Q4 2022 Magic Software Enterprises Ltd Earnings Call
Speaker 1: To or.
Speaker 1: Thanks for watching!
Speaker 1: Wondering.
Speaker 2: fourth quarter 2022 earnings release was issued before the market opened this morning and it has been posted on the company's website at www.magicsoftware.com.
Speaker 2: At this time, all participants are in a listen-only mode. A brief questions and answer session will follow the formal presentation.
Speaker 2: As a reminder, this conference is being recorded. For operator assistance during the conference, please press star 0.
Speaker 2: With us on the line today are Magic CEO Mr. Guy Berenstein, Magic CFO Mr. Asaf Berenstein, Magic CTO Mr. Yuval Levee.
Speaker 2: Magic 4th Quarter 2022 Earnings Release was issued before the market opened this morning and has been posted on the company's website. Before we start, I would 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 context of this call.
Speaker 2: 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.
Speaker 2: 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 our investor relations section of the company website.
Speaker 2: I will now turn the call over to Mr. Asaf Berenstein, CFO of Magic Software. Please go ahead. owner name is Raj 29 motor vehicle inv absorb
Speaker 3: Thank you, operator, and thank you everyone for joining us today as we report our fourth quarter and full year 2022 financial results.
Speaker 3: During the call today, I will review highlights from our fourth quarter results and provide an overview of our achievements. We appreciate your continued support and look forward to sharing our progress with you.
Speaker 3: During the year, we continue to make big strides across multiple fronts of our business, which is reflected by our record-breaking results exceeding $500 million in revenues for the first time, and with double-digit growth recorded across all of our key financial indices for the year. Revenues, gross profit, operating income, EBITDA, net income, and dividends distributed to our shareholders.
Speaker 3: by our teams led to another year of strong performance recorded across our business.
Speaker 3: This quarter, Magic delivered its strongest fourth quarter top line and bottom line results, with revenues increasing by 10.6% year-over-year to approximately $147.1 million, exceeding market expectations and non-GAAP net income increasing by 9.9% year-over-year.
Speaker 3: to a fourth-quarter record-breaking result of $13.9 million. Growth in Q4 was mainly driven by North American operations growing in double digits, accompanied by a strong pipeline, offsetting the negative impact of the Jewish New Year holiday season, which this year resulted in a decrease of approximately 6.5 billion billable working.
Speaker 3: On currency basis, revenues for the fourth quarter of 2022 would have increased by 16.5% over the year to $155 million with 69.6% reflecting organic growth.
Speaker 3: Magic Fourth 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 our priority of top-line growth resulted in yet another strong performance for the quarter.
Speaker 3: Our strategy allows us to carefully balance our growth, resources, investment and risk across regions and markets. Our solid execution in the fourth quarter and throughout this year validates our strategy of building a broad business portfolio which provides for the foundation of our sustained solid performance. For more information visit www.fema.gov
Speaker 3: and growth as we continue supporting our customers throughout their innovative digital transformation journey based on our long-term engagement cycle.
Speaker 3: Despite seeing some caution in recent months in the high-tech sector, we are still witnessing a healthy demand and maintaining a solid pipeline to deliver continued growth also in 2023. As our customers increasingly engage us as a preferred partner for innovative digital information initiatives,
Speaker 3: And as such, we continue to fortify our position as a leading software solution and IT service global vendor.
Speaker 3: We are extremely proud of the positive results we continue to demonstrate, particularly from our organic growth and from achieving this quarter another growth milestone crossing for the first time the $500 million in annual revenues. This is a significant milestone which serves as the key evidence to our continued success.
Speaker 3: We are certain that ever we are
Speaker 3: certain than ever that we have all the tools in place for sustained growth. We have a well-established track record of growth, profitability and high cash generation and the Medic team worldwide, which this year has crossed for the first time the 4,000 employee and contractor's headcount mark is committed to executing our strategy.
Speaker 3: to deliver growth and continue improving our shareholders' value. On the M&A front, we continue to explore M&A opportunities in the fields that we operate in, as well as in fields that we target and identify growth opportunities as we have in the past. Moving to the financials and starting with the geographical breakdown of our revenues, during the fourth quarter along some...
Speaker 3: million dollars up 20% compared to 70.6 million in the same period last year with 12% organic growth year over year. On a sequential basis North America revenue grew by 7.5% from 79 million dollars in Q3 2022 with 0.2% sequential organic growth.
Speaker 3: Revenues in Israel reached $48.2 million, down 7% compared to $52.1 million in the same period last year. On a constant currency basis, revenues in Israel increased by approximately 3.2% compared to the same period last year and despite the negative impact of the New Year Jewish holiday season. For more information on Israel and its region visit our website www.israel.org
Speaker 3: Turning now to profitability, despite the significant currency headwind and the negative impact of the Jewish holiday season, we were able to deliver growth in our gross profit as well as in our gross margin as our long gap gross profit for the fourth quarter of 2022 reached 43.2 million up approximately 11.5 percent.
Speaker 3: The breakdown of our revenue mix for the year of 2022 was approximately 17.4% related to our software solution with gross margins of approximately 64% and 82.6% related to our professional services with gross margin of approximately 21%.
Speaker 3: While in 2021, 20% of our revenues were attributable to our software solutions segment with a gross margin of approximately 64% and 80% related to our professional services with gross margin of approximately 20%.
Speaker 3: The increase in the percentage of our professional services is due to the continuous strong demand for our professional experts driving our professional service revenue stream, as well as the acquisition of PGG concluded during the third quarter of 2022.
Speaker 3: The breakdown of our gross profit mix for the year was approximately 39% related to our software solutions and 61% related to our professional services compared to 44% and 56% in the same period last year. Moving to operational costs. Our long gap operating income for the 4th quarter...
Speaker 3: to 14.9% in the fourth quarter of 2021 and 13.1% in the third quarter of 2022.
Speaker 3: Financial expenses during the quarter, we have financial debt interest expenses of $684,000 resulted from our $51 million financial debt compared to $200,000 recorded in the same period last year for a total financial debt of $37 million.
Speaker 3: As interest rates are still expected to rise, we expect our interest expenses to continue growing.
Speaker 3: Net income attributable to non-controlling interest as our business combination model has often relied on keeping former shareholders in acquired entities as minority stakeholders. In addition to the managerial role in such entities, we are allocating a portion of our net income to these minority shareholders.
Speaker 3: Net income attributable to non-controlling interest amounted this quarter to $1.5 million compared to $1.8 million in the same period last year.
Speaker 3: Our non-GAAP tax expenses this quarter total $2.5 million compared to a tax expense of $3.9 million in the fourth quarter of 2021. Our effective tax rate for the year was approximately 18% compared to 17.8% recorded in 2021. We expect our effective tax rate in 2022 to be in the range of 19 to 20...
Speaker 3: Turning now to the balance sheet, as of December 31, 2022, cash and cash equivalent, short and long-term deposit and marketable securities amounted to approximately $87 million compared to $88.8 million in the previous quarter.
Speaker 3: Our total financial debt as of December 31, 2022, amounted to $51.1 million compared to $59.1 million in the previous quarter.
Speaker 3: During the fourth quarter, our cash flow from operating activities reached $12.1 million compared to $5.9 million in the same period last year. Our cash flow from operating activities for the year reached $49.6 million compared to $37.8 million in 2021.
Speaker 3: In accordance with our dividend distribution policy, our board of directors has declared the semiannual cash dividend in an amount of 30 cents per share and in an aggregate amount of approximately 14.7 million, which together with the dividend distributed for the first half of 2022 in an amount of approximately 14.2 million.
Speaker 3: continued growth in 2023 we anticipate revenues in the range of between 585 million to 593 million reflecting annual growth of 3.2% to 4.6%.
Speaker 3: This growth takes into consideration anticipated organic growth, the current macroeconomic environment and the current evaluation of foreign currency exchange rates versus average rates in 2022.
Speaker 3: Based on 2022 average currency exchange rates, Magic 2023 annual revenue guidance would have been between 600 million and 608 million, reflecting annual growth of 5.9% to 7.3%.
Speaker 3: In summary, this was a strong, challenging and overall exceptional year of execution on many fronts and we want to congratulate the Magic Global team for their outstanding performance in 2022.
Speaker 3: The results we delivered show that our strategy is working and that by focusing on our investment to deliver possible growth, we can significantly enhance shareholders' value. With that, I will now turn the call over to the operator for questions.
Speaker 2: Thank you. Ladies and gentlemen, at this time we will begin the question and answer session.
Speaker 2: If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received.
Speaker 2: please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions.
Speaker 2: The first question is from Chris Reimer of Barclays. Please go ahead. Hi. Congratulations on this strong quarter and thanks for taking my questions. Just touching on operating expenses. manga
Speaker 4: double-digit increases over the past few quarters. Do you expect this to level out at some point or is there some other investment going into there? Is it just macro-related? Just wondering what the moving parts around the operating expenses are and how you see that going forward.
Speaker 3: The majority of the increase in our operating expenses relate to ourselves in marketing.
Speaker 3: Some of it, a portion of that, one third of that was from the acquisitions that we did, especially TGG, which contributed around $3 million to our sales and marketing expenses in 2022 versus 2021.
Speaker 3: And all other increases are mainly related to our investment in increasing our sales team and recruitment teams and the bonuses that we pay as part of the growth that we experience in our revenues and in our gross profits.
Speaker 4: And just touching on the headcount and your employees' levels, how do you feel like you're positioned now and how do you see the trends in staffing? Is it still hard to...
Speaker 4: to acquire new employees? Or do you find maybe that they are staying longer? Just any of the trends around that and how you see your employee levels going forward.
Speaker 4: to acquire new employees or do you find maybe that they're staying longer? Just any of the trends around that and how you see your employee levels going forward?
Speaker 5: I think we see that the trend is changing still, you know, the chasing after the talents is still a challenge.
Speaker 5: But let's say that the regular IT players are easier to get on one hand
Speaker 5: On the other hand, we see some hesitance from customers because of the economical uncertainty. So on one hand it's easier for us to find the employees, on the other hand some hesitance in the market.
Speaker 3: I would add to that one thing that when normally we serve as subcontractors to our customers. So you know on a difficult macro economic environment or would they resist.
Speaker 3: you know, wins of recession, the customers tend to go with their subcontractors rather than with increasing their internal hand count and this works for our benefit. When there is actual, you know, actual recession, then you first run and, you know, and minimize the...
Speaker 3: the responsibility of the subcontractors. So currently, we only see winds of recession or sound for recession, but we don't actually see it in the demand for services.
Speaker 2: That's it for me. Thank you. The next question is from Kate Kronstein of William Blair. Please go ahead. Don't registrate.
Speaker 6: Hi guys, congrats on the nice quarter. This is Kate Chromstein on for Maggie Nolan. My first question is, can you guys talk through a bit the foreign currency mix in revenue and the cost base right now?
Speaker 3: Yeah, basically we have experienced, you know, significant devaluations in the 45% of our businesses as 55% of our business relates to the US and to North America. So this is something that doesn't affect us, but something around 35 to 40% of our businesses
Speaker 3: a negative impact over our offline. And since eventually we have Israeli people, Israeli employees that carries out the project in the Israeli territory, it goes down also and devaluates the operating.
Speaker 3: So every 100, you know, every one of the change basis points in the exchange rate gives, you know, reduces our operating profit by around 80,000, 75 to 80,000 dollars.
Speaker 3: So of course, we took that into consideration when we provided the guidance for 2023. If the average exchange rate in Israel between the dollar and the shekel was 3.36 for 2022, we are currently at around 3.6. So that has a significant impact over our revenues. And by that, over our time...
Speaker 6: Okay, great. That's super helpful. Thank you. And then my last question, have there been any meaningful changes that you have observed in client behavior across any of the industry verticals you could call out?
Speaker 7: so we
Speaker 5: We don't really feel any change in the behavior of customers. We do hear concerns, but for now we didn't feel it.
Speaker 6: Okay, great. Thanks for taking my questions.
Speaker 2: If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we pull for more questions.
Speaker 5: There are no further questions at this time. Mr. Bernstein, would you like to make your concluding statement? Yes, thank you everyone for joining the call. I sure hope that we will bring you some kind of a
Speaker 5: more good news in the near future and we'll update the revenues as well as the the guidance because of the uncertainty in the market right now we'd rather be conservative and see you in the next water recall thank you