Q3 2022 Magic Software Enterprises Ltd Earnings Call

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Welcome to Magic software Enterprises, 2022 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 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 VP of technology and innovation, Mr. You'll file levy.

Magic third quarter 2022 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. 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 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.

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'll now turn the call over to Mr. Asaf Bernstein CFO of Magic software. Please go ahead.

Thank you operator, and thank you everyone for joining us today as we report our first quarter 'twenty to 'twenty two financial results joining the call today.

Highlights from our third quarter results and provide an overview of our achievements.

Matrix delivered its strongest topline and bottom line quarterly results with revenue increasing by 19% year over year.

Approximately $144 million.

Excluding the market expectation and net income increasing by 14, 9%.

Approximately $13 5 million.

Growth in Q3 was broad based with all major geographies growing in double digits, accompanied by strong pipelines on a constant currency basis revenue for the third quarter of 2022 would have increased by 23% compared to the same period last year with 19%, reflecting a growth organic growth.

These men translated to a 14, 4%.

non-GAAP operating income in the third quarter with operating margin, reaching 12, 9% down from 13, 4% in the same period last year.

Gross margin was mainly attributable to the change of our revenue mix related to our software solution versus a professional services.

Later on this call on a constant currency basis operating income for the third quarter of 2022 would've increased by 19% to a third quarter record breaking result of nine three.

$3 million was 15, 4%, reflecting organic growth.

Magic's third quarter results strongly demonstrate our sustained profit oriented approach, we continue supporting our existing loyal customers as well as closing new deals. The continued strategic focus on the execution of all of our priority topline growth resulted in yet another strong performance for the quarter with sales mainly coming from.

The ongoing expansions of our business in North America.

Magic software is a global company operating across multiple markets and also a broad IP services portfolio. Our strategy allows us to carefully balance our gross resources investment and risks across regions and markets.

Solid execution in the third quarter and throughout the few validates our strategy of building a broad business portfolio, which provides the foundation for sustained solid performance envelope.

We continue supporting our customers well.

These digital transformation journey based on a long term engagement cycle.

You start seeing some caution in the high tech sector, we are witnessing a healthy demand in developing a growing pipeline to deliver continued growth in 2022.

Customers increasingly engage us as a preferred partner.

If Jesus and transformation initiatives and are starting to continue increasing our resources. Despite fierce competition, although talented workforce currently maintaining hundreds of open positions. We are extremely proud of the positive results. We continue to demonstrate particularly from our organic growth and format choosing this quarter another gross milestone.

Looking for the first time before thousand employee and contractor head count Mark all this despite the challenging macroeconomic environment and what seems to be a central customer what's the longer decision, making processes. This is a significant milestone and a key parameter to our continuous growth.

We all feel certain that we have all the tools in place for sustained growth we are all well.

We have a well established track record of growth.

Profitability and high cash generation and the magic team worldwide is committed to executing our strategy to deliver growth and continuing improving our shareholder value.

On the M&A front, we continue to explore M&A opportunities in the field that we operate in as well as in the field that we target and identify growth opportunities as we have in the past in August 2022, we acquired the good kind of scope or did you.

So your U S based company, which also is obviously consulting services.

Temporary staffing services.

Italy to enterprises in various dropped types, such as IP finance healthcare and administration.

In 2012 P. G. G team consists of approximately 200 and a P. Billable employees all based in the U S and carries a monthly revenue run rate of approximately 2 million with an average operating margin of 10%.

Purchase price was approximately $8 million in cash and an additional amount of $2 million, which will be paid in two equal annual installments in 2023 and in 2020 for each of the first and second year anniversary from the acquisition date.

Moving to the financials and starting with the geographical breakdown of our revenues during the third quarter North America accounted for 55% of total revenue is 37% Europe , 6% in APAC and the rest of the world accounted for 2% of yourself water revenues.

Revenue in North America reached a record high of $79 million up 20% compared to 66 million in the same period of the previous year accounting for 56% of our grocery just third quarter with 13% organic growth on a sequential basis North America revenue grew by seven 8% from 70.

$3 3 million in Q2 of 2022 with one 9% sequential organic growth.

Revenue in Israel also reached an all time high of $53 4 million up 22% compared to $43 8 million in the same period last year accounting accounting for approximately 42% of our growth in the third quarter.

On a constant currency basis revenues increased by approximately 28% compared to the same period last year on a sequential basis revenues in Israel inches by 4% approximately $2 million from 51 4 million recorded in the second quarter of 2022.

He's been with region was significantly affected by currency headwinds.

As new Israeli shekel weakened against the dollar on a constant currency basis, a sequential growth would've been five 6%.

Turning now to profitability.

The significant currency headwinds, we were able to deliver growth in our gross profit adult all.

non-GAAP gross profit for the third quarter of 2022, which $40 5 million up approximately 18, 5% compared to $34 2 million in the third quarter of last year on a constant currency basis.

Gross profit would have increased by approximately 22% compared to the third quarter of last year to approximately $41 1 million.

non-GAAP gross margin for the first quarter of 2022 decreased by 20 basis points from 28, 3% in the third quarter of 'twenty, one to 'twenty, one 'twenty eight 'twenty, 20% in the third quarter of 22. The decrease in our gross margin is mainly attributable to the change of our revenue mix related to our software solution versus a professional service.

He says.

As well as to the devaluation of the new Israeli shekel and the you. All this is the U S. Dollar on a constant currency basis compared to the third quarter of last year. Our gross margin would have remained constant at 28, 3%.

The breakdown of our revenue mix for the nine months period of 22 was approximately 17, 5% related to our software solution with a gross margin of approximately 64% and 82, 5% related to our professional services with a gross margin of approximately 20%.

All in the same period of 21, 21% of our revenues was attributable to our software solutions segment with a gross margin of approximately 64% and 79% related to our professional services with a gross margin of approximately 20%.

Increasing the percentage of our professional services due to the continued strong demand for professional experts driving a professional service revenue stream as well as the acquisition of BTG concluded during the third quarter was 22.

The breakdown of our gross profit for the nine months period of 22 was approximately 40% related to our software solutions and 60% related to our professional services compared to 46% and 54% in the same period last year respectively.

Moving to operational costs, our non-GAAP operating income for the third quarter of 2022 increased by 14, 4% to $18 5 million compared to $16 2 million in the same period last year and $17 6 million in the second quarter of 2022.

This reflects an operating margin of 12, 9% for the quarter compared to $13 fall in the third quarter of 'twenty, one and 12, 8% in the second quarter of 2022 financial expenses net during the quarter, we had financial debt interest expenses of 46 $468000.

Resulted from a $59 million I mentioned that at <unk>.

So we would expect to continue to rise we expect interest expenses to continue to grow.

Net income attributable to Noncontrolling interest as a business combination model has often relies on keeping former shareholders and acquired entities as minority stakeholder. In addition to the managerial roles in such entities. We are allocating a portion of our net income to those minority shareholders.

Net income attributable to Noncontrolling interest amounted this quarter to $1 4 million compared to $1 3 million in the same period last year.

non-GAAP tax expenses this quarter totaled $2 7 million compared to a tax expense of $2 3 million in the second or third quarter of 'twenty one.

You've talked faithful the nine months period was 22 was approximately 23% compared to 22% recorded in 'twenty. One we expect an effective tax rate in 2020 to be in the range of 22% to 23%.

non-GAAP net income for the third quarter increased 14, 9% to $13 5 million or <unk> 26 cents per fully diluted share compared to 11.8.

8 million or 24 centers fully diluted share in the same period last year.

Turning now to balance sheet as of September Shloshim, 'twenty, 'twenty, two with cash and cash equivalents short and long term bank deposits and marketable securities amounted to approximately $88 8 million compared to $93 9 million in the previous quarter. Our total financial debt as of September 32022 amounted to 59 million compared to 56.

$6 5 million in the previous quarter.

During the third quarter of 2022, our cash flow from operating activities reached $21 $9 million.

In closing I would like to turn out now to our guidance for 2022, given our solid backlog and a strong pipeline. We are revising upwards for the third time. This year, our 2020 to annual revenue guidance to a new range of 555 million to 565 million up from the prior range of 500.

50 to 560 million for the year, reflecting annual growth of 15, six to 17 point sticks. This revised revenue guidance for the year takes into consideration the following negative impacts as evaluation of the new Israeli shekel and the euro versus the dollar they usually October holiday season, which this year mainly.

During the fourth quarter. These are the election day, which also took place in November and the U S end of year holiday season. These negative factors. It yourself it would build up in working days in the fourth quarter compared to the third quarter by $6 five days, which are equivalent to approximately $5 million or three 5% of our revenue.

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To summarize from a financial perspective, Magic's hybrid business model of software solutions and software services is solid strong and proved itself even in uncertain times, we continue to grow our revenues our profits and our cash flow and we are paying dividend on a semiannual basis from a business perspective, we are diversified both in our.

Offerings and in the geographies in which we operate we have thousands of customers with 85% of our revenues, resulting from the pizza business carried with our existing customers is based on a long term engagement cycle, which result in business and flexibility and risk mitigation to our shareholders 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. You'll 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 lift the handset before pressing the numbers youre questions will be pulled in the order. They are received please standby while we.

Paul for your questions.

The first question is from Chris Reimer of Barclays. Please go ahead.

Hi, congratulations on the strong quarter and thank you for taking my questions.

I'll start with what's probably on everyones mind is are you seeing any change in customer behavior, you mentioned earlier, the delays or potential slowness in.

And new deals and I was wondering if you could comment on.

How youre seeing that how you're seeing the change in new deals or with current customers.

Okay. So.

I would say that for now.

There is.

There is a lot of talking in the market about the slowdown in the fact that customers are hesitating.

I must say that I'm a in all business for now we don't really feel it so still we see strong demand.

And we don't really see agitation or delays.

Mhm, Okay, thanks and.

In terms of the pipeline, we see the pipeline continues to be strong it takes a little bit more time to sign the agreement. So we do the scoop and we work with the client and we you know and really we have a fully engage with them but to conclude the the the thing that takes a little bit more time that's it.

Okay.

How would you characterize trends you're seeing around operating expenses and what would you say are the main challenges right now and it really managing opex levels.

Let's say that you know, though we expected that due to the.

Environment in the market and it talks about a recession.

We will be it will be easier for us to hire our employees and for now I must say, it's not the it's not the case, we are still struggling to find people.

Our salaries are are still in the sky.

But you know we managed it before we can continue to manage it it's not oh it could.

Improve only for the bedroom.

Got it.

Okay. Thanks, that's it for me thank you.

The next question is from Kate Constantine William Blair. Please go ahead.

Hi, everyone. Thanks for taking my question and congrats on the quarter.

I wanted to start off with a question around revenue guidance can you talk us through the biggest drivers behind the increase in the guidance last quarter.

I must say, it's across the board so I cannot oh.

It will just be something.

Specifically that made the change I think we are improving in terms of the.

Of the operations in terms of the sales cycles were doing probably a bit of joke.

But it's across the board.

Not in a specific place.

Okay, Great. That's good to know and then last quarter I know you called out seeing.

A little bit of while we're demand from younger companies is that still a trend that you are seeing yes, yes. It is still a trend that we see we are being very cautious with the with the ones that.

Didn't raise money or that we know that like in the.

The final amount that they can spend so we are being very strict with them.

And we continue with the ones that are heavy cash.

But we're being cautious about it.

Okay, Great. That's good to know thank you that's all for me. Thank you.

If 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. Guy Bernstein would you like to make your concluding statement.

So again, thank you everyone for joining.

Our coal.

It was a good quarter and we definitely hope to bring you some more good quarters.

Our near future.

Thank you very much.

Thank you. This concludes the magic software Enterprises L. T. T 2022 third quarter results Conference call. Thank you for your participation you May go ahead and disconnect.

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