Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing buys that culp until begin shortly.
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Ladies and gentlemen, thank you for standing by welcome to Magic software enterprises to selling 21st quarter financial results Conference call.
At this time all participants are in listen only mode. A brief question answer session will follow the fall presentation for Operatorship since joining the conference. Please press Star zero.
Minder. This conference is being recorded with US all that today are magic seal, Mr. Guy Bernstein Magic CFO, Mr. Asaf Berenstin imagine VP of technology innovation, Mr Robot Levine.
Magic quarterly earnings release was issued before the market opened this morning simple sit on the company's website at Www Dot Magic software dotcom.
Before we start I'd like to remind everyone that this conference call they contain projections or other forward looking statements. The safe Harbor provision provided in the press release issued today also applies to the contents 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.
You mentioned that views or expectations or otherwise.
Also during the conference call today magical refer to non-GAAP financial measures reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning.
This call will be available after the call on the Investor Relations section of the company's upside I wouldn't out let's turn the call over to Mr. are soft Bernstein CFO of Magic software. Please go ahead.
Thank you. Thank you everyone for joining us today.
Total first quarter, what is one internationally.
The second half of 29, 10, we defer arthritis business, which reflected.
Strong momentum into 2020.
First quarter results demonstrate.
Continued focus on supporting our existing customers and closing you'll do integral canceled as executional wallboard, all geographies topline growth.
Reported 19% year over year gross in the quarter, we filled many carbon from expansion of all businesses. Most ameristar I mean is or what are the Japanese market.
Overall Goldman repayment I've only a slight theme park into first quarter a report.
Performance, where the Justin Gover brochure operation.
We work closely with a large customer base supporting that window transition to remote wallboard.
I think the children's refurbishing supervision.
The vast majority of magic for employees are the doors working more with required unfortunate for structure and guidelines in place I results Oh provision for the Wolfcamp, a hallmark was relatively small.
During most of all the LIBOR floors existing customers continuously and we didn't see any significant embarked on a revenue stream for existing customers.
Sure.
We'll go to live in the old Bolting on new projects later in the you on yourself, a little softer solutions on enterprises based new agreements from all that.
74 gold is located.
As we said under Basel businesses benefiting from global trends that are driving a world vision comes first and foremost them the muscle wide ranges bump acknowledges methodologies and services 40 of them beyond the bars digital transformation the multiple services a golden even should continue to laggards for legacy systems modem flexible.
The on premise cloud based solutions as well as the need for meeting customers expectation for digital and more personalized experience.
Eric is well positioned to benefit for market trends impacting our customers would you do the migration from legacy systems in the adoption of digital capabilities. The gone business disruptions related to cold and my FEMA highlights the need for the brokers to modernize the black hole. So they can probably mold axis and also to just our services.
Colin Lumpiness border to be an accent idle to trend or begun over the last few years little more than ever in terms of carbon Central force abused movement, you just don't get persevered and service deliveries were variety of digital trends.
These markets, usually coburn enterprise's Myrtle beach to complete build yourself or formation for.
Well magics point of view, we have optimize our oldest operations to me the new business reality, although in customer relations as well as a trusted advisor up all have been up an official surface aspect of our business model, especially in this challenging business environment as we have customers address the new and unique challenges to call the lighting.
We don't do so for us to secure repeating revenue, while while increasing sales within our existing customer base.
The close relationships, we enjoy with a customer gives us a meaningful knowledge of their business challenges you nickel version on environments. Underpin. These collection. Her first two will be highly actually working on exposed to that means and deliver of additional services live in the rules and success.
As we adopted a new knoll, Oh operation have gone through some changes as well the global business environment very rapidly evolving reaction to called in my team and usually Sportsbook magic due to this change is increasing go digital engagement holder.
I always remain executing all I'll start to do for the reminder, 20 blending we continue to go where we are more would be laggard and leverage our investments we remain focused to advance our competitive position as a one stop shop for yes, we'll be market, we've enhanced products and services, we should be has grown organically and.
It does M&A was we seek further opportunities to reduce or operating efficiencies and improve margins.
There continues to be new bill uncertainty for Colby location, we remain focused on execution, we have taken appropriate actions to provide the necessary flexibility and operating efficiency with nickel and circumstances only be mindful offerings, we are getting revenue and a solid balance sheet position us for success in history.
Energy environment, we are confident or are the global economy cover metric will emerge stronger and well positioned for continued growth [laughter] joining an old school.
First quarter business performance, and we know we view our loan GAAP results followed by comments on the balance sheet cash flow and we the outlook for blending blending lines of the cold with my solutions area.
Well first quarter revenue totaled 85 million compared to 71.8 million for the first quarter last year, reflecting you you overview liking for some real yoga revenue growth was 8%, we'd about our carbon from being part of less effect for acquisition completed during the third quarter of winning team.
Looking at how did your geographical breakdown of our revenue during the first quarter North America accounted for 47% of spoken revenue you heard 44% you won't 7% any book and the rest of the world are terrible so 5% overall revenue most of our roles you absolutely love those was traditionally.
For North American Israel, which continued to be our strongest in Italy, North America accounted for 43% of our rolls into first quarter, and usually and accounted for 53% of our rolls into first quarter.
Turning now to perfect WPP are long gone well spoken for the first Waldorf 21 was 26.5 million.
Approximately 12% compared to $23.6 million into first quarter last year, our non-GAAP gross margin for the first quarter of 2020 degrees from 32.9% into first quarter of 29 pm.
31.1% into first quarter when it when.
The breakdown of our revenue mix for the three months do those 21 was approximately 23% related to our social solutions and 77% related to our professional services compared to 26% elected to all software and 74% related to our professional services in 2018 of the whole [noise].
The decrease in the percentage of all software solutions, mainly due to the acquisition of retrofit and do you expansion of our professional services portfolio. The burden of our gross profit mix for the 12 month period of 20, making was approximately 45% relating to our software solutions and 55% related to a professional services.
Compared to 50% related to El Salto, and 50% delivered to our professional services in Glenlake you know the whole [noise].
Moving to operational costs R&D expenses on an all got bases in the first quarter was 21, daughter 3 million compared to 2.5 millimeter same quarter last year in 2.9 million the previous quarter.
The increase in our R&D expenses related mainly to the first time consolidation of firewall and development enforcing our R&D center in India in support of our rolling basis on a global customers.
Our non-GAAP operating income for the first quarter was 20 blending increased 9% to $11 million compared to 10.1 million in the same good luck view.
This will reflect an operating margin of 12.6% for the first quarter compared to 14% in the first of all those blending team and wonderful as part and 24 and 5% into force models plenty, noting.
Our non-GAAP tax expense was this quarter totaled 1.5 million compared to a tax expense was 1.7, meaning the first order when lumping.
The effective tax rate for the three month period of 21 was 20%, but let him perfectly Golden 20 magazine.
We expect all the effective tax rate is plenty plenty to be in the range of 20% to 21 person.
Non-GAAP net income for the first quarter increased 41% to 9.4 million or 19 cents per fully diluted share compared to 6.7 million or 14 cents per fully diluted shares. So good last year, excluding the impact of the devaluation of the new Israeli shekel versus the U.S. dollar during the first quarter.
Oh, no financial income net income would have increased by 26% to 8.4 million or 17 cents per fully diluted share.
Turning now to the balance sheet as of March 31st 2020, cash and cash equivalents Showtime and long term bank deposits. It must have a secured you amounted to approximately 89 million compared to 98 million in the previous quarter.
Total selection dipped a little while 31st plenty plenty amounted to 20 million compared to 23 million in the previous water. The decreasing I'll talk on cash balances mainly resulted from a $50 million paymode made towards an acquisition of 20% of the minority interest in most of social industries MTV interesting.
With the interest we lost also 60% to 80%.
Our continued focus on Google financial position and as a testament of our confidence in our existing operations also we knew that use an Israeli based software company. We've over three decades of proven experience inpatient medical medical information management system and it markedly that anyone.
I will make cash flow perspective, we generated $13.1 million from operating activities into first quarter.
As to our dividend policy, we know that you state that each year the company will distribute the dividend or up to 75% always distributable process.
Just a discussion of our board of directors to transfer the sensors all decide local distributor bbten seem determining the giving them to be distributed for the second half of 2019, our board of directors decided and part of the global impact of calling they seem to a pull the dividend distribution for the second half of women 18 miles away from Scotia.
$3.9 million, which in the aggregate we'd be amounts distributors with respect to the first some 2019 or $7.6 million reflect approximately 56% of magic software net income attributable attributable to its shareholders for the use lending team and demonstrates our continued confidence you know.
Business.
Ability to continue generating positive cash flow.
The dividend is payable on June 20 to 2022, all of the company shareholders already sold at the close of the they love the global select markets on July 2020.
In closing I would like to jello to our guidance for 2020.
On a quarterly experienced significant assumption for holding my team and we have manage their pandemics affects fulltime employees and customers worldwide.
That said, though business more than a has shown strong under this new business environment from an operational perspective, we are a software company, which Fortunately allows us to reasonably begin to walk from home today, 98% of magic worldwide employees very few successfully working for more all four clients.
[noise] gradually and carefully employees of problem can you talk to offices.
I will resolve we have very high visibility over revenue stream from existing customers, which is almost 80% of our revenue.
These factors give us confidence for the remainder of the year.
That's fair.
Faced some headwinds macroeconomic uncertainty is impacting the timeline to close new business and commence new implementations are the result, we are revising our 2020 revenue guidance to a new range of three other than 50 million to $360 million as compared to the financial for younger than $60 million.
370 million, reflecting a 2.7% reduction in the midpoint of the range the operational efficiency measures, we do to adjust the cost to the possible lower revenue expectations.
Thank you to do so across all the bachman differently allows us to minimize its negative impact over the operating profit we've done a really helped on the call over to operator for questions.
Thank you ladies and gentlemen at this time will begin the question answer session. If you have a question. Please press star one if you wish to camp. Your question. Please press star to if you're using speaker equipment kind enough to have stepped for pressing the numbers your questions will be pulled in the order. They opt received please standby we pull for your questions.
The first question is pumps have Erosnow Barclays. Please go ahead.
Hi, This is Chris Reimer on for Kevin. Thank you for taking my questions you talked about the impact that you called 19 has had on new orders.
Can you run us through some of the push maybe that you've seen from new customers and do you think it's because they're just being conservative when it comes to new investments.
I see I will divide it into.
For on one hand, we see.
Young companies that are being a bit more cautious in joe's through their cash flow.
And therefore performing.
Andy laying up off of the project.
And.
On the other as you know the a fast prospects that we have seen the.
We are few.
Next we take longer to cool.
Mhm.
Okay, how is the M&A pipeline at the moment.
Assuming some of these valuations out there may have come down a little bit is there any color you can add on that.
Yes, we have probably.
Oh do seem to five I.
I would say that.
Two of them softens before these all pandemic.
And draw.
Jamie probably is a resolved or you know people being more cautious.
And you know they seem to using moved.
I mean to mitigate.
Oh, yes, no real before you really Jonathan we need to.
Oh.
Okay. Thank you that's it for me.
Thank you.
The next question is fun Maggie Nolan of William Blair. Please go ahead.
Hi, Thank you you talked about some of the all operating efficiencies that you're driving in the business can you talk to your does going a little bit more detail.
A couple of understand you know what that operating margin may look like in the second quarter or the third or fourth quarter as it compares to what you saw in the first quarter here.
Okay. So.
First quarter I must say that we have.
Threed that vision that were.
Other performing.
Oh, and therefore, we you know.
Got a heat.
And reduced the operating 11 to 12.
1.6%, rather than where we shouldn't be around 14%.
Having said that we are working on that three.
Companies.
To bring them to bring them back to their Oh ongoing 11.
And the same time, you know because of these on price and then because you see that.
You can walk in more efficient way.
And we decided to.
Take the extra step and.
Through the operating leverage.
We will see resolved malls and was.
[noise] [noise] internal steps that we have to take we have let's say out of approximately close to 2000.
Employees, we show dealing with the billable.
Project a week, we had to boot pulled some of the one other than 50 people on the unpaved vacation, we had some cost cutting too little salary adjustments or results. The salary increases, which also was supposed to support the maintaining will valley.
Operating margin I think decided that the company already in previous years Itron choose to support the movement of its R&D unbelievably a capabilities towards India. It's worked on previous will also support.
Ability to manage and maintain its fairly and solid.
Operating margin.
Okay, great. Thank you and then in terms of all of your topline guidance and how you put that together and you know what are the conversations that you're seeing maybe with clients in April versus may that kind of informed the competition at that guidance and how it made.
Glass over the course shifting here in terms of.
No. It is just going to be weaker is there an expectation that guys you're probably towards December any color there would be helpful. Thank you.
Basically during the month so March in beginning of May we you know it was at least in Israel field.
All three of the color and shutdown I can tell you that fall proximately one other than 50 people that that's where that were.
On unfazed occasion during these months a doing may was at least cocked by half.
In coal into the as we as we speak we believed that by the end of May will have approximately 30 people.
Still on P. vacation, so we see customers and you know you're asking us to bring back to the employees starting to engage all the work that was calling for you know sealy in process.
Are you still see some hesitation all you know way what to expect from them in the in the coming let's say a pleasing to third quarter I think look into fourth quarter, you things will pick up in the phase the del Conte you seem to be picking up.
We will see a you know back to.
Some all back to normal activity on the fourth quarter, but for the second and third quarter. You know people are still uncertainty 11.
Understood and then one quick housekeeping for me what is the amount of organic growth embedded in that guidance that you gave for the full year. Thank you.
As we said out of the 19 a percent growth a person came from basically we didn't do any acquisition. So everything is coming from the business that we the to go into yet, but 8% coming from organic activity and the remaining you stroke acquisition that we completed during the third quarter.
Hey off net effect in the U.S., which was not consolidated you into first quarter over 2019.
So, it's like 40% or gotten a failure sentinel okay.
I guess, well that whole set up well that hold for the full your expectation as well.
Meaning.
In terms of the guidance that you put out there organic versus.
Got it alright, thank you so much.
The next question some Kevin DB H.C. Wainwright. Please go ahead.
[noise] Hi, guys. Thanks for taking my question Assaf, you were going so fast I missed the geographic breakdown itself do you run through that again, sorry, starting to make you do that.
No you're old Navy students anymore I'm Olivia.
Okay. We are basically don't hold basically there's no significant change we always between to 47, 48% to 49% in the U.S. and 38% to 41% in Israel. So this quarter. It was 47% in the U.S. and 41% in a new five 7% in eight book interest.
Okay.
Thank you.
Can you give us a little more insight on the valuation ad.
Washed off and calm black to both you guys decided to increase your stake I'm I'm just.
You know I know someone already asked you about the M&A pipeline and spoke and you spoken evaluations little bit I guess, what I'm wondering is.
You know given given your cash balance you have a great opportunity to take advantage.
Of course of changes in the environment and I'm wondering what you see and what your focus is do you think you'll try to go for more professional services.
Or do you think you're trying to develop your technology technology capabilities can you give us some more insight on that.
Yes, we say always you know we prefer the technology Bob Unfortunately, the prices are aware at higher on the tech side, we are checking balls as long as we see the synergies.
Currently we have like.
So you probably want that company and we are services companies in the bye.
[noise] okay.
[noise] [noise].
Well when you look across across the world certain countries or try our handling the pandemic differently like in Sweden, I don't think they did anything and I think things are.
Sure to scale back in Germany versus other places.
And.
And I think Japan to its also trying to come back quickly can can you talk to how you see countries.
Now dealing with a pandemic and how that might change the way.
Your geographic revenues grow.
Oh, I think yeah, you know our amazing that's probably a main concern is or.
The state.
Although people talk what used to working from home and let's see.
Anyway, the concern for us because even though we are you are feeling this.
Oh, the middle East that result.
I think in Israel.
Where we have like all other mean revenue stream and we are in good position.
I'm more comfortable today.
For the rest public offerings, I think in euro between Germany, and France, or Germany handling it okay upfront fees.
Ugly less.
Okay, then, Germany, but feeling in terms on the business is more on smoking okay.
Japan, the same the rest of them or other small countries and based on a recurring business. So we all lessons.
Okay Guy can you talk about rushed off and its capabilities and why specifically you wanted to increase your stake there and whether or not you think you can take those that skill set.
And use it in a in other countries.
Okay, so as for raw stone.
We're talking about a very wasn't profitable company.
We are.
Struggling turns off.
Oh translating the operating level to the bottom line and therefore, we are trying to improve that as a result, we're going after.
Then minorities.
In order.
On to improve the bottom line, while hands on and on the other hence seem to let's partners over there.
Keep sometimes incentive.
And since you know after like I don't know problem Blotnick for five years that we have also.
Oh, we feel quite confident we will.
With this transaction.
And also talking about the fact that a you know as a result of diesel situation.
In Israel are doing better and better.
As for taking them out.
All of these Ryan.
We are checking solve what you're gonna do but I must say that.
Dawn.
No, Indiana, the varying Tennessee.
Projects.
That usually involve like the minister has seen specific countries.
So you have to be soon.
[noise], but all in all that money is improving all the time.
Okay. So be okay. When we first acquired washtub.
You know the profit level diabetes into profit and be I know profits that they do now have increased by 40% from 2016 until the end to 2019.
Strong customer base. There there has guys as mentioned they are doing very very well because they're going to healthcare industry. The stocks you know with this pandemics has also increased the activity a now.
As it even got stronger we doubt this a pandemic engine and again for Oxy Sydney Survey submitted a way to improve outlined to all shareholders.
[noise] okay.
[noise] Oh gosh so.
Can you talk little bit about the professional service business and in the U.S. and I guess, what sort of resonates with me is.
A large retail customer that you have.
And I know that they're going through a merger and they time to scale back there.
There are development activities and now I guess on top of that with a pandemic it seems that they might be.
You know even more reluctant to continue to invest and I'm I'm. Just wondering if you could talk to that example, and maybe.
What you see is Ah prevailing mindset I mean, I know you spoke in very bullish Lee on the call about the opportunities that you have helping your client companies build their software capability.
But but I'm I'm, particularly concerned about what what you see happening in those companies that have a retail facing and retail presence.
Let's say the major ones that were working where we've seen day in the U.S. sees a.
Yes, and I don't think that I'm, there because you know made the business any.
Any let's see any less you know good and what it was before that even the opposite I think there and again, we didn't see any any decline in India operation again. The offers the if we sold even 2 million dollar more this quarter than weird and we sold them in the fourth quarter, So even improved.
Operation with them during the first quarter.
I think the problem that we're going to depend on facing is you know how much can we rely on continued growth rather than you know withstand feel on the level of operation that we have with them. Thus far that's the only question.
[noise], Okay. When when you take a step back and you look at the development projects in general can.
I mean.
There was a big driver for many your customers to to move more or their business to the cloud.
ER and maybe more business to mobile and I I have the impression that you haven't seen that change much and maybe it's even accelerated and I was wondering if you could.
Just maybe be more specific about the.
You know the the big drivers on the on development.
I think we can see.
Especially.
Some of them, making the situation.
And we see.
On the wall that customers in one thats still wants to go forward than the other head there are not jumping right and left to any and you.
Ideas or new thing and this is positioning us in a very good place where we.
Actually taking the role of legacy modernization. So we are an expert in legacy and also moving to them with the realization there is no big rush.
And we see actually customer is slowing down on the new.
Yeah, Hi, Mike.
Concept.
Okay. That's what we have more indicative. The next few steps, which is again mobileye or maybe some global services, but nobody's going to be bedding and at the moment and they're getting say, giving existing customer.
If we expect to our site.
[noise] [noise], Okay can you talk a little bit about your own R&D I know you made a big point and trying to improve operations by doing more development.
Ah outsourcing more development outside of Israel.
I'm wondering.
What.
Lets you, what's your development focus and.
How do you see the investment dollars that you put in R&D.
Helping your customers manage the the you know the current environment.
[laughter].
Some people.
Right.
To be successful obviously from the cost point of view, but also from the efficiency of the deliverables. We see we have a good set of skilled people and.
And there are actually doing very very good work on that.
Also delivering what we need as an ongoing but also pushing forward to a new ideas and new technologies and the.
We see the new features that we are bringing.
Words, our cloud solutions towards our mobile solutions.
With our legacy.
Tools the over the years the development platform and the integration platform. So I guess, we're not jump into a kind of leapfrog into a new.
It product, we are actually taking our existing products with our existing customer Wheeler existing employees into a more during the technologies methodologies and the way to deliver solutions.
Oh, Okay gentlemen, thanks, Thanks for taking me through through all the questions I really appreciate it.
Yes.
Is there any additional questions. Please press star one.
Thank you Mr. kept your question. Please press Star Kim Please stand by only poll for questions.
The next question is from a soft barrels send out of Oppenheimer. Please go ahead.
Hey, guys. Thanks for taking my questions and congrats on a great quarter.
I'm just kind of a technical question here to partner so for Q2 anything that would kind of make you think differently about the usual seasonality where.
You are seeing sequential growth from one Q2, Q and then what kind of assumptions are you guys, making whether they'd be macro war with respect to some of your customers that are driving the kind of the.
She wage 20, a guide thinking.
[noise] yeah.
Good for US we don't see any.
Any significant change normally in terms of seasonality.
Sales in Q2 words, one a second half.
And he's snow.
No one is much better than the first talking any magic or we normally have much stronger second half into first half and and this is one of the second again in index a second quarter. We had as I said, we have like 7% of out of a headcount which was leave unpaid leave on the other.
And we managed to offset the impact so that impacts on top line on the other Hain, we managed to offset that with the steps that we take in putting also a non billable pull back office personnel also an unpaid leave to minimize any negative impact on our operating a a process.
And you know also April is you know the Passover Jewish holiday, which also you don't have.
On the negative impact on revenue, but this is something that happens every every year on on the on the second quarter.
Other than that we currently as we said except for the uncertainty that accordingly in the market that we want to feel more conservative and because of that we slightly updated all the guidance and lower the by 2.7 load the midpoint by 2.7%.
I think we pretty much as as we mentioned also the call feel very comfortable from the existing business. That's we currently have without customer.
[noise] I guess, just a follow up here.
Whether it be for results for the quarter. If you guys want to breakout on a constant currency basis, what was the FX impacts on the full year guide.
Basic normally we don't have a significant cooling T.A.M. impacted because we rather we are operations, we have a foot on the ground. So he says well my projects in Germany, we have a an office in Germany, where we have people that are no delivering the project the same in Japan.
And the same forcing day in the U.S. and he needs right. So normally we don't have any any material impact of a fluctuation the thing that happened. This quarter is that in certain areas. We accumulated it's it can be a significant amount of cash which was nominated in U.S. dollar in one of the U.S. dollar here.
386 level.
Versus the second we converted the Kansas, we had to enhance a week. So we like managed to record a profit of around.
Five half a million dollars and the second thing is the devaluation that we have over a loan that we have over $14 million nominated in checking which was evaluated you know and made the same the same amount of their profit down 600000. So this is something like that we call like let's call. It.
Any money so money that you have on hand, and you just compared to Chicago, a liabilities that are eliminated in the shekel in you know based on changing cooling season and made it made any the impact that's on the level of the actual operation.
There's not much impact.
Okay. Thanks for taking my country. Thanks.
The next question is from the motion. Please go ahead.
[noise] Yeah alright.
Thanks for taking my call.
I want to know.
How do your position yourself to take advantage of the GE five a resolution.
And we have no we are working on a limited on some limited basis Weve day on the telecom industry I think that's using one of the as Guy mentioned on the core one of the Oh, one of the ER PNM center that was underperformed.
Well the ones that you know is more focused on the telecom industry. We feel that we have you know what state to get benefit from the AG five and upgrade but this is something that is yet to happen. So once you lap and we are working we they saw we provide project same services.
So on a we are working around Timo by these these clients you know once we get these these GE five going on I think that we love the positive impact on our operation again.
It's still a limited limited scale something to think that.
The total revenues on an annual basis that we have from the telecom sector would be something around between $30 million to $40 million out of the 300 and.
50, 360 million that we anticipate for the year.
Okay. Thanks for the <unk>, Clair so restriction factor right.
There are no further questions at this time Bernstein, which I can make his concluding statement.
So thank you everybody for joining a cool and we hope to reduce some are more good news and next quarter. Thank you.
Thank you. This concludes the magic software enterprises LTB first quarter 2020 myself the conference call. Thank you for your participation you May go ahead disconnect.
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