 2009 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 126,887 $ 139,701 $ 253,168 $ 273,034 Cost of revenues 92,542 102,275 186,901 198,796 Gross profit 34,345 37,426 66,267 74,238
Selling and marketing 9,681 9,838 18,893 19,891 General and administrative 21,233 24,551 44,818 48,893 Insurance settlement related to 2007 arbitration expense, net of related expenses - - (2,610) - Commissions related to the sale of Israeli SAP sales and distribution operations - - (2,534) - Total operating expenses 30,914 34,389 58,567 68,784
Operating income 3,431 3,037 7,700 5,454 Financial expenses, net (666) (442) (1,822) (651) Income before taxes on income 2,765 2,595 5,878 4,803
Taxes on income 537 1,707 1,179 3,217 Net income from continuing operations $ 2,228 $ 888 $ 4,699 $ 1,586
Net loss from discontinued operations (1,186) (845) (2,129) (6,232) Net income (loss) $ 1,042 $ 43 $ 2,570 $ (4,646)
Basic net earnings per share from continuing operations $ 0.06 $ 0.02 $ 0.12 $ 0.04 Diluted net earnings per share from continuing operations $ 0.06 $ 0.02 $ 0.12 $ 0.04
Basic net earnings (loss) per share $ 0.03 $ 0.00 $ 0.07 $ (0.12) Diluted net earnings (loss) per share $ 0.03 $ 0.00 $ 0.07 $ (0.12)
Weighted average number of shares (in thousands) used in computing basic net earnings per share from continuing operations, basic net earnings (loss) per share and diluted net loss per share 38,590 38,161 38,755 38,230 Weighted average number of shares (in thousands) used in computing diluted net earnings per share from continuing operations and diluted net earnings per share 39,149 38,592 39,333 38,672
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME U.S. dollars in thousands
Three months ended Six months ended June 30, June 30, 2009 2010 2009 2010 Segment Data (1): (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues from continuing operations: Software Product Engineering $ 25,688 $ 28,060 $ 50,654 $ 54,457 System Integration and Application Development.. 101,199 111,641 202,514 218,577 $ 126,887 $ 139,701 $ 253,168 $ 273,034 Operating income (loss) from continuing operations: Software Product Engineering $ 4,096 $ 4,388 $ 8,210 $ 8,241 System Integration and Application Development.. 3,228 2,746 8,539 5,973 Unallocated Expenses (3,893) (4,097) (9,049) (8,760) $ 3,431 $ 3,037 $ 7,700 $ 5,454 Geographic Data:
Revenues from continuing operations: Israel $ 42,371 $ 51,327 $ 87,641 $ 98,966 Europe 38,601 38,164 75,074 77,165 North America 43,544 48,381 86,023 93,630 Asia and the Far East 2,371 1,829 4,430 3,273 $ 126,887 $ 139,701 $ 253,168 $ 273,034
(1) The company no longer reports a separate Software Distribution segment, as its European software distribution operations were reclassified as discontinued operations and its Israeli software distribution operations were reclassified to its System Integration and Application Development segment, effective as of January 1, 2010. Segment data for prior periods has been restated to reflect the current organization of the segments.
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands Six months ended June 30, 2009 2010 (Unaudited) (Unaudited) Cash flows from operating activities: Net income (loss) $ 2,570 $ (4,646) Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: Net loss from discontinued operations 2,129 6,232 Stock-based compensation 1,756 1,600 Currency fluctuation of restricted cash and short-term bankmdeposits - (415) Depreciation and amortization 8,423 8,631 Loss (gain) on sale of property and equipment and impairment and sale of cost investments (205) 79 Commissions related to the sale of Israeli SAP sales and distribution operations (2,534) - Decrease (increase) in trade receivables, net 38,709 (6,719) Decrease (increase) in unbilled receivables 894 (5,680) Decrease (increase) in other accounts receivable and prepaid expenses (1,949) 1,423 Decrease (increase) in work-in-progress (343) 1,393 Increase in long-term prepaid expenses (346) (540) Deferred income taxes, net 513 847 Increase (decrease) in trade payables (13,387) 11,473 Decrease in advances from customers and deferred revenues (1,200) (2,851) Decrease in other accounts payable and accrued expenses (14,810) (8,369) Increase in other long-term liabilities 472 882 Increase (decrease) in accrued severance pay, net (1,384) 266 Net cash used in discontinued operations. (1,853) (3,712) Net cash provided by (used in) operating activities 17,455 (106)
Cash flows from investing activities: Consideration from sale of a consolidated subsidiary - 1,711 Net cash paid for acquisition of a consolidated subsidiary - (16,259) Cash paid for acquisition of intangible assets - (513) Additional payments in connection with acquisitions of subsidiaries in prior periods (14,395) (1,330) Proceeds from maturity of (investment in) short-term bank deposits, net (15,778) 10,791 Proceeds from sale of property and equipment 703 - Purchase of property and equipment and capitalization of software developed for internal use (4,864) (5,287) Net cash used in discontinued operations (1,808) - Net cash used in investing activities (36,142) (10,887)
Cash flows from financing activities: Repurchase of shares (2,037) (2,169) Acquired subsidiary's dividend to its former shareholder (683) - Short-term bank loans and credit, net (4,560) 6,361 Proceeds from long-term debt 15,000 13,364 Principal payments of long-term debt (2,161) (8,701) Net cash provided by financing activities 5,559 8,855
Effect of exchange rate changes on cash and cash equivalents (1,101) (2,987) Decrease in cash and cash equivalents (14,229) (5,125) Cash and cash equivalents at the beginning of the period 44,585 40,218 Cash and cash equivalents at the end of the period $ 30,356 $ 35,093
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands December June 30, 31, 2009 2010 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 40,218 $ 35,093 Restricted cash 2,470 2,474 Short-term bank deposits 25,939 15,556 Trade receivables, net of allowance for doubtful accounts 131,452 136,725 Unbilled receivables 28,012 32,625 Other accounts receivable and prepaid expenses 27,832 26,677 Work in progress 9,690 7,111 Total assets attributed to discontinued operations 43,212 28,391 Total current assets 308,825 284,652
LONG-TERM ASSETS: Long-term prepaid expenses and other assets 6,083 6,575 Unbilled receivables 4,654 4,417 Deferred income taxes, net 3,608 2,442 Severance pay fund 53,145 53,726 Property and equipment, net 35,739 34,019 Intangible assets, net 10,016 11,672 Goodwill 263,541 265,039 Total long-term assets 376,786 377,890
Total assets $ 685,611 $ 662,542
CURRENT LIABILITIES: Short-term bank credit $ 500 $ 8,792 Current maturities of long-term debt 21,332 24,035 Trade payables 30,914 40,573 Advances from customers and deferred revenues 40,639 36,134 Other accounts payable and accrued expenses 99,464 94,256 Total liabilities attributed to discontinued operations 25,461 14,561 Total current liabilities 218,310 218,351
LONG-TERM LIABILITIES: Long-term debt, net of current maturities 50,836 46,965 Other long-term liabilities 6,689 7,276 Deferred income taxes 2,045 2,489 Accrued severance pay 56,443 57,311 Total long-term liabilities 116,013 114,041
Total stockholders' equity 351,288 330,150
Total liabilities and stockholders'equity 685,611 $ 662,542
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES RECONCILIATION OF SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION EXCLUDING STOCK-BASED COMPENSATION; AMORTIZATION OF INTANGIBLE ASSETS; EARN-OUT AND RETENTION EXPENSES RELATED TO PRIOR ACQUISITIONS; INSURANCE SETTLEMENT RELATED TO 2007 ARBITRATION EXPENSE, NET OF RELATED EXPENSES; SEVERANCE EXPENSES; ACQUISITION AND INTEGRATION COSTS OF GILON ACQUISITION; ALL NET OF TAXES U.S. dollars in thousands (except per share data)
Three months ended Six months ended June 30, June 30, 2009 2010 2009 2010 Statements of Income Data:(Unaudited) (Unaudited) (Unaudited) (Unaudited)
GAAP gross profit $ 34,345 $ 37,426 $ 66,267 $ 74,238 Stock-based compensation 57 116 120 155 Amortization of intangible assets 187 136 376 189 Severance expenses - - 966 - Non-GAAP gross profit $ 34,589 $ 37,678 $ 67,729 $ 74,582
GAAP operating income $ 3,431 $ 3,037 $ 7,700 $ 5,454 Stock-based compensation 828 331 1,756 1,160 Amortization of intangible assets 1,729 1,452 3,365 2,720 Earn-out and retention expenses related to prior acquisitions - 497 - 977 Insurance settlement related to 2007 arbitration expense, net of related expenses - - (2,610) - Severance expenses - - 2,646 - Acquisition and integration costs of Gilon acquisition - 728 - 728 Non-GAAP operating income $ 5,988 $ 6,045 $ 12,857 $ 11,039
GAAP operating margin 2.7% 2.2% 3.0% 2.0% Non-GAAP operating margin 4.7% 4.3% 5.1% 4.0%
GAAP net income from continuing operations $ 2,228 $ 888 $ 4,699 $ 1,586 Stock-based compensation; amortization of intangible assets; earn-out and retention expenses related to prior acquisitions; insurance settlement in respect of 2007 arbitration expense, net of related expenses; severance expenses; acquisition and integration costs of Gilon acquisition; all net of taxes 2,085 2,866 4,282 5,518 Non-GAAP net income from continuing operations $ 4,313 $ 3,754 $ 8,981 $ 7,104
GAAP diluted net earnings per share from continuing operations $ 0.06 $ 0.02 $ 0.12 $ 0.04 Stock-based compensation; amortization of intangible assets; earn-out and retention expenses related to prior acquisitions; insurance settlement in respect of 2007 arbitration expense, net of related expenses; severance expenses; acquisition and integration costs of Gilon acquisition; all net of taxes 0.05 0.07 0.11 0.14 Non-GAAP diluted net earnings per share from continuing operations $ 0.11 $ 0.10 $ 0.23 $ 0.18
Segment Data:
Software Product Engineering: GAAP operating income $ 4,096 $ 4,388 $ 8,210 $ 8,241 Amortization of intangible assets 38 38 76 76 Non-GAAP operating income $ 4,134 $ 4,426 $ 8,286 $ 8,317
System Integration and Application Development: GAAP operating income $ 3,228 $ 2,746 $ 8,539 $ 5,973 Amortization of intangible assets 1,691 1,414 3,289 2,644 Earn-out and retention expenses related to prior acquisitions - 497 - 977 Insurance settlement related to 2007 arbitration expense, net of related expenses - - (2,610) - Severance expenses - - 1,293 - Acquisition and integration costs of Gilon acquisition. - 728 - 728 Non-GAAP operating income $ 4,919 $ 5,385 $ 10,511 $ 10,322
The Company Delivered 10% Year-Over-Year Quarterly Revenue Growth With Sequential Operating Margin Expansion
PR Newswire -- July 28, 2010
HACKENSACK, New Jersey, July 28, 2010 /PRNewswire-FirstCall/ -- Ness Technologies, Inc. (NASDAQ: NSTC and TASE: NSTC), a global provider of IT services and solutions, announced today its financial results for the quarter ended June 30, 2010.
Second Quarter 2010 Highlights:
- Quarterly revenues were $139.7 million, up 10% year-over-year.
- Quarterly operating income was $3.0 million, down 11% year-over-year. On a non-GAAP basis ([1]), quarterly operating income was $6.0 million, up 1% year-over-year.
- Quarterly net income from continuing operations was $0.9 million, down 60% year-over-year. On a non-GAAP basis, quarterly net income from continuing operations was $3.8 million, down 13% year-over-year.
- Quarterly diluted net earnings per share from continuing operations were $0.02, compared to $0.06 in the second quarter of 2009. On a non-GAAP basis, quarterly diluted net earnings per share from continuing operations were $0.10, compared to $0.11 in the second quarter of 2009.
- Quarterly operating cash flows from continuing operations were $0.4 million.
- Cash, cash equivalents and short-term bank deposits were $53.1 million as of June 30, 2010.
- Backlog from continuing operations as of June 30, 2010 was $658 million, up 3% year-over-year and 2% sequentially, in constant currencies.
- Headcount for continuing operations was approximately 7,765 as of June 30, 2010.
- The previously announced acquisition of Gilon Business Insight, Ltd., a provider of business intelligence services in Israel, closed during the quarter.
"I am pleased by our performance in the second quarter, as all our businesses did well, other than in Central and Eastern Europe," said Sachi Gerlitz, president and chief executive officer of Ness Technologies. "While the timing of the economic recovery in Central and Eastern Europe remains uncertain, we continued to improve our operating efficiency and are encouraged by the increasing demand in the public sector in the Czech Republic, where we won several deals. I am optimistic about continuing our growth in the second half of the year based on the demand that we see in our pipeline."
- Results by operating segment:
- The company's Software Product Engineering segment, which provides outsourced software product research and development services to companies that build or rely on software to generate revenues, continued to perform well in the second quarter, with higher-than-normal operating margins and sequential and year-over-year revenue growth.
- The company's System Integration and Application Development segment showed good year-over-year revenue growth and sequential non-GAAP operating margin improvement, with strong performance in the United States and Israel, and weak performance in Central and Eastern Europe.
- As previously announced, the company no longer reports a separate Software Distribution segment, as its European software distribution operations were reclassified as discontinued operations and its Israeli software distribution operations were reclassified to its System Integration and Application Development segment, effective as of January 1, 2010.
"We continued to execute on our operational plans in the second quarter, and I am encouraged by our results," said Ofer Segev, executive vice president and chief financial officer. "The restructuring steps we completed through the end of the first quarter to improve our operating efficiency have provided a good platform for our planned future growth, as we work to further drive revenues and increase operating margins in the second half of 2010."
Business Outlook
Ness continues to expect top line revenue growth and margin expansion in 2010, with third quarter results in line with second quarter results, and fourth quarter results significantly better than third quarter results.
Ness is reiterating its full year 2010 guidance of revenues from continuing operations in the range of $575 million to $585 million with diluted net earnings per share from continuing operations in the range shown in the reconciliation table below:
Full year diluted net earnings per share ($) Low High
GAAP basis from continuing operations........ $ 0.12 $ 0.16 Stock-based compensation; amortization of intangible assets; earn-out and retention expenses related to prior acquisitions; acquisition and integration costs of Gilon acquisition........................... 0.31 0.31 Non-GAAP basis from continuing operations......$ 0.43 $ 0.47
Based on the weakness of European currencies, Ness currently expects to be near the lower end of the revenue guidance range.
The company's 2010 GAAP guidance excludes any unannounced future acquisitions or stock-based compensation grants; and the company's GAAP and non-GAAP guidance further assumes that outstanding diluted shares will average approximately 39 million in 2010 and that relevant foreign currency exchange rates will remain at their levels as on July 23, 2010.
For the reasons set forth elsewhere in this release, Ness' management believes that non-GAAP earnings per share financial guidance provides the best comparative basis for investors to understand and assess the company's on-going operations and prospects for the future.
Conference Call Details
Sachi Gerlitz, president and chief executive officer of Ness Technologies, and Ofer Segev, executive vice president and chief financial officer, will conduct a conference call to discuss the second quarter 2010 results. The call, which will be simultaneously webcast, will begin at 8:30 AM Eastern Time / 5:30 AM Pacific Time / 3:30 PM Israel Time on Wednesday, July 28, 2010.
To access the Ness Technologies second quarter 2010 earnings conference call, participants in North America should dial 1-800-399-0427, participants in Israel should dial 1-80-924-5917 and all other international participants should dial +1-973-200-3375. A live audio webcast of the conference call will be available on the investor relations page of the Ness Technologies corporate web site at http://investor.ness.com. Please visit the web site at least 15 minutes early to register for the teleconference webcast and download any necessary audio software. A replay of the call will be available on the web site approximately two hours after the conference call is completed.
About Ness Technologies
Ness Technologies (NASDAQ: NSTC and TASE:NSTC) is a global provider of IT and business services and solutions with specialized expertise in software product engineering; and system integration, application development, consulting and software distribution. Ness delivers its portfolio of solutions and services using a global delivery model combining offshore, near-shore and local teams. With about 7,800 employees, Ness has operations in North America, Europe, Israel and India, has customers in over 20 countries, and partners with numerous software and hardware vendors worldwide. For more information about Ness, visit http://www.ness.com.
Use of Non-GAAP Financial Information
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Ness uses various non-GAAP measures of net income and earnings per share, including adjustments from results based on GAAP to exclude (a) non-cash stock-based compensation expenses in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718, "Stock Compensation" (formerly, FASB Statement 123R) and amortization of intangible assets, net of taxes; (b) earn-out and retention expenses related to prior acquisitions; (c) an insurance settlement in the first quarter of 2009 related to a 2007 arbitration expense, net of related expenses, net of taxes; (d) severance expenses in the first quarter of 2009, net of taxes; and (e) acquisition and integration costs of its Gilon acquisition, net of taxes. Ness' management believes the non-GAAP financial information provided in this release is useful to investors' understanding and assessment of Ness' on-going core operations and prospects for the future. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Management uses both GAAP and non-GAAP information in evaluating and operating the business internally and as such has determined that it is important to provide this information to investors.
Ness also uses these non-GAAP measures in the formulation of its financial guidance. This requires Ness management to make assumptions regarding certain factors that could affect future net income and earnings per share, such as the timing and size of future potential acquisitions (which could result in additional non-cash amortization of intangibles), the timing and size of future potential stock-based compensation grants (which could result in additional non-cash stock-based compensation expense), and the timing and size of any one-time income or expenses. The company discloses such assumptions in conjunction with its financial guidance.
Forward Looking Statement
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often are preceded by words such as "believes," "expects," "may," "anticipates," "plans," "intends," "assumes," "will" or similar expressions. Forward-looking statements reflect management's current expectations, as of the date of this press release, and involve certain risks and uncertainties. Ness' actual results could differ materially from those anticipated in these forward looking statements as a result of various factors. Some of the factors that could cause future results to materially differ from the recent results or those projected in forward-looking statements include the "Risk Factors" described in Ness' Annual Report of Form 10-K filed with the Securities and Exchange Commission on March 15, 2010. Ness is under no obligation, and expressly disclaims any obligation, to update or alter its forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise.
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME U.S. dollars in thousands (except per share data)
Three months ended Six months ended June 30, June 30, 2009 2010 2009 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 126,887 $ 139,701 $ 253,168 $ 273,034 Cost of revenues 92,542 102,275 186,901 198,796 Gross profit 34,345 37,426 66,267 74,238
Selling and marketing 9,681 9,838 18,893 19,891 General and administrative 21,233 24,551 44,818 48,893 Insurance settlement related to 2007 arbitration expense, net of related expenses - - (2,610) - Commissions related to the sale of Israeli SAP sales and distribution operations - - (2,534) - Total operating expenses 30,914 34,389 58,567 68,784
Operating income 3,431 3,037 7,700 5,454 Financial expenses, net (666) (442) (1,822) (651) Income before taxes on income 2,765 2,595 5,878 4,803
Taxes on income 537 1,707 1,179 3,217 Net income from continuing operations $ 2,228 $ 888 $ 4,699 $ 1,586
Net loss from discontinued operations (1,186) (845) (2,129) (6,232) Net income (loss) $ 1,042 $ 43 $ 2,570 $ (4,646)
Basic net earnings per share from continuing operations $ 0.06 $ 0.02 $ 0.12 $ 0.04 Diluted net earnings per share from continuing operations $ 0.06 $ 0.02 $ 0.12 $ 0.04
Basic net earnings (loss) per share $ 0.03 $ 0.00 $ 0.07 $ (0.12) Diluted net earnings (loss) per share $ 0.03 $ 0.00 $ 0.07 $ (0.12)
Weighted average number of shares (in thousands) used in computing basic net earnings per share from continuing operations, basic net earnings (loss) per share and diluted net loss per share 38,590 38,161 38,755 38,230 Weighted average number of shares (in thousands) used in computing diluted net earnings per share from continuing operations and diluted net earnings per share 39,149 38,592 39,333 38,672
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME U.S. dollars in thousands
Three months ended Six months ended June 30, June 30, 2009 2010 2009 2010 Segment Data (1): (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues from continuing operations: Software Product Engineering $ 25,688 $ 28,060 $ 50,654 $ 54,457 System Integration and Application Development.. 101,199 111,641 202,514 218,577 $ 126,887 $ 139,701 $ 253,168 $ 273,034 Operating income (loss) from continuing operations: Software Product Engineering $ 4,096 $ 4,388 $ 8,210 $ 8,241 System Integration and Application Development.. 3,228 2,746 8,539 5,973 Unallocated Expenses (3,893) (4,097) (9,049) (8,760) $ 3,431 $ 3,037 $ 7,700 $ 5,454 Geographic Data:
Revenues from continuing operations: Israel $ 42,371 $ 51,327 $ 87,641 $ 98,966 Europe 38,601 38,164 75,074 77,165 North America 43,544 48,381 86,023 93,630 Asia and the Far East 2,371 1,829 4,430 3,273 $ 126,887 $ 139,701 $ 253,168 $ 273,034
(1) The company no longer reports a separate Software Distribution segment, as its European software distribution operations were reclassified as discontinued operations and its Israeli software distribution operations were reclassified to its System Integration and Application Development segment, effective as of January 1, 2010. Segment data for prior periods has been restated to reflect the current organization of the segments.
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands Six months ended June 30, 2009 2010 (Unaudited) (Unaudited) Cash flows from operating activities: Net income (loss) $ 2,570 $ (4,646) Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: Net loss from discontinued operations 2,129 6,232 Stock-based compensation 1,756 1,600 Currency fluctuation of restricted cash and short-term bankmdeposits - (415) Depreciation and amortization 8,423 8,631 Loss (gain) on sale of property and equipment and impairment and sale of cost investments (205) 79 Commissions related to the sale of Israeli SAP sales and distribution operations (2,534) - Decrease (increase) in trade receivables, net 38,709 (6,719) Decrease (increase) in unbilled receivables 894 (5,680) Decrease (increase) in other accounts receivable and prepaid expenses (1,949) 1,423 Decrease (increase) in work-in-progress (343) 1,393 Increase in long-term prepaid expenses (346) (540) Deferred income taxes, net 513 847 Increase (decrease) in trade payables (13,387) 11,473 Decrease in advances from customers and deferred revenues (1,200) (2,851) Decrease in other accounts payable and accrued expenses (14,810) (8,369) Increase in other long-term liabilities 472 882 Increase (decrease) in accrued severance pay, net (1,384) 266 Net cash used in discontinued operations. (1,853) (3,712) Net cash provided by (used in) operating activities 17,455 (106)
Cash flows from investing activities: Consideration from sale of a consolidated subsidiary - 1,711 Net cash paid for acquisition of a consolidated subsidiary - (16,259) Cash paid for acquisition of intangible assets - (513) Additional payments in connection with acquisitions of subsidiaries in prior periods (14,395) (1,330) Proceeds from maturity of (investment in) short-term bank deposits, net (15,778) 10,791 Proceeds from sale of property and equipment 703 - Purchase of property and equipment and capitalization of software developed for internal use (4,864) (5,287) Net cash used in discontinued operations (1,808) - Net cash used in investing activities (36,142) (10,887)
Cash flows from financing activities: Repurchase of shares (2,037) (2,169) Acquired subsidiary's dividend to its former shareholder (683) - Short-term bank loans and credit, net (4,560) 6,361 Proceeds from long-term debt 15,000 13,364 Principal payments of long-term debt (2,161) (8,701) Net cash provided by financing activities 5,559 8,855
Effect of exchange rate changes on cash and cash equivalents (1,101) (2,987) Decrease in cash and cash equivalents (14,229) (5,125) Cash and cash equivalents at the beginning of the period 44,585 40,218 Cash and cash equivalents at the end of the period $ 30,356 $ 35,093
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands December June 30, 31, 2009 2010 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 40,218 $ 35,093 Restricted cash 2,470 2,474 Short-term bank deposits 25,939 15,556 Trade receivables, net of allowance for doubtful accounts 131,452 136,725 Unbilled receivables 28,012 32,625 Other accounts receivable and prepaid expenses 27,832 26,677 Work in progress 9,690 7,111 Total assets attributed to discontinued operations 43,212 28,391 Total current assets 308,825 284,652
LONG-TERM ASSETS: Long-term prepaid expenses and other assets 6,083 6,575 Unbilled receivables 4,654 4,417 Deferred income taxes, net 3,608 2,442 Severance pay fund 53,145 53,726 Property and equipment, net 35,739 34,019 Intangible assets, net 10,016 11,672 Goodwill 263,541 265,039 Total long-term assets 376,786 377,890
Total assets $ 685,611 $ 662,542
CURRENT LIABILITIES: Short-term bank credit $ 500 $ 8,792 Current maturities of long-term debt 21,332 24,035 Trade payables 30,914 40,573 Advances from customers and deferred revenues 40,639 36,134 Other accounts payable and accrued expenses 99,464 94,256 Total liabilities attributed to discontinued operations 25,461 14,561 Total current liabilities 218,310 218,351
LONG-TERM LIABILITIES: Long-term debt, net of current maturities 50,836 46,965 Other long-term liabilities 6,689 7,276 Deferred income taxes 2,045 2,489 Accrued severance pay 56,443 57,311 Total long-term liabilities 116,013 114,041
Total stockholders' equity 351,288 330,150
Total liabilities and stockholders'equity 685,611 $ 662,542
NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES RECONCILIATION OF SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION EXCLUDING STOCK-BASED COMPENSATION; AMORTIZATION OF INTANGIBLE ASSETS; EARN-OUT AND RETENTION EXPENSES RELATED TO PRIOR ACQUISITIONS; INSURANCE SETTLEMENT RELATED TO 2007 ARBITRATION EXPENSE, NET OF RELATED EXPENSES; SEVERANCE EXPENSES; ACQUISITION AND INTEGRATION COSTS OF GILON ACQUISITION; ALL NET OF TAXES U.S. dollars in thousands (except per share data)
Three months ended Six months ended June 30, June 30, 2009 2010 2009 2010 Statements of Income Data:(Unaudited) (Unaudited) (Unaudited) (Unaudited)
GAAP gross profit $ 34,345 $ 37,426 $ 66,267 $ 74,238 Stock-based compensation 57 116 120 155 Amortization of intangible assets 187 136 376 189 Severance expenses - - 966 - Non-GAAP gross profit $ 34,589 $ 37,678 $ 67,729 $ 74,582
GAAP operating income $ 3,431 $ 3,037 $ 7,700 $ 5,454 Stock-based compensation 828 331 1,756 1,160 Amortization of intangible assets 1,729 1,452 3,365 2,720 Earn-out and retention expenses related to prior acquisitions - 497 - 977 Insurance settlement related to 2007 arbitration expense, net of related expenses - - (2,610) - Severance expenses - - 2,646 - Acquisition and integration costs of Gilon acquisition - 728 - 728 Non-GAAP operating income $ 5,988 $ 6,045 $ 12,857 $ 11,039
GAAP operating margin 2.7% 2.2% 3.0% 2.0% Non-GAAP operating margin 4.7% 4.3% 5.1% 4.0%
GAAP net income from continuing operations $ 2,228 $ 888 $ 4,699 $ 1,586 Stock-based compensation; amortization of intangible assets; earn-out and retention expenses related to prior acquisitions; insurance settlement in respect of 2007 arbitration expense, net of related expenses; severance expenses; acquisition and integration costs of Gilon acquisition; all net of taxes 2,085 2,866 4,282 5,518 Non-GAAP net income from continuing operations $ 4,313 $ 3,754 $ 8,981 $ 7,104
GAAP diluted net earnings per share from continuing operations $ 0.06 $ 0.02 $ 0.12 $ 0.04 Stock-based compensation; amortization of intangible assets; earn-out and retention expenses related to prior acquisitions; insurance settlement in respect of 2007 arbitration expense, net of related expenses; severance expenses; acquisition and integration costs of Gilon acquisition; all net of taxes 0.05 0.07 0.11 0.14 Non-GAAP diluted net earnings per share from continuing operations $ 0.11 $ 0.10 $ 0.23 $ 0.18
Segment Data:
Software Product Engineering: GAAP operating income $ 4,096 $ 4,388 $ 8,210 $ 8,241 Amortization of intangible assets 38 38 76 76 Non-GAAP operating income $ 4,134 $ 4,426 $ 8,286 $ 8,317
System Integration and Application Development: GAAP operating income $ 3,228 $ 2,746 $ 8,539 $ 5,973 Amortization of intangible assets 1,691 1,414 3,289 2,644 Earn-out and retention expenses related to prior acquisitions - 497 - 977 Insurance settlement related to 2007 arbitration expense, net of related expenses - - (2,610) - Severance expenses - - 1,293 - Acquisition and integration costs of Gilon acquisition. - 728 - 728 Non-GAAP operating income $ 4,919 $ 5,385 $ 10,511 $ 10,322
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