Q2 2020 Magic Software Enterprises Ltd Earnings Call
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Ladies <unk> welcome to Magic software enterprises, 2022nd quarter Financial results Conference call. At this time all participants are in the listen only mode. A brief question and answer session will follow a formal presentation.
Assistance during the conference. Please press Star Zero as a reminder, this conference is being recorded with US on the line today are magic CEO, Mr. Guy Bernstein Magic CFO Mr. Asaf Bernstein.
<unk> VP of technology and innovation, Mr. You've all of the Magic quarterly earnings releases or lease was issued before the market opened this morning, and it has been posted on the company's website at Www Dot Magic software Dotcom before we start I'd like to remind everyone that this conference call Makena.
Jane projections or other forward looking statements the safe Harbor provision provided in the press release issued today also applies the content of this call magic expressly disclaims any obligation to update or revise any of these forward looking statements whether because of the future events no information.
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 before the market opened this morning.
Replay of this call will be available after the call on our Investor Relations section of comp of the company website I will now turn the call over to Mr. assault Bernstein CFO of Magic software. Please.
Go ahead.
Thank you you own and thank you everyone for joining us today for brick and mortar wasn't one financial results.
[laughter] order for a second quarter results demonstrates our ability to deliver solutions and services well existing customer and closing new deals alone Sardo continued solid execution, although well if you don't loan growth. Despite the continued global reimbursable the Goldman.
So option.
Revenues grew by 12% year over year were 86.5 million dog in the quarter with so many coming from expansions of our business North America is.
Overall called <unk>.
The only more although first <unk> second quarter results as we probably over there are no formal why not just wont do operation. We continue to work closely with a large customer base. So holding Domingo commission to the new working former in addressing the challenges they see.
Our markets continue to adopt the new nor will we see that the corn business disruption related to different then [laughter] urgency for enterprises to measure their legacy plus all we know competitive advantage by offering more digital solutions, while the operational efficiency.
Hello draws in future opportunities for Magic software, although business is benefiting from these global trends that are driving overall.
Leasing momentum for most of the muscle well one branch of topic mergers methodologies and services hold your from BBB simple formation the multiple services.
Renovations continued to Missouri legacy systems to model, let's see both on premise old cloud based solution as well as the need for meeting customers expectation, well digital and social and mobile personalized experience.
Although most of all the deliverables to our existing customers continuous flow and we look to significant embarked on 11 lists for existing customers, although folk roseburg, all taking longer to grow as enterprises, new agreements on hold until there's a certain people call me my view.
Well magic point of view, our direct customer relations of Lenovo trusted advisor approach have been had been official aspect of our business model, especially in these challenging business environment.
He has got some of the does the new and unique John just covered my team.
So do you feel secure repeating revenues, while increasing sales, we got to existing customer base, delivering additional services label or customer girls Opex.
Oh priority remains executing on our growth strategy for the remainder of what he's doing I'm, sorry, but deliverables to our existing customers remain on track.
We will continue to grow when we have already live and leverage of investments. We continue to see the growth in sales to our existing customer which was the viability of our position as a one stop shop hold the SMB market. We knew we know well that's in service.
Well there continues to be new build on certain people call. This day 19, we remain focused on execution, Oh seems a whole focus on developing remote glycosylation and digital marketing well drugs that are very strict draw them and local face to face even we have accelerated the online engagement model and being very active.
Whereas remotely mold user groups do we played the face to face session.
Overall, we see that the auction we have taken provided us the necessary flexibility and operating efficiency within the Colin circumcised.
Well, let me be mindful offering we die repeating revenue and a solid balance sheet position us for certain the challenging environment. We continue to seek business growth organically and we'd M&A why do we see further opportunities to increase operating efficiencies any margin, we're confident that of the global economy Cabelas Magic software we mean.
Installed and well positioned for continued growth.
Turning now to pick and water business performance I will now review our non-GAAP results followed by comments on the balance sheet cash flow and then we'd also pulled anymore.
20.
Revenue in the second quarter, a whole blood blending increased by 12%.
One $5 million compared to 77.1 million into second quarter of 20 my team [laughter].
The second half of when you make the we have experienced continued decline in revenue in the telecom industry.
As a result, Oh second quarter results reflect the you over you degree.
One $6 million, you know revenues and a decrease of 1.7 mean anything to operating income excluding the decline in the telecom industry. Our revenue grew by 24% year over year, 7% with respect to the acquisition of net effect, which was concluded on July 1st Moneymaking and 7%.
Organic growth.
Looking at the geographical breakdown, although revenues during the second quarter. Most summary car accounted for 49% of total revenue you won 48% Europe, 8% and African Dampens the world accounted for 5%, although second quarter revenue.
Most of our girls knobs lumber was traditionally before most amedica end user which continues to be our strongest David.
North America accounted for 51% of a growth into second quarter in Israel accounted for 46%.
He loved to profitability a little girls for people to second quarter of 21 was 26.5 million dollar approximately <unk> percent compared with 25.9 million into second quarter of last year.
The overall revenue mix for the six month period of 21 was approximately 42% you like to dwell software solution and 78% related Htwo professional services compared to 26% nurses to all software and 74% related to our professional services in 2019 of the whole.
The break so a global mix for the six month period of one is when it was approximately 42% related to software solution and 54%, maybe lower professional services compared to 50% delays as well, so well and present reluctant or professional services in 2019 of the whole.
R&D expenses on a non-GAAP basis in the second wonderful 2020 totaled 2.8 million compared to 3.2 million in the same quarter last year and 3 million in the previous quarter did you give you know R&D expenses related mainly to shift of all development resources for me, but to India and go scoping.
Measurements taken with respect to the covered lighting business disruption.
As you know expenses on a non-GAAP basis in the second quarter when it one well above 11.4 million compared to 11.4 million the same quarter last year and 12.3 million in the previous quarter. The de casino as Jim expenses versus the first quarter. When when he was attributable to cost cutting measurement bacon with respect to.
The corporate lending business disruption.
On a non-GAAP operating income for the second quarter was 21 increased 14%, it's 1.2 million compared to 10.7, 11% did last year.
Reflects an operating margin on hold informed 1% well this quarter compared to 13.9% in the second auto lending team or 1.9% into first quarter once when.
Excluding the declining the telecom industry amounting to 1.7 million versus second quarter of a blending they didn't operating income grew by 31% year over year, 50%, mainly with respect to the acquisition of Motherfucker, which was concluded on July 1st Lineal open and 50% organically.
Non-GAAP tax expenses this quarter totaled 2.3 million compared to a tax expense of 2 million in the second quarter. When you make team our effective tax rate for the six month period of 20 blending was 20% compared to 19% recorded in 2019 of the whole.
We expect all the effective tax rate in 2020 to be individual wanting to 21 person.
Our non-GAAP net income for the second quarter into 14% of 8.1 medium or 17 cents per fully diluted share compared to 7.1 million or holding sensed a fully diluted sharing the same period last year.
Excluding reimbursables devaluation of the U.S dollar versus the new Israeli shekel during the second quarter blended learning Oh financial income and emotional equal net income would have increased 25% bugle viewed waste and low media or 18 cents diluted share.
Turning now to the balance sheet as of June 31, 20, cash cash equivalent short and long term by people, who the most of US acuity amounted to approximately 92 million, although 89 million wanting to move this quarter.
Total financial debt as of June 30, plenty plenty amounted to 25.3 million compared to 20 million in the previous quarter.
Well my personal perspective, we generated 16 million from operating activities into second quarter, which will also mostly.
By 3.9 million related to dividend distribution to shareholder.
With respect to the second half blending 19 hope on full me again related to dividend distributions to noncontrolling interests, and 4.3 million related to M&A activities, mainly towards acquisitions non controlling interest.
Personally these issues today, we announced that Magic software enterprises board of directors and declared a semiannual cash dividend you'd be on all those 17.5 cents to show and in the aggregate amount of approximately 8.6 million for the first off of 20 Glenn.
I think approximately 75% of other net income and 30% of our cash flow from opening a few review for the first off of wedding planning and in accordance with our dividend policy.
In closing I would like to John No catalog either full 20, when the global economy experienced significant disruption from Cobiz My team and we have managed to Pandemics effect, well, most all employees and our customers worldwide that said our business model show you severe here in this challenging environment.
Well I mean operational perspective, we are a software company, which fortunately allow the remotely work from home oftentimes site. Other results. We are very higher these ability although revenue stream from existing customers.
These parcel give us confidence will be mindful of that you and we are reiterating our 20 plenty full year revenue guidance, which we expect to be in the range of rather than 60 million to 360 million on a constant currency basis, you flipping amending our growth rate of 7% to 11% you over to you.
We've got I will now turn the corner over to the operator for questions.
Thank you ladies and gentlemen at this time, we will begin the question and answer session. If you have a question. Please press star one if you wish to cancel your request. Please press star too. If you are using speaker equipment kindly, what's the handset before pressing the numbers questions will be pulled in the.
What are they are a seat please standby, while we poll for questions.
The first question is from Tabby Rosner of Barclays. Please go ahead.
Oh, hi, everyone thinks focusing my questions.
I have a couple hurst.
You mentioned.
The strong demand you're seeing driving by 19 wishing companies to returning to more digi cold and swap the transformation projects. So we started mine I'm wondering.
Why you're reiterating guidance and not being a bit more constructive is that because you are.
Being conservative.
Environment or because perhaps the projects will take more time to kind of developed and turning to additional revenue.
Uh huh.
Yes, definitely we are being a more conservative because of these all are known.
Situation.
We see a lot of things going on.
The same time, we do see companies that are a especially the young companies that are struggling to raise money.
And therefore, we.
I wanted to be in a position that.
If we surprise surprise for the good enough for that.
Okay. That's that's helpful. And then you guys talked about the telecom markets in a in your prepared remarks can't can you elaborate of what's going on there and whats hurt your expectations for the second half.
2019, I get anywhere that we experienced a very good start it for the year.
Kind of a in conjunction with the merger between a sprint and T mobile and the I think that most of the carrier we do much woodlands side. There is strong investment on me on that Fiveg generation.
And we that we also experience you know in decline while work a lot of support that we provide to such as such company.
This is something that's following the approval of the merger in 2020 caused it to relieve but you always happen stopping I would say the close to the end of the second quarter and we expect any provable talked about but if I take a the first half of a winning 20 versus the first half.
Any 19 now was as you see as you saw that was a significant a decline of around 6.6 million in our revenues.
Quarter over quarter and amounted to 1.7 million loss of operating profit, which we managed to compensate you know when we are there and with other projects that we have but still you know where are you holding we expected to be at the better place.
I can tell you that once we once that is a turnaround moved up markets. We are you know at least to monetize them back as well.
Okay. That's that's very helpful and perhaps the last one for me.
You know covidiens put the other restriction on traveling and this is place where where were you save money and you talked about you or your digital.
Capacity two to two kind of promote to clients and so on and I guess I'm wondering you know looking beyond.
Oh koby than the current environment are there and the cost savings that you guys can maintain that would kind of helped your margins structurally.
Oh, Yes. This is definitely what we intend to do.
The result, with the question for you know people who like to travel.
There will always try to travel.
But definitely we will.
I'll be more a strict on this.
I can tell you guys I can better that's another thing that is worthwhile benefit is that didn't do that it was always the pressure on silent.
Lots of people you know into professional service side of the business and at the moment based on the I'd say a comic environment. So there's no much pleasure to know now as it was in the past two increased salaries. So this is something that you walk on one side will.
Favor on data and you still have cards, you know pushing on the you know on on discount on rate. So I think that although all of these kind of supposed to support our goals and more local use.
That's very helpful. Thank you very much.
The next question is from Kevin TD H.C. W. Please go ahead.
Okay gentlemen, thanks for taking my question.
Congrats on the Great expense management I was wondering if you could talk a little bit too.
Sure ESG cost the shops please.
So basically we managed to save a in on the on the asked you may we save something around 1.1 $1.2 million compared to two a few look versus the first quarter.
It's significant part of that savings as it relates you know too I love the decline situation not something that necessarily would last for Dave.
For the month to come.
I would I would assume that we can keep approximately 50% or 40% of that cost cutting also also for the future, but we had people on them. We had people on a unpaid leave we did some his salary reduction we are trying to travel constrain all of that you know I'm not necessarily going to.
Continue as we progress on the year, but around 40% of that they believe that we managed to maintain I think that over the years. If you look back you can see that magic always at least maybe if my asset management always knew how to adjust our cost level versus the 11 of our operation well. This is something that was done from.
Well many years of I would the company.
I can you talk to your head count at the end of the June quarter, and what your expectations might be given prevailing circumstances.
Headcount didn't change much where we are down 2600, a employees I can tell you that today, we have something around 150 open position.
We are trying to see lab.
In something let's say that 70% of diabetes into us a 30% always are in Israel.
So you know we've done you know, we feel really confident with our ability to continue the momentum that we I mean for the first half.
Majority is a billable people were looking for.
Okay.
What's the me over arching trend appears to be that professional services are becoming a greater and greater share revenue and I was wondering if.
You could kind of talk too.
Why you think that's happening is.
As a software development side of your business, just less attractive to customers.
Or just finding.
Greater demand on.
Outsource people at your clients, maybe just some insight on that over arching trend. Please.
Okay. So I'll divide it into the field, where a question into too.
One part yeah.
Every now and then we have renewal level or new sale of a softer a bit.
And apparently this.
Last quarter.
It was less than the comparable water and therefore, you see some decline in the filter.
But it will probably change our next quarter end to end the one I'm sorry.
Other than that when we look at the acquisition five.
Then definitely we see more service oriented company is Dan filter oriented companies.
And you know as a result, we did the on the last transaction.
It was that it is a therapy space.
Company and therefore, we do affect the arm the ratio between.
Services and software.
[noise] [noise] okay.
Thanks, guys you can you.
I guess can you extend that and talk to what you see going forward.
And M&A I mean, you guys have a ton of cash still I know you've been very very careful about picking and choosing and I know all your investors appreciate that.
I was just wondering if you're thinking about becoming more aggressive because I mean other companies are clearly not going to be in the same financial strength that you are and they might be willing to negotiate more closely that a little we said, we'd definitely look for such a companies.
For now we don't see yet.
A declining prices multiples and no.
All companies are still looking for rather high multiples look at the capital markets. You know companies are raising money like if it was.
Papers.
So we don't see.
We don't see pressure on on on.
Companies that want to be tool to before.
To sell their their operation.
Yes, do we have quite a nice bye.
Rick risk progress with what we have and you know that apparently you know the fact that we've been conservative is helping for the business, meaning we do.
Quite safe acquisition.
No.
I don't I don't see even one acquisition that they can no.
It does.
No bad into and from the bid.
Okay.
Do you foresee maybe getting deals done over the you know the remainder of this year or early next.
Definitely a while a you know before the cold good things sort of gets resolved.
We do have a two companies in that five like and.
Why the van.
To Asian, hopefully, it's going to cool.
Okay.
Can you speak a little bit to the R&D activities I noticed cost there were down and I'm I'm kind of wondering number one.
What are your clients asking for and what is your R&D development focus.
R&D developments focusing again the.
Kind of sticking to waive the low code.
Equity that we have so going more and more.
Yeah.
Fourth editorial we'd be weeks easily development.
All around that and.
Yeah.
A lot of.
It.
Now than they build I mean cloud, we thus for the last 10 years, or but really becoming more and more cloud native forwarder tools and environmental say obligation.
Okay.
I mean any insight on the costs of the cost side of that it just seems most.
Most I tell you they headcount didn't change even grew so most of the cost cutting happened because we shifted between 2900 20 swimming in some of our R&D.
Efforts from Israel to Indiana, So that takes off the cost on one end and there'll be other then we also.
We also during the call uptime had some simple data, that's where all utilizing the vacation days or will some kind of it.
Unpaid vacation.
So this is something that contribute to the deduction on day of the cost.
Just for the second gas. So so you kind of expect things to bounce back.
More historical norms in the third quarter, yeah, something around the 3 million.
Okay. Okay.
All right.
Cede the floor. Thank you for entertaining my questions gentlemen, nice job.
Thank you.
The next question is from a soft far out of Oppenheimer. Please go ahead.
Hey, guys congrats on a quarter that execution.
On the professional services side of the business any specific vertical verticals, you guys want to highlight kind of having offset.
The decline and then number two any further comment you guys would want to gave on the dividends. Thanks.
In terms of the effects. So that we managed to compensate with its basically the finance sector, where we are very strong in the healthcare.
We add some improvement on the cyber security companies are utilizing.
People we are.
40, 50 people that are working around the cyber security and we filed you know people are trying to companies are trying to six you better there's a technological infrastructure.
That was the main let's say sectors that let's we managed to to compensate with on the dividend side I think the those low much to just say well. This is we are keeping where pretty much keeping with our dividend policy.
We took the second half, where we distribute took only 50% of.
I have already distributable profits.
Just because you know back at the during April May you know there was more unclear and let's say a side.
And now we are we feel that we are back on track.
Well, maybe $1 million, a $92 million or non cash the company's generating $15 million.
Quarter from operating cash flow.
Leverage is low.
Yeah Okay.
That's helpful just on.
Kind of on a go forward basis, we know that the mix.
Favoring Buffalo several frequently.
Clearly on the gross margin.
I mean, what do you guys.
The gross margin on a normalized basis as a closer to 30 on the have finished at one ish or causal affirmed sue.
Although it depends on where gross flows depending on the second but just any commentary there.
She is closest to the 32.
Okay Yeah.
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That's all from us.
If there any additional questions. Please press star one if you wish to cancel your request. Please press star to please standby, while we pull for more questions.
The next question is from Maggie Nolan of William Blair. Please go ahead.
Hey, this is Ted on for Maggie I'm sorry.
In the press release, and you mentioned that stop in your prepared remarks, you said, you're gaining traction with new and existing clients can you add some color around the new logo.
Corridor.
And also in your prepared remarks, you talked about prospects taking longer.
To kind of ramp up can you talk about kind of a case of project ramp ups in the second quarter ended in July and August. Thank you.
I think I don't think up you know mentioning.
New logos.
And I'll tell you why something that we feel that we give you any more color about the about the business.
First of all 80% of the business is pretty much relying on our existing community on one hand and on the other and we don't have if I look I'd be below 50, I'll, just say accountants, we having the goofy doesn't account for more than 2% of our revenue. So every year I can tell you that we are winning I don't something Oh.
80 to 100, new client favorably and every quarter.
And you know and John just you know something that build up the pie is something that can go to one I've been at scale Twond of getting five understate depends on the depends in all deal did the so this quarter, we ideas Santa Clara for example that they acquire though there a low.
Co development platform when the deal of all 200000 dollar is three years a contract to develop no low coding business application.
And then there are numerous let's say numerous examples they like that.
Jobs over the improvement on the a professional services side, then I think that's where I would just you know being on day old riding on the way.