Q2 2021 Magic Software Enterprises Ltd Earnings Call

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Welcome to Magic software Enterprises, 'twenty 'twenty, one second 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 proper in.

Your assistance during the conference. Please press Star Zero as a reminder, this conference is being recorded.

Also on the line today are magic's CEO, Mr. Guy Bernstein, Magic's CFO, Mr. Asaf Bernstein, Magic's VP of technology and innovation, Mr. You've all lovey.

Magic quarterly earnings release was issued before the market opened this morning, and it has been posted on the Companys 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.

The 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 expectations or otherwise also.

Also during the course of today's call management.

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 our Investor Relations section of the company website.

I'll now turn the call over to Mr. Asaf <unk> CFO of Magic software. Please go ahead.

Thank you operator, and thank you everyone for joining us today as we report on second quarter of 'twenty and 'twenty one financial results.

During the call today are what are you doing.

Alerts from our second quarter results and provide an overview of our achievements.

Second quarter results demonstrate our continued focus on supporting our existing customers and closing new deals and the continued solid execution.

Oh with diesel topline growth since we reported 38%.

Growth in the quarter and 32%.

In the first half with sales mainly coming from the continued expansion of our businesses in North America than in Israel, a second quarter revenue reached a record high of 119 million compared to $86.5 million for the second quarter last year, reflecting a year over year growth of 37, 7% compared to the second quarter.

And in 'twenty, the organic revenue growth was 22, 6%, which reflects 60% of our year over year.

Well in the second quarter with the balance of 15, 1%, resulting from the consolidation of acquired subsidiaries.

The cheeseman delivered a 32% year over year.

Non-GAAP operating income in the second quarter with operating margin, reaching 13, 4% for the second quarter down from whole pinpoint 1% in the same period last year on a non-GAAP operating margin for the first half of 2021 was 13, 6% up 10 basis points compared to the same period.

Last year.

Software is a global company operating across multiple markets and I'm, feeling broad IP business service portfolio.

How did you allows us to balance our gross resources investment and risk across regions and markets over the past quarter. We continued to experience strong demand for digital transformation will feelings, we're constantly increasing resources in order to support existing transformation projects as well as new business towards the second half of the year, while carefully managing them.

Trolling on expenses in summary, our solid execution in the second quarter delivering double digit growth across all key financial indices in revenue gross profit operating income net income and EBITDA, we think with breaking revenue, reaching one other than the 19 million and record breaking operating income demonstrates the important all magic software blades.

Customers lifecycle and pencil amazing journey, that's one of the successful when I started to build a broad business portfolio that creates value for our customers in managing streamlining accelerating and maximizing their own businesses.

We are extremely proud of the success, we continue to demonstrate for my organic growth with 3500 talented employees spread globally versus 3000 in Q4 of 2020, we have all the tools in place for continued growth there.

The Disruptors of Covid 19, and they're up in the industry shift to digital are driving smbs to speed up there.

Transformation projects, we are looking ahead to land new customers and expand existing customer business on the M&A front, we continue to explore M&A opportunities in the field, we target and identify growth opportunities and we act upon them of having the best.

Moving to the financials and starting with the geographic breakdown of our revenues during the second quarter North America accounted for 53% of total revenue you said, 37% Europe, 7% in APAC and the rest of the world accounted for 3% of our first quarter revenue second quarter most of our growth in absolute numbers was traditionally for most of them.

Erika and Israel, which are our strongest staying in North America accounted for 65% of our growth in the first quarter into second quarter, and Israel accounted for 33% of our goals in the second quarter.

Turning now to profitability, our non-GAAP gross profit for the second quarter of 2021 was $34.4 million up approximately 30% compared to $26.5 million in the second quarter of last year.

Non-GAAP gross margin for the second quarter of 2021 decreased one other than 70 basis points from 36% in the second quarter was 2022.28, 9% in the second quarter of 2021.

We've seen our gross margin is mainly attributable to the change of our revenue mix related to our software solutions. This is a professional services and an increase in employee payroll costs due to increased demand for digital cloud data cyber impulse system professional experts.

Based on all of our revenue mix for the six months period of 'twenty 'twenty, one was approximately 20% related to our software solutions and 80% related to our professional services compared to 22% related to our software and 78% related to our professional services in the same period last year the breakdown of our gross profit mix for the six months period.

It was 2021 was approximately 45% related to our software solutions and 55% related to our professional services same magazine in the same period last year.

Moving to operational costs R&D expenses on a non-GAAP basis in the second quarter of 'twenty 'twenty, one totaled $3.2 million compared to $3 million in the first quarter of 'twenty 'twenty, one and $2.8 million in the same period of last year, our non-GAAP operating income for the second quarter of 'twenty 'twenty, one increased 32%.

All time high of $15.9 million compared to $12.2 million in the same period last year and 15 million in the first quarter of 2021. This reflects an operating margin of 13, 4% for this quarter compared to $14. One in the second quarter of 2020 and 14% in the first quarter of 2021.

On a non-GAAP tax expenses this quarter totaled $2.5 million compared to a tax expense of $2.3 million in the second quarter of 'twenty 'twenty.

On a non-GAAP net income for the second quarter increased 59, 9% to $11.3 million or 23 cents per fully diluted share compared to $8.1 million or 17 cents per fully diluted share in the same period last year.

Turning to the balance sheet as of June 32021, cash cash equivalents short term and long term bank deposits and marketable securities amounted to approximately 106 million compared to 108 million in the previous quarter.

Total financial debt as of June 32021 amounted to 37 million compared to $23 million in the previous quarter.

From a cash flow perspective, we generated 28 million from operating activities in the first half of 'twenty 'twenty one.

The press release issued today, we announced that Magic software Enterprises Board of directors has declared a semiannual cash dividend in an amount of $23.04 per share and in the aggregate amount of approximately $11.5 million for the first half of 'twenty 'twenty one.

<unk> approximately 75% of our net income and 41% of our cash flow from operating activities for the first half of 'twenty 'twenty. One on April seven 2021, we paid our shareholders a cash dividend of approximately $10.3 million or 21 cents per share for the second half of 2020 and in accordance with our dividend policy.

In closing I would like to turn out to our guidance for 'twenty and 'twenty one.

The high growth in North America, and in Israel, We are revising for the second time this year up 'twenty 'twenty, one revenue guidance to a new range of $450 million to $460 million for man Angel 425 to 435 million, reflecting an annual growth of 22, 2% to 23, 9%.

For the entire U with that I will now turn the call over to the operator for questions.

Yeah.

Thank you ladies and gentlemen at this time, we will begin the question and answer session.

Have a question please press star one.

Wish to cancel your request please press star two.

If you are using speaker equipment kind of lift the handset before pressing the numbers questions will be pulled in the order. They are received please stand by while we poll for your questions.

The first question is from Taffy Rosner of Barclays. Please go ahead.

Hey, good afternoon, Thanks for taking my questions and congrats on the strong results are so can you talk about the difference in growth between organic and the M&A contribution I wanted you to dig a little bit into the contributions this quarter.

You know what what particular acquisition contributed the most and are indeed any.

Color would be appreciated.

We mentioned in the past that we acquired a company called the Socal, which is a staffing company in the U S. So again last year, we acquired during the second half of the year in this series is not consolidated.

For the first half so we are during the quarter. It contributed contributed approximately a $4 million to all revenue. Additionally.

Additionally, during the second quarter, we acquired another consulting company in there in the U S. As we do a in any given year, we managed to acquire between one to two.

We call small companies.

That operate around the aerospace and we acquired another company called enable ITV in the U S and we dug approximately one on the Ftes and we generated approximately a five between $5.6 million in revenues during the second quarter.

Okay. Thanks for that.

It's a little further along you mentioned.

The gross margin decline partly attributable to the.

O E M E. I guess looking ahead, what kind of.

What kind of Oh.

Our gross margin.

<unk> modeling in for the.

The remainder of 'twenty, one and looking into 'twenty two.

We are looking at 30% gross margin again, we expect the second half to be better than the first half also in the in the software Division and think of software and Technology Division.

Basically the <unk> 'twenty 'twenty, one started very strong and we sold the more licenses and an increase on maintenance.

Versus the 2020, but the increase once we have acquired companies the increase of all of our professional services are tops you know the the contribution that we make for them the technology and software.

On top of that we have one of our largest accounts, which is C. V. S. A and we have implemented they are implemented we don't see a rebate mechanism, which is subject to the to the businesses that we that we have with them.

Last year, the the discount the rebate was approximately 10% this year it can be something between even 16, two and can reach even 18%.

Rebate that we are that we are applying over our financial statements. When we report our revenue. So just just looking at the IPO.

The increase of all of our operation this year versus last year, we have six more present in our revenues that we that we are discounting for the client.

What we are doing our best to to increase the M O M.

The bill rate.

And to all of them as much as we can also back to the cargo to also back to the customer, but you know it's been.

In pairs on gross margin.

Understood. Thanks for the color and congrats on the strong results.

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

Congrats on the results I wanted to ask about the back half of the year here, what kind of opportunity do you think there is two I see.

The upside surprise.

Given that you're kind of modeling flat from this strong quarter that you just had in the back half of the year.

I don't I don't think that you know that's a that's where I'll try and give them to you know too conservative of course, we are trying to be at the high end of the of the range that we are that we are giving you need to remember that 40% of our revenues and approximately 50% of our profit comes from the.

He's really market Q3 is not considered as a as a strong.

Strong quarter four for these early market because of the Jewish holiday season. They then you use the Jewish new year, having said that we still you know we still expect you know an absolute number two managed to cover that and this is why we expect the second half to be still better in terms of absolute number than the than the first half from other <unk>.

<unk> that we that we carry to grow more in the in the U S to sell more licensing and technology. During the second half that will still allow us to to reach the high end of the target that we reported.

Very good and then when you think about the remote working environments current talent supply constrained.

What are your latest thoughts on the delivery model and any opportunity to expand into new geographies or change how you deliver it in the past.

We are we came very very close to them and we even see that it is something that we like I said as a company as an organization and our employees are also starting to even even when we are into the new new candidate. They are expecting you know this hybrid work of the hybrid.

Working model so even now when they when there are some some noises in Israel there for perhaps another lockdown period. This is not something that we expect to do you have any any implication on our on our operations.

People are working hybrid leave them from home in front of them to inform the company from client site to off site and we have offerings, where where are we in the cloud because even rely on us as an offshore or needle show there and.

Vendor for services. So this is something that for us seems to be a very attractive.

Thanks, so much.

The next question is from Spencer Kirschman of H C. Wainwright. Please go ahead.

Hi, guys. This is expensive hirschmann and for Kevin D D.

That's on the corner.

So a question on <unk>.

Kind of how you see.

That hybrid work environment moving forward.

Given the surge of infections in Israel, and what your customers are kind of saying about bag do they want those professional service employees to be on site or are they more okay with that hybrid model.

Yes.

I think adjusted said exactly that that the.

We see it from both from the employee side and from that we also see it from the customer side and of course, we see it for them for the masses.

Managing the operation.

Things that we find very very good to the company very good to the organization. It allows people to be more.

More productive.

Instead of wasting time and traffic. They are you know they are working instead of a I know instead of.

Being 24 seven in the office. They are they're also balancing their work life balance so for us.

Made our employees happy era, it made us.

We've made them more productive and then and the customers are also you know also prefer to do to do that especially as I said, we are also offering our customers offshore Neil shortly.

With our solution. So this is something that any way you can always discuss them fall for working for them outside the premises.

Okay. Thank you that's great color.

And how do you see the competitive atmosphere going forward do you see some of your larger competitors potentially moving to a smaller and more midsized companies.

Yes, we definitely see.

First and foremost we see the the fight over the balance.

This is a big issue all over the place you know Israel in the states and in other places even in.

And Oh wherever we have like Oh offshore companies, whether it's in India or in Ukraine and.

Russia.

I think this is the biggest concern because you know we.

We are doing our best but we cannot compete.

Compete with Amazon and Google and the rest of them.

Yep.

So it is an issue.

Till now somehow.

We succeeded in keeping the employees.

And you know create like a good oh work environments.

But it's it's really a challenge.

Mhm yeah.

Yeah.

And final question.

How is.

That software development going I remember that powwow acquisition.

It was supposed to make the coding process a little more streamlined.

We are still in the process of adopting more and more into our platform in Poland. We also have an opportunity.

Specifically on the power plant for them themselves.

And new customer coming into the platform.

We are a partnership that we have in our in the U S.

Sure World.

And other partners. So we are adopting the cloud for sports customer requirement and towards our own internal requirements.

Okay. Thank you I appreciate it.

Yeah.

Yeah.

If there are 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.

Yeah.

There are no further questions at this time, Mr. Bernstein would you like to make your concluding statement.

Yeah. So once again, thank you all for joining our Oh quarter released and we sure hope to bring you some more good news in the next quarter. So thank you.

Thank you. This concludes the Magic software Enterprises Ltd second quarter 'twenty 'twenty one results conference call. Thank you for your participation you May go ahead and disconnect.

Yes.

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