Magic Software Enterprises Q1 2023 Earnings Call Transcript

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May 18, 2023

There are 5 speakers on the call.

Operator

Welcome to Magic Software Enterprises 2023 First Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. With us on the line today are Magic's CEO, Mr.

Operator

Guy Bernstein Magic's CFO, Mr. Assaf Bernstein and Magic's VP of Technology and Innovation, Mr. Yuval Lavi. Magic's Q1 2023 earnings release was issued before the market opened this morning, and it has been posted on the company's website at www.magicsoftware.com. Before we start, I'd like to remind everyone that this conference call may contain projections or other forward looking statements.

Operator

The Safe Harbor provision provided in the press release issued today also applies to the content of this call. Magic expressly disclaims any obligation to update or revise any of these forward looking statements whether because of future events, new information, a change in its views or expectations or otherwise. Also, during the course of today's call, management will refer to non GAAP Financial measures, a reconciliation schedule showing GAAP versus non GAAP results has been provided in the press release issued for the market opened this morning. A replay of this call will be available after the call on our Investor Relations section of the company's website. I will now turn the call over to Mr.

Operator

Asaf Bernstein, CFO of Magic Software. Please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining us today as we report our Q1 2023 financial results. During the call today, I will review highlights from 1st quarter results and provide an overview of our achievements. We appreciate your continued support and look forward to sharing our progress with you. Our hard work and dedication continued to contributed to our solid performance in the Q1 of 2023 As we report approximately 3% year over year growth in revenues, which is 1st quarter all times high of 142,400,000 And operating income of $18,400,000 These results demonstrate the growing investment made by enterprises and organizations worldwide Even during COVID challenging macroeconomic climate, to leverage their digital technologies and cloud based platforms, creating high demand for our innovative software solutions And services, which together with the outstanding execution by our teams led to another quarter of solid performance recorded across our business. Our top line reported growth in Q1 of 2023 was solely driven by our North American operation, Which grew by 4% year over year to $72,600,000 while revenues reported with respect to our operations in Israel remained flat At $53,300,000 on a constant currency basis, our revenues in the Israeli market grew by 10% year over year, which represents in real terms an all time high of $58,800,000 when calculated based on average currency Change rates for the 3 months ended on March 31, 2022.

Speaker 1

The strong growth of our operation in the Israeli market, particularly in light of the current macroeconomic Conditions reconfirmed our long term strategic decision to focus on mature, stable and technology driven sectors such as healthcare, Defense, Finance and the Public Sector, which compensated the recent slowdown, which we are currently experiencing in the high-tech and telecom Sectors mainly in North America and to some extent also in Israel. Despite seeing some ongoing caution during recent months in the high-tech sector, We are still witnessing a healthy demand and maintaining a solid pipeline to deliver continued growth during 2023 As our customers increasingly engage us as a preferred partner for innovative digital transformation initiative And as such, we continue to fortify our position as a leading software solution and an IT service global vendor. We have a well established track record of growth, Profitability and high cash generation and the Magic team worldwide is committed to executing our strategy to deliver growth and to continue On the M and A front, despite the rising interest rate environment, we continue to believe that M and A remains an important part of our growth And as such, we continue to explore, though with an increased level of cautious, new opportunities in the fields that we operate As well as in fields that we target and identify growth opportunities as we have in the past.

Speaker 1

Moving to the financials and starting with the geographical A breakdown of our revenues. During the Q1 of 2023, North America accounted for 51% of our total revenues Israel 37%, Europe 9% and APAC and the rest of the world accounted for 3% of our first quarter revenues. Our revenues in North America reached $72,600,000 up 3.9% compared to $69,900,000 in the same period last year. Revenue in Israel reached $53,300,000 as in the same period last year. On a constant currency basis, our revenues in the Israeli market grew by 10% which as I have already mentioned represented in real terms an all time high of $58,800,000 compared to $53,300,000 In the same period last year.

Speaker 1

Turning now to profitability. Despite the significant currency headwind, we were able to deliver growth in our Gross profit as well as in our gross margin. As our non GAAP gross profit for the Q1 of 2023 reached $40,200,000 Up approximately 3.1 percent compared to $38,900,000 in the same period last year. Our non GAAP gross margin for the Q1 Of 2023 increased by 10 basis points from 28.1 percent in the Q1 of 2022 to 28.2% in the Q1 of 2023. On a constant currency basis, our gross margin would have gained an additional 30 basis points and amount to 28.4%.

Speaker 1

The breakdown of our revenue mix for the Q1 of 2023 was approximately 18% related to our software solutions With a gross margin of approximately 65% and 82% related to our professional services with a gross margin of approximately 20%. While in the Q1 of 2022, approximately 19% of our revenues were attributed to our Software Solutions segment With a gross margin of approximately 64%, MAT1 related to our professional services with gross margin of approximately 20%. The breakdown of our gross profit mix for the quarter was approximately 42% related to our software solutions and 58% related to our professional services, compared to 43% 57% in the same period of last year. Our non GAAP Operating income for the Q1 of 2023 decreased by 3.4 percent to $18,500,000 compared to $19,100,000 in the same period last year. This reflects an operating margin of 13% for the quarter compared to 13.8% in the Q1 of 2022 and 13.1% in 2022 as a whole.

Speaker 1

On a constant currency basis calculated based on average currency exchange rate For the 3 months ended on March 31, 2022, non GAAP operating income for the Q1 of 2023 would have increased by approximately 3% To a Q1 record breaking $19,600,000 Financial expenses. During the quarter, we added financial debt interest expenses of $800,000 resulted from our $67,000,000 financial debt compared to $200,000 recorded in the same period last year for a total financial debt of As the majority of our debt bears variable interest and interest rates are still expected to rise, we expect our interest Net income attributable to non controlling interest as our business combination model has often relied on keeping former shareholders in acquired entities As minority shareholders, in addition to their managerial role in such entities, we are allocating a portion of our net income to these minority shareholders. Net income attributed to non controlling interest amounted this quarter to $1,700,000 compared to $1,500,000 in the same period last year. Our non GAAP tax expenses this quarter totaled $3,100,000 compared to a tax expense of $3,600,000 in the Q1 of 2022. Our effective tax rate for the quarter was approximately 18% compared to 20% recorded in the same period last year.

Speaker 1

Our non GAAP net income attributable to Magic shareholders for the Q1 decreased 3.2 percent to $12,600,000 or 0.26 dollars per fully diluted share compared to $13,000,000 or $0.26 per fully diluted share in the same period last year. Turning now to the balance sheet. As of March 31, cash and cash equivalents and short term bank deposit amounted to approximately $106,400,000 Compared to $87,000,000 in the previous quarter, our total financial debt as of March 31 amounted to $67,400,000 compared to $1,200,000 in the previous quarter. Our cash flow from operating activities reached $18,800,000 during the Q1 of 2023 compared to $12,800,000 in the same period last year. In closing, I would like to turn to our guidance for 2023.

Speaker 1

We are reiterating our 2023 full year revenue guidance of $585,000,000 to 593,000,000 Reflecting annual growth of 3.2 percent to 4.6 percent. We believe that this growth takes into consideration anticipated organic growth, The current macroeconomic environment and the current devaluation of foreign currency exchanges versus average rates in 2022. In summary, we remain committed to executing our strategy, leveraging our strength and delivering sustainable growth and value for our shareholders. I would like to thank our clients and shareholders for their continued support and trust, and we look forward to delivering even greater success throughout the remainder of 2023. With that, I will now turn the call over to the operator for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you wish to cancel your request, please press star 2. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received.

Operator

The first question is from Chris Reimer of Barclays. Please go ahead.

Speaker 2

Hi. Thanks for taking my questions. I was wondering if you could give some more color on the diversification that Your strategy of diversifying revenues and verticals that you mentioned and if there's anything in particular where you're seeing a slight change And basically, where you see the growth coming from this year?

Speaker 3

I think it's It's a very unique year this year because of what happened in the with the economy and the market and the interest rate. We definitely see some customer being cautious in the States. For now, outside of the state, especially in Israel, we don't see that. So we pushed Quite hard on the Israeli market, in order to compensate for some of the Business reduction in the study. But all in all, we feel quite comfortable because We are working with big corporate, so we know how to plan it.

Speaker 2

Great. Okay. Yes?

Speaker 1

And just adding that in terms of the business, we see, of course, the growth coming From our clients that basically are moving their whole systems to the cloud, we see a Significant improvement and increase in our cloud consumption operation. We see significant increase on our cyber security consulting. We provide Handling services for our clients, we provide penetration test, we provide NOC services, we provide CISO as a service, SOC as a service to our clients. I think that just on the migration of What we expect to continue and see as migration of core systems into the cloud, is probably the main growth engine for the company.

Speaker 3

And then not about the managed service as opposed to professional services, moving into a managed cloud service offering.

Speaker 2

Okay. Thanks. That's really helpful. And just one more. How comfortable are you with current staffing levels?

Speaker 2

And are you finding, attrition rates maybe declining? Or is there some is there any change or easing

Speaker 1

I think that today we see that Due to the current market situation, attrition rates have significantly decreased. Of course, the Most salaried people are still being looked after and quoted And their level of salary and their ambition to stay is always something that is very challenging. But on the average, we see people that are Hanging on to their seats, so this became more comfortable. We see the salaries being pretty much stabilized and all of the increases that we Experience in 2022 and in 2021 post COVID were already behind us. I think that our hit rate In recruiting new employees has also been improved.

Speaker 1

So in the past, we had to look for much more The reason the competition was much higher in order to succeed and recruit people and now today it's a bit more easier.

Speaker 3

And also think that when we're looking into bringing juniors in a way that we grow inside the organization as opposed to bringing Champions, it's much harder to compete on.

Operator

The next question is from Mattie Nolan of William Blair. Please go ahead.

Speaker 4

Hi, how are you? I'm hoping you can give us a little bit more clarity on how you expect revenue to come in for the year on a quarterly basis. It was great to see you reiterate the full year.

Speaker 1

It's a little bit difficult during this Kind of call to provide something that we want that we don't share on the global side on our PR, but I can say that, of course, We have as I said, we have 50% of our business in the U. S. And 2nd quarter is a regular quarter, full day, billable sales, no chain, no special Events in the post of the Israeli market where we have the Passover and we have the Independence Day, which are holiday that Holiday season that our employees are where it already happened where they were on vacation days. So in Q1, we had like 65 billable days in the Israeli market, it goes down next quarter to 59.5. Overall, I would say that that should bite or normally bite our revenue level by around 3.5% For Q2 versus Q1.

Speaker 4

That's really helpful. Thank you. And then what opportunity do you think there is from potential increases in enterprise spending on AI for your business? And then how also do you intend to leverage it within your own business models?

Speaker 3

We are Again, I'm not sure I fully understood the question about the AI, but we are looking into implement quite a lot of AI into our technologies in specific fields, okay? We're looking now for some cooperation or Joint ventures around predictive and other trends in this market. But the challenge again with AI, we want to come with a defined solution and not just with a general statement of how we're doing AI Again, most of this market. So we're trying to come and see how we plug it into our product and how to our solution. Putting aside all the other consultancies that we have that are doing also AI consultancy, okay.

Speaker 3

So it's kind of from 2 levels, AI consultancy, data scientists and stuff like that and bringing AI into our products.

Speaker 4

Perfect. Thank

Operator

There are no further questions at this time. There is an additional question from Mike Silver of Kingston Capital. Please go ahead. Mike Silva? Hi.

Speaker 3

Is there anything you could share about future acquisitions? We do have 2 or 3 potential acquisitions.

Speaker 1

Again, we're trying to play safe here.

Speaker 3

We are We made

Speaker 2

the negotiations from our side way harder because we

Speaker 3

think the market allowed it We don't see yet,

Speaker 2

call it, reduction in multiples of prices.

Speaker 3

But I'm sure it will come. I don't know how if it will be that significant, but for sure it will come. For the time being, we are trying to close with the one we have in the pipe at better terms.

Operator

There are no further questions at this time. Mr. Bernstein, would you like to make your concluding statement?

Speaker 3

So thank you very much for joining our call, and we sure hope

Speaker 2

to bring you some more good news in the

Speaker 3

next call. Thank you very much.

Operator

Thank you. This concludes Magic Software Enterprises Ltd. 2023 First Quarter Results Conference Call. Thank you for your participation. You may go ahead and

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Earnings Conference Call
Magic Software Enterprises Q1 2023
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