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Aladdin's Operating Expenses Rise on Strong Shekel as Product Demand Increases

Shares of Aladdin Knowledge Systems Ltd. (ALDN) were down 26.621% following this Monday's earning release in which the company reported lowered EPS Guidance in range of $1.08 to $1.18 despite record revenues of $30M for the quarter and reaffirming previously stated guidance revenues for the year.

Chairman & CEO Yanki Margalit said, "We continued to experience increased demand across both Software DRM and Enterprise Security markets throughout all geographic regions. However, our results were negatively impacted by currency exchange rates with a strong Israeli shekel raising our operating expenses." According to the company, expectations were higher than the current actual rate as the company concluded its budget at the end of 2007. During its earnings call, the company stated that it had no idea of the magnitude of the currency's strengthening. Said Margalit, "If you look at sheckle in Q1 2008 compared to Q4 2007 and Q1 2007, you have two numbers. It's a $400,000 impact compared to Q4 numbers, and an $800,000 impact compared to Q1 2007 numbers." Expaining the drag on EPS despite a record quarter and growing demand for product, Margalit stated, "When we started 2008, we already had a strong EURO as part of our expectations and investment plan. What we've seen in last three months is a deviation of the dollar in Israel which effected Q1 and 2008 going forward. We benefit from the top line increment, and once we pay for it in the bottom line expense, we end up selling more but our profitability is going down. we don't get compensated on profitability level."

Operating costs were a challenge for the company as a result of the R&D spike due to consolidation activities in Athena Smartcards and raised salaries in the first quarter. Although the company is not reducing or adding headcount, it will use a 12-month time frame, the company has made plans to reduce operating costs for the second half of the year by outsourcing. Said Margolit, "We can't break the Athena numbers by themselves yet, but if you look at the top line perspective, nothing has changed except the operating expenses. Overall we've increased demand geographically everywhere."