RNS Number:0414D
Tescom Software Systems Testing Ltd
31 August 2007
Tescom Software Systems Testing Ltd. ("Tescom" or "the Company")
Interim Results for the Six Months ended 30 June 2007
Tescom Software Systems Testing Ltd. (Symbol: TSCM), the international quality
assurance and software testing service provider, announces its interim results
for the six months ended 30 June 2007.
Highlights
* Revenues amounting to $27.5m, versus $26.8m in 2006
* Gross margins were 34.0%, compared to 32.1% in 2006
* Profit before tax was $1.4m, versus $1.1m in 2006
* Diluted earnings per share were $0.06, versus $0.05 in 2006
* Strengthening of senior sales and account management personnel in the
UK, US and Israel
* Continued emphasis on European activities, which comprise over 54% of
consolidated revenues, versus 51% in 2006
Ofer Albeck, CEO of Tescom, said: "Tescom's H107 results reflect an improvement
in gross margins, alongside stability in revenues. During H107, we re-focused
our efforts on large-scale, long-term projects, which resulted in improved gross
margins, alongside a decrease in revenues in the short term. We have also
significantly enhanced our investments in sales and marketing resources on a
global basis. These actions, which were taken for their long-term benefits to
the Company, are expected to result in a relatively modest increase in our top
line and a decrease in operating profitability for the remainder of 2007.
The Company expects to benefit from its continued emphasis on the European
market, now representing more than 54% of its total revenues, which has
significantly higher gross margins. Tescom continues to focus its efforts on
growth from new large-scale, long-term contracts, as well as on cultivating its
well established account management with existing customers.
We expect to leverage our investments in sales and marketing, along with our
previous investments in infrastructure and management, in order to achieve
consistent, sustainable long-term growth in both revenues and profitability".
Enquiries:
Tescom
Ofer Albeck, CEO + 972 3 535 0990
Phil Serlin, VP Finance + 972 3 535 0990
Ravit Halevy, VP Corporate Development + 972 3 535 0990
Landsbanki Securities (UK) Limited
(Nominated Adviser)
Tom Hulme +44 (0)20 7426 9593
Chief Executive's Review
Tescom's revenues for H107 of $27.5m remained stable in comparison to revenues
of $26.8m in H106. These figures reflect the weakening of the US dollar against
the major currencies of the Group of approximately 10% on a weighted average
basis for H107 in comparison to H106.
Gross margins have increased to 34.0% from 32.1% in the corresponding 2006
period, as we begin to see the effects of improved account and delivery
management. As part of our continuing efforts to improve our margins, we have
also invested in establishing a "near-shore" operation in Israel. This operation
is expected to bring results in 2008. We anticipate that our near-shore
experience from this operation will enhance our global off-shore capabilities in
the future.
During H107, we made a strategic decision to significantly enhance our sales and
marketing efforts on a global basis, as we believe our previous investments in
delivery management have provided us solid delivery capabilities and the
necessary infrastructure for expansion. As part of this decision, we have
focused our investments in enlarging and upgrading our sales force in most of
our territories.
Overseas activities have grown to represent over 54% of consolidated revenues,
in comparison to 51% for the same period in 2006, and this percentage is
expected to increase.
Within the framework of the Company's enhanced sales and marketing efforts, we
recognized an opportunity to compete on a substantial tender for Tescom in the
European market. This tender, while consuming significant resources and
management attention, resulted in our entering into new alliances and refining
our marketing tools. This experience will serve the Company in realizing similar
opportunities in the future. We are proud of the efforts invested by our local
and global resources to produce a high-quality submission. We are currently
waiting to receive formal notification with regard to the tender.
Tescom continues to make progress in the US, and has invested in new senior
sales and delivery management. These investments are expected to have a positive
effect on long-term revenue and profitability growth. In the Asia-Pacific
region, Tescom has increased its off-shore contract activities.
Tescom Israel has re-focused its efforts on large-scale projects for the long
term. These actions are expected to result in improved gross margins in the long
term, alongside a decrease in revenues in the short term. The Company has
recently established a low-cost, near-shore operation in Modi'in Elite, which
has successfully completed training of the first group of new employees. This
operation is part of an Israeli-government subsidized programme to provide
employment and training to certain segments of the population. The Company has
also been successful at gaining new contracts in the insurance sector and has
won the principal tender for testing issued by the IDF (Israel Defence Forces)
We expect to leverage our investments in sales and marketing, along with our
previous investments in infrastructure and management, in order to achieve
consistent, sustainable long-term growth in both revenues and profitability.
I also wish to thank our employees for their continued efforts on the Company's
behalf.
Financial Review
Results
Revenues for H107 of $27.5m remained stable in comparison to the corresponding
period in 2006. Revenue increases in Europe, the US and Asia-Pacific, mainly as
a result of new contracts in these locations, were offset by a decline in
revenues in Israel.
Pre-tax profit amounted to $1.4m, versus $1.1m in 2006. Gross profit margins
increased to 34.0% from 32.1% in the 2006 period, mainly as a result of higher
margin contracts in Israel, the US and Australia. G&A expenses increased
slightly, to $5.8m from $5.7m in 2006. Sales and marketing expenditure increased
by 13.6%, to $1.9m from $1.6m in the 2006 period.
The Company's revenues and operating profit were positively affected by the
weakening of the US dollar against the major currencies of the Group (Pound
Sterling, Euro and Israeli Shekel) of approximately 10% on a weighted average
basis for H107 in comparison to H106.
Net financial expenses increased by $0.1m, as a result of fluctuations in the
exchange rates between the NIS, the dollar and the other operating currencies in
the various Group locations.
The Company generated $0.5m in cash from operating activities during H107,
versus utilizing $1.1m in H106. The increase in operating cash flows results
primarily from a smaller increase in trade receivables, as opposed to the
corresponding period last year. The Company's cash balance at 30 June 2007 was
$1.7m, which reflects the payment of a $0.9m dividend during the second quarter.
The Company maintains short-term bank credit lines in both Israel and the UK in
the aggregate amount of approximately $8.0m. $3.0m had been drawn against these
credit lines as of 30 June 2007.
Dividends
The Company's dividend policy is subject to the future performance of the
Company and its funding requirements. In March 2007, the Company declared a
final dividend of $0.9m on account of 2006, which was paid on 2 May 2007.
Outlook
Tescom expects a relatively modest increase in its top line and a decrease in
operating profitability for the remainder of 2007. Our focus on long-term,
large-scale projects has resulted in improved gross margins, alongside a
decrease in revenues in the short term. Our increased investments in sales and
marketing, while reducing operating profit in 2007, are expected to bring
results in 2008.
The Company expects to benefit from its continued emphasis on the European
market, now representing more than 54% of its total revenues, which has
significantly higher gross margins. Tescom continues to focus its efforts on
growth from new large-scale, long-term contracts, as well as on cultivating its
well established account management with existing customers.
The Board of Tescom continues to examine a number of strategic opportunities to
expand its businesses in its current territories and enhance shareholder value.
CONSOLIDATED BALANCE SHEETS
In thousands of US dollars
December 31, June 30,
2006 2007
Audited Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 2,071 1,725
Trade receivables 13,830 14,424
Other current assets and prepaid expenses 1,227 1,733
Total current assets 17,128 17,882
NON-CURRENT ASSETS:
Severance pay fund 2,267 2,245
Property and equipment, net 1,661 1,906
Deferred income taxes 1,379 1,504
Goodwill and other intangible assets 432 403
Total non-current assets 5,739 6,058
Total assets 22,867 23,940
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
In thousands of US dollars
December 31, June 30,
2006 2007
Audited Unaudited
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term credit and current portion of 2,506 2,987
long-term loans
Trade payables 1,336 1,508
Income taxes payable 293 587
Other current liabilities and accrued expenses 6,868 6,846
Total current liabilities 11,003 11,928
LONG-TERM LIABILITIES:
Long-term loans 252 273
Accrued severance pay 2,691 2,709
Total long-term liabilities 2,943 2,982
EQUITY:
Share capital 51 51
Share premium 10,480 10,516
Treasury shares, at cost (328) (328)
Foreign currency translation reserve (732) (717)
Accumulated deficit (550) (492)
8,921 9,030
22,867 23,940
The accompanying notes are an integral part of the consolidated financial
statements.
August 30, 2007
Date of approval of the Ofer Albeck Philip Serlin
financial statements CEO and Chairman of Vice President, Finance
the Board of Directors
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands of US dollars, except share and per share data
Year ended Six months ended
December 31, June 30,
2006 2006 2007
Audited Unaudited
Revenues 53,437 26,760 27,490
Cost of revenues 35,808 18,171 18,146
Gross profit 17,629 8,589 9,344
Operating expenses:
Selling and marketing 3,121 1,630 2,022
General and administrative 11,389 5,728 5,716
Total operating expenses 14,510 7,358 7,738
Operating income 3,119 1,231 1,606
Financial income 106 28 81
Financial expenses (244) (156) (294)
Other expenses, net (4) (5) -
Profit before taxes on income 2,977 1,098 1,393
Taxes on income 657 350 427
Net profit 2,320 748 966
Basic and diluted net earnings per share 0.15 0.05 0.06
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
In thousands of US dollars
Share Share Treasury Foreign Accumulated Total
premium shares, at currency deficit
capital cost trans-lation equity
reserve
Balance as of January 1, 2006 51 10,881 (173) (1,331) (2,870) 6,558
(audited)
Share compensation expenses - (401) - - - (401)
Shares repurchased by the Company - - (155) - - (155)
Foreign currency translation - - - 599 - 599
adjustments
Net profit - - - - 2,320 2,320
Balance as of December 31, 2006 51 10,480 (328) (732) (550) 8,921
(audited)
Share compensation expenses - 22 - - - 22
Foreign currency translation - - - 15 - 15
adjustments
Exercise of options 14 - - - 14
Dividends - - - - (908) (908)
Net profit - - - - 966 966
Balance as of June 30, 2007 51 10,516 (328) (717) (492) 9,030
(unaudited)
Share Share Treasury Foreign Accumulated Total
premium shares, at currency deficit
capital cost trans-lation Equity
reserve
Balance as of January 1, 2006 51 10,881 (173) (1,331) (2,870) 6,558
(audited)
Share compensation expenses - 123 - - - 123
Shares repurchased by the - - (163) - - (163)
Company
Foreign currency translation - - - 244 - 244
adjustments
Net profit - - - - 748 748
Balance as of June 30, 2006 51 11,004 (336) (1,087) (2,122) 7,510
(unaudited)
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of US dollars
Year ended Six months ended
December 31, June 30,
2006 2006 2007
Audited Unaudited
Cash flows from operating activities:
Net profit 2,320 748 966
Adjustments to reconcile net profit to net cash provided by
(used in) operating activities:
Share compensation expenses (401) 123 22
Depreciation and amortization 442 275 221
Increase in accrued severance pay, net 121 90 43
Deferred income taxes, net (131) (144) (119)
Increase in trade receivables (1,279) (2,774) (456)
Increase in other current assets and prepaid expenses (501) (331) (500)
Increase in trade payables 377 1,057 155
Increase (decrease) in other current liabilities and accrued (618) (166) 163
expenses
Net cash provided by (used in) operating activities 369 (1,122) 495
Cash flows from investing activities:
Additions to property and equipment (462) (70) (214)
Proceeds from sale of property and equipment - 8 -
Net cash used in investing activities (462) (62) (214)
Cash flows from financing activities:
Dividend payment (1,050) (1,021) (908)
Short-term bank credit, net 576 807 351
Exercise of options - - 14
Shares repurchased by the Company (155) (163) -
Repayment of long-term bank loan (20) (8) (87)
Net cash used in financing activities (649) (385) (630)
Effect of exchange rate changes on cash and cash equivalents 199 61 3
Decrease in cash and cash equivalents (582) (1,508) (346)
Cash and cash equivalents at the beginning of the period 2,653 2,653 2,071
Cash and cash equivalents at the end of the period 2,071 1,145 1,725
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of US dollars
Year ended Six months ended
December 31, June 30,
2006 2006 2007
Audited Unaudited
(a) Supplemental disclosure of cash flows:
Cash paid during the period for:
Interest 180 72 92
Income taxes 1,679 548 330
(b) Cash received during the period for interest 37 25 45
(c) Supplemental disclosure of non-cash transactions:
Property and equipment acquired on credit 340 229 226
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In thousands of US dollars, except share data
NOTE 1:- GENERAL
a. These financial statements have been prepared in a condensed format as of
June 30, 2007 and for the six months then ended. These financial statements
should be read in conjunction with the annual financial statements of the
Company as of December 31, 2006, and their accompanying notes.
b. The interim condensed consolidated financial statements herein have been
prepared in accordance with IAS 34, "Interim Financial Reporting", on the
historical cost basis. The significant accounting policies and methods of
computations applied in the preparation of the interim financial statements are
the same as those applied in the annual financial statements as of December 31,
2006.
NOTE 2:- EXCHANGE RATE DATA
Following are data regarding the representative exchange rates of the New
Israeli Shekel ("NIS") and the Pound Sterling in relation to the US Dollar:
Exchange rate of Exchange rate of
As of one US Dollar one Pound Sterling
June 30, 2007 NIS 4.249 NIS 8.507
June 30, 2006 NIS 4.440 NIS 8.138
December 31, 2006 NIS 4.225 NIS 8.288
NOTE 3:- FUTURE ACCOUNTING POLICIES
IAS 23 (Revised), "Borrowing Costs"
IAS 23 has been revised to require that borrowing costs be capitalized if they
are directly attributable to the acquisition, construction or production of a
qualifying asset. A qualifying asset is defined as an asset that takes a
substantial period of time to get ready for its intended use or sale and
includes fixed assets, investment properties and inventories that require a
substantial period of time to bring them to a saleable condition. The option to
immediately recognize such costs as an expense is eliminated. The revised
Standard is effective for annual periods beginning January 1, 2009. Early
application is permitted.
The Company believes adoption of the revised Standard is not expected to have a
material effect on its financial position, results of operations and cash flows.
NOTE 3:- FUTURE ACCOUNTING POLICIES (cont.)
IFRIC 8 - Adoption of IFRS 2 Regarding Share-Based Payments
IFRIC 8 deals with share-based payment transactions where all or part of the
goods or services are not specifically identifiable. These goods or services are
measured upon the date of grant as the difference between the fair value of the
share-based payment and the fair value of the identifiable goods or services.
The Company believes adoption of IFRIC 8 is not expected to have a material
effect on its financial position, results of operations and cash flows.
IFRIC 10 - Interim Financial Reporting and Impairment
IFRIC 10 disallows the reversal of an impairment loss recognised in the past in
the interim financial statements with respect to goodwill, investments in equity
instruments or financial assets presented at cost. IFRIC 10 will be adopted in
the Group's financial statements beginning in 2007, and will apply to goodwill,
investments in equity instruments and financial assets presented at cost from
the date on which the Company first adopts the measurement principles of IAS 36
and IAS 39, retrospectively. The Company believes that adoption of IFRIC 10 will
not have a material effect on its financial statements.
NOTE 4:- SEGMENT INFORMATION
Six months ended June 30, 2007 (unaudited):
North Europe Israel Other Total
America
Segment revenues 2,839 14,922 7,872 1,857 27,490
Segment results 404 2,032 (58) 292 2,670
Unallocated expenses 1,064
1,606
Six months ended June 30, 2006 (unaudited):
North Europe Israel Other Total
America
Segment revenues 2,556 13,747 8,834 1,623 26,760
Segment results 5 1,723 450 220 2,398
Unallocated expenses 1,167
1,231
NOTE 4:- SEGMENT INFORMATION (cont.)
Year ended December 31, 2006 (audited):
North Europe Israel Other Total
America
Revenues:
Segment revenues 4,831 27,604 17,216 3,786 53,437
Segment results (241) 4,173 1,260 327 5,519
Unallocated expenses 2,400
3,119
NOTE 5:- DIVIDENDS
In March 2007, the Company declared a dividend of approximately $ 900 ($ 0.06
per share), which was paid in May 2007.
NOTE 6:- CONTINGENT LIABILITIES
a. In July 2007, a former senior employee of the Company commenced legal
proceedings against the Company for amounts that he alleges should have been
paid to him during the period of his employment. The financial statements
include an accrual for these proceedings that reflects the best estimate of the
Company's liability, based on the opinion of its legal counsel. No accrual has
been made for an additional amounts claimed (approximately $ 250), which
management does not expect the Company to have to pay, based on the opinion of
its legal counsel.
b. In August 2007, the Company received notice of a legal claim made against
it by a former supplier in the amount of approximately $ 230. The Company is
currently evaluating its response to the claim and has not yet filed a defense
motion in respect thereto. At this early stage, the Company is unable to
determine the likelihood of any loss in connection with the claim and,
accordingly, no accrual has been made in the financial statements in respect of
this matter.
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