Q3 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 third quarter financial results Conference call Magic third quarter 2023 earnings release was issued before the market opened this morning, and it has been posted on the Companys web.
Site 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 conference call. Please press star zero with US on the line today are magic's CEO, Mr. Guy Bernstein Magic's CFO, Mr. Asaf burn.
Steam and Magic CTO Mr <unk>.
We start I would like to remind everyone the projections or other forward looking statements may be provided on this conference call. The safe Harbor 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.
So during the course of today's call management World car 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 the 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 third quarter of 2023 financial results.
Do you need to take today I will review the highlights from our third quarter results and provide an overview of our outlook.
Revenue in the third quarter of 2023 decreased when I lived in $29 5 million down approximately 10% from the third quarter of 2022.
As already mentioned during the conference call for the second quarter results of operations. The effects of the course fluctuations on our revenues over the course of the year is significant compared to the corresponding quarter of last year.
On a constant currency basis calculated based on average currency exchange rates for the three months ended September 32022 revenues for the third quarter of 2023 would have decreased by approximately 6% compared to the third quarter of 2022 to $135 3 million below $5 $5 million.
Higher than our reported revenue figure for the quarter.
As we described in the P&L this quarter, while third quarter results on November eight the reduction you know third quarter revenues was caused primarily by two factors.
One currency headwinds caused by significant deterioration of the new Israeli shekel relative to the U S dollar.
'twenty, three which is half that of Israeli shekel be nominated operation by $6 3 million for the third quarter compared to the same period last year.
And two is substantial and an unexpected decline in demand for our software services and several of our important U S based customers carrying local small gym, which without any other that simplification and due to internal reasons unrelated to our software services decided to immediately suspend significant powerful they act.
Diamond material based project.
Beyond behind the results also lies the ongoing challenging microeconomic climate.
It's all kind of probability to overcome the primary adverse factors weigh against us.
We also note a significant fourth quarter events. The old vehicles. These are in the war against the turbulence organization from Us, which among other things have cooled currently led to the drafting two active military service of approximately 200 out of a 1500 Israeli employees.
We started with these early with these learnings in its fight and we shall employees, while fighting in the entirety Israeli armed forces success, eliminating that they're always organization the claim that the conduct and conducted the brutal murder or.
1400, Israeli civilians and continues to all 240, you sign in foreign hostages.
The absence of a Israeli employees, where they're asking for active military service since the beginning of the war and it's going to go.
On October seven together with the decline.
And in demand for our software services from several other vote.
More important U S based customers and the computer challenging microeconomic environment of high interest rates persistent inflation and reduced capital spending of course, that's to anticipate significantly lower revenues for the fourth quarter and the angel whenever than 15 million to 125 million.
We play a mountain of third quarter results on November 8th immediately after the effects of all of the foregoing factors became clear to us and in order to prevent multiple updates to our investors while the effect of such factors was being carefully analyzed by us once the effect of all of these factors was clear we immediately operated.
Our investors.
I would highlight that we have provided a wider than normal range given that many of the factors that are outside of our control, but that said we have taken a very conservative approach and feel very comfortable with this guidance range.
Despite all of those difficulties working against US we continued to flow forward without worldwide dedication and confidence that we can continue to execute on sales of our world class suite of products and in providing related services.
Our low code no code and services all spending on critical as customers continue to automate and digitize their systems.
And while some of our customers.
Facing macro company see company specific challenges, we believe we have the right set of offerings to address our clients' needs.
We have seen even in this.
Challenging environment, that's outstanding execution by our teams and our adherence to our cost structure, you're able to maintain our profitability. Despite the lower revenue in the third quarter of 'twenty thing to see our non-GAAP operating margin held strong at approximately 13, 3% of our revenue 10 basis points higher.
Compared to the margin during the first half of 2023, and 20 basis points higher compared to the corresponding period last year.
This slow down.
D M scalability, just shows the inherent scalability and defensive reality of our business model and our ability to maintain an operating margin whether our revenues I hopefully, we believe that our ability to maintain the profitability of our operations. We will keep our balance sheet is strong and will enable us to invest to drive.
Revenue growth as soon as the opportunity presents itself.
As we look at our business, we see that we continue to leverage our digital technologies and cloud based platforms to create strong demand for innovative software solution and services.
We similarly continued to see excellent execution by our teams setting aside the factor that slowed us down or slow down our revenues in North America, which are beyond our control we experienced another quarter of solid performance recorded across all other parts of our business.
We continue to see exciting opportunities and growth potential in the dynamic Grandma's cloud technology and managed services since the first days of Magic software, we have been characterized by our ability to take complex processes and make them seem things today, we put a focus on helping our clients to transition seamlessly to the cloud in anthem.
As a service capabilities and deliver an exceptional value through our comprehensive suite of managed cloud services. We have made it our mission to assist businesses in overcoming the challenges associated with migrating the two.
The cloud and achieving through SAS excellence, we recognize that the cloud is not just the technology shift.
Formative churn journey that demands expertise dedication and innovation to which we bring industry, leading best practices, ensuring that our clients cloud deployments meet the highest standards of performance scalability security and reliability.
Our suite of managed cloud services, which include services such as milk as a service so kind of a series of Dev ops as a service Phoenix as a service and much more tailored to address critical aspect of cloud operation involving our clients to focus on their core competence, when leaving the management and optimize optimization over.
The cloud environments to us on integration and application products are fully cloud native and we are now starting to provide those products and managed cloud services, allowing our new and existing customers to move their businesses to the SaaS model, while keeping their legacy systems and with minimum disturbances to their business.
Global Cloud services market continues to experience rapid growth with businesses of all sizes, recognizing the benefits of migrating to the cloud the managed cloud service market in particular is projected to witness substantial expansion due to the increasing complexity of cloud environment and the need for specialized expertise.
As of today Magic has over 200 logos consuming it's managed cloud services.
What's that magic capacity these deep domain expertise and customer centric approach and a proven track record of delivering successful cloud transformation people.
Team of seasoned professional leverage that extra piece of cost of the three major cloud platforms AWS GCB in Israel, and we are well positioned to provide our customers with the optimal solutions tailored to their unique needs.
Proceeding to address our third quarter financials in the third quarter of 2023 of our revenue in North America amounted to $58 $5 million, approximately $19 2 million or 25% lower than the Q3 of 2022 and $11 million or 15% lower compared to the.
Second quarter of 2023, mainly due to additional capex made by serving our clients in the U S. Among with some of our largest customers, which decided to reduce expenses and put on hold the IP investment decision, resulting in a decrease of close to 500 or are you, especially as compared to the respective quarter last year.
Revenue from our former he's already operation amounted to $54 million up by 2% compared to $53 1 million reported in Q3 of 2022 the impact of continued devaluation of the new Israeli shekel versus the U S. Dollar it wasn't a material factor in reducing our dollar reported Israeli market revenue.
On a constant currency basis revenues for the third quarter of 2023 O, but he's already operation would have increased by $7 2 million to all of you over the year to $63 million, reflecting a year over these Gulf of 13, 6% in real terms.
This demonstrates our strong performance in the region and reconfirm, our long term strategic decision to focus on mature stable and technology driven sectors, such as healthcare, which account for 25% of our revenue defense, which accounts for 10% final, 20% and the public sector, which accounts for 5%.
It allowed us to partially compensate for the corn slowdown we experienced in North America.
Turning now to profitability, despite a significant currency headwind and the problems with our U S. Based revenue in Q3, we were nevertheless, able to increase our gross margin for the third quarter of 2020 see what by 130 basis points to 29, 4% of revenues or $38 $1 million.
21, 28, 1% in the same corresponding quarter of 2022 in which it was $45 million.
The breakdown of our revenue mix for the first nine months of 2023 was approximately 19% related to our software solutions with a gross margin of approximately 64% and 81% related to our professional services with a gross margin of approximately 21%.
In the first nine months of 2020 to approximately 17% of our revenues was attributable to our software solutions segment with a gross margin of approximately 64% and 83% related to our professional services with a gross margin of approximately 20%.
The breakdown of our gross profit mix for the nine months period since the start of 2023 was approximately 41% related to our software solutions and 59% related to our professional services compared to 40% and 60% in the same period last year.
Our non-GAAP operating income for the third quarter of 2023 on an absolute basis when remaining relatively the same on a percentage basis compared to the corresponding period of 2022.
It was $17 $2 million compared to $18 9 million in the same period last year. This reflects an operating margin of 13, 3% for the quarter compared to 13, 1% in the third quarter of 2022.
On a constant currency basis calculated based on an average currency exchange rates for the three months period ended September 32022, non-GAAP operating income for the third quarter of 2023 would've Inc. Would have decreased by 5% to $17 9 million.
Financial expenses.
During the during the quarter, we had financial debt interest expenses $1 7 million.
It was $87 million financial depth compared to 0.6 million of interest expenses recorded in the same quarter last year related to a total financial debt of $60 million.
Although overall depth grew in 2023 and as the majority of our variable interest rate, which has been subject to higher interest rates in 2023 compared to the same period last year. We expect interest expenses to continue to rise in the fourth quarter compared to the corresponding quarter of last year.
Net income attributable to Noncontrolling interest as a business combination model has also often rely on keeping former shareholders and acquired entities as minority stakeholders. In addition to the managerial warning such entities. We are allocating a portion of our net income to these minority shareholders net income attributed to attributable to Noncontrolling.
Interest increased to $2 million compared to $1 5 million for the same period last year.
Our non-GAAP net income for the third quarter decreased by 24% or $10 4 million.
All 21 cents per fully diluted share compared to $17 7 million or 28 cents per fully diluted share in the same period last year, which was a product of the reduction in the operating income an increase in financial expenses, resulting from the increased level of debt and the increase in bank interest rates.
Turning now to the balance sheet as of September 32023, cash and cash equivalent and short term bank deposits amounted to approximately 107 million comp.
Compared to 106 million as of June 22023.
Our total financial debt as of September 32023 amounted to $88 million compared to 90 million as of the end of the previous quarter.
During the third quarter of 2023 magic babies shareholder or the semi annual cash dividend of $32.07 per share or approximately $16 1 million.
Approximately 75% of our net income for the first half of 2023, which was paid on September 13, 2023 to shareholders of record as of August 30, 'twenty to 'twenty three we Furthermore, paid $3 million in Q3 2023 towards payment of financial debt.
Our cash flow from operating activities was $22 9 million during the third quarter of 2023 compared to $21 $9 million in the same period of 2022.
Closing I would like to turn now to our guidance for the fourth quarter of things or anything.
As we stated in our earnings pre announcement issued on November eight.
The updated revenue guidance for Q4 2023 estimated that our revenue will be in the range of one other than 50 million to one other than 25 million for that quarter.
That reflects the confluence of an adverse factors that they identified towards the start of the school.
The deterioration of the new Israeli shekel against the U S dollar, which we estimate will have an adverse impact on revenues.
So in the fourth quarter the difficulties experienced by some of our largest north American customers, which carry relatively low margins.
The absence of the significant portion of our Israeli workforce, which has been called to duty and these are any war against come off and not the general challenging macroeconomic conditions, which weigh against capital spending biocatalyst by our clients.
Some of them, we acknowledged that while short term conditions are not ideal we I've never been as optimistic that in 2020 full once the major part of the world is behind Us now.
The customer returned to full operation they will resume to engage us to an increasing degree as the preferred partner for innovative digital transformation initiatives and we expect to return to a normalized historical growth rates in the midterm.
As such we will be able to continue to fortify our position as the leading social solutions and 90 service global vendor. We we have a well established track record of growth profitability and high cash generation and the magic team worldwide is committed to executing on our strategy to deliver growth and continuing improving our shareholders value I would like to.
Thank our clients and shareholders for their continued support and trust and we look forward to continue to deliver results on your behalf.
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 were you.
Using speaker equipment can live with the handset before pressing the numbers questions will be pulled in the order. They are a seat. Please standby while we poll for your questions.
The first question is from Maggie Nolan of William Blair. Please go ahead.
Hi, Good afternoon to you guys and this is Jesse on for Maggie, We we hope everyone's safe and Israel, but.
Could you remind us of the makeup of your delivery in other countries and your ability to transfer work to other locations.
If you heard my showed brief as I said quality, except for the 200 people that are currently being drafted actively drafted basically.
We have you know.
Good work and good business relationship still going on with our clients most of our clients.
Large financial institutions or customers working in the defense sector, which are all in the health care sector, which will not much.
Fluent buggy.
But what is going on now in you need but the fact that we are losing 200 people and doing a time and material work of course. This is something that we call. It we can compensate and in most aspects we comps.
Certainly move to other to other locations.
Understood and then for my follow up is there anything incremental you can share about the cancellations and <unk>.
Would you be able to elaborate on demand and your other sectors outside those cancellations.
Yeah, So I think that what we what we've seen in the in North America.
We updated our the.
At the end of last quarter that we saw some slowdown on you spoke to some of the big customers that were cutting.
Cutting some employees.
Towards let's.
Let's say end of this quarter, we saw a significant.
A reduction in force by some of the customers. It was across the board. So I cannot I cannot identify a specific customer although we still work with all of them. They are.
Some of them decided to cut some of the projects while I continue with the projects that you still continue with us Hum.
All you know it was really unexpected then on top of the call that we had with them before that.
We will make the the.
The relevant adjustments and.
We will bring the business back to speed.
Makes sense, thanks for taking our questions. Thank you.
The next question is from Chris Reimer of Barclays. Please go ahead.
Yeah, Hi, Thanks for taking my question last quarter I believe.
You did.
The decrease in especially particularly for Cvs health.
Now when you mentioned that these issues are today has that customer.
Maintained the same level or have you seen further decline at that customer.
And just also how can we look at margins given the issues are that you've brought up earlier in your comments.
So as for the specific customer I think the main hit.
Or let's say the significant heat came from these customer while we talked to discuss them or lost time.
We understood that they are going for some kind of cutoffs.
And later on they decided to go deeper.
In terms of the margin.
I don't think it's going to affect the margin percentage wise.
It may even get we may even get better margins because because of this.
Of the rebate policies as most of them. So we can improve the margins on the percent of charge side.
In absolute numbers.
We will probably feel a small.
Heat on the on the numbers, but again you know.
I think.
We are doing whatever is needed in order to overcome this.
Great.
And regarding the managed cloud services vertical can you give us an idea of what what percentage of our business.
Is there or how should we look at that progression going forward.
When you're talking about percentage of the business from the total business or from the right from the total.
I wouldn't comment on that.
First of all we need to understand.
<unk> cloud services, we separated between cloud consumption and managed services on the cloud cloud consumption size. We are currently running that there aren't rate of around $60 million gross.
In terms of the cloud consumption.
Working mainly with the Shaw and we the AWS and we are now establishing a much deeper relationship also we'd be DCP. So we intend. We expect these are these revenues to continue to rise those amounts, which I mentioned, we don't present them at gross we present them. So we of course.
I'll set the cost that we pay to those they care to those vendors and for such services. So it has a much much more.
Minimum wage.
Impact over the total revenues.
We create cool off.
Coffee to range between 7% to 10% on cloud consumption and cloud services. This is part of the services that the that you see that we provide and as you see and as I reported we experienced around 13%.
Average growth.
In the Israeli market significant portion of it comes from projects that we are that we provide to 200 different logos today on managed services on different aspect of managed services and cloud.
Great. Thanks, that's great color. Thank you that's it for me.
Yeah.
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.
Yeah.
There are no further questions at this time, Mr. Bernstein would you like to make your concluding statement.
And so.
I know that this quarter was not the best quarter for us.
We take the time and I believe that within the next two quarters.
We'll bring the business back to speed of call. There are some unknowns with the war is going on now in Israel, but I'm assuming.
We know this is the start is that we are facing now and it will not get worse than I believe that in the next.
Two quarters will bring.
Business up to speed.
The growth again, and just to remind you as our investors you know from.
For the last probably 14 years, we have.
Taking the business from a.
A quarter by quarter.
And every time, we succeeded in bringing good news to our investors and we hope that our will bring that sooner rather than later.
Do you guys well, thank you for joining and thank you for the patient.
Yes.
Thank you. This concludes the magic software Enterprises L. T. D 2023 third quarter results Conference call. Thank you for your participation you May go ahead and disconnect.
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