Q1 2021 Magic Software Enterprises Ltd Earnings Call
Good day.
Good day.
Okay.
[music].
Ladies and gentlemen, thank you for standing by the conference will begin shortly.
[music] BBB debt.
Okay.
[music].
Good day.
Good day.
[music].
Welcome Ladies and gentlemen, thank you for standing by welcome to Magic Software Enterprises 2021 first 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, this conference is being recorded.
With us on the line today are magic's CEO, Mr. Guy Bernstein, Magic's CFO, Mr. Asaf Bernstein, and Magic Vice President of Technology and innovation, Mr. You've I Love you.
Magic's quarterly earnings 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.
Before we start I'd like to remind everyone that this conference call may contain projections or other forward looking statements.
Safe Harbor provision provided in the press release issued today also applies to the content of this call magic expressly disclaims any obligation to update or revise any of these forward looking statements, whether because of future events, new information a change in its views or expectation or otherwise.
During the course of today's call management will refer to non-GAAP financial measures.
Conciliation schedule, showing GAAP versus non-GAAP schedule has been provided in the press release issued before the before the market opened this morning, a replay of this call will be available after the call on our Investor Relations section of the company's website I will now turn over the call to Mr. S off Bernstein CFO of Magic software. Please.
Go ahead.
Thank you all for Evo and thank you everyone for joining us today on the board.
Our first quarter of 2021 financial results during the call today I'm going to give you hard on for our first quarter results and provide an overview of our achievements on.
First quarter results demonstrate our continued focus on supporting our existing customers and closing new deals and the continued solid execution of our priorities on top line growth as we reported 26 per cent Eagle for Ya.
In the quarter, we felt mainly coming from the continued expansion of our business in North America on the newsroom.
First quarter revenue was built on one other than $73 million compared to $85 2 million for the first quarter last year, reflecting a year over year growth of 26 per cent compared for the first quarter of 2020, the organic revenue growth was 15, 8% with the biological standpoint, 1%, resulting from the cost.
For reduction of acquired empathy, which were completed after the first quarter of 2020. These achievements delivering 37 per cent decrease in operating income with operating margin, reaching 14% up from 12, 9% last year.
I think software is a global company operating across multiple markets and offering brought to argue business service portfolio.
<unk> allows us to balance our growth resources investment and the east coast regions and markets over the past quarter. We continued to experience strong demand for did you talk on formation offerings, we are going to increasing resources in order to support existing transformation projects as well as new business towards the second half of the year.
Carefully managing and controlling our expenses.
Some of you on Q1 saw the resorts validate all star could you or building a broad business portfolio to provide the foundational magic continued performance in growth looking at FY 2021 since the outbreak of COVID-19 Magic has been dedicated to business continuity and mitigating the pandemic impact on the company, while maintaining our gross.
Rental on drive is returning to normal in many of the regions in which we operate with employees continue to work remotely or from client site without disruption.
I'm extremely proud of the success, we continue to demonstrate for now.
Organic growth with more than 3000 talented employees for globally, we have all the tools in place for continued growth the disruptor of COVID-19, and they're up in the interest of shape to do just on driving smbs to speed up their digital transformation projects. We are looking ahead to net new customers and expand existing customer business.
Moving to our financial results, starting with the geographical breakdown of our revenue during the first quarter on most of America accounted for 50 per cent of total revenue usually on 38% Europe, 7% in APAC and the rest of the world accounted for 5% of our first quarter revenue most of our growth in absolute numbers was traditionally for North America.
And he's run which continues to be our strongest stared at those North America accounted for 62% of our growth from the first quarter and Israel accounted for 28 per cent of our growth in the first quarter, turning now to profitability on non-GAAP gross profit for the first quarter of 2021 was $31 $7 million a proportionately ninth.
For sand compared to $26 7 million in the first quarter of last year on.
Non-GAAP gross margin for the first quarter was 2021 decreased by one other than 80 basis points from 31, 4% in the first quarter of 2020 to 29, 6% from the first quarter from 2021 gross margin for the first quarter of 2020, one was negatively impacted by the Jewish holiday season, which took place.
Mark This is a burn in the respective period last year and it's usually on election day, which together accounted for a decrease of four 7% from the amount of billable days the.
On the baby on all of our revenue mix for the three months period of 'twenty for any one was approximately 21% related to our software solutions and 79 per country related to our professional services compared to 22 per country related to our software and 78 per cent relate at all on professional services in the same period last year.
The breakdown of our gross profit mix for the three months period of 2021 was approximately 46 per cent related to our software solutions and <unk>.
<unk> four per cent, but related to our professional services compared to 45 per cent related to our software solutions and 55 per cent relating to our professional services in the same period last year.
Moving to operational costs R&D expenses on a non-GAAP basis in the first quarter of 'twenty or 'twenty. One total 3 million similar to our investment in the same period of last year and in the previous quarter on.
Non-GAAP operating income for the first quarter of 'twenty or 'twenty, one increased 37% from 50 million compared to 11 million in the same period last year.
This reflects on operating margin of 14%.
For this quarter compared to 29% in the first quarter of 2020, and 14, 6% in the fourth quarter of 'twenty 'twenty our non.
Non-GAAP tax expenses this quarter total $2 6 million compared to a tax expense for $1 5 million in the first quarter of 2020, our effective tax rate for the three months period on 'twenty 'twenty. One was approximately 18 per cent compared to 19% from call. It in 2020 as a whole we expect on effective tax rate from 2020, you wanted to be in the range of 22.
21 per cent.
Our non-GAAP net income for the first quarter increased $9 five per cent to $10 3 million on 'twenty, one cents per fully diluted share compared to $9 4 million on 19 cents per fully diluted share in the same period last year.
Turning now to the balance sheet, Oklahoma City for 2021 cash on cash equivalent short and long term bank deposits and marketable securities amounted to approximately 108 million compared to 92 million in the previous quarter. Our total financial debt as of March 31st 2021 amounted to 23 million compared to $25 million.
Previous quarter on.
On April seven 2021, we paid our shareholders a cash dividend.
Ultimately $10 3 million or 21 cents per share for the second half of 'twenty 'twenty and in accordance with on dividend policy.
From a cash flow perspective, we generated $15 $9 million from operating activities in the first quarter in closing I would like to turn on to our guidance for the remainder of 'twenty or 'twenty or 'twenty. One here given the high growth in North America and in Israel. We are revising our 2021 revenue annual revenue guidance to a new range.
For 425 million to flow under the $35 million for a range of 420 to 430 million, reflecting an annual growth rate of 13, 5% to 17 to book to 17, 2% without that we'd like now to turn the call over to the operator for questions.
Thank you ladies and gentlemen at this time, we will begin the question and answer session.
You have a question. Please press star one if you wish to cancel your request. Please press star two.
If you are using speaker equipment kindly Mister headset for pressing for numbers your questions will be pulled in the order. They are received please standby while we poll for your questions.
The first question is from Maggie Nolan of William Blair. Please go ahead.
Hi, This is Ted on for Maggie I wanted to follow up on your statement about increasing resources for transformation. So we're we've been hearing a lot about the war for talent and some peers in the industry are facing headwinds from wage inflation could you provide an update on your hiring plans for 2021 any color.
And what you're seeing from a wage standpoint.
For.
And this is based on.
Pipeline on projects, so definitely if we continue to grow loans.
I don't know 15 20 per cent for on your.
We need to increase for says it's a battle out there.
Salaries are increasing all the time.
And we are looking for creative ways to find people are overseas, whether it's in India, where they are eating.
Eastern Europe.
No checking all the possibilities, but yes, I'd say its a struggle.
Alright. Thanks.
That's helpful. And then in terms of guidance can you talk about just kind of the revenue cadence for the rest of the 2021 it sounds like maybe.
With that new business in the second half and maybe back half loaded any thoughts are on the cadence. Thank you.
I think that you know as you said, we are still at the beginning of the year tea, although in Israel. It seems that we are pretty much managed to overcome the negative impact on the COVID-19.
You'll see some struggles in the U S. Although in the clients that we at least provide services, it's not something that impact the business. So that we so that you know that reduces our backlog with them.
I think we are a little bit conservative bonds.
And most likely we will give an update the revenue guidance also in the in the next Florida, but who knows.
Very strange a you know a period of time for us. So we prefer to do is to remain conservative.
Definitely what do you what do you view as the medium term and long term sustainable organic growth rates for software and for professional services.
The way.
I think in the previous years. It was a I would say probably between 10 and.
12% something like that organic.
And the rest came from M&A.
For many.
I believe we can.
Keep on doing so.
Okay, any thoughts regarding kind of the software piece that organic growth rate.
Thank you for the same you know we may face like a.
That is for a year over year, which is less goods, but all in all these for your checking it over.
I would say five years, you can see it ready for the same.
Okay, great. Thanks.
Yes.
The next question is from Kathy Rosner Barclays. Please go ahead.
Yeah.
Oh, Hi, this is Chris on for Katy. Thank you for taking my question.
Regarding operating expenses can you give some color around expenses this quarter.
Relating to maybe.
If anything was impacted are still from COVID-19 items, or if anything was under or over something that would be more sustainable or if the levels. We've seen this quarter is is it sustainable going forward.
I think that's what we see today.
We can even sales in day and the results of the company, where we are doing the fourth quarter of every year is considered to be our strongest quarter and we see that in the first quarter. We started in a very strong momentum and we are showing pretty much the same level of operation as we had.
We had them in the fourth quarter EPS is something that was across across the organization on the a on the software on the.
The software on our software division in our professional service Division.
I think that the level of expenses that we see today is he's he's pretty much sustainable for the flow for the need for the near future.
Surely we benefit from the fact that our employees are working from home and you know in kind of a hybrid.
Mother.
From client side, we don't expect this to change.
At least during the during the coming year I guess, you know we will see starting from the second half of the year more way events be bad we'll try we'll get back flying where once again, but I don't think it's something that you're supposed to be material in terms of on the level of operations.
Mhm, Okay. Thank you regarding customers.
Where do you see demand coming from in terms of verticals.
And has there been any major changes.
As we moved to a postscript on environment for example in terms of customer budget or spend around being projects etcetera.
I think we see across the board.
One sector that wasn't made that started a bit.
Unless we find some weakness with deep endemic was the.
On the.
Startup companies that we serve.
So it was we started with a slowdown at the beginning of the pandemic and now it's picking up again, so overall, we see it across the board on venues.
Nations are going.
Faster towards.
For the transformation.
We enjoy it mhm.
Uh-huh Uh-huh and.
And then just touching on M&A if I can.
Have you seen anything relevant in the pipeline and.
Have any of the dynamics changed maybe around good valuation on it or competition levels.
Mostly we see small companies.
That we swallow them like you know.
Easily.
We don't have anything which is material in size.
Not in fact, okay.
Great Alright, Thank you very much that's it for me. Thank you.
The next question is from a software on top of Oppenheimer. Please go ahead.
Hey, guys. Congrats on another great quarter and thank you for taking my questions.
Just to kind of start on them.
Updated guidance.
Mentioned that maybe there is some conservative conservatism kind of baked in but obviously you know if we take either once you run rate and we multiply it by four we're good.
Roughly the full year guide so is there anything that you're seeing in in <unk> that would imply any sort of you know a sequential decline any maybe commentary you can give on how you're seeing the cordless so for Oh.
No we don't see any day any decline.
I think what we do see that we see a strong views on strong demand, but something that we expect and as we said that we are hiring just for that he's he's supposed to you know make it makes it makes the difference over the second half for the of the year. This is why we said that for the for the time being we feel comfortable.
You know that will be something very close to the auto hopper.
A part of all we hold on a range of guidance.
Most likely we will update it in the second day at the end of the second quarter.
Okay, great and in terms of currency impact what would be a if you guys have it in front of you I Didnt hear it on the call. Let me know if I missed it the constant currency revenue growth and then what would be constant currency number be for the full year guide.
Hum.
Again, it wasn't materially more sexy I think except for you.
Especially if you compare Q4 and day in the Q1 day and currency exchange impact was the most to see close to non especially not material versus the first quarter. It was something around $2 million per day in the topline, but it reduces too.
On a few hundred thousand dollars on the bottom line because of the because most of the work that we do we have you.
We have a foot on the ground in the in the territories, where we generate the projects. So if you walk on Europe. So we have people in Europe. If you walk into stays the same and if we work in Israel. The same so the company is not exposed to the exchanges exchange rate differences between its cost and its centre in the day.
On seats revenue he has nominated.
Okay, great Yeah, very clear very clear.
Any commentary you can maybe give us on end markets total that'd be health care, a telco defense anything you guys are seeing.
I know, it's a big market and.
These are relatively small revenue figures for.
For the broader kind of maybe professional services market, but do you feel you're taking share.
And then maybe kind of commentary on the competitive zone.
And you said you know magic is noise characteristics by the fact that we don't have except for C. V. S. A which is around all day.
Let's say, 13% of all of our revenue as we don't have a material.
And you know another materially customer so we split it out you know.
I mean, many many different customers in the in the different sexual debt with the sectors that we operating a overall, we see you know, we see stability and we see and we see growth in the AR in the clients that we operate in and we try to once we once we land an account we try to expand into.
From type of services that we can offer him Hey, you know for we'd say, it's called a digital journey.
With us and this is something that you know that the translated to the gross debt you see most of the business that we generated this quarter is very you know he's he's contribute for my existing customer.
Customer base, and I think that around 60 per cent move things around 60 per cent of the gross debt in Q1 versus there is versus the.
The respective period was from organic activity as I said.
On the six closer to 16% and most of it comes from existing clients. So we see the demand we see that we have the ability to grow within the community that we that we land.
And we stay optimistic with debt.
Okay, Great and then just on gross margins here.
You mentioned, some one time items that depressed our gross margin this quarter and obviously year over a year that number is going to maybe kind of trend down slightly over time as the revenue mix shifts towards professional services, but just kind of on a on a normalized or sustained basis at least for 'twenty. One 'twenty two can we assume for the rest of the.
A year, we see kind of the 22 23 per cent margin for professional services and closer to that 66% number for software that would imply around 31 ish percent.
Obviously, we've seen similar numbers in late 2020, just to kind of confirm Theres no kind of you know it's.
Structural change.
There's no structural change in the gross profit is pretty much in the area that you mentioned for the software on for the services I guess it would be something between the 38 would be the over 30, so something between deferred Andy in this 31% gross profit gross margin.
Okay, Great. That's all for me and again congrats on the very strong outperformance.
Next question is from Kevin D D. H C. Wainwright. Please go ahead.
Hello, gentlemen, thanks for taking my questions on.
Curious on the on the breakdown just by customers can you give us a little bit more insight on.
You know on where you're seeing the bulk of the professional services versus software.
I mean I'm sure it hasnt changed much from last year, but.
So it hasn't changed much in the last year. It was around 22% debt. They originated from our software division in <unk> versus 78 net wells from our professional service Division in these four day. It was 21 and and 79, we had it.
We had a very decent border in terms of the sales of the license sales. Despite there being this being the first quarter after a very good for.
For the fourth quarter and significant though 20 per cent of all the growth came from the software division in terms of the revenues in terms of the profit 54 per cent of the of the growth came from the software Division and this is why you know we say that this is a hybrid company on an M D.
Success of the all the software gives US you know is the ability to maintain a high or a higher level of margins compared to our peers.
And you know, it's pretty pretty the same way as the way we were in there in the fourth quarter of 2020, and we keep the momentum.
Okay. Thanks for software traditionally you've done when you're doing a lot of work in health care and telecom.
Can you look at can you look at the at the revenue from that perspective.
There's no real change in the <unk>.
The allocation between customer mix, yeah between the mix thing and again you can see it also from the top line you can see that you know we did the one other than 7 million in Q1, we did one other than for million, one 5 million in India for fourth quarter.
And then the revenue mix was pretty much the same.
Some of your customers are.
Holding back though on account of COVID-19 and now what you're saying is you're still seeing a little bit of that but maybe not as much.
I think that we started to see you know a releasing more projects at the end of the first of all the.
The second half of 2020 and now we see it more still has the pipeline level and this is why we expect the second half to be better than the than the first half.
And you know yet to be seen.
Okay.
Any sort of influence on the sprint and T mobile.
Merger is that Where's that going as you guys I think that it's not materially there they did a very stable.
What are very similar to what we did indeed day into Q4.
Exxon was there was stable and the same is the same as the T mobile and on.
Telecom project. So no change so there wasn't any any so the growth didn't came from the telecom business. He came on from the defense. It comes more from the from the.
From the financial service sector. All it comes on from the health care sector I.
I would say that it's stable in there on that day.
On site.
Okay. That's helpful. Thanks.
Thanks for stopping you.
Also on the call could you all can you give us an update on where you are with the power of integration and when you expect the next X P. I version to be released you guys still on track for that I know last time, we talked about it you expected it sort of springtime early summer.
Yeah.
Still are we still looking to keep it on track the challenge is.
Mentioned in more in most of our territories, we managed to overcome the challenges of COVID-19.
But.
And this project specifically is located with the team in India, whereas you know there is a big challenge there with COVID-19, but we're still trying to overcome those challenges and keep it on for us.
Okay.
Have you released like in alpha or beta or anything and have you gotten any feedback on it.
We have we have a we're in the alpha stage, which is a purely internal yet with our branches are not with the with the customers.
We're looking at forward like in the next two months to start doing it with the with the kind of yeah.
House player customers as we call them.
Okay. So.
So you really you really don't have any sort of commercial feedback on it yet so too early.
Yeah, Yeah, it's a bit too early for them.
Okay.
Fair enough.
Hey, gentlemen.
Oh, a soft one question just on the debt it was 23 million.
What are you guys paying on that whats the plan given that you're generating so much cash why are we carrying the debt at this point.
First of all most of these comps for let's say it's big.
A big chunk of it comes from a debt that we took in 2016, where we wanted to finance one of the acquisition that's why one of the.
For the larger let's say type of acquisition that we did when we acquired watchdog in Israel.
So this is something that still you know.
He is on our balance sheet, we pay something around two 6% for fixed rate of two 6%. So it's not heavy on our cash flow.
It allows us to be you know too it gives us the flexibility of our companies to do the acquisition.
To do the acquisitions that they wanted that they wanted to do and you know stick with the <unk> 75 per cent dividend policy that we maintain for.
Since 2012.
Yeah.
Okay.
I I know part of the M&A policy is too.
You know by a little bit into a deal and then.
By the entire company over time as operations work out for you.
Where where are you on yeah I don't think this is the right you know where to describe a day. So normally when we buy an asset company.
Company, you know we want to keep the managers the founders are motivated and they are billable people. They you know they they they see the opportunity of joining forces without without existing teams.
As we normally say you know what this company has come from the from the division manager that the debt. The you know on working inside of their magic. So these are partnered with wells a company's debt we are familiar with the with their businesses. So for them you know it creates a good future it could be a good upside so you create like.
Our balance in terms of and capital expectations. Both from as you know with the price that we want to pay and the AR and the seller side you know on the outside that he can add if he can achieve.
And this is why most of the acquisitions that we do.
You know it turns out that they were rather small, but we manage to multiply it and increase them.
On a significantly.
Over the long term.
So I I know you said theres nothing material near term is there anything maybe smaller I I was little confused by guys remarks.
Can't tell us for anything happened in the.
And during the March quarter.
We expect workers anything.
Is that you know we never given year, we managed to close between one or two.
You know small companies that we that we take can I expect.
One company too.
But we will manage to close by the you know during let's say by the end of the by the end of the second quarter.
And there is another way a very small company you know debt is is a long game magic partner of ours and up an application company, but it's a very small they are growing like something like $1 $5 million in terms of revenues.
We don't have any <unk>.
Generation two.
Take over the company, we know we support them for many many years so for us in order to step in and it's very easy and then you know try and up sell to.
For the clients that day that they have.
It's something that we do over time.
And that works best for them.
Okay.
Our well one you mentioned was an application company. So that's.
That support on the software side, yeah, but the very small as I said, it's only one $5 million in terms of revenue.
Okay.
Okay. Okay any features or functionality there that are interesting to note.
No. It's again, it's very theoretical value.
For the technology and application so for US we see first of all the opportunity to continuing to support their customers and you know and and continue the lifespan of the application on one hand I'm on the secondhand you know way for give access to all the experts you know and try to get more business in other.
Areas of their of their business, mostly in the I T.
Understood. Okay. Thank you for entertaining my questions gentlemen, I.
Appreciate it.
Yeah.
Is there any additional questions. Please press star one if you wish to cancel your request. Please press star two please stand by while we poll for more questions.
Okay.
There are no further questions at this time, Mr. Bernstein would you like to make your concluding statement.
So thank you again for joining us for our quarterly call and we sure hope to a few on the next school on bringing some more good news. Thank you.
Thank you. This concludes the Magic software Enterprises Ltd first quarter 'twenty 'twenty. One result conference call. Thank you for your participation you May go ahead and disconnect.
[music].