Ness Technologies Announces Third Quarter 2010 Financial Results

Ness Delivers 15% Year-Over-Year Quarterly Revenue Growth With Continued Sequential Operating Margin Expansion

Oct 27, 2010, 04:30 ET from Ness Technologies Inc

HACKENSACK, New Jersey, October 27, 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 September 30, 2010.

    Third Quarter 2010 Highlights:

    - Quarterly revenues were $141.3 million, up 15% year-over-year.
    - Quarterly operating income was $3.7 million, down 5% year-over-year. On
      a non-GAAP basis,[1] quarterly operating income was $6.6 million,
      flat year-over-year. On a GAAP and non-GAAP basis, operating income and
      operating margin improved sequentially, reaching the highest level in
      three quarters.
    - Quarterly net income from continuing operations was $1.6 million, down
      41% year-over-year. On a non-GAAP basis, quarterly net income from
      Continuing operations was $4.1 million, down 17% year-over-year. On a
      GAAP and non-GAAP basis, net income and net margin improved
      sequentially, reaching the highest level in four quarters.
    - Quarterly diluted net earnings per share from continuing operations
      were $0.04, compared to $0.07 in the third quarter of 2009. On a non-
      GAAP basis, quarterly diluted net earnings per share from continuing
      operations were $0.11, compared to $0.13 in the third quarter of 2009.
    - In Central and Eastern Europe, operating margin was the highest in five
      quarters, on a non-GAAP basis.
    - Quarterly operating cash flows from continuing operations were ($11.1)
      million, primarily due to slower collections during the summer quarter.
    - Cash, cash equivalents and short-term bank deposits were $52.6 million
      as of September 30, 2010.
    - Backlog from continuing operations as of September 30, 2010 was $633
      million, up 2% year-over-year, and down 4% sequentially on relatively
      lighter bookings during the summer quarter.
    - Headcount for continuing operations was approximately 7,825 as of
      September 30, 2010.

"We delivered revenues and earnings on target in the third quarter," said Sachi Gerlitz, president and chief executive officer of Ness Technologies. "This very solid quarter, in both our software product engineering and system integration segments, follows the achievement of a new record billable headcount in India and the highest operating margin in five quarters in Central and Eastern Europe, where we remain optimistic about continued recovery. We remain focused on operating margin expansion in 2011 with organic growth."

    - 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 third quarter, with in-line operating
      margin and sequential and year-over-year revenue growth.
    - The company's System Integration and Application Development segment
      showed significant year-over-year revenue growth and good sequential
      operating margin improvement, with strong performance in Israel and
      improving 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 improved the operations of our system integration and application development segment, while we enjoyed the continued strong performance of our software product engineering segment," said Ofer Segev, executive vice president and chief financial officer. "Bookings were a little light in the quarter, but we expect them to return to a normal level in the fourth quarter. We are also working to improve our collections from their temporary dip during the quarter. We anticipate a good fourth quarter, historically our strongest quarter of the year."

Business Outlook

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 for much of this year, 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 of October 22, 2010.

For the reasons set forth elsewhere in this release, Ness' management believes that non-GAAP 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 third quarter 2010 results. The call, which will be simultaneously webcast, will begin at 8:00 AM Eastern Time / 5:00 AM Pacific Time / 2:00 PM Israel Time on Wednesday, October 27, 2010.

To access the Ness Technologies third 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 in the second quarter of 2010, 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       Nine months ended
                                    September 30,           September 30,
                                 2009        2010        2009        2010
                             (Unaudited) (Unaudited) (Unaudited) (Unaudited)

    Revenues................. $ 123,202   $ 141,346   $ 376,370   $ 414,380
    Cost of
    revenues.................... 89,780      102,716    276,681     301,512
    Gross
    profit...................... 33,422       38,630     99,689     112,868
    Selling and
    marketing.............       10,033        9,542     28,926      29,433
    General and
    administrative...........    19,521       25,401     64,339      74,294
    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.... 29,554       34,943     88,121     103,727
    Operating
    income...........             3,868        3,687     11,568       9,141
    Financial expenses,
    net......................      (388)        (489)    (2,210)    (1,140)
    Income before taxes on
    income....................    3,480        3,198      9,358       8,001
    Taxes on income....             826        1,631      2,005       4,848
    Net income from continuing
    operations................  $ 2,654      $ 1,567    $ 7,353     $ 3,153
    Net loss from discontinued
    operations...........        (1,812)        (799)    (3,941)     (7,031)
    Net income (loss)...          $ 842        $ 768    $ 3,412    $ (3,878)
    Basic net earnings per
    share from continuing
    operations............       $ 0.07       $ 0.04     $ 0.19      $ 0.08
    Diluted net earnings per
    share from continuing
    operations..........         $ 0.07       $ 0.04     $ 0.19      $ 0.08
    Basic net earnings (loss)
    per share...........         $ 0.02       $ 0.02     $ 0.09     $ (0.10)
    Diluted net earnings
    (loss) per share...          $ 0.02       $ 0.02     $ 0.09     $ (0.10)
    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................        38,451       38,001     38,653      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............            38,864       38,349     39,181      38,658




                   NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                            U.S. dollars in thousands

                                  Three months ended       Nine months ended
                                      September 30,           September 30,
                                   2009        2010        2009        2010
    Segment Data (1):         (Unaudited) (Unaudited) (Unaudited) (Unaudited)

    Revenues from continuing
    operations:
    Software Product            $ 25,621    $ 28,879    $ 76,275    $ 83,336
    Engineering
    System Integration and
    Application Development..     97,581     112,467     300,095     331,044
                               $ 123,202   $ 141,346   $ 376,370   $ 414,380
    Operating income (loss)
    from continuing operations:
    Software Product             $ 3,609     $ 3,675    $ 11,819    $ 11,916
    Engineering.
    System Integration and
    Application Development.       3,159       4,002      11,698       9,975
    Unallocated Expenses          (2,900)     (3,990)    (11,949)    (12,750)
                                 $ 3,868     $ 3,687    $ 11,568     $ 9,141
    Geographic Data:
    Revenues from continuing
    operations:
    Israel..................... $ 41,905    $ 51,714    $ 129,546  $ 150,680
    North
    America.................      42,115      48,557     128,138     142,187
    Europe..................      36,819      38,449     111,893     115,614
    Asia and the Far
    East.........................  2,363       2,626       6,793       5,899
                               $ 123,202   $ 141,346   $ 376,370   $ 414,380

    (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

                                                    Nine months ended
                                                       September 30,
                                                   2009             2010
                                                (Unaudited)      (Unaudited)
    Cash flows from operating activities:
    Net income
    (loss)....................................... $ 3,412         $ (3,878)
    Adjustments required to reconcile net
    income (loss) to net cash provided by
    (used in) operating activities:
    Net loss from discontinued
    operations.............................         3,941            7,031
    Stock-based compensation.......                 2,619            2,357
    Currency fluctuation of restricted
    cash and short-term bank deposits......             -             (999)
    Depreciation and
    amortization.................................. 12,937           13,387
    Loss (gain) on sale of property and
    equipment and impairment and sale
    of cost investments                              (138)             108
    Commissions related to the sale of Israeli
    SAP sales and distribution operations.......   (2,534)               -
    Decrease (increase) in trade receivables,
    net........................................    53,444           (9,255)
    Decrease (increase) in unbilled
    receivables.................................... 3,549          (11,298)
    Increase in other accounts receivable and
    prepaid expenses.............................  (4,293)          (1,982)
    Decrease (increase) in
    work-in-progress............................     (754)           2,612
    Increase in long-term prepaid
    expenses........................                 (414)            (825)
    Deferred income taxes,
    net...........................................    395            1,437
    Increase (decrease) in trade
    payables..................................    (17,174)           2,372
    Decrease in advances from customers
    and deferred revenues........                  (2,210)          (9,518)
    Decrease in other accounts payable
    and accrued expenses...............           (15,508)             (15)
    Increase in other long-term liabilities..         677              902
    Increase (decrease) in accrued severance pay,
    net.......................................     (2,570)             114
    Net cash used in discontinued
    operations.............................. ..... (1,279)          (6,109)
    Net cash provided by (used in) operating
    activities.................................... 34,100          (13,559)
    Cash flows from investing activities:
    Consideration from sale of a consolidated
    subsidiary..............                            -            1,711
    Net cash paid for acquisition of a
    consolidated subsidiary..........                   -          (17,197)
    Cash paid for acquisition of intangible assets      -             (513)
    Additional payments in connection with
    acquisitions of subsidiaries in prior
    periods.................                      (13,643)          (1,330)
    Proceeds from maturity of (investment in)
    short-term bank deposits, net............     (16,822)          12,031
    Proceeds from sale of property and
    equipment....................................     796                -
    Purchase of property and equipment and
    capitalization of software developed
    for internal use.                              (9,395)          (6,906)
    Net cash used in discontinued
    operations...................................  (1,808)               -
    Net cash used in investing
    activities.............................       (40,872)         (12,204)
    Cash flows from financing activities:
    Exercise of options.......................          -                4
    Repurchase of shares.......................... (2,037)          (2,169)
    Acquired subsidiary's dividend to its former
    shareholder..................................  (1,430)               -
    Short-term bank loans and credit, net......    (2,960)          26,622
    Proceeds from long-term debt...........        15,000           13,364
    Principal payments of long-term debt.........  (4,411)         (14,659)
    Net cash provided by financing activities.....  4,162           23,162
    Effect of exchange rate changes on cash and
    Cash equivalents.....................          (1,038)          (2,385)
    Decrease in cash and cash equivalents......    (3,648)          (4,986)
    Cash and cash equivalents at the beginning
    of the period..................                44,585           40,218
    Cash and cash equivalents at the end of the
    period...................................... $ 40,937         $ 35,232




                   NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                              U.S. dollars in thousands

                                                    December   September
                                                    31, 2009    30, 2010
                                                        (Unaudited)
    CURRENT ASSETS:
    Cash and cash equivalents...................... $ 40,218    $ 35,232
    Restricted cash...........................         2,470       2,572
    Short-term bank deposits......................... 25,939      14,802
    Trade receivables, net of allowance for doubtful
    accounts......................................   131,452     146,683
    Unbilled receivables.........                     28,012      42,307
    Other accounts receivable and prepaid
    expenses.......................................   27,832      30,451
    Work in progress...............                    9,690       6,877
    Total assets attributed to discontinued
    operations....................................... 43,212      30,616
    Total current assets............................ 308,825     309,540
    LONG-TERM ASSETS:
    Long-term prepaid expenses and other assets.....   6,083       7,209
    Unbilled
    receivables......................................  4,654       3,508
    Deferred income taxes,
    net...........................................     3,608       2,704
    Severance pay
    fund...........................................   53,145      57,074
    Property and equipment, net................       35,739      33,813
    Intangible assets, net.....................       10,016      11,129
    Goodwill.......................................  263,541     279,875
    Total long-term
    assets.......................................... 376,786     395,312
    Total assets.................................. $ 685,611   $ 704,852
    CURRENT LIABILITIES:
    Short-term bank
    credit.......................................      $ 500    $ 30,379
    Current maturities of long-term
    debt..........................................    21,332      26,303
    Trade
    payables.......................................   30,914      33,796
    Advances from customers and deferred
    revenues........................................  40,639      31,640
    Other accounts payable and accrued
    expenses.......................................   99,464     106,300
    Total liabilities attributed to discontinued
    operations....................................... 25,461      12,779
    Total current
    liabilities..................................... 218,310     241,197
    LONG-TERM LIABILITIES:
    Long-term debt, net of current maturities......   50,836      43,351
    Other long-term liabilities......................  6,689       7,722
    Deferred income taxes...........................   2,045       2,477
    Accrued severance pay............................ 56,443      60,670
    Total long-term
    liabilities................................      116,013     114,220
    Total stockholders'
    equity.........................................  351,288     349,435
    Total liabilities and stockholders' equity..   $ 685,611   $ 704,852




                   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       Nine months ended
                                      September 30,           September 30,
                                     2009        2010       2009      2010
    Statements of Income Data:(Unaudited) (Unaudited) (Unaudited) (Unaudited)

    GAAP gross profit......        $ 33,422    $ 38,630   $ 99,689 $ 112,868
    Stock-based compensation........     63          49        183       204
    Amortization of intangible assets   205         140        581       329
    Severance expenses........            -           -        966         -
    Non-GAAP gross profit......... $ 33,690    $ 38,819  $ 101,419 $ 113,401
    GAAP operating income....       $ 3,868     $ 3,687   $ 11,568   $ 9,141
    Stock-based compensation....        863         751      2,619     1,911
    Amortization of intangible assets 1,860       1,571      5,225     4,291
    Earn-out and retention expenses
    related to prior acquisitions..       -         557          -     1,534
    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
    Non-GAAP operating income...    $ 6,591     $ 6,566   $ 19,448  $ 17,605
    GAAP operating margin......         3.1%        2.6%       3.1%      2.2%
    Non-GAAP operating
    margin.........................     5.3%        4.6%       5.2%      4.2%
    GAAP net income from continuing
    operations..................    $ 2,654     $ 1,567    $ 7,353   $ 3,153

    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..................        2,223       2,505      6,505     8,023
    Non-GAAP net income from
    continuing operations......     $ 4,877     $ 4,072   $ 13,858  $ 11,176
    GAAP diluted net earnings per
    share from continuing operations $ 0.07      $ 0.04     $ 0.19    $ 0.08
    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.....................         0.06        0.07       0.17      0.21
    Non-GAAP diluted net earnings
    per share from continuing
    operations......                 $ 0.13      $ 0.11     $ 0.35    $ 0.29
    Segment Data:
    Software Product Engineering:
    GAAP operating
    income..........................$ 3,609     $ 3,675   $ 11,819  $ 11,916
    Amortization of intangible
    assets......................         38          38        115       114
    Non-GAAP operating
    income........................  $ 3,647     $ 3,713   $ 11,934  $ 12,030
    System Integration and
    Application Development:
    GAAP operating
    income......................... $ 3,159     $ 4,002   $ 11,698   $ 9,975
    Amortization of intangible
    assets....................        1,821       1,533      5,110     4,177
    Earn-out and retention expenses
    related to prior acquisitions.        -         557          -     1,534
    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
    Non-GAAP operating income...    $ 4,980     $ 6,092   $ 15,491  $ 16,414

[1] See "Use of Non-GAAP Financial Information" above for more information regarding the company's use of non-GAAP financial measures.

    Media Contact:

    David Kanaan
    Intl: +972-54-425-5307
    Email: media.int@ness.com


    Investor Relations Contacts:

    Drew Wright
    USA: +1-201-488-3262
    Email: investor@ness.com

    Maya Lustig
    Israel: +972-3-767-5110
    Email: maya.lustig@ness.com

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