Magic Software Enterprises Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 16, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises 20 24 First Quarter Financial Results Conference Call. Magic's Q1 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. With us on the line today are Magic's CEO, Mr. Guy Bernstein Magic's CFO, Mr.

Operator

Asaf Bernstein and Magic's CTO, Mr. Yuval Lavi. Before we start, I would like to remind everyone that 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.

Operator

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 the Investor Relations section of the company's website. I will now turn the call over to Mr. Assaf Bernstein, CFO of Magic Software.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining us today as we report our Q1 2024 financial results. During the call today, I will review highlights from our Q1 results and provide an overview of our Revenues in the Q1 of 2024 decreased $130,700,000 down approximately 8.2% from the Q1 of 2023. As we already mentioned in past calls, the effect of the currency fluctuation on our revenues was still and is still significant compared to the corresponding quarters of last year. On a constant currency basis calculated based on the average currency exchange rate for the 3 months ended March 31, 2023, revenues for the Q1 of 2024 would have decreased by approximately 6.4% compared to the Q1 of 2023 to $133,300,000 $2,600,000 higher than our reported revenue figure for the quarter. On a sequential basis, revenues for the Q1 increased by 4.1%.

Speaker 1

As we described in the Q3 results conference call on November 14, 2023, the reduction in our revenues was caused primarily by 2 factors, currency headwind caused by the significant deterioration of the new Israeli shekel relative to the U. S. Dollar in 2023, reaching 3.6% for this quarter, which has hurt our Israeli shekel denominated operation by $2,560,000 for the Q1 and a substantial and unexpected decline in the demand for our professional services for several of our important U. S.-based blue chip customers, which without any advanced certification and due to internal reasons are related to our software services decided during the second half of the third quarter of 2023 and going forward to immediately suspend significant parts of their active time and material based projects. Behind the results also lie the ongoing challenging macroeconomic climate, which did not help our ability to overcome the primary adverse factors that weigh against us.

Speaker 1

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. Our AI, low codeno code and services offerings are critical as customers continue to automate and digitize their systems and products 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 a decreasing degree as a preferred partner for innovative digital transformation initiatives. Furthermore, even in this challenging environment, our non GAAP operating margin held strong at approximately 13.9 percent of our revenues, 90 basis points higher compared to the margin during the Q1 of 2023 and 50 basis points higher compared to the full year of 2023.

Speaker 1

This shows the inherent scalability and the stability of our business model and our ability to maintain and even improve our operating margin, whether our revenues rise or fall. 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. As we look at our business, we see that we continue to leverage our digital technologies and cloud based platforms create strong demand for our initiative software solutions and services. We similarly continue to see excellent execution by our teams. Setting aside the factors that slowed down 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.

Speaker 1

We continue to see exciting opportunities and growth potential in the dynamic realm of cloud technology and managed services. We have made it our vision to help businesses choose the best cloud migration strategy and avoid the pitfalls associated with moving to the cloud. We understand that the cloud is not just a technology shift, it's a transformative journey that requires expertise, dedication and innovation. We apply industry leading best practices that our clients' cloud deployments meet the highest standard of performance, scalability, security and reliability. Our suite of managed cloud services is designed to address critical aspects of cloud operation and client business continuity, enabling our clients to focus on their core competencies, while leading the management and optimization of their cloud and IT systems environment to us.

Speaker 1

Our services include NOC as a service, SOC as a service, DevOps as a service, FinOps as a service and much more. What's at Magic apart is its deep domain expertise, a customer centric approach and a proven track record of delivering successful cloud migrations and transformations. Our team of seasoned professional leverages their expertise across the 3 major cloud platform, AWS, GCP and Azure, and we are well equipped to provide our customers with the optimal solution tailored to their unique needs. We have over 350 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 1

Lastly, as you know, GenAI is a game changer in the cloud industry and the leading cloud providers, AWS, Azure and GCP are investing heavily in it. We at Magic are strategically positioned to leverage their solutions and offer them to our customers with our value added services and expertise. Moreover, the cloud vendors are partnering with us to implement their solutions to customers recognizing our strong market presence and reputation. Proceeding to address our Q1 financial results. In the Q1 of 2024, our revenues in North America amounted to $52,300,000 which is approximately 19,900,000 or 27.4 percent lower compared to Q1 of 2023 and $1,400,000 or 2.7 percent higher compared to Q4 of 2023.

Speaker 1

Revenues in North America accounted this quarter for 40% of our overall quarterly revenues. Revenues from our Israeli operations amounted to $59,200,000 up by 11.1% compared to $3,300,000 reported in the same period last year. The impact of the continued devaluation of the new Israeli shekel versus the U. S. Dollar reduced the increase recorded in our dollar reported Israeli market revenues.

Speaker 1

On a constant currency basis, calculated based on average currency exchange rate for the 3 months ended March 31, 2023, revenues for the Q1 of 2024 of our Israeli operation would have increased by additional $2,100,000 year over year to $61,300,000 reflecting a year over year growth of 15% in real terms. This demonstrates our strong performance in the region and reconfirms our long term strategic decision to focus on mature, stable and technology driven sectors, which allowed us to partially compensate for the current slowdown we experienced in North America. The revenues from our Israeli operations accounted for 45 percent of our overall quarterly revenues. Turning now to profitability, despite continued currency headwind and the slowdown in the U. S.

Speaker 1

Based revenues as of the second half of twenty twenty three, we were nevertheless able to increase our gross margin for the Q1 of 2024 by 110 basis points to 29.3 percent of revenues or $38,300,000 compared to 28.2% in the corresponding quarter of 2023, in which it was $40,100,000 The breakdown of our revenue mix for the Q1 of 2024 was approximately 90% related to our software solution with a gross margin of approximately 64% and 81% related to our professional services with a gross margin of approximately 21% same as in 2023 as a whole. The breakdown of our gross profit mix for the Q1 was approximately 42% related to our software solutions and 58% related to our professional services, same as in 2023 as a whole. Our non GAAP operating income for the Q1 of 2024 fell on an absolute basis, while increasing on a percentage basis compared to the corresponding period of 2023. It was $18,100,000 compared to $18,500,000 in the same period last year. This reflects an operating margin of 13.9% for the quarter compared to 13% in the Q1 of 2023.

Speaker 1

On a constant currency basis calculated based on average currency exchange rates for the 3 month period ended March 31, 2023, non GAAP operating income for the Q1 of 2024 would have reached $18,500,000 same as it was in the Q1 of 2023. Financial expenses. During the quarter, we had financial debt interest expenses of $1,500,000 related to our $80,000,000 financial debt compared to $700,000 of interest expenses recorded in the same quarter last year related to a total financial debt of $50,000,000 The increase in our financial expenses mainly resulted from the increase in our overall debt during 2023 and in our interest rate level as the majority of our debt bears variable interest rate, which has been subject to higher interest rate in Q1 2024 compared to the same period last year. Net income attributed 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 their managerial role in such entities, we are allocating a portion of our net income to these minority shareholders. Non GAAP net income attributable to non controlling interest slightly decreased to $1,600,000 compared to $1,900,000 for the same period last year.

Speaker 1

Our non GAAP net income for the Q1 decreased by 10.4 percent to $11,300,000 or $0.23 per fully diluted share compared to $200,600,000 or $0.26 per fully diluted share in the same period last year, mainly resulting from the increase in our financial expenses resulting from increased level of debt and increased bank interest rates. Turning now to the balance sheet. As of March 31, 2023, cash and cash equivalent and short term bank deposits amounted to approximately $126,000,000 compared to $107,000,000 as of December 2023. Our total financial debt as of March 31, 2024 amounted to $78,000,000 compared to $81,000,000 as of December of 2023. Our cash flow from operating activities was $27,700,000 during the Q1 of 2024 compared to $18,800,000 in the same period of 2023 and $12,400,000 in the Q4 of 2023.

Speaker 1

In our press release issued today, we announced that Magic Board of Directors has declared a semi annual cash dividend in the amount of $0.204 per share or in the aggregate amount of approximately $10,000,000 reflecting approximately 70% of our net income for the second half of twenty twenty three. The dividend will be paid on July 11, 2024 to shareholders of record as of June 20 7, 2024. Finally, today we are reiterating our 2024 guidance. We expect 2024 full year revenue in the range of $540,000,000 to $550,000,000 I will now turn the call over to the operator for questions.

Operator

Thank you. The first question is from Maggie Nolan of William Blair. Please go ahead. Maggie?

Speaker 2

Hi, guys. Hi, this is Jesse on for Maggie Nolan. Thanks for taking our questions. We had a few for you today. So first to start, could you talk about how this quarter compared to your expectations and what gives you confidence in achieving full year guidance?

Speaker 1

I think the first of all, yes, it met our expectation. We need to remember that still, although it's on a reduced level, we still have around 70 people. At the highest level, it was 200 people back in October, November. Now it went down in December to around 120 and now 70 people that are still on reserve duty. We saw, except for I would say, if we compare it to last year, except for the U.

Speaker 1

S. Market, though we saw improvement compared to Q4, we in the Israeli market, we see a significant improvement and continued improvement. We also saw that in 2023, 15% on a constant currency basis year over year. We see our backlog, which is increasing. We see strong demand for our services and good execution by our teams.

Speaker 1

And with that, we feel confident that we will meet the guidance that we provided for 2024. We also mentioned that we expect 2024 to act as that in a way that the second half would be much stronger than the first half and 80% of the growth will come from during the second half rather than from the first half. So this is something that we communicated also in prior calls.

Speaker 2

That's great. And then one of my follow-up questions was on the execution you're seeing. Could you elaborate on just the execution you're seeing? Is there anything going on in the sales or delivery organization that you're proud of?

Speaker 1

I think that basically, things are working in plan. Again we did some adjustment in the U. S. Operations of course because of the situation that we currently face with our customers there. But in the Israeli market, of course, we push on sales and we see the contribution and the return on our investment in terms of the revenues that we record and that we explained to you about.

Speaker 2

Okay. That makes sense to me. And then the last one we had, we saw one of your subsidiaries acquired a staffing and technology services firm based in the United States back in April. Can you talk about the strategic decision behind the acquisition? Do you think you'll continue pivoting the business to more of a services company than a software company?

Speaker 1

I don't think it's a question of pivoting in the way that we know that the current state of the business. We have 80% of our operations, which are mainly services and 20% of the business, which is relying on mostly our technology, proprietary technology. So this is not something that we call that now we are pivoting towards services. In the U. S.

Speaker 1

Market, if you look back, you would see that we traditionally did the acquisitions there and mostly in the staffing area, we are acquiring market share. These are companies that for us are very easily to integrate with our current operations and we manage once we buy them, we manage to improve them in terms of their margins and we manage to push their business forward with the depending the regions that we are buying, but enhancing, let's say, their clients there and enhancing their operation. So this is something that we normally do and we intend to continue in doing and hopefully with the situation today, the macroeconomic situation in the U. S, perhaps we will find additional opportunities and continue to even buy more as the time progress. But this is very it all depends situation.

Operator

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

Speaker 3

Hi, thanks for taking my questions. Glad to see the reiteration of the year end guidance. I was wondering if you could give any color on the pipeline and maybe where you're seeing strengths. And then just touching on the U. S.

Speaker 3

Customers who reduced their interactions with you over last year. Do you see them coming back to the table at some point? Are there ongoing discussions? Just any color on that would be great. Thanks.

Speaker 4

Okay. So I'll relate first to the strong demand that we see here in the Israeli operation and in Europe. Definitely, we see a lot of traction around the cloud, around defense, all digital areas, it's all growing and we see a strong demand. As for the Due to the interest level somewhere beginning of last year they stopped many of the projects. I think now we saw that it was stabilized and they are starting to hire again.

Speaker 4

They are way more cautious. So as long as the interest is high, they are way more cautious. By the way, on the small businesses that we work with, we do see a strong demand. On the bigger ones, I think it will take a bit of time. But all in all, it's the reduction in force has stopped and they started to hire, but not at the same scale that we were used to.

Speaker 3

Got it. And then just touching on your AI strategy, you mentioned the partnerships with the large cloud vendors. Can you just give some color on where you're seeing AI touch the business and some potential use cases that come out of that?

Speaker 5

Okay. We see the strong change in the Gen AI sorry, the Gen AI area. I think the concept of Gen AI brought a big change to the enterprise customers and to the industry with the fact that we can actually bring a business value using this type of solution, okay. It's no longer like a long journey with hoping of a result. This is a short journey with a quick evidence of results, maybe even a failure, but then getting up again and jumping on the next iteration.

Speaker 5

And the partnership with AWS, Azure and GCP on that and we implement some of our technology in a combination with their technology, taking it into our customers. Since most of our business or a lot of our business is evolving around the data and organizational data. And since we are coming with customers that have data on prem and they are moving to the cloud, All this combination is putting us in the perfect place of actually bringing value to our customers in all different areas of it via in the cloud or on prem on their data or the cloud data. So we see it very fast happening.

Operator

Mr. Bernstein, would you like to make your concluding statement?

Speaker 4

Thank you everyone for joining the call. I'm glad that we start to see the positive shift again in our business and hopefully we'll be able to bring you some good news in the near future. Thank you.

Operator

Thank you. This concludes the Magic Software Enterprises Ltd. 20 24 1st quarter results conference

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Key Takeaways

  • Revenues for Q1 2024 fell by 8.2% year-over-year (down 6.4% on a constant currency basis) due to a strong shekel headwind and an unexpected drop in U.S. professional services demand, though sequential revenues rose 4.1%.
  • The company maintained a robust non-GAAP operating margin of 13.9%, up 90 basis points year-over-year, and improved its gross margin by 110 basis points to 29.3%, underscoring the scalability of its business model.
  • Magic’s Israeli operations grew revenues by 11.1% reported (15% on a constant currency basis), representing 45% of total revenues and partially offsetting a 27.4% decline in North America.
  • Cloud and GenAI offerings remain a strategic focus, with managed services (NOC, SOC, DevOps, FinOps) supporting over 350 customers and partnerships with AWS, Azure and GCP to deliver AI-driven digital transformation.
  • Management reiterated full-year 2024 guidance of $540–$550 million in revenues, declared a semi-annual dividend of $0.204 per share, and highlighted a strong balance sheet with $126 million in cash.
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Earnings Conference Call
Magic Software Enterprises Q1 2024
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