Foreign Exchange, Biz Slowdown Hit BluePhoenix in Q3

Published: November 17, 2008

by Timothy Prickett Morgan

BluePhoenix Solutions, a maker of legacy application modernization tools for midrange and mainframe platforms, reported its financial results for the third quarter of 2008 last week, and said that its revenues and profits were adversely impacted by whipsawing currency exchange rates between its Israeli home market and the North American and European countries where it does a lot of its business.

For the quarter ended in September, BluePhoenix posted sales just a smidgen over $22 million, up 4.5 percent, but the company had an operating loss of $5.2 million, a net loss of $6.84 million, and a net loss from continuing operations of $5.21 million. In the year ago quarter, BluePhoenix had an operating profit of $1.53 million and brought $781,000 to the bottom line on continuing operations.

The discontinued operation in the books concerns Mainsoft, a provider of .NET-to-Java translation tools that BluePhoenix used to own a chunk of and which the company sold off on October 6 to Catalyst Private Equity Partners for $1.7 million. Without that Mainsoft sale, the numbers would have been worse, obviously.

The financial results above do include the ASNA midrange legacy application modernization business, which BluePhoenix bought last year. The company has not provided a breakdown of ASNA's sales, and does not break out software license sales from support and other services.

"This was a disappointing quarter for us, yet, during the quarter we made significant steps to build our future success," explained Arik Kilman, chief executive officer at BluePhoenix. "This quarter was influenced by several factors primarily by rapid currency fluctuations which mostly worked against us. This situation had a significant negative impact of $1.8 million or $0.09 EPS to our bottom line. In addition, we faced a challenging environment which delayed deal closure and experienced slower than expected progress in some of projects which required us to allocate additional resources. These contributing factors resulted in lower revenues, lower gross margins, and higher operating and financial expenses which led to a minor negative cash flow from operations. In addition, on a GAAP basis in this quarter we incurred $2.3 million for one time expenses related to cost reduction plan, including changes to our management structure and resource deployment. As a result of an operational review that was conducted during the quarter, we have implemented a cost saving plan which we expect will reduce operating expenses by approximately $3 million on annual basis, beginning in 2009."

Kilman said that even while some deals were pushed out or postponed because of the economic crisis, the company's sales pipeline was at a record $220 million level, up from $193 million in the second quarter of this year. And while the deal backlog--deals that are in the process of being finalized, not just sitting out there as potential deals--fell to $95 million, a decrease of 7.8 percent from the Q2 2008, if currency rates had remained the same between Israel and the Western economies, that backlog would have been up a nearly $1 million. Currency is obviously a big issue now for any multinational business, and a weak dollar has played into the favor of BluePhoenix in past quarters.

Credit is also important these days, and that is why BluePhoenix raised $16 million in funds, mostly long-term loans from Israeli banks, during the quarter. You have to be able to borrow some money to ride out the waves in this rocky economy. BluePhoenix exited the quarter with $33.3 million in cash and equivalents, and a market capitalization that has plummeted, like most stocks have in the wake of the economic meltdown. At the end of last week, BluePhoenix had a market cap of $39.5 million.

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