Q3 2024 Magic Software Enterprises Ltd Earnings Call

The

. . . . . . . . .

Speaker Change: Ladies and gentlemen, thank you for standing by. The call will begin shortly.

[inaudible]

Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprise 2024 3rd Quarter Financial Results Conference Call. Magic's 3rd Quarter 2024 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 Change: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

Speaker Change: With us on the line today are Magic CEO, Mr. Guy Berenstin, Magic CFO, Mr. Asaf Berenstin, and Magic CTO, Mr. Yuval Lavi.

Speaker Change: The safe harbor provision provided in the press release issued today also applies to the content of this call.

Speaker Change: whether because of future events, new information, a change in its views or expectations or otherwise.

Speaker Change: 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.

Speaker Change: Thank you, Operator, and thank you, everyone, for joining us today as we report our third quarter 2024 financial results. During the call today, I will review highlights for our third quarter results and provide an overview of our outlook.

Speaker Change: Revenue in the third quarter of 2024 increased to $143 million, up approximately 10.4% from the third quarter of 2023.

All organic, primarily resulted from AIDS.

Speaker Change: strong demand for our cloud DevOps AI services along with continued strong demand for our services in the defense sector and B, increase in billable days in the Israeli market accounting for 11% due to the Jewish holiday season of Passover taking place in April of the second quarter

Speaker Change: North America delivers sequential mid-single digit growth of 1.5% with client sentiment in the U.S. remaining stable, with no significant changes.

Speaker Change: Despite these difficulties working against us, we continue to plow forward with our worldwide dedication and confidence that we can continue to execute on sales of our world-class suite of products and in providing related services.

Speaker Change: And while some of our U.S. customers are facing macro and company-specific challenges, the sequential improvement in our top-line results reflect that the vast majority of our customers continue to value our unique proposition and resume to engage us to an increasing degree as a preferred partner for innovative digital transformation initiatives.

Speaker Change: Furthermore, even in this challenging environment, Arnon Gap operating margin for the first nine months ending September 30, 2024, held strong at approximately 13.4% of our revenue, 20 basis points higher compared to the corresponding period last year.

Speaker Change: We believe that our ability to maintain the profitability of our operations will keep our balance sheet strong and will enable us to invest in order to drive revenue growth in the future.

Speaker Change: 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 our innovative software solutions and services.

Speaker Change: We similarly continue to see excellent execution by our team. Setting aside the factors that slow us down,

Speaker Change: Our revenues in North America, which were 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 realm of cloud technology and managed services.

Speaker Change: We have made it our vision to help businesses choose their best cloud migration strategy and avoid the pitfalls associated with moving to the cloud.

We apply industry-leading best practices.

Speaker Change: to ensure that our clients' cloud deployments meet the highest standards of performance, scalability, security, and reliability.

Speaker Change: Our suite of managed cloud services is designed to address critical aspects of cloud operations and client business continuity, enabling our clients to focus on their core competences.

Speaker Change: while leaving the management and optimization of their cloud and IT system environments to us.

Speaker Change: We have approximately 430 satisfied customers across various industries and geographies who trust us with their cloud journey. We are committed to delivering excellence, innovation and value to our customers and we are confident that we can help them achieve their cloud goals.

Speaker Change: 0.9 million or 1.5% higher compared to Q2 of 2024. Revenues in North America accounted for 41% of our overall quarterly revenues.

Speaker Change: Revenues from our Israeli operations amounted to $64.7 million, up by 18.1% compared to $54.8 million reported on the same period last year.

Speaker Change: This demonstrates our strong performance in the region and reconfirms our long-term strategic decision to focus on mature, stable and technology-driven sectors.

Speaker Change: which allows us to fully compensate for the slowdown we experienced from the second half of 2023 in North America. Revenues from our Israeli operation accounted for 45% of our overall quarterly revenues.

Speaker Change: Turning to profitability, a gross margin for the third quarter of 2024 amounted to 28.7% of revenues, or $41 million, compared to 29.4% in the corresponding quarter of 2023, or $38.1 million for the same period last year.

Speaker Change: On a nine-month basis, our gross margin for the first nine months of 2024 amounted to 29.1%, or $119.4 million, down 20 basis points from 29.3% in the same period last year.

Speaker Change: The breakdown of our gross profit mix for the nine-month period of 2024 was approximately 42% related to our software solutions and 58% related to our professional services.

Speaker Change: compared to $1.6 million of interest expenses recorded in the same quarter last year, related to a total financial debt of $88 million. The decrease in our financial expenses mainly resulted from continued repayment of debt.

Speaker Change: Net income attributable to not controlling interest, as our business combination model occasionally relies 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.

Speaker Change: Non-GAAP net income attributed to non-controlling interest increased to $2.4 million, compared to $2 million for the same period last year.

Speaker Change: Arnon Gapnet's income for the third quarter increased by 6.9% to $11.1 million or $0.23 per fully diluted share, compared to $10.4 million or $0.21 per fully diluted share in the same period last year.

Speaker Change: Turning now to the balance sheet, as of September 30, 2024, cash and cash equivalents and short-term bank deposits amounted to approximately $99.7 million, compared to $106.7 million as of December 31, 2023.

Speaker Change: Turning to our guidance, we are raising the lower end of our 2024 Annual Revenue Guidance, reflecting continued strong momentum for the remainder of the year and a positive outlook. We now anticipate full year 2024 revenue to be in the range of $544 million to $550 million.

Speaker Change: For the fourth quarter, we are projecting revenue between $134 million and $140 million, with a midpoint of $137 million. This represents a 9.2% increase compared to $125.5 million in the same period last year.

Speaker Change: It is important to emphasize that the projected fourth quarter revenue is expected to be lower than the third quarter revenue for 2024 solely due to the reduction in billable days.

Speaker Change: This reduction is the result of the timing of the Jewish New Year holidays Rosh Hashanah and Sukkot, which this year occurred entirely in October, reducing the number of billable days by 5.5 days or 8.3% of revenues.

Speaker Change: compared to the third quarter of 2024 and by three billable days compared to the same period last year. In 2023, part of these holidays fell in September and part in October, spreading their impact across two quarters.

Speaker Change: Similarly, in North America, billable days are expected to decrease by two billable days due to the Thanksgiving and Christmas holidays consistent with 2023.

Speaker Change: I will now turn the call over to the operator for questions.

Speaker Change: 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. Please stand by while we poll for your questions.

Speaker Change: The first question is from Tavi Rosner of Barclays. Please go ahead.

Tavi Rosner: local weakness here and there. Is it in the pushback that you're getting generally a longer cell cycle, i.e., we're very much interested, but...

Tavi Rosner: Let's discuss in a couple of months, and is there anything else? And I guess, is there any specific segments in your end market that are more receptive than others?

Speaker Change: I think the two countries will continue to see from the fourth quarter of 2024 till today we see our U.S. operation in a pretty much stagnant state.

Speaker Change: with a very small increase, although we get some good signs for the fourth quarter, but we prefer to remain cautious.

Speaker Change: Understood. So it's broadly speaking, right? It's not a specific segment or anything. It's just in general that's the sense that you're getting from your client base.

Speaker Change: to cloud services, and so on and so forth. So in the Israeli market, we see the opposite.

In the U.S. we work predominantly with Fortune 500.

The minute the interest went up...

Speaker Change: They all either freeze projects or cut some of the staff working on the project. So, we suffered at the end of 2023, we suffered from reduction.

Speaker Change: in some of the projects, then it stabilized and now we see some first signs, first positive signs for Q4.

Speaker Change: In the rest of the world, you know, we did pretty well and we covered for the US and hopefully in Q4 we'll be able to show growth again in the US.

Great. Thank you, guys. That's all for me.

Speaker Change: Hi everyone, it's Kate Kronstein on for Maggie. Last quarter you guys sounded pretty positive on the pipeline, so what can you tell us about how some of those large deals you've signed recently are progressing?

Speaker Change: U.S. and the rest of the world, so 60% of our business is doing good and growing, and with high single-digit or low double-digit growth. And the U.S. market currently is stable, but with good signs for growth.

Speaker Change: Okay, great. Thank you. That's helpful. And then just one more for me. I know you kind of hit on this with the first question, but is there any additional detail you can share about the performance of your U.S.-based blue chip customers that are in the professional services space?

You were cut off, can you repeat the question?

Speaker Change: I know you kind of hit on this with the first question, but can you provide any additional detail about the performance of your U.S.-based Blue Chip customers in the professional services space?

Speaker Change: I can say that during 2023, second half, due to the raise of the interest, most of them were cutting, let's say, up to 10%.

Speaker Change: Except for CVS that went into this struggle with the merger with Aetna, we're cutting a lot of projects, so we suffered quite a bit from CVS.

We believe that with the recovery of the U.S.,

We can be back on track and show night growth.

Okay, great. Thank you both.

Speaker Change: 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 more questions.

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

Mr. Berenstin: Thank you everyone for joining our call again and we sure hope that we can bring you some good news during Q4. Thank you very much.

Speaker Change: Thank you. This concludes the Magic Software Enterprises LTD 2024 third quarter results conference call. Thank you for your participation. You may go ahead and disconnect.