Q2 2023 Magic Software Enterprises Ltd Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to the Magic software Enterprises 2023 second quarter Financial results Conference call Magic second quarter 2023 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 Dot com.

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 call. Please press star zero with US on the line today are magic's CEO , Mr. Guy Bernstein, Magic's CFO , Mr. Asaf Bernstein and Magic CTO Mr. <unk>.

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 content of this call magic expressly disclaims any obligation to update or revise any of these forward looking.

That's 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 our Investor Relations section of the company website I will now turn the call over to Mr. Asaf Bernstein <unk> CFO of Magic software. Please go ahead.

Thank you Tony and thank you everyone for joining us today as we report our second quarter 2043 financial results. During the call today I will leave you highlights from our second quarter results and provide an overview of our achievements. We appreciate your continued support and look forward to sharing our progress with you.

Revenue in the second quarter of 2023 increased one other than $37 6 million.

0.4% from the second quarter of 2023 of 2022.

The currency headwind on revenues is significant.

Compared to the second quarter of last year on a constant currency basis calculated based on average quarterly exchange rates for the three months ended June 32022.

For the second quarter of 2023 would've increased by four 4% to a record breaking second quarter results of $143 million.

Even when compared to the previous quarter of this year on a constant currency basis calculated based on average going through exchange rate for the three months ended March 31st 2023.

In Q2, 2023 would have been $1 $8 million higher than the reported one Richard whenever and $39 4 million daus.

These results demonstrate the continued growing investments made by enterprises and organizations worldwide. Even during the current challenging macroeconomic climate, we leveraged our PCR technologies and cloud based platforms, creating higher demand for our innovative software solutions and services, which together with the outstanding execution by our teams.

To another quarter of solid performance recorded of course, our business.

We continue to see exciting opportunities and growth potential in the dynamic random or cloud technology and managed services since the first days of Magic software, our PMA was to take complex R&D processes and make them simple.

We put a focus on helping our clients to transition seamlessly to the cloud and that was their software.

Software as a service capabilities and deliver an exceptional value through our comprehensive suite of managed cloud services. We have made it our mission is to us.

And overcoming the challenges associated with migrating to the cloud and achieving a true fast excellence, we recognize that the cloud is not just the technology shift.

It's a tough formative journeys.

<unk> dedication and innovation, which we brand industry, leading best practices, ensuring that our clients cloud deployment mix the highest stand of our performance scalability security and reliability.

Our football managed cloud services, which include services, such a smoker herself silicones assemblies desktop as a service female focused service and much more a payload to address keeping kind of aspect of cloud operations and following our clients to focus on their core competencies, while leaving the management and optimization of the club members.

And to us.

We converted all integration and application products to be fully cloud Macy's, we created some new products like workspace and we are now starting to provide those products those managed cloud services, allowing them to new and existing customers to move their businesses to the SaaS model, while keeping their legacy systems and with minimal disturbance.

Their business.

The global cloud services market continues to experience rapid growth with businesses.

All sides are recognizing the benefits of migrating to the cloud the managed cloud services market in particular is projected to witness substantial expansion due to the increasing complexity of cloud environments and the need for specialized expertise.

What church magical qualities are deep domain expertise.

From a scientific approach and a proven track record of delivering successful cloud transformation.

Oh excuse me professional is committed to understanding our clients' unique needs and Telemundo services.

But the business outcomes.

Moving to our financials in the second quarter of 2023, our revenues in North America amounted to $69 two two.

$2 million for.

Four 1% and approximately $2 $9 million lower than Q2 of 2022 and $3 $4 million lower compared to Q1 of 2023, mainly due to cutbacks made by several clients in the U S and especially Cvs health, which decided to reduce expenses and put on hold our team.

One decision, resulting in a decrease of close to 250, although U S specialist she is.

The end of 2022 most of them are one other than 50 specialists during the second quarter was 2023.

Revenue for my Israeli operations amounted to 51 7 million up 1% compared to Q2 of 2022.

The impact of the continued devaluation of the new Israeli shekel versus the U S. Dollar was material overall Israeli market revenue on a course that currency basis calculated based on average exchange rates for the three months ended June 32022 revenues for the second quarter of 2020, so although the Israeli operation would have increased by $5 4 million.

So $57 1 million, reflecting a year over year Gulf of 11, 1%.

This demonstrates our strong performance in the region.

Confirms our long term strategic decision to focus on mature stable and technology driven sectors, such as health care defense finance and the public sector, which compensated for the current slowdown we are experiencing in North America.

Despite seeing some ongoing caution you in recent months and the Arctic sick dog, we're still witnessing a healthy demand and maintaining a solid pipeline to deliver continued growth during 2023 as our customers increasingly engage us as their preferred partner for innovative digital transformation initiative and a search we continue to fortify apples.

<unk> is a leading software solution and in Iot services global rental.

We have a well established track record of growth profitability and cash generation and the matrix team worldwide is committed to executing our strategy to deliver growth and continue improving our shareholders' value.

Moving to a geographical breakdown of our revenues during the second quarter of 2023, and North America accounted for 50% of total revenues and 38% Europe , 9% and APAC and rest of the world accounted for 3% of our second quarter revenues.

Trailing multiple suitability despite the significant currency headwinds, we were able to deliver growth in our gross profit as well as in gross margins as our non-GAAP gross profit for the second quarter of 2023.

Reached $41 $6 million up approximately nine 3% compared to $38 $2 million in the same period last year.

Our non-GAAP gross margin for the second quarter of 2023 inches by 240 basis points from 27, 9%.

233% in the second quarter of 2023.

The breakdown of our revenue mix for the six months period of 2023 was approximately 18, 4% related to our software solutions with a gross margin of approximately 63, 1% and 81, 6% related to our professional services gross margin of approximately 21, 6%.

While in the first half of 2022 approximately 80% of our revenues was attributable to our software solutions segment with a gross margin of approximately 64% and 82% related to our professional services with a gross margin of approximately 20%.

The breakdown of our gross profit mix for the six months period was 12 43 was approximately 40% related to our software solutions and 60% related to our professional services compared to 41% and 59% in the same period last year.

Our non-GAAP operating income for the second quarter of 2023 increased by approximately 4% to wait until the $4 million compared to $17 8 million in the same period last year.

This reflects an operating margin of 13, 4% for the quarter compared to 17% in the second quarter of 2022.

On a constant currency basis calculated based on the average currency exchange rates for the three months period ended June 32022, non-GAAP operating income for the second quarter would have increased by approximately 7% to a second quarter record breaking result of $19 $1 million.

Financial expenses met during the quarter, we had financial debt interest expenses of $1 $2 million resulted form of them $89 6 million dollar financial depth.

<unk> zero point $4 million recorded in the same period last year for a total financial debt of 50 $615 million as an overall depth continue to grow in 2022, and that's the majority of our debt balance variable interest rate, we still expect noninterest expenses to lives compared to last year.

Net income attributable to Noncontrolling interest as a business.

Combination model has often relies on keeping former shareholders and acquired entities of minority stake holders. In addition to the managerial hall in such entities. We are allocating a portion of in my opinion come to those minority shareholders.

Net income attributable to Noncontrolling interest increased $1.8 million compared to $1 6 million in the same period last year.

I don't know what GAAP tax expenses this quarter totaled $2 $9 million compared to a tax expense of $3 9 million in the second quarter of 2022, our effective tax rate for the first half was down 23 was approximately 17% compared to 20% recorded in the same period last year.

Our non-GAAP net income for the second quarter increased 15, 4% to $13 5 million or 28 cents per fully diluted share compared to $11 7 million or 24 cents per fully diluted share in the same period last year.

Turning now to the balance sheet as of June 32023, cash and cash equivalent and short term bank deposits amounted to approximately one other than $6 million.

Compared to whenever that $6 4 million in the previous quarter.

Total financial debt as of June 32020 amounted to $89 6 million compared to $67 4 million in the previous quarter.

The second quarter Magic paid shareholders of $14 $7 million with respect to its 2020 to second half semiannual dividend distribution as well as $12 $3 million towards settlement of liabilities related to acquisition, which we acquired in prior years.

Our cash flow from operating activities reached $23 $9 million during the second quarter of 2023 compared to $5 6 million in the same period last year.

In our press release issued today, we announced that Magic Board of directors has declared a semiannual cash dividend in the amount of $32.07.

Sure or in the aggregate amount of approximately $16 $1 million, reflecting approximately 75% of our net income for the first half of 2023, the dividend will be paid on September 13, 2023 to shareholders of record as of August 13 2023.

In closing I would like to turn to our guidance for 2023.

Revenue guidance. The updated consist of the following two main factors one the impact of foreign exchange headwinds and mainly the continued devaluation of the new Israeli shekel.

The U S dollar and to the slowdown of our operation in North America market.

With respect to the extremes that turbulence, we continue with machine and significant weakness of the new Israeli shekel versus the U S dollar, which began during the second half of 'twenty to 'twenty, two and has been continuously.

Ever since.

The impacts on our yearly revenue guidance for the previous guidance from the previous guidance, we bought any my amounts to approximately $6 million with respect to the slowdown we have experienced during the first half of 'twenty.

North American market and in particular, the reduced level of our workforce.

S health.

Do we start seeing first signs of improvement we are still below our original expectations and our starch decided to reduce the forecasted revenue level until the end of the U the impact on our annual guidance amounts to approximately $9 million.

A result, we have updated our revenue guidance from a range of $585 million to $593 million to a new range of five other than $70 million to $590 million. We anticipate that Q3 will be higher than Q2 revenues by three 5% to 4%.

In summary, we remain committed to executing our strategy, leveraging our strength and delivering sustainable growth and value for our shareholders. Our business model enables us to navigate the current macro economic environment. We've added stability today over 85% of our revenue comes from existing clients, giving us stability in a highly visible.

A source of cash from operations.

Of course, it asking the market's need for digital transformation and in our ability to address it remains high we can confer coincidently continue to execute our strategy to deliver growth and generate cash I would like to thank our clients and our shareholders for their continued support and trust and we look forward to deliver greater success throughout the remainder of 'twenty.

So with that I will now turn the call over to 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 live with that.

Handset before pressing the numbers no questions will be pulled in the order. They are a seat. Please standby while we poll for your questions.

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

Hi, guys. Thanks for taking my questions.

First off could you give any color about what contributed to the margin expansion with that have just derived from the reduction of.

Of the North American related employees or was something else going into that any color on that would be helpful.

Yes in the major aspects of the mainly the reduction of alteration with Cvs, which carried in much lower.

Most margins than the other.

Professional service projects that we do with.

C V S because of the magnitude of or overall, the relationship business, where something between 10% to 12% gross margin and as you can see our average gross margin is around 28, 28%. So once that went down.

It impacted our gross margin for the fourth quarter.

Okay and you.

You mentioned seeing some signs of improvement.

Can you give any color on that as it leads into the pipeline for for maybe next year and.

And maybe if you could just comment on what kind of project or are you seeing being done now maybe in lieu of something else.

Yes.

Well, we see again, the digital transformation and cloud and movement to the cloud all over even in some places we see Cvs in the future going into more digital transformation.

And this is what the reassure us that the yeah and we are on the right track as far as looking to provide the cloud.

Transformation tomorrow for our customers.

In terms of the in terms of the prospects during the first six months of the year, we did see a significant reduction of new business coming from the U S. In several sectors.

Sectors that we operate in and if you've seen the telecom of course seemed to health care as I mentioned, but also for cloud consumption and from high to companies.

By the end of the second quarter, and let's say all through.

The month of July we see we see clients coming back we see pipelines would incorporate so we believe that this is not something that you know only represent July but something that we feel is a windows.

Going back to improvement rather than once at one thing.

But damn thing.

Great. Thanks, that's very helpful. That's it for me.

Okay.

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

Thank you can.

Can you talk a little bit about them.

The kind of percentage of revenue coming from your managed cloud services versus other services that you offer and how you expect that to be and developing over time.

First of all I need to do are to put out that hey, if we look at the cloud consumption for example, and today, we sell something around $60 million in approximately $60 million give or take in com cloud consumption, but we don't show it on a graph.

Last week, we show it on the net and the and this is on the gross margin that kindergarten formed for a harmful or five 5%. So despite the fact that we sell what do we see a significant amount of revenue from cloud consumption services. This is no.

It's something that is highly reflected no no we're not.

Topline Nevertheless of course bring other type of all the businesses and services as I mentioned.

Or is it.

So kind of service.

No because the service channel.

All other managed services also we can see this are.

I think more than 50% of our ongoing.

Oh offerings that are in the market are asking for managed cloud services.

Hardly stood the type of cloud services, but they want it as a managed cloud service and noted that.

Perpetual or on premise. So we see it as more and more I think it's hard to say the cost and the absolute numbers that are being here and there because there is a shift that we see in some places but also increased so from putting the line. It's hard at the moment for me at least.

Got it no. That's helpful. Thank you and then on the demand side of things can you talk a little bit about now.

What level of these are cancellation, it's a spend that you expect will materialize.

The future at some point and then what do you think it takes for customers to get comfortable kind of loosening up their budgets and spending again.

I think we need to differentiate here between.

The U S market and Oh.

The rest of the world.

In the U S. We saw customers started to squeeze their budgets at the beginning of the year.

The wind down dramatically towards.

With me a second.

And now we start to see again that they start to hire again.

But we prefer to be cautious here, because we don't know where it goes.

In the Israeli market for example, you know nothing happened.

It's a market with all the mess in the country's steel.

Okay.

Business is rather good.

Hum.

Again, we prefer to be cautious because.

There is some kind of uncertainty.

Political uncertainty.

That's affected at the beginning and no we like.

We see that the business are growing again.

So what do you see where we stand.

Got it thank you for the update.

Okay.

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Okay.

If there are 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. Bernstein would you like to make your concluding statement.

So thank you everyone for joining the call of Magic software.

We definitely intend.

We tend to bring you more good news so thank you very much.

Thank you. This concludes the magic software Enterprises L. T. D 2023 second quarter results Conference call. Thank you for your participation you May go ahead and disconnect.

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