Magic Software Enterprises Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 13, 2025

Key Takeaways

  • Positive Sentiment: Record Q2 revenue of $151.6 million, up 11.3% year-over-year, driven by strong growth in Israel (+18.8% organic) and North America (+6.5%).
  • Positive Sentiment: Non-GAAP net income rose 8.7% to $12.7 million, or $0.26 per fully diluted share.
  • Neutral Sentiment: Non-GAAP gross margin was 28.7%, down slightly year-over-year due to revenue mix and software renewal timing, but improved 20 basis points sequentially.
  • Positive Sentiment: Full-year 2025 revenue guidance raised to $600 million–$610 million, implying 8.6%–10.4% growth.
  • Negative Sentiment: Cash flow from operating activities declined in the first half to $54.6 million, reflecting higher working capital investments; expected to normalize in coming quarters.
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Earnings Conference Call
Magic Software Enterprises Q2 2025
00:00 / 00:00

There are 3 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises twenty twenty five Second Quarter Financial Results Conference Call. Magic's second quarter twenty twenty five 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 a 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. Dai Bernstein Magic's CFO, Mr. Rastaf Bernstein and Magic's CTO, Mr. Yuval Abid. Before we start, I would like to remind everyone that projections or other forward looking statements may be 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. Medic 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 new expectation or otherwise. Also during the course of today's call, management will refer to non GAAP financial measures. Our reconciliation schedule showing that various non GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on the Investor Relations section of the company's website.

Operator

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

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today as we report our second quarter twenty twenty five financial results. During the call today, I will review highlights from our second quarter results and provide an overview of our outlook. Revenue in the 2025 increased to a quarterly all time record of $151,600,000, up approx approximately 11.3% from the 2024 and sequential growth of 2.8%. This quarter showcased solid execution with Israel delivering a year over year double digit growth of 18.8% with more than 90% organic, primarily resulted from strong demand for our cloud, DevOps and AI services along with continued strong demand for our services in the defense sector. Our North American operation delivered strong performance this quarter with revenue increasing approximately 6.5% year over year and 6% on a sequential basis.

Speaker 1

In The United States, results for the 2025 reflected approximately 9% year over year revenue growth, driven by agreements executed in late twenty twenty four and early twenty twenty five. We are beginning to see third signs of improvement in The U. S. Market, reinforcing our positive momentum and positioning us for continued growth through the second half of the year. We remain steadfast in our global commitment and confident in our ability to drive continued growth through sales of our world class product suite and delivery of high value services.

Speaker 1

Leveraging our AI low code, no code cloud based platform and managed services, we are well positioned to meet the accelerating demand for automation, digitization and innovative software solutions. Our teams continue to execute with excellence, and our customers increasingly recognize the unique value we deliver, engaging us as a preferred partner for transformative digital initiatives. These trends combined with exciting opportunities across cloud technology and AI reinforce our positive momentum, position us for a strong second half of the year. At Magic, we are redefining the way organization unlocks the full potential of generative AI. As AI continues to reshape industries and everybody's life, we are at the forefront transforming our internal operations, reimagining our products and delivering next generation services that drive measurable business impact.

Speaker 1

Today, we manage over two seventy projects, spanning across more than 20 industries, have expanded our expertise from over 30 to over 50 specialists and offer comprehensive end to end solutions for successful Gen AI adoption. From proof of concept to large scale deployment, our customers enjoy a remarkable 70% success rate, nearly six times higher than the industry average of 12%. Supported by more than 100 AI focused events and over 10 strategic alliances with global leaders such as AWS, Azure and Google Cloud, we empower organizations in finance, healthcare, government, defense and manufacturing to accelerate innovation, enhance productivity and secure the competitive advantage in the AI era. With an average of three major AI developments announced weekly, we ensure our clients gain the benefits of the latest breakthrough while keeping their strategies aligned with core business objectives. Backed by deep expertise and proven success, we see unprecedented opportunities to further expand and elevate our offerings.

Speaker 1

Proceeding to address our second quarter geographic revenue breakdown. In the 2025, our revenues in North America increased by 6.5% from $58,400,000 to 62,200,000.0 Revenue from our Israeli operations totaled $68,700,000 an increase of 18.8% compared to $57,800,000 in the same period last year. On a constant currency basis, revenues grew by 13.5%. This performance underscores our strength in division and reaffirms our long term strategic focus on mature, stable and technology driven sectors. Revenues from our Israeli operations accounted for 47% of our overall quarterly revenue.

Speaker 1

Turning to to profitability. Our non GAAP gross margin for the 2025 was 28.7 of revenue, amounting to $43,600,000 compared to 29.4% or $40,100,000 in the corresponding quarter of 2024. The year over year change in gross margin primarily reflects the composition of our revenue mix and the timing of renewals of our term based software agreements. In the current fiscal year, the majority of these renewals are scheduled for the fourth quarter with a smaller portion in the third quarter compared to the first and second quarters of the prior year. Sequentially, our gross margin improved by 20 basis points, rising from 28.5% in the 2025 to 28.7% in the second quarter.

Speaker 1

This improvement came despite the timing of the Passover holiday, which reduced second quarter billable days by approximately four point five days compared to the first quarter. That reduction was equivalent to about 7% of time and material billable capacity in our Israel operation. The breakdown of our revenue mix for the 2025 was approximately 17% related to our software solutions with a gross margin of approximately 6583% related to our professional services with a gross margin of approximately 21% compared to 18% related to our software solutions with a gross margin of approximately 6482% related to our professional services with a gross margin of approximately 22% in 2024 as a whole. Our non GAAP operating income for the 2025 increased by 1.9% to to $18,600,000 compared to 18,200,000.0 in the same period last year. Financial expenses.

Speaker 1

During the second quarter, we had financial expenses of $700,000 compared to $1,200,000 The decrease in our financial expenses was mainly attributed to the continued decrease of our overall financial debt during 2024 and in the 2025 for an from an average debt of 72,000,000 during the 2024 to 63,000,000 during the 2025. The balance of our financial debt as of 06/30/2025, amounts to approximately $70,000,000 Net income attributed to noncontrolling interest as our business combination model occasionally relies on keeping former shareholders in acquired entities as minority stakeholders. In addition to their managerial role in such entities, we are allocating a portion of net income to these minority shareholders. Non GAAP net income attributable to noncontrolling interest decreased to $1,800,000 compared to $2,000,000 for the same period last year. Our non GAAP net income attributable to shareholders for the second quarter increased by 8.7% to $12,700,000 or $26 per fully diluted share compared to $11,700,000 or $0.24 per fully diluted share.

Speaker 1

Turning to the balance sheet. As of 06/30/2025, cash and cash equivalents and short term bank deposits amounted to approximately $90,000,000 compared to $112,800,000 as of 12/31/2024. Our total financial debt as of 06/30/2025, amounted to approximately $70,000,000 compared to $60,000,000 as of 12/31/2024. On 01/08/2025, and on 05/07/2025, in accordance with our dividend distribution policy, we paid our shareholders cash dividends on the aggregate of approximately $27,600,000 or $0.05 $62 per share for the first and second half of twenty twenty four. In addition, today, in accordance with our dividend distribution policy, our Board of Directors declared a semiannual cash dividend in an amount of 29.6¢ per share and in aggregate amount of approximately $14,500,000 reflecting approximately 75% of our distributable profit for the 2025.

Speaker 1

The dividend is payable on 10/22/2025 to all of the company's shareholders of record at the close of trading on Nasdaq Global Select Market on 10/06/2025. Cash flow from operating activities for the 2025 amounted to $21,200,000 compared to $41,400,000 in the corresponding period of 2024. For the twelve month period ended 06/30/2025, cash flow from operating activities totaled $54,600,000 compared to $67,700,000 recorded in the respective period. The decline in our first half cash flow from operating activities primarily reflects our increased investment in working capital to support our revenue growth trajectory. This is particularly evident in our record setting top line performance with second quarter revenues reaching an all time high.

Speaker 1

These dynamics do not reflect a deterioration in our underlying performance. On the contrary, both operating income and net income increased compared to the same period last year. We expect cash conversion to normalize over the coming quarters. Turning to our guidance for 2025. We continue to observe healthy demand across our market and are building a strong and growing pipeline that supports our expectation for sustained growth throughout the year.

Speaker 1

Accordingly, we revised our full year 2025 revenue guidance, increasing the previous estimate of 593,000,000 to 603,000,000 to a revised range of 600,000,000 to 610,000,000 based on current currency exchanges. This updated guidance reflects the sustained operational momentum and favorable outlook for the remaining part of the year, representing an anticipated annual revenue growth rate of approximately 8.6% to 10.4% as compared to the prior fiscal year. In conclusion, I would like to reiterate the announcement made in March regarding the signing of a memorandum of understanding to enter into negotiation for the contemplated merger of Magic into Matrix. This proposed transaction represents a significant inflection point in our corporate journey, one that holds the potential to be transformative for both organizations. The contemplated measure is expected to combine the set the strength of the of two well established technology leaders, creating a more diversified and resilient global IT service provider.

Speaker 1

The combined entity will possess enhanced capabilities to serve a broader range of customers across geographies and industries, faster accelerated innovation and deliver sustainable long term value to shareholders. We continue advancing through the execution phase of the transaction and anticipate presenting the transaction for shareholders' endorsement in the 2025. 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 have a question, please press 1. If you wish to cancel your request, please press 2. If you are using speaker equipment, kindly leave the handset before pressing the numbers.

Operator

Your questions will be pulled in the order they received. Please stand by while we poll for your questions. The first question is from Chris Reiner of Barclays. Please go ahead.

Speaker 2

Hi. Congratulations on the strong results, and thanks for taking my question. Can you give us any color on customer behavior in The U. S? And perhaps to what degree, if any, you're seeing a recovery in IT spend in that region?

Speaker 1

Overall, it varies, of course, between the different operations that we have in The US. But with the major clients that we hold, we see increased demand. We need to remember that for pretty much almost a year, we saw a segment level of demand. And now from the first quarter to the second quarter and and on our basing on our expectation for the remainder of the year, we see some expected recuperation in the demand for our services.

Operator

Uh-huh. Got it. And can

Speaker 2

you talk about some of the drivers that are impacting margins? And how do you see these drivers evolving towards the end of the year through the year end?

Speaker 1

As I mentioned, mainly, we were impacted by the timing of the recognition of the of the selling of a of our of our term license software, which last year mainly occurred during the first half of the year. And this year, it is much concentrated on the first the renewal term are much concentrated on the fourth quarter of the year, which slide with a small portion in q three. This is on one hand. On the second and then more primarily is the mix of our revenues. Basically, we see a significant increase in revenues from our projects and service operations.

Speaker 1

And these operations, as I mentioned, carry a gross margin of around 21% versus our technology operation that carries a 64 to 65 gross margin. So this this quarter and for the second quarter and for the 2025, we saw the entire increase in gross profit coming from the coming from the professional service side of the business. We expect for that to improve in the second half towards the software, which will improve the margins that you currently see and will level them on an annual basis at around 29%.

Speaker 2

Got it. That's very helpful. If I could just ask one more around cloud, how how would you describe the progress of customers transitioning to cloud solutions now that's saved versus last year?

Speaker 1

Unless you qualify for that. Yeah. I I I can

Speaker 2

take it. Yeah. We see more and more adoption of of cloud from from all around. Again, new customer are jumping directly into the cloud and legacy customer, even in our Japanese territory, starting to address and adopt the cloud solution and the cloud offering. So as, you know, we are a traditional business and we have some legacy customers, but we're starting to see more and more move towards the cloud, and we're looking forward to a bigger cloud adoption.

Speaker 2

Got it. Thanks. That's it for me.

Operator

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

Speaker 2

Hi. Thank you. I'm hoping you could give us a little more commentary on how the pipeline is building, maybe the size and types of deals that you're seeing from customers.

Speaker 1

I think that the significant driver that's given back on the prior question is coming from a cloud and AI. We see, as I mentioned, we have hundreds of projects that are in the midst. We managed to convert those projects in a higher in a much higher rate than industry standard. Those projects push also for for cloud services. We managed to increase our position in that aspect, only in the Israeli market, not only in the Israeli defense sector, but in many sectors, including The US and also in The recently also in Canada and The UK.

Speaker 1

So this is one of the significant drivers that we see today in the business.

Speaker 2

Yeah. And I I can add that the general opportunities are definitely also the type of land and expand. Okay? So we see a lot of lending as you hear 270 and more projects, but this project is not ending. We keep on expanding.

Speaker 2

This is just the nature of what GenAI is doing to all of us in the market. Understood. And then can you comment a little on the strategy behind the acquisition that was done in July and the contribution to the financials for this year? We

Speaker 1

didn't acquire any company in July.

Speaker 2

Small manufacturing company?

Speaker 1

Axiom. It's a very small operation. It's something at around $2,500,000 in terms of turnover. It's a con it's a kind of a consultancy firm that we work with them as partners, and we acquire them in order to push forward our our business in

Speaker 2

Faster AI.

Speaker 1

Our Faster AI operation in The US.

Speaker 2

Got it. Okay. Thank you for taking my questions.

Operator

If there are any additional questions, please press 1. If you wish to cancel your request, please press 2. Please standby, or we'll full for more of your questions. There are no further questions at this time. Mister Bernstein, would you like to make a concluding statement?

Speaker 1

Thank you everybody for joining us to the call today. We hope to continue in giving you good news on our upcoming call.

Operator

Thank you. This concludes the Magic Software Enterprises Ltd twenty twenty five second quarter results conference call. Thank you for your participation. You may go ahead and disconnect.

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