Magic Software Enterprises Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 14, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Magic Software Enterprises 20 24 Second Quarter Financial Results Conference Call. Magic's Q2 2024 earnings release was issued before the market opened this morning and it has been posted on the company's website at www.magicsoftware.com. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation.

Operator

With us on the line today are Magic's CEO, Mr. Guy Bernstein Magic's CFO, Mr. Asaf Bernstein and Magic's CTO, Mr. Yuval Avi. Before we start, I would like to remind everyone that projections or other forward looking statements may have been provided on this conference call.

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, 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 have been provided in the press release issued before the market opened this morning. A replay of this call will be available on the Investor Relations section of the company's website.

Operator

I will now turn the call over to Mr. Asaf Bernstein, CFO of Magic Software. Asaf, please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining us today as we report our Q2 2024 financial results. During the call today, I will review highlights from our Q2 results and provide an overview of our outlook. Revenues in the Q2 of 2024 decreased to $136,300,000 down approximately 1% from the Q2 of 2023. On a constant currency basis calculated based on the average currency exchange rate for the 3 months ended June 30, 2023, revenues for the Q2 of 20 24 would have increased by approximately 0.4% to $138,100,000 This quarter showcased solid execution with Israel delivering sequential mid single digit growth of 6.6% and North America delivering sequential double digit growth of 11.1 percent primarily resulted from the addition of Tereoriz Inc. Acquired at the beginning of the Q2.

Speaker 1

Pieris Inc. Is an IT and engineering consulting firm based in Indiana with extensive IT industry experience who specialize in delivering strategic IT solutions, application development, cloud and staff augmentation services across diverse sectors including healthcare, life science, financial services, retail and manufacturing. Fiori's management has worked together for many years and it is a great addition to our operations in the U. S. As I mentioned in the previous calls, the reduction in our 2nd quarter and first half revenues compared to last year results is primarily driven by 2 factors.

Speaker 1

Currency headwind caused mainly by the continued devaluation of the new Israeli shekel relative to the U. S. Dollar amounting to 2.1 percent year over year for the quarter and 2.8% for the 6 months period, which along with the devaluation of other foreign currencies reduced the reported revenues by $1,900,000 for the 2nd quarter and by $4,500,000 for the 6 months period. And more important, the substantial and unexpected decline in demand for our professional services from several of our important U. S.-based blue chip customers, which due to internal reasons unrelated to our services decided during the second half of twenty twenty three and going forward to sustain significant parts of their active diamond material based projects, particularly in the face of softer demand and budget constraints.

Speaker 1

That said, over the past 6 to 9 months, client sentiment in the U. S. Has remained stable with no significant changes either positive or negative. While we have not yet been seeing material market improvement, we believe that an improving U. S.

Speaker 1

Economy could serve as a catalyst for growth in our U. S. Operation. Although our full year guidance does not currently account for any macroeconomic improvement, we are confident that we are on the right path and momentum is building. Despite this difficult working against us, we continue to plow forward with our worldwide dedication and confidence that we can continue to execute on sales of our world class suite of products and in providing and products.

Speaker 1

And while some of our U. S. Customers are facing macro and and products. And while some of our U. S.

Speaker 1

Customers are facing macro and company specific challenges, the sequential improvement in our top line results reflect that the vast majority of our customers continue to value our unique proposition and resume to engage us to an increasing degree as a preferred partner for innovative digital transformation initiatives. Furthermore, even in this challenging environment, our non GAAP operating margin for the 2nd quarter held strong at approximately 13.4% of our revenues, same as in the Q2 of 2023. Our operating margin for the first half of twenty twenty four increased by 40 basis points to 13.6% compared to 13.2% in the same period last year. This shows the inherent scalability and defensibility of our business model and our ability to maintain and even improve our operating margin whether our revenues rise or fall. We believe that our ability to maintain the profitability of our operations will keep our balance sheet strong and will enable us to invest in order to drive revenue growth in the future.

Speaker 1

As we look at our business, we see that we continue to leverage our digital technologies and cloud based platforms to create strong demand for our initiative software solution and services. We similarly continue to see excellent execution by our team. Setting aside the factors that slowed us down our revenues in North America, which were beyond our control, we experienced another quarter of solid performance recorded across all other parts of our business. We continue to see exciting opportunities and growth potential in the dynamic realm of cloud technology and managed services. We have made it our vision to help businesses choose the best cloud migration strategy and avoid the pitfalls associated with moving to the cloud.

Speaker 1

We apply industry leading best practices to ensure that our clients' cloud deployments meet their highest standards of performance, scalability, security and reliability. Our suite of managed cloud services is designed to address critical aspects of cloud operations and client business continuity, enabling our clients to focus on their core competencies while leaving the management and optimization of the cloud and IT system environment to us. Our services include NOC as a service, SOC as a service, DevOps as a service, FinOps as a service and much more. What sets Magic apart is the deep domain expertise, a customer centric approach and a proven track record of delivering successful cloud migration and transformation. We have approximately 400 satisfied customers across various industries and geographies who start us with their cloud journey.

Speaker 1

We are committed to delivering excellence, innovation and value to our customers and we are confident that we can help them achieve their cloud goals. Proceeding to address our Q2 financial results. In the Q2 of 2024, our revenues in North America amounted to $58,000,000 which is approximately $11,200,000 or 16.2 percent lower compared to Q2 of 2023 and $5,800,000 or 11.1 percent higher compared to Q1 of 2024. Revenues in North America accounted for 43% of our overall quarterly revenues. Revenues from our Israeli operation amounted to $58,200,000 up by 12.6% compared to $51,700,000 reported on the same period last year.

Speaker 1

This demonstrates a strong performance in the region and reconfirms our long term strategic decision to focus on mature, stable and technology driven sectors, which allows us to partially compensate for the slowdown we experienced from the second half of twenty twenty three in North America. Revenue from our Israeli operations accounted for 43% of our overall quarterly revenues. Turning now to profitability, our gross margin for the Q2 of 2024 amounted to 29.4 percent of revenues or $40,100,000 compared to 30.3 percent in the same corresponding quarter of 2023 or $41,600,000 for the same period last year. On a semi annual basis, our gross margin for the first half of 2024 amounted to 29.4 percent or $78,400,000 up by 20 basis points from 29.2% in the same period last year. The breakdown of our revenue mix for the 6 month period of 2024 was approximately 19% related to our software solutions with a gross margin of approximately 65% and 81% related to our professional services with a gross margin of approximately 20%.

Speaker 1

The breakdown of our gross profit mix for the 6 months period of 2024 was approximately 43% related to our software solution and 57% related to our professional services. Our non GAAP operating income for the Q2 of 2024 was $18,200,000 compared to $18,400,000 in the same period last year. This reflects an operating margin of 13.4% for the quarter, same as in the Q2 of 2023. On a constant currency basis calculated based on average currency exchange rates for the 3 months period ended June 30, 2023, non GAAP operating income for the Q2 of 2024 would have reached $18,400,000 same as it was in the Q2 of 2023. Financial expenses, during the quarter we had financial debt interest expenses of $1,100,000 related to our $75,000,000 financial debt compared to $1,100,000 of interest expenses recorded in the same quarter last year related to a total financial debt of $70,000,000 The increase in our financial expenses mainly resulted from foreign currency exchange fluctuation income of approximately $800,000 recorded with respect to monetary assets and liabilities denominated in foreign currency in the respective quarter.

Speaker 1

Net income attributable to non controlling interest as our business combination model occasionally relies on keeping former shareholders in acquired entities as minority stakeholders in addition to their managerial roles in such entities, we are allocating a portion of our net income to these minority shareholders. Non GAAP net income attributable to non controlling interest slightly increased to $2,000,000 compared to $1,800,000 for the same period last year. Our non GAAP net income for the Q2 decreased by 13.6 percent to $11,700,000 or $0.24 per fully diluted share compared to $13,500,000 or $0.28 per fully diluted share in the same period last year, mainly resulting from currency exchange rate fluctuation income of approximately $800,000 recorded with respect to monetary asset and liabilities denominated in foreign currency in the respective quarter and increase in our tax expenses. Turning now to the balance sheet, as of June 30, 2024, cash and cash equivalent and short term bank deposits amounted to approximately $108,400,000 compared to $106,700,000 as of December 31, 2023. Our total financial debt as of June 30, 2024 amounted to approximately $65,000,000 compared to $81,200,000 as of December 31, 2023.

Speaker 1

Our cash flow from operating activity during the 6 month period of 2024 was $41,100,000 compared to $42,600,000 in the same period of 2023. Moving to our guidance, we are reiterating our 2024 guidance. 2024 guidance. We expect 2024 full year revenue in the range of $540,000,000 to $550,000,000 I will now turn the call over

Speaker 2

to the operator for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from Maggie Nolan of William Blair. Please go ahead.

Speaker 3

Hi, thank you. Congrats on reiterating the guidance here. I wanted to ask you about what you're seeing with your customer base, maybe how those conversations around demand for your services have evolved since you saw the weakness last quarter? And am I right in perceiving that you have a little bit of increased optimism around North American customers in particular?

Speaker 2

So basically in Israel and in Europe, especially in Israel, we see a phenomena where we continue to grow, the demand is very strong, although what's happening in Israel. In the States, right now, we see it stable with some first signs for improvement. But we see that the sales cycle is still quite long compared to what it used to be like a year and a half ago.

Speaker 3

Okay, that's helpful. Thank you. And then on the margins, good to see that you can pull on some levers to help improve them even in the face of year over year revenue declines. But what are you thinking is kind of a normalized level of operating margin on more of like a multi year basis for the business?

Speaker 2

I think if we leave, let's say, in a stable environment, I would probably I think 14% is achievable. But right now we have a situation where we don't see a big improvement in the States, which is a big market for us. We definitely see improvements in Israel and in parallel of course we continue to invest in our new products. So we are a bit less than that.

Speaker 1

Just to emphasize, between 13.5% 14% is for the operating margin and for the gross margin, it would be something between the 29% 30%.

Speaker 3

Okay, that's helpful. Thank you very much.

Operator

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

Speaker 4

Hi, thanks for taking my questions. I have 2, one on margins. You guys have pretty consistently delivered margin expansion over the last year and I'm just wondering if there was anything specific in this quarter that operating margin was flat, gross margin was down a bit. Is it just because of the revenues mix or is it due to the acquisition that you mentioned earlier? And then following on that, if you could just touch on the acquired business a little more in detail?

Speaker 1

So in terms of the margins, eventually this quarter, we had less billable days in the Israeli market. In the Q1, we had around 65 billable days. In the Q2, we had 59 billable days because of the Passover holiday season. Israel is 43% same as the U. S.

Speaker 1

Sector that we work. That influences our gross margin and take it down a bit. We managed to still maintain a solid margin as you mentioned because of the sales of our software licenses which basically covered for the missing profitability in the professional service division. So this is with respect to the margin. With respect to the operations that we have acquired, again, it's a company that provides software services staff augmentation, where it's mainly from a headquarter in Indiana, serving again some blue chip customers like Johnson and Johnson, Securitas and other U.

Speaker 1

S. Companies, but they are working also with global companies. For example, on the opposite side because they are also working with SMBs, they will less impact by the economic macroeconomic situation today in the U. S. Which hinders mainly large organizations that we work with.

Speaker 1

And with them, we are positive that and we are seeing that they manage to maintain their profit and grow from 1 year to another. So for us, it's another good addition for operations in North America. And as we normally do from 1 year to another, we look for this kind of operation, this kind of businesses and we hope to acquire them.

Speaker 4

Great. Thanks. That's really helpful. That's it for me.

Operator

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

Speaker 2

Yes. So thanks again for everyone to joining our call and we sure hope to have you on our next call next quarter and bring you some good news. Thank you.

Operator

Thank you. This concludes Magic Software Enterprises Limited 20 24 Second Quarter Results Conference Call. Thank you for your participation. You may now go ahead and disconnect.

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Earnings Conference Call
Magic Software Enterprises Q2 2024
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