Magic Software Enterprises Ltd. Q1 2023 Earnings Call

Speaker 1: Thanks for watching!

Speaker 1: Thanks for watching!

Welcome to MAGIC Software Enterprises' 2023 first 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 CEO Mr. Guy Bernstein, Magic CFO Mr. Asaf Bernstein, and Magic VP of Technology and Innovation Mr. Yuval Avi.

Magic first quarter 2023 earnings release was issued before the market opened this morning and it has been posted on the company's website at www.magicsoftware.com 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 other changes in the way it is used.

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 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 2023 financial results. During the call today, I will review highlights from our first quarter results and provide an overview of our achievements.

We appreciate your continued support and look forward to sharing our progress with you. Our hard work and dedication continue to be contributed to our solid performance in the first quarter of 2023 as we report approximately 3% year-over-year growth in revenues reaching first quarter all-time high of 142.4 million

and operating income of $18.4 million. These results demonstrate the growing investment made by enterprises and organizations worldwide, even during COVID challenging macroeconomic climate, to leverage their digital technologies and cloud-based platforms, creating high demand for innovative software solutions.

and services which together with the outstanding execution by our teams led to another quarter of solid performance recorded across our business.

Our top-line reported growth in Q1 of 2023 was solely driven by our North American operation, which grew by 4% year-over-year to $72.6 million, while revenues reported with respect to our operations in Israel remained flat at $53.3 million.

times high of $58.8 million when calculated based on average currency exchange rates for the three months ended on March 31, 2022. The strong growth of our operation in the Israeli market, particularly in light of the current macroeconomic conditions.

reconfirms our long-term strategic decision to focus on mature, stable, and technology-driven sectors such as healthcare, defense, finance, and the public sector, which compensated the recent slowdown which we are currently experiencing in the high-tech and telecom sectors mainly in North America and to some extent also in Israel.

Despite seeing some ongoing caution during recent months in the high-tech sector, we are still witnessing a healthy demand and maintaining a solid pipeline to deliver continued growth during 2023 as our customers increasingly engage us as the preferred partner for innovative digital transformation initiatives.

And as such, we continue to fortify our position as a leading software solution and an IT service global vendor. We have a well-established track record of growth, profitability, and a high cash generation, and the Magic team worldwide is committed to executing our strategy to deliver growth and to continue improving our shareholders' value.

On the M&A front, despite the rising interest rate environment, we continue to believe that M&A remains an important part of our growth strategy and as such we continue to explore, though with an increased level of cautious, new opportunities in the fields that we operate in as well as in fields that we target and identify growth opportunities.

APAC and the rest of the world accounted for 3% of our first quarter revenues. Our revenues in North America reached $72.6 million, up 3.9% compared to $69.9 million in the same period last year.

Revenues in Israel reached 53.3 million as in the same period last year. On a constant currency basis, revenues in the Israeli market grew by 10% year over year, which as I have already mentioned, represented in real terms an all-time high of $58.8 million compared to $53.3 million in the same period last year.

Turning now to profitability, despite the significant currency headwind, we were able to deliver growth in our gross profit as well as in our gross margin. As our non-gap gross profit for the first quarter of 2023 reached 40.2 million, up approximately 3.1% compared to 38.9 million in the same period last year.

Our non-gap gross margin for the first quarter of 2023 increased by 10 basis points from 28.1% in the first quarter of 2022 to 28.2% in the first quarter of 2023. On a constant currency basis, our gross margin would have gained an additional 30 basis points in amount to 28.4%.

While in the first quarter of 2022, approximately 19% of our revenues were attributed to our software solution segment with a gross margin of approximately 64% and 81% related to our professional services with gross margin of approximately 20%.

The breakdown of our gross profit mix for the quarter was approximately 42% related to our software solutions and 58% related to our professional services, compared to 43% and 57% in the same period of last year.

Our non-GAAP operating income for the first quarter of 2023 decreased by 3.4% to $18.5 million, compared to $19.1 million in the same period last year. This reflects an operating margin of 13% for the quarter, compared to 13.8% in the first quarter of 2022.

and 13.1% in 2022 as a whole. On a constant currency basis calculated based on average currency exchange rates for the three month ended on March 31, 2022, non-GAAP operating income for the first quarter of 2023 would have increased by approximately 3% to a first quarter record breaking $19.6 million.

percent in 2022 as a whole. On a constant currency basis calculated based on average currency exchange rate for the three months ended on March 31st 2022 non-GAAP operating income for the first quarter of 2023 would have been would have increased by approximately 3% to a first quarter record breaking 19.6 million dollars financial expenses

During the quarter, we had a financial debt interest expenses of 0.8 million, resulted from our $67 million financial debt, compared to 0.2 million recorded in the same period last year for a total financial debt of 60 million. As the majority of our debt...

There's variable interest and interest rates are still expected to rise. We expect our interest expenses to continue growing

Net income attributable to non-controlling interest, as our business combination model has often relied on keeping former shareholders in acquired entities as minority shareholders in addition to their managerial role in such entities, we are allocating a portion of our net income to these minority shareholders. Net income attributed to non-controlling interest amounted this quarter to $1.7 million compared to $1.5 million.

Our long gap net income attributable to magic shareholders for the first quarter decreased 3.2% to $12.6 million or $0.26 per fully diluted share, compared to $13 million or $0.26 per fully diluted share in the same period last year.

Turning now to the balance sheet, as of March 31, cash and cash equivalents and short-term bank deposit amounted to approximately $106.4 million compared to $87 million in the previous quarter. Our total financial debt as of March 31 amounted to $67.4 million compared to $51.2 million in the previous quarter. When you receive this news, please view the video and remain couL and many more hackathons observe the

Our cash flow from operating activities reached $18.8 million during the first quarter of 2023, compared to $12.8 million in the same period last year. In closing, I would like to turn to our guidance for 2023. We are reiterating our 2023 full year revenue guidance of $585 million to $593 million.

reflecting annual growth of 3.2% to 4.6%. We believe that this growth takes into consideration anticipated organic growth, the current macroeconomic environment, and the current devaluation of foreign currency exchanges versus average rates in 2022.

In summary, we remain committed to executing our strategy, leveraging our strengths, and delivering sustainable growth and value for our shareholders. I would like to thank our clients and shareholders for their continued support and trust, and we look forward to delivering even greater success throughout the remainder of 2023. 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 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.

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

Hi, thanks for taking my questions. I was wondering if you could give some more color on the diversification that your strategy of diversifying the revenues verticals that you mentioned and if there's anything in particular where you're seeing a slight change.

coming from this year.

and basically where you see the growth coming from this year.

I think it's a very unique year this year because of what happened in the...

with the economy and the market and the interest rate we definitely see some

You know, customer being cautious in the States.

For now, outside of the state, especially in Israel, we don't see that, so we pushed quite hard on the Israeli market in order to compensate for some of the...

For now, outside of the state, especially in Israel, we don't see that, so we pushed quite hard on the Israeli market in order to compensate for some of the business reduction in the state.

But all in all we feel quite comfortable because we are working with big corporates.

But all in all we feel quite comfortable because we are working with big corporates so we know how to plan it.

Great, okay. Yeah? Just adding that in terms of the business we see of course the growth coming from our clients that basically are moving their whole systems to the cloud. We see a significant improvement and increase in our cloud consumption operation.

we see significant increase on our cyber security consulting, we provide hardening services for our clients, we provide penetration tests, we provide knock services, we provide CISO as a service, SOC as a service to our clients. The things that...

just from the migration of what we expect to continue and see as migration of core systems into the cloud is probably the main growth engine for the company. And a lot about managed service as opposed to professional services, moving into a managed cloud service offering.

Ah, okay. Thanks. That's really helpful. And just one more. How comfortable are you with current staffing levels and are you finding attrition rates maybe declining or is there any change or easing related to employee acquisition?

I think that today we see that due to the current market situation, attrition rates have significantly decreased. Of course, the most talented people are still being looked after and courted and their level of salary and their ambitions to stay is always something that is.

I think that our hit rate in recruiting new employees has also been improved. So in the past we had to look for much more employees and the competition was much higher in order to recruit.

succeed and recruit people and now today it's a bit more easier. And I also think that when we're looking into bringing juniors in a way that they will grow inside the organization as opposed to bringing champions that it's much harder to compete on.

Great. That's great color guys. Thank you. That's it for me.

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

Hi, how are you? I'm hoping you can give us a little bit more clarity on how you expect revenue to come in for the year on a quarterly basis. It was great to see you reiterate the full year.

It's a little bit difficult during this kind of call to provide something that we don't share on the global side on our PR, but I can say that of course we have, as I said, we have 50% of our business in the US. So, share it, down below.

Second quarter is a regular quarter, full day. Bill of Allele is no special event. In opposed to the Israeli market where we have the Passover and we have the Independence Day, which are holiday season that our employees are...

you know, where it already happened, where they were on vacation days. So in Q1 we had like 65 billable days in the Israeli market, it goes down next quarter to 59.5. Overall, I would say that that should bite or normally bite our revenue level by around 3.5.

your business and then how also do you intend to leverage it within your own business models.

Again, I'm not sure I fully understood the question about the AI.

But we are looking into implementing quite a lot of AI into our technologies in specific fields. We are looking now for some cooperation or joint ventures around predictive and other trends in this market.

But the challenge again with AI, we want to come with a defined solution, not just with a general statement of how we're doing AI, as again most of these markets. So we're trying to come and see how we plug it into our product and how to do our solution. And that's all I'm saying aside, all the other consultants.

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 poll for your questions.

There are no further questions at this time. There is an additional question from Mike Silver of Kingston Capital. Please go ahead.

Mike Silva?

Is there anything you could share about future acquisitions?

We do have two or three potential acquisitions.

Again, we are trying to play safe here.

We made the negotiations from our side way harder because we think the market allows it to us.

We don't see yet a reduction in multiples of prices.

But I'm sure it will come, I don't know if it will be that significant, but for sure it will come. So for the time being we are trying to close with the one we have in the pipe, but better terms.

Thank you.

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

So thank you very much for joining our call and we sure hope to bring you some more good news in the

and next call. Thank you very much. Thank you. This concludes Magic Software Enterprises LTD 2023 first quarter results conference call. Thank you for your participation. You may go ahead and disconnect.

Thanks for watching!

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