Q3 2021 Magic Software Enterprises Ltd Earnings Call

Welcome to Magic software Enterprises, 2021, third or third 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 kind of.

France is being recorded with us on the line today are magic's CEO, Mr. Guy Bernstein, Magic's CFO, Mr Asaf Bernstein and Mr.

And Matt and Magic VP of technology and innovation, Mr. You've all Avi.

Magic Heartedly earnings release was issued before the market opened this morning, and it has been posted on the company's website at Www Magic software Dot com before we start I'd like to remind everyone. This conference call may contain projections or other forward looking statements.

However, our provision provided in the press release issued today also applies to the contents of this call magic expressly disclaims any obligation to update or revise any of these forward looking statements, whether because of future events, new information a 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, a replay of this call will be available after the call on Magic software Investor relation section on the company website.

I will now turn the call over to Mr. Asaf Bernstein of C. F O of Magic software. Please go ahead.

Thank you operator, and thank you everyone for joining us today as we report our third quarter 2021 financial results. During the call today I will review highlights from our third quarter results and provide an overview of our achievements and results for the third quarter sales was another record quarter, which part which further adds to our strong 2021 momentum and outlines on.

Continued focus on supporting our existing customers the success of our strategy and the visibility of our business stable profitable and with high level of visibility.

Reported 27%.

Growth in the quarter and 30% year over year.

For the first nine months of 'twenty or 'twenty, one magic software as a global company operating across multiple markets and also in the IP business service portfolio strategy allows us to balance our gross resources investment and leafs across regions and markets over the past quarter. We continued to demonstrate our continued focus on the execution of our growth strategy.

As our customers increasingly engaging us as a preferred partner for when you're implementing fastest growing technologies, such as digital cloud data and AI, creating significant value in managing streamlining accelerating and making their businesses thrive. We are we are constantly increasing resources in order to support existing transformation project.

As well as new business towards the final quarter of the year, whilst carefully managing and controlling our expenses.

One is to continue to offer our customers innovative diverse and flexible solutions empowering them to gain a significant competitive advantage.

Third quarter revenues reached a record high of $129 million compared with $94 9 million for the same quarter last year, reflecting a year over year growth of $27 four point.

4%, we delivered these results despite the holidays of the Jewish month of Detroit, which is this you have entirely coincided with the third quarter as opposed to spreading over the third and the fourth quarters in the previous year and reduced our time in material available billable hours of operation in Israel by approximately 7%.

The organic revenue growth for the quarter was 14, 1% of which two 5%, resulting mainly from the devaluation of the U S dollar versus the new Israeli shekel, and which reflects 52% of our year over year growth in the third quarter with a balance of 13, 3%, resulting from the consolidation of acquired subsea.

This achievement deliver the 14% year over year.

The increase in our non-GAAP operating income in the third quarter with an operating margin, reaching 13, 4% for the third quarter down from 14, 9% in the same period last year.

The decrease in operating margin was mainly attributable to the effect of the holidays of the Jewish month, a T shirt, which do seem to have an entirely coincided with the third quarter as opposed to spreading over the third and the fourth quarters in the previous you therefore, reducing our operating margin in the third quarter of 2021, but the 110 basis points.

Extremely proud of the success, we continue to demonstrate for my organic growth with 3500 talented employees going to spread globally versus approximately 3000 at the end of the third quarter of 2020, we have all the tools in place for continued growth.

He stopped or did he stopped of COVID-19, and they're happy the industry shift to digital all driving smbs to speed up their digital transformation projects. We are looking ahead to land new customers and expand existing customer business moving.

Moving to a geographical breakdown of our revenues during the third quarter North America accounted for 555% of our total revenues usually have 36% Europe, 6% in the APAC and the rest of the world accounted for 3% of our third quarter revenues most of our growth in absolute numbers is traditionally for North America, and Israel, which are strong.

Mr. Italy, this quarter North America accounted for 86% of our growth and Israel accounted for 16% as previously stated mainly resulted from the negative impact of the holidays of the Jewish month of fishery.

Turning now to profitability, our non-GAAP gross profit for the third quarter of 2021 was $34 $2 million up approximately 11% compared to $30 7 million in the third.

Third quarter of last year.

GAAP gross margin for the third quarter of 2021 decreased by 410 basis points from 32, 4% in the third quarter of 2020 to 28, 3% in the third quarter of 2021 the decrease in our gross margin is mainly attributable to one the change of our revenue mix related to our software solutions compared to what.

Professional services to the interesting employee payroll costs due to increased demand for digital cloud data side that caused you some professional experts and loved from the impact of the holiday of the Jewish month of Vishay, which this year are entirely coincided with the third quarter.

With a lot of reducing our gross margin by approximately 70 basis points. The breakdown of our revenue mix for the nine months period of 2021 was approximately 19% related to our software solution and 81% related to our professional services compared to 24% related to our software solutions and <unk>.

<unk> six related to our professional services in the same period last year.

The breakdown of our gross profit mix for the nine months period of 2021 was approximately 45% related to our software solutions and 55% related to our professional services compared to 50% related to our software solutions and 50% related to our professional services in the same period last year.

Moving to operational costs R&D expenses on a non-GAAP basis in the third quarter of 2021 total $3 million compared to $3 2 million in the second quarter of 2021 and $3 1 million in the same period of last year.

Non-GAAP operating income for the third quarter of 2021 increased 14% to an all time high of $16 2 million compared to $14 2 million in the same period last year and $15 9 million in the second quarter of 2021.

This reflects an operating margin of 13, 4% for the third quarter of 2021 compared to $14 nine in the third quarter of 2020 and $13 three in the second quarter of 2021, excluding the negative impact of the holidays of the Jewish month of Deshea operating income for the third quarter.

Quarter operating margin for the third quarter of 2021 would have been 14, 4%.

Our non-GAAP tax expenses this quarter totaled $2 3 million compared to a tax expense of 3 million in the third quarter of 2020.

Our effective tax rate for the nine months period of 2021 was approximately 18% compared to 17% recorded in the <unk> in 2020 as a whole on a non-GAAP net income for the third quarter increased 24, 5% to $11 8 million.

<unk> 24 cents per fully diluted share compared to $9 5 million or 19 cents per fully diluted share in the same period last year.

Turning now to the balance sheet as of September 32021, cash and cash equivalents short and long term bank deposits and marketable securities amounted to approximately $100 million compared to $106 million in the previous quarter.

Total financial debt as of September 32021 amounted to 43 million compared to 37 million in the previous quarter.

So from a cash flow perspective, we generated 37, $34 2 million from operating activities in the first nine months of 2021.

In summary, the third quarter further establishes 2021 as a record breaking year in magic history, delivering double digit growth and record high results across all key financial indices.

Revenues gross profit operating income net income and EBITDA. These performance demonstrate the important all magic software players and its customers business as they increasingly engage us as their preferred partner for them implementing fastest growing technologies, such as digital cloud data side or any eye, creating significant value and managing streamlining accelerating.

And making their business thrived.

In closing I would like to turn to our guidance for 2021, given the strong momentum we are experiencing in our pipeline. We are revising for the third time this year or 2021 revenue guidance to a new range of 470 million to 475 million for the range of 450 million to 460 million, reflecting the annual.

<unk> of 26, 6% to 28% will deal with that I will now 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. If 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 kind of if the handset before pressing the numbers three 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.

Thank you.

When you're thinking about your operating margins and you normalize for the impact of holidays in the quarter and is that a good level that we should expect for when we're thinking about Q4 2022 is that the right run rate for the business or how should we be thinking about where costs may go in the next couple of quarters to a year.

The last quarter of every year is the ease normally.

Characterize with the higher margin because we we intend to sell much more software which of course impacts on the.

Gross both gross margin and our operating margin and same for professional services I think that this quarter was again as I said negatively impacted by the holiday season, which in a post just in terms of the of a billable days in Q3 and Q2, we had 63 billable days this quarter, we had 58 billable days.

And next quarter, we are expected to have again around 62 63 billable days. So just from that we expect to have better profit in the fourth quarter and better margins in the fourth quarter.

Okay. Thank you that's helpful. And then when you talk about head count additions in the quarter, what you're seeing in terms of utilization of your employee base and our attrition trends.

I think that magic for them for many years. He was excited he's excelling in the utilization that we managed to get for our personnel.

We keep it for many many years that the at a high rate we.

The only the only.

Lead times that we found ourselves you know I don't know with people with the reduced level of utilization was.

You know if something has happened in the market like we like few years ago with the telecom market and last you we'd be Crawford, our when we found ourselves you know Wayne sitting having people sitting on the bench waiting for waiting to see if the change in the market is there is.

Something that is you know for a long time it was short term, but normally we managed to utilize our people for their maximum.

Okay. Thank you for taking my questions.

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.

There are no further questions at this time, Mr Bauer and saying what do you like to make your concluding statement.

Oh, yeah, so I would like to thank everybody for joining the call we definitely see a promise.

Promising outlook ahead of us.

So we hope to bring you some more good news in the near future. Thank you.

Thank you. This concludes the Magic software Enterprises Ltd third quarter 2021 results conference call. Thank you for your participation you May go ahead and disconnect.

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