Q4 2020 Magic Software Enterprises Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by the conference will begin shortly.
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Welcome to Magic software Enterprises, 'twenty 'twenty fourth quarter financial results Conference call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation for operator assistance. During the conference. Please press Star Zero as a reminder, at this conference is being recorded.
Magic's quarterly earning release was issued before the market opened this morning, and it has been posted on the company's website at Www Dot Magic software Dotcom Rep.
Representing magic software today are magic's CEO, Mr. Guy Bernstein, Magic's CFO, Mr. Asaf Bernstein, and magic VP of technology and innovation, Mr. Eval Lovie before we start I'd like to remind everyone that this conference call may contain per.
Rejections or other forward looking statements the safe Harbor provision provided in the press release issued today.
Also applies to the content of this call Matt.
Magic, but it's expressly disclaims any obligation to update or revise any of these forward looking statements, whether because of future events, new information a change in its views or expectations or otherwise will so during the course of today's call.
Management will work, we'll 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, a replay of this call will be available after the call on Magic software Investor Relations section on the company's website I will now turn the call over to.
Mr. A soft Bernstein <unk> CFO of Magic software. Please go ahead.
Thank you operator, and thank you everyone for joining us today on the border.
Fourth quarter 2020 financial results.
Turning to first on business is benefiting from global trends that are driving arguing this includes first and foremost the demand for work Angel towards technologies methodologies and services for the SMB enterprise digital transformation derived from services as organizations continue to migrate from legacy systems to more than on flexible on on Prem.
On cloud based solutions as well as the need for meeting customers expectations for did you don't on a more personalized experience on that.
No Magic Q4 was an outstanding finish to a strong and challenging year.
Fight COVID-19, we close for the first time during the fourth quarter will be $100 million margin quarterly revenue coming.
And the one other than five mainly on 15% higher than last year. These achievements was further supported by the 33% increase in operating income to a record on 15 3 million.
For the full year revenue increased by 14% to $371 million and we delivered operating margin of 14 point to compare to 326 million in revenues and for pinpoint 5% operating margin in 2019.
These recycled results will be the outcome of our focus on strategic execution. Overall during 2020, we signed over 200, new logos across all other business lines and territories, one third related to our software software solution and the remaining to our professional services.
On the M&A front magic as demonstrated in the bar for historic track record of acquisitions that have accelerated top line and bottom line drawings, we have proven our ability to successfully integrate acquisitions and improve the operational performance on the combined entities.
Through our acquisition strategy, we have expanded the offerings for our customers and increase our global footprint.
During the second half of 'twenty 'twenty, we completed the acquisition of stock on inflammation system ink and up to net income both U S based companies, which especially on large staffing and recording to extend out for a president in the U S market and diversify our client portfolio. Both Stoke on an opt on a team that consists of 200.
For the IP consultants and their customer base that includes blue chip companies like buyer, Norfolk, Southern and Edward Jones investments on <unk>.
Related to our airports to fulfill our commitment to our clients to serve as a one stop shop for a fourth set of solutions and continue on expansion. We continue with other airports to find potential companies that fit our strategy and our valuation range. We continue looking for small to midsized companies with revenues in the range of 10 to 15.
Doyle on which will follow on strategy geographic expansion complementary solutions and customer base, turning now to our fourth quarter and annual business for a full month I will now review on non-GAAP results, followed by comments on the balance sheet cash flow and end with our outlook for 2021 on fourth.
Fourth quarter revenues totaled $105 million compared to 91 million for the fourth quarter of last year, and 95 million in the previous quarter, reflecting 15 per cent and 10% growth respectively.
Fourth quarter revenues were mainly fueled by increased demand for our professional services in North America, and Israel, and especially in the health care in the defense sector.
Looking at the geographical breakdown of our revenue during the fourth quarter North America accounted for 49% of total revenues, Israel, 39%, Europe, 7% and APAC and the rest of the world accounted for five per cent of our annual revenue.
Most of our growth in 2020, and absolute number was traditionally for North America, and Israel, which continued to be on strongest territories.
For America accounted for 46 per cent of our growth for the 12 months well either on accounted for 52% of our growth and on a quarterly basis, North America accounted for 61% of our growth in the fourth quarter compared to the respective period last year.
Israel accounted for 38 per cent of our growth.
Our revenues in North America for the 12 months period for 13% year over year and on revenues in Israel for the 12 month period grew 16% for you over you on a constant currency basis.
And now to profitability on a non-GAAP gross profit for the fourth quarter of 2020 was $32 5 million.
Up approximately 11% compared to $29 4 million in the fourth quarter of last year.
Our non-GAAP gross margin for the fourth quarter of 2020 decreased from 32 three per cent in the fourth quarter of lost you for 31, one person on non-GAAP gross margin for the 12 months period of 2020 decreased to 31 three per cent compared to 33, 1% in the same period of last year the decrease.
Gross margin is mainly attributable to the change of our revenue mix related to on software solution versus on professional services.
The breakdown of our revenue mix for the 12 months period of 2020 was approximately 22% related to our software solutions and 78 related to our professional services compared to 26 per cent related to on software and 74 per cent related to a operation for professional services in 2019 of the whole day.
The interest in the percentage of on professional services is due to the continued strong demand for our Paul Fisher on the expert, but I think on a professional service revenue stream and the addition of spoken and up to now to our professional services business segment.
The breakdown of our gross profit mix for the 12 months period on 'twenty 'twenty was approximately 47% related to our software solution and 53% related to our professional services compared to 50% related to on software and 50% related to our professional services in 2019 other holes.
Moving to operational costs R&D expenses on a non-GAAP basis in the fourth quarter of 'twenty 'twenty total $3 1 million compared to $2 9 million in the same quarter of last year and $3 1 million in the previous quarter.
Non-GAAP operating income for the fourth quarter increased 34% for $15 million compared to 11 million in the same period last year. This reflects on operating margin of 14, 6% for this quarter compared to 12, 5% in the fourth quarter of 2019, and $14 nine and $14 nine for sampling the third.
Quarter on 2020.
On a non-GAAP operating income for the year increased 20% to 53 million compared to 44 million in the same period last year. This reflects an operating margin of 14, 2% for the year compared to $13 five for 2019. The gross operating income reflects 70 per cent organic.
<unk> 30 per cent from the M&A.
Our non-GAAP tax expenses this quarter totaled $2 million compared to a tax expense of $2 9 million in the fourth quarter of 2019 on.
Our effective tax rate for the 12 months period of 'twenty, 'twenty, and 2020 on 19, or 17% and 19% respectively.
The decrease in our effective tax rate in 'twenty 'twenty resulted mainly for me one 2 million dollar reversal of tax provision following completion of a tax assessment conducted in the regular course of our business. We expect our effective tax rate in 2021 to be in the range of 19 to 20 per cent.
On a non-GAAP net income for the fourth quarter of ink is for 63 per cent to $10 3 million for 'twenty, one cents per fully diluted share compared to $6 3 million or 13 cents per fully diluted share in the same period last year on non-GAAP net income for the year increased 32% for $37 3 million or <unk>.
76 cents per fully diluted share compared to $28 2 million for 58 cents per fully diluted share in 2019.
Turning now to the balance sheet as of December 31, 2020 cash on cash equivalent on short and long term bank deposits and marketable securities amounted to approximately 92 million and interest of 7 million from the previous quarter total.
Total financial debt as of <unk>.
At December 31st 2020 amounted to 25 million compared to 29 million in the previous quarter.
So on a cash flow perspective, we generated $11 million from operating activities in the fourth quarter and $52 3 million during the 12 months period of 'twenty 'twenty.
I would like to turn now to our guidance for 'twenty 'twenty, one and 'twenty 'twenty. One we anticipate revenue in the range of between 420 million to $430 million, reflecting annual growth of 13% to 16%. This reflects 9% to 12% organic growth with the contribution on P. M and H conducted during 'twenty 'twenty, adding.
All four per cent.
The press release issued today, we announced that Magic software Enterprises Board of directors has declared a semiannual cash dividend in the amount of 21 cents per share and in the aggregate amount of approximately $2 million for the second half of 'twenty 'twenty.
Together with the dividend distributed for the first half of 'twenty 'twenty. These payments reflect approximately 75% of on net income and 50% of our non-GAAP net income for the 12 months period of 2020.
And so many of these for the storm challenging and overhaul exceptional year of execution on many fronts and we want to congratulate the magic global team for their outstanding work in 2020, especially during these uncertain times introduced by the COVID-19, global pandemic, demonstrating the rapid and professional adaptation to the challenges of COVID-19.
As long as we deliver that show that our strategy is working and that we and by focusing on our investments to deliver profitable growth, we can significantly enhance shareholder value with thousands of customers approximately 3000 talented employees spread globally and a broad portfolio of solutions supported by proprietary software we have all day.
And place to help our clients reached major milestones in the digital transformation project and for continued growth with that I will now turn the call over to the operator for questions.
Yes.
Thank you ladies and gentlemen at this time, we will begin the question answer session if you're on.
I have a question. Please press star one if you wish to cancel your request. Please press star two if.
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The first question is from Maggie Nolan of William Blair. Please go ahead.
Hi, This is Ted Starck King on for Maggie.
Thanks for taking our question so.
First of all on very strong strong revenue performance in the fourth quarter on can we maybe dig into where where your outperformance in the fourth quarter.
Came from relative to your expectations last quarter.
I think that we saw very strong demand.
And from the health care defense and banking sectors. This is something that worked for us for the entire year, but in Q4, especially the defense on the healthcare sector.
Contributed to significantly or mainly to the to the growth I can tell you for example, during the fourth quarter, we recruited out of it.
Two other people that grew organically in the company one other people are.
Were recorded during the fourth quarter on.
So you don't even see the entire impact on all on our revenues for the year.
For the health care sector. So this was for the defense N V and the health care for all the main contributors for the fourth quarter.
Improvement.
Okay, that's very helpful.
In terms of your expectations for the revenue mix for 'twenty 'twenty, one what are your expectations for the mix between software and services.
And then how does that compare to kind of your medium term expectations.
I think that for us we can see the main contribution of the technology does not come from the from day, let's say the change in revenues versus what we have on day professional services because the professional services is significantly higher than the sale of technology, if we sell today.
I don't know if technology segment around $90 million day, the remaining through the 370 million that we report comps on the proficient on service. So the main impact of other technology comes on the a on the bottom line in that aspect you know if we and this is something that is very difficult to say because a I.
Can't say that we won't continue do acquisition and the professional services segment. We have a we have some leave all of them basically on the Ace software professional on on the professional service side on the business. So on the mixture between software and services I believe that we will continue to see the.
On the software you know a percentage of our business declining.
On another one or 2% for.
For next year versus day additional revenues that we gain on the AR on the professional service side of the business on the other hand, we managed too quick to consistently generate something around 65% to 67% gross profit on our technology.
So even a small you know even a small improvement on the software side of the business contributed significantly to the bottom line.
Very very helpful. Thank you can you can you share some of your insights into kind of the head count additions it sounded like you'd mentioned earlier.
Fourth quarter, you know strong recruiting quarter can you talk about for 'twenty 'twenty, one kind of your expectations for head count additions utilization and pricing.
Let's summarize first 'twenty 'twenty 2020, we grew around 400 people in on head count.
Half of it came from the two acquisitions that I mentioned of Spokane and up to a net 230 IP specialists and another 200 came from organic a recruitment net.
Organic growth of Oh about head count if we expect 9% to 11% organic growth next year. You know this is this and since we are working on the professional services. Mostly then you know it would be it would be supported by an increasing on head count.
Okay. Thanks, and then last question for me can you talk about this for the margin expectations for 'twenty 'twenty, one and kind of the cadence of the margin throughout the year. Thank you.
I'll touch it in two aspects one aspect I think that over there even if you find out if I look over the last few years, we managed to maintain.
Gross margins on the side of the technology and I'm on the side of the and on the side of the proficient on services we are at around <unk>.
22, 23% gross profit on the gross margin on the professional side and we are.
And around as I said 65 or 67% on the year on the technology side and this is something that we manage to way to keep.
Over the over the years.
Becomes very challenging I can tell you debt for example in 2020 in opposed to or many other perhaps many other companies are.
We tried not to not to reduce salaries and even you know where we need their day to increase salaries for especially because we knew that you know this is a period that the short period that we need to overcome and we want to maintain all of our work force.
For way for the second half of it was 2020 on of course for <unk> 'twenty 'twenty, one and we believe that we will see the fruitful debt becomes due on the other hand very difficult.
Two one over income increase that we have in salaries to the clients.
Some of them are also facing a market difficulties and you know these are discovered thing is not day, he's not over yet so altogether I believe that for for the next year, we will still manage to to continue on and maintain the level of margin that we see today and I've, even and even expect an improvement on our operating <unk>.
Jim from a 'twenty 'twenty, one from 'twenty to 'twenty, two 'twenty 'twenty, one as we did in 2020 versus 2019.
And other half a percent.
Yeah.
All right very good thanks for taking my questions.
Yeah.
The next question is from Tavy Rosner of Barclays. Please go ahead.
Hi, Thanks for taking my question assets, you mentioned that during 2020, you sign about 200 and Euro goes on.
Were there particular vertical that we're interested in your product I remember last quarter, you mentioned healthcare if you were to break it down to 200 and different categories. One would there be.
We are working with again with Smbs I can't I think I can say may say that it doesn't.
Necessarily change from the from the percentage that we normally see and magic and magic as a whole. So we we maintain around 20% of our business on the finance sector something the same on the same range in the AR.
The defense sector around 15% in the are in the health care sector. So you know I believe that we pretty much go to the same for the same on location of the Oh. These are these verticals.
Right. That's helpful. And then when you look at you just mentioned margins and are in the previous questions. What do you do you take into account for resumption of.
Travel expenses, you know on hours towards the second half for the year or is that already part of your operating assumptions.
I I think that altogether.
The COVID-19 impact on OE on.
Cost was not was not that significant something something around $1 5 million in let's say in cost cutting.
Put aside the salaries are which were already you know increase and already are reflected in other you know the numbers.
So I don't think this has a significant impact over our expectation for for next year. You know we are generating 53 million.
The dog.
Operating profit we are growing normally the same in the same range in our revenues.
The bottom line, even we have some exponential growth in the or better growth in the operating in the operating profit so.
So I don't think that this has this would have a significant impact on our way on our bottom line. Even you know even if it's really increase back in the second half of 2020 one.
Great. That's helpful. Thank you very much and congrats on the numbers.
The next question is from Kevin D. D of H C. Wainwright. Please go ahead.
Good afternoon, gentlemen, thanks, very much for taking my call.
I.
I'm curious about a couple of things that maybe we could take a step back in.
And sort of looked at overall overall demand.
By geography, obviously strong in Israel.
In U S. As you said was health care defense.
Typical verticals, but I'm wondering if we could look at little bit at Europe on and maybe.
Some of the others APAC.
Just give us a sense on what you're seeing there and how much there.
Might be a little different.
Again, a Europe you know today is around 7% of all of our revenue that wasn't there a.
Significant a significant change or even if there is a significant change.
I can have a significant impact.
On all day on our business, we seem to you know to once you have it.
And a significant customer base you know, we mean day in.
In this region in the U S and he needs on most as you can see for for the last years.
Oh for many years back most of our growth come from on existing our existing community something around 85 per cent of our revenues you know other generated for them.
Continued projects new projects that we managed to to get for my existing customers. So this is why you know once we have.
Established in the U S and in Israel. This is mainly a growth engine that we that we produce today.
Europe is again he is pretty small so where so I think they will I can be a.
It'd be flat on the on the on the revenue this year.
Okay fair enough. Thanks for Safra, you mentioned.
You know it's.
I guess, the focus with acquisitions and building customers and technology and.
I noticed that obviously right you spoke to two acquisitions they seem to be on the professional services side.
If we were you know sort of looking on the.
On the Grand scheme, maybe the five year plan is the company's focus really to build out more professional services it become sort of less reliant on developing new software.
How would you characterize the overall strategy.
Yeah.
Oh, Hi, Kevin.
You know most of the for acquisitions or most of the opportunities are coming from within the business, we don't usually get opportunities from our investment banking firms.
And therefore.
Most of the opportunities are kind of related to our business. Therefore, you know they are in in nature, a more conservative and more safe to go on.
On one hand on the other hand, I must say that the prices are picking up so we.
Get to see less and less attractive.
Attractive deals on the software side rather than on the.
Professional services side.
We need to.
Probably invest more in it and see how to go through this one and.
Get some more software businesses as well.
Okay. So can we talk a little bit about that to guy I am.
The power of integration I know you've also on the call maybe if I remember correctly, you were hoping to have that pretty well integrated through the first half for this year and I was wondering if you could touch on that and and maybe some of the customer response that you're getting.
Yes, we are running basically on schedule we are.
Going to release for a release candidate on.
<unk>.
And we are already sharing this inflammation with the with customers around the world and.
There is excitement again its that they haven't had the chance to play with it and the only see it obviously on a some kind of for a small table on.
But the but.
But we see the debt.
The fiery speaking up their own customers that are looking to actually move their legacy system, all the way down to the to the web and through the mobile.
I have tomorrow meeting with.
Insurance company here in Israel regarding taking the.
Their application into a mobile deployment and everything is around that.
And we're getting a big technology for sure, but a combination of comp.
Mining power plus for me door student.
Okay do you think that sort of changes the way people look at magic software I mean, given now that it's still right it's more hands on consulting.
Do you think.
I mean do you think that opens more business development opportunities for you having that type of functionality built in.
I believe it does.
And again, what will be the effect this year or next year I still do it.
Hard to say.
We have the good day.
The benefits of being a 35 years old technology company that are still around live and kicking in with customers that are having.
Having their code base since 25 years ago. Okay. So this is strength on the other hand, we are conservative customers that it's hard for them to actually jump into new technologies, and new frontiers, So where we're doing it.
The beat in a in a careful way we cannot just run forward then forget our existing customer because this is our biggest strength of thing.
On the other hand, we need to push a customer to adopt new technology, which are sometimes.
Now some of them are excited about it and some of them, it's hard for them to move to new technologies in a way.
Right I understand you know if it works don't don't change it.
Hum.
We are the thing that's really interesting.
Is that your you know your it seems to me that your flourishing I think you guys are doing well it seems to me to be a great job right. I mean, it was really as I sort of made the point, it's really difficult operating environment for the past 12 months.
Your numbers seem to show that it had basically not much of a problem.
Compared to a lot of other companies.
So.
I guess.
I'm wondering if you're seeing the fact that you're doing well might change the perception of some of the larger companies that you know they might be concerned that magic software is up and coming now granted you've been there a long time, but you know now you're on a $400 million run rate youre not so small right over the past seven years as I suppose.
I've been following you it's been a big change.
But we are still rather small and especially when you talk about the U S market.
I think the big difference is debt although.
On a big portion of our numbers is coming from the professional services side.
So that's probably a sure that most of our customers do not see us as a professional services shop.
On one hand.
On the other hand, I think the big barrier that we faced during the year is a was a.
The fact that the big.
Names are used to work with a bigger size.
And we were targeting all the time, mostly on the SME market.
Oh, we have to be seen yes, I think it's an opportunity but.
You know used to really show that.
On a weekend we can.
Fight better in places that are you know the.
There is a limit of either money or time.
Right.
So guy do you think you'd be able to talk a little bit more about how you're gonna mark yet.
You know the new software capabilities, maybe on the March quarter call or do you think it.
It might not be until the June quarter call that you'll talk about how we as always we stopped we usually start with our based community.
After we get some feedback from them, we are we start to expand to new clients.
So we need to see that are.
There is a good exception by them.
Then we will be able to talk about it.
Okay, but as it is your own you don't really see that you're going to change the way you go to market.
That's how we're trying to kind of go to the let's say tier I would call them, probably tier three tier two.
It's we're talking about long sales cycles and until now we are doing way better we do.
The SME market.
Understood understood. So the it's still a majority on the technology side is still the focus is still integration right. I mean, yes, you've all talked about pushing more for to the cloud on the mobile which is something you guys have been working on for years, yeah, but.
With a with a low code solution. It just seems to me that would facilitate that for a lot of companies and is there going to be a scale issue. I mean, if you were able to push up to address larger.
Customers.
Would that strap.
Our resources and personnel that maybe you'd have to have.
I have to change given.
You know a bigger deal or longer sales cycle.
I know I don't think so I think we can manage it.
You know every now and then we do face like a big customer that we need to.
To serve and until now it was not a problem of course, if it will be like a phenomenon you know suddenly we'll have like tens of custom.
Customers like a blue chip names will have to reorganize them and but it's a good problem.
Yeah Okay.
Do you think there's going to be a change.
And given the change in administration here in the U S. Do you think theres going to be a change in emphasis on defense work.
Or maybe collaboration between Israel and the United States.
A good question you know right now in debt.
Must say that I'm more concerned about what's going on in the states than what's going on here with the election.
Yeah.
Okay.
Fair enough. Thank.
Thank you gentlemen, always a pleasure to talk to you congratulations on a really great quarter and a really good year considering the circumstances.
Is there any additional questions. Please press star one if you wish to cancel your request. Please press star two please standby, while we poll for more questions.
There are no further questions at this time, Mr. Bernstein would you like to make a concluding statement.
So thank you all for joining our call this quarter and are we sure hope to bring you some more good news in the next one thank you.
Thank you. This concludes the magic software enterprises fourth quarter and 'twenty 'twenty results Conference call. Thank you for your participation you May go ahead and disconnect.
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