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Mind CTI plans acquisitions
Published by: Globes
www.globes.co.il
Gitit Pincas
30/12/2004


CEO Monica Eisinger on Mind CTI's future, pros and cons of Polar's exit, why, despite it all, she admires Rimon Ben-Shaoul.

Last month marked the end of a two-year episode in the life of billing company Mind CTI (Nasdaq: MNDO; TASE: MNDO). Polar Communications (TASE: PLRC) sold most of its holdings in Mind CTI to Israeli investment institutions.

Polar Communications, led by Rimon Ben-Shaoul, purchased two blocks of Mind CTI shares in 2002, one on the market, and the other from ADC Israel. “Whatever is Polar Communications seeking in Mind CTI?”, capital market players asked, and answered their own question by saying, “The cash reserves are what interests Polar Communications. They’ll take over the company, and dismantle it. Keep away from it.”

This theory prevailed in the market for many months. “No one believed me then, when I said that Polar Communications wouldn’t distribute the cash. The market really felt threatened, because the company was traded at a $20 million market cap, and it had $40 million in cash reserves,” says Mind CTI founder, chairperson, president and CEO Monica Eisinger. “Rimon constantly said that he was optimistic about the company, but people in Israel were skeptical, and they relayed the message overseas. As a result, US investors more than once told us that the company’s business was interesting and its potential was great, but they were concerned that regardless of what was happening in the company, Polar Communications would one day want money, and would flood the market with merchandise.

”It was like a cloud hanging over the company, and we couldn’t get past this barrier to get people to think otherwise. I therefore think that the distribution of shares in November was good for the company, and was preferable to Polar Communications selling 1-2% from its holdings each quarter.”

Successful

Mind CTI supplies enterprise IP billing systems, including voice, data, content, and call registration service technology. The distribution of shares in the company, carried out by Polar Communications-linked Leader & Co. Investment House, totaled 1.8 million shares for an estimated total of over $8.5 million. Polar Communications did not stop there; over the past year, it sold more than one million shares on the market, leaving it with 4.5% of Mind CTI, compared with a peak stake of 25%.

Confounding any possible concern, the share actually rose during this process. “In the Nasdaq IPO, we sold a total of three million shares, and we had a road show with three bankers,” Eisinger relates. “During a few days of the local road show, on the other hand, Leader & Co. distributed over half the quantity of shares in our IPO. To tell the truth, I wasn’t sure that we’d be able to sell this whole block of shares in so short a time span, but I was pleasantly surprised.” Polar Communications bought most of its shares at $1.10 per share, so made an enormous profit. “I haven’t heard any negative feedback from investors that Polar Communications was selling shares because it didn’t believe in us.” Eisinger declares. “In the capital market, everybody knows that if people have achieved a return of over 300%, they will behave according to the reasonable standard operating procedure for profit taking and capital gains. You can’t expect anything else.” With the completion of this process, in addition to the shares sold by Eisinger herself, the public now holds 65% of Mind CTI, compared with 30% two years ago.

Eisinger has only good things to say about Ben-Shaoul and Polar Communications. “I admire Rimon,” she says. “His desire to help and his understanding, not only in high tech, but also in other matters. My concern about the sale of their shares was the loss of such an amazing partner, but he will remain on the board of directors. Even had Polar Communications sold all of its shares, I would have begged him to stay there.”

”Still under-priced”

The largest shareholders in Mind CTI are now Eisinger 20%, Mind CTI cofounder and board member Lior Salansky 12.5%, and Driehaus Capital 6.2%.

Mind CTI has done well recently. The company had cash reserves of $56.5 million, as of the end of the third quarter, and its market cap is over $115 million. Its share price has now returned to its level at the beginning of the year.

”Globes”: You’ve said more than once that Mind CTI is under-priced. The share is now at $5.50, and is on a clearly rising trend. What is your opinion now?

Eisinger: ”I still feel that, although it’s less obvious. Polar Communications’ holding created pressure, which has now been alleviated. I believe that this will help the share rise. Today, investors are looking at us differently. Our value is no longer in doubt, and they believe in us. For a target price for the share, I can only quote Miller Johnson, the only investment house that covers us. Their very non-aggressive analysis gives a target share price of $8.50. As a rule, I want everyone who invested in the company to earn money.”

People who invested in the issue at $10 are certainly not very satisfied.

”I agree, but I can promise you that our chances of returning to $10 are better than those of Cisco Systems to return to $70, its share price when we had our IPO.”

According to Mind CTI’s forecast, growth and profits will continue in the fourth quarter. Bear in mind, however, that the company’s business is still small-scale, even for Israel. Its annual revenue rate is now at $19 million, and its annualized net profit at $8 million. The company hopes to report a net profit of $2 million on $4.8 million in revenue for the fourth quarter of 2004. Mind CTI also expects to distribute a dividend of $6.5 million this year, the company’s third, in line with its expected profit for the year.

Eisinger is aware that the company she manages is not a giant. “We’ll be a large and well established company when our annual sales reach $100 million. When that will happen is still not clear, but I’m sure we’ll get there. At the company’s peak in 2000, it had $15.6 million in sales, and the company is expected to better that this year.

Portal at its current value

Mind CTI’s annual sales are satisfactory, but what will make it a really big company?

”I’m tired of saying it, but only acquisitions will do it, and we’re constantly looking. A large proportion of my managing time is devoted to this, but we’re not finding any. The number of things I’ve looked at in recent years, even those for which we’ve done due diligence and discovered no value in them, is enormous. There were companies that burned millions of dollars, and wound up with nothing in hand. In 2005, we plan to make acquisitions, but it’s important to stress that it will only happen when we find something good, because we won’t make an acquisition just for the sake of making an acquisition.”

Eisinger’s real dream is to combine forces with Portal Software (Nasdaq: PRSF), whose market cap has recently been shrinking to less than that of Mind CTI for the first time ever. Portal Software, which has also focused mainly on IP billing, has not yet published its third quarter financial report, because its auditors are considering whether to recognize an error in the company’s past revenue. In the second quarter, Portal Software lost $22 million on revenue of $18.6 million. “Portal once sold 15 times as much as Mind CTI. Today, it’s four times as much, or less. Portal has a continual fall in revenue, while we’ve grown 30% this year, and remained profitable,” Eisinger boasts.

Is a merger with Portal logical today?

”Portal has money in the bank and many debts, and it’s burning cash. What we find attractive in the company, however, is its wide customer base. It’s a dream, something completely theoretical, which is not on the agenda, but it’s clear to us that combining the two companies would create something complete. Mind CTI and Portal’s technology and large customer base, and Portal’s market presence, would be combined with our conservative management, and we could create an amazing company. I’m also sure that if Portal is put up for sale, we won’t be the only ones to jump at the chance.” Portal’s market cap is $105 million. Very surprisingly, and in theory, it would be almost a merger between equals.

Could Amdocs also be in the picture for acquiring Portal?

”Emotions are involved here. I assume that Portal founder and former CEO John E. Little will consent to other combinations, provided it won’t be said that he was sold to Amdocs. We’ve said from the beginning that we don’t competing with Amdocs; we sell mostly to second and third-tier customers. We haven’t approached top-tier customers, because Amdocs has economies of scale, and we have no relative advantage there.

”Portal went head-to-head against Amdocs, and lost, even with Vodafone, which was always Portal’s stronghold. We’ve all simply got to take our hats off to Amdocs. It’s not easing competing with it. I assume that now, no one will offer much more than the market price for Portal. The truth is that if the revenue that the company reported really isn’t correct, it’s not definite that even Portal’s current price is worthwhile.”

Are there offers to acquire Mind CTI now? Were there opportunities in the past?

”There’s nothing on the agenda now. There were quite a few offers in 1999, but we were a dream technology company then, and we eventually went for an IPO. That’s real prehistory, but those interested at the time were Amdocs and Convergys. Today, Amdocs, for example, has no reason to buy us.”

Prepare for the worst

Meanwhile, Mind CTI is looking for cooperation that will enable it to make sales without a massive investment in marketing. Among other things, it is cooperating with Cisco Systems (Nasdaq: CSCO). The latest addition to Mind CTI’s cooperation list is Veraz Networks, in which ECI Telecom (Nasdaq: ECIL) has a 43% stake.

Beyond its growth in revenue, Mind CTI is also still expanding its personnel by recruiting new employees. Mind CTI currently has 250 employees, at least 30% more than at the beginning of the year. The company has 110 employees in Israel and even more, about 130, in Romania.

There are other reasons besides it being Eisinger’s birthplace for Mind CTI’s presence in Romania. “In 2001, we opened a large customer support center in Romania, with eight employees. It’s a country in the same time zone as we are, and we can employ high quality personnel there at low cost, which cost-benefit analysis shows to be worthwhile. There aren’t many good engineers out of work in Israel, and no outstanding Technion graduate will work here in technical support for customers. In Romania, I’ve got engineers supporting customers. What attracts them is the overseas travel.”

Besides Portal Software, Mind CTI’s main competitors are British company Intec Telecom Systems (LSE: ITL), an aggressive company that recently made a number of acquisitions, including the billing business of ADC Telecommunications (Nasdaq: ADCT), and Geneva Technology, a subsidiary of Convergys (NYSE: CVG).

How big is Mind CTI’s market? There is no answer to this question. “I’d pay a lot to someone for a comprehensive examination of the market. It’s clear to us, though, that it’s not growing by 30% a year. We’ve succeeded in growing by this rate,” Eisinger states.

Eisinger says that in the company presentation for its IPO in 2000, it had forecasts in hand, including one by IDC, that promised the earth and the moon. “They mentioned astronomical numbers that I’m ashamed even to repeat, because they were so unreal. Ever since then, I haven’t included any surveys in presentations. I always try to think ahead about extreme cases. In the road show in the US, investors asked me, ‘How much will you burn if you have no revenue?’ At the time, I thought to myself that it was a stupid question, but today I realize that it was very smart. You have to prepare for all contingencies, and we’re doing that now, too,” Eisinger says.