BluePhoenix Grows Sales and Profits on Legacy App Modernization

May 12, 2008 Timothy Prickett Morgan

Legacy application modernization tool maker BluePhoenix Solutions has finished out its first quarter of 2008, and despite any uncertainties in the economy in the United States, the company is riding the wave of legacy application projects that are helping dozens of tool vendors for IBM mainframe and AS/400 platforms make a decent living. In fact, it booked a record quarter.

BluePhoenix, which is based in Herzliya, Israel, was focused mainly on the mainframe market until last summer when it acquired ASNA, which has a set of tools that take RPG applications and move them to Windows and .NET using ASNA’s own AVR for .NET compiler. Now it spans both of the dominant proprietary platforms still in use in commercial data centers (providing you don’t consider Windows or the various flavors of Unix proprietary, of course). And now that ASNA acquisition has helped fuel BluePhoenix’s growth.

For the quarter ended March 31, BluePhoenix reported sales were up 32 percent to $24 million, which is growth that most software vendors would love to see. But according to Arik Kilman, chief executive officer at BluePhoenix, the exchange rate between the U.S. dollar and the Israeli shekel is hurting profitability at the company, which is publicly traded on the NASDAQ exchange back in the states and which reports its figures in dollars even though many of its expenses are in shekels. Still, despite the currency issues, BluePhoenix was able to bring $1.2 million to the bottom line, or 6 cents per share, with exchange rates shaving off approximately 2 cents per share. (In other words, had the dollar-shekel rate held constant in the quarter, BluePhoenix would have brought 8 cents a share to the bottom line.) Still, net income in the first quarter of 2008 was almost 10 times higher than in the year-ago period, so that has to feel pretty good.

The company generated $2.1 million in cash from operations in the quarter, and the board of directors has authorized BluePhoenix to buy back as much as 800,000 of the company’s shares. Even though BluePhoenix’s shares rose by 26 percent after it posted its financial results and have stabilized last week at around $11 per share, giving the company a market capitalization of $230 million, that is about half of the peak trading level the company hit last fall (after it acquired ASNA) and mostly held until the U.S. stock market started taking hits in January.

“We are seeing continued strength in the market for the legacy information technology modernization solutions that we provide,” explained Kilman in referring to the company’s financial results for the quarter. “Especially during periods of economic uncertainty, organizations seek to reduce license, maintenance, and support costs of legacy systems while ensuring that they have the resources and manpower going forward to support their mission critical systems. The analyst group Gartner reported this quarter that based on their research, organizations should not be surprised to find that 25 percent to 30 percent of their employees with legacy skills will be eligible to retire in the next three years. As such it is becoming increasingly important for companies to rapidly and efficiently respond to the legacy knowledge and skills that are becoming increasingly scarce. BluePhoenix modernization tools and services play a key role in tackling this growing challenge.”

Kilman added that at current dollar-shekel exchange rates, BluePhoenix expects to have revenues of between $101 million and $107 million and would bring somewhere between $1.00 and $1.05 per share on a non-GAAP basis to the bottom line this year.

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