Magic Software Enterprises Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 21, 2025

There are 3 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprise twenty twenty five First Quarter Financial Results Conference Call. At this time, all participants are at present in listen only mode. A brief question and answer session will follow the formal presentation. For operator assistance during the conference, please press 0.

Operator

As a reminder, this conference is being recorded. With us on the line today are Magic's CEO, Mr. Guy Bernstein Magic's CFO, Mr. Asaf Bernstein and Magic's VP of Technology and Innovation, Mr. Yuval Abi.

Operator

Magic's first quarter twenty twenty five 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 otherwise. Also, during the course of today's call, management will refer to non GAAP financial measures.

Operator

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's website. I will now turn the call over to Mr. Asaf Bernstein, CFO of Magic Software. Please go ahead.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today as we report our first quarter twenty twenty five financial results. During the call today, I will review highlights from our first quarter results and provide an overview of our outlook. Revenue in the first quarter of twenty twenty five increased to a first quarter all time record of $147,300,000, up approximately 12.7% from the first quarter of twenty twenty four. This quarter showcased solid execution with Israel delivering year over year double digit growth of 17.7% and sequential growth of 11.3% with more than 80% organic, primarily resulted from strong demand for our cloud, DevOps, and AI services along with continued strong demand for our services in the defense sector. Our North American operation increased by approximately 11.1% resulting from the addition of Theory Inc acquired in April 2024.

Speaker 1

Excluding Theory, revenues in North America remained stable. And while The U. S. Market has yet to show a full recovery, we anticipate positive momentum fueled by economic improvement. We are confident that we are on the right path and momentum is building.

Speaker 1

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 providing related services. Our AI, low code, no code and service offerings are critical as customers continue to automate and digitize their systems and products. And while some of our US customers were and may still be facing macro and company specific challenges, the improvement in our top line results reflects 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. As we look at our business, we see that we continue to leverage our digital technologies and cloud based platform to create strong demand for our innovative software solution and services. We similarly continue execution by our team together with exciting opportunities and growth potential in the dynamic realm of cloud technology, managed services and AI.

Speaker 1

At Magic, we are redefining how organization harness generated AI As AI transforms industries and everybody's in everyday life, we are leading the charge, revamping our internal operations, reimagining our products and delivering next generation services to our customers. With over 200 projects across more than 20 industries and a dedicated team of more than 30 specialists, we provide a one stop shop for successful Gen AI adoption. From proof of concept to full scale production, our customers enjoy a 62% success rate, dramatically outperforming the industry average of just 12%, backed by more than 100 AI events and more than 10 strategic partnerships. We empower organizations in finance, health care, government, defense, and manufacturing to accelerate innovation, boost productivity, and stay ahead in the AI era. Adisa consistently ranks among the top 10 countries in the world in terms of private investment and r and d in the field of AI, and about 25% of Israeli high-tech companies are AI companies, we as well see AI and especially generative AI together with our skill set and experience as a great opportunity to increase our offering.

Speaker 1

On top of this, the Israeli government launched a multiyear government of AI leadership and independence where Matrix IT has also a very big footprint. We believe that once and if they contemplate the merger with Matrix IT, which we announced back in March, is concluded, together, we will be a stronger a strong player in the public sector and other sectors in Israel. Proceeding to address our first quarter geographic revenue breakdown. In the first quarter of twenty twenty five, our revenues in North America increased by 11.1% from 59 $52,900,000 to 58,700,000.0. Excluding m and a, our revenue in North America remained unchanged and accounted for 40% of our overall quarterly revenue.

Speaker 1

Revenue from the Israel operation amounted to $69,900,000 up by 17.7% compared to 59,300,000.0 reported on the same period last year. These demonstrate our strong performance in the region and reconfirms our long term strategic decision to focus on mature, stable and technology driven sectors. Revenue from our Israeli operations accounted for 47% of our overall quarterly revenue. Turning to profitability. Our non GAAP gross margin for the first quarter of twenty twenty five was 28.5% of revenues, amounting to 41,900,000.0.

Speaker 1

This compares to a gross margin of 29.3% or 38,300,000.0 recorded in the corresponding quarter of 2024. The fluctuation in our gross margin is primarily attributable to the composition of our revenue mix and the timing of renewals of our 10 based software license agreement. In the current fiscal year, these renewals are predominantly scheduled for the fourth quarter and to a lesser extent, the third quarter, in contrast to the first and second quarters of the prior year. The breakdown of our revenue mix for the first quarter of twenty twenty five was approximately 17% related to our software solutions with a gross margin of approximately 6283% related to our professional services with a gross margin of approximately 21.5%. This is compared to 18% related to our software solutions with a gross margin of approximately 6482% related to our professional services with a gross margin of approximately 22% in 2024 as a whole.

Speaker 1

Our non GAAP operating income for the first quarter of twenty twenty four increased by 1.9% to $18,500,000 compared to 18,500,000.0 in the same period last year. Financial expenses. During the first quarter, we had financial expenses of $600,000 compared to 1,500,000.0. The decrease in our financial expenses was mainly attributed to the continued decrease of our overall financial debt during 2024 and in the first quarter of twenty twenty five from 78,000,000 as of 03/31/2024 to 56,000,000 as of 03/31/2025. Net income attributed to noncontrolling interest As our business combination model occasionally relies 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.

Speaker 1

Non GAAP net income attributed to controlling interest increased to 2,400,000.0 compared to 1,600,000.0 for the same period last year. Our non GAAP net income for the first quarter increased by 8.3 percent to $12,200,000 or 25¢ per fully diluted share compared to 11,300,000.0 or 23¢ per fully diluted share. Turning now to the balance sheet. As of 03/31/2025, cash and cash equivalents and short term bank deposits amounted to approximately $105,000,000 compared to 112,000,000.8 as of 12/31/2024. Our total financial debt as of 03/31/2025 amounted to approximately $56,300,000 compared to 59,300,000.0 as of 12/31/2024.

Speaker 1

On 01/08/2025, in accordance with our dividend policy, we paid our shareholders a cash dividend of $16,100,000 or 32.7¢ per share for the second half of twenty twenty four. Altogether, these two payments accounted for 75% of our 2024 distributable profits. Cash flow from operating activities for the first quarter of twenty twenty five amounted to $14,900,000 compared to 27,700,000.0 in the corresponding period of 2024. For the twelve month period ended 03/31/2025, cash flow from operating activities totaled $62,100,000 compared to $74,800,000 for the year ended 12/31/2024. The decline in our first quarter cash flow from operating activities primarily reflect our increased investment in working capital to support our revenue growth trajectory.

Speaker 1

This is particularly evident in our record setting top line performance with first quarter revenues reaching an all time high. These dynamics do not reflect the deterioration in our underlying performance. On the contrary, both operating income and net income increased compared to the same period last year. We expect cash conversion to normalize over the coming quarters. Turning to our guidance for 2025.

Speaker 1

We continue to observe healthy demand across our market and are building a strong and growing pipeline that supports our expectation for sustained growth throughout the year. Accordingly, we reiterate our full year 2025 revenue guidance in the range of $593,000,000 to $6.00 $3,000,000 reflecting an anticipated year over year growth of 7.3 to 9.1%. Looking ahead to the second quarter, we wish to highlight a calendar driven operational factor. Due to the timing of the path of a holiday in 2025, the second quarter will include approximately 4.5 fewer billable days compared to the first quarter, equivalent to a reduction of about 7% in the time and material billable capacity in our Israeli operation. These dynamics represent a temporary headwind to operational activity in the period.

Speaker 1

While the precise impact on the financial results may vary and could be partially mitigated by other aspects of our business performance, we believe it is important to acknowledge this factor in the context of our ongoing operation. In conclusion, I would like to reiterate the announcement made in March regarding the signing of a memorandum of understanding to enter into a negotiation with the contemplated merger of Magic into Matrix. This proposed transaction represents a significant inflection point in our corporate journey, one that holds the potential to be transformative for both organizations. The contemplated merger is expected to combine the strength of two well established technology leaders, creating a more diversified and resilient global IT service provider. The command the combined entity will possess enhanced capabilities to serve a broader range of customers across geographies and industries.

Speaker 1

Faster accelerated innovation and deliver sustainable long term value to shareholders. We are currently advancing through the execution phase of the transaction and anticipate its completion during the first quarter of twenty twenty five, subject to the satisfaction of customary closing conditions, including the receipt of all necessary regulatory approval. Following completion, we believe the merged entity will be strategically positioned to broaden its customer base, deepen its technology offerings and expand its market presence. We remain confident in the strategic rationale behind this initiative and are energized by the opportunity we present as we continue to pursue long term growth and value creation. I will now turn the call over to the operator for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press 1. If you wish to answer your request, please press 2. The The first question is from Chris Reimer of Barclays.

Operator

Congratulations

Speaker 2

on a strong quarter. I was wondering if you could comment. You mentioned on the press release and in your comments, indications that momentum is changing in The U. S. And there may be some initial coming back to the table.

Speaker 2

Can you give a little color on what exactly you're seeing? Is that new customers? Is that current customers expanding a little bit? Just anything helpful.

Speaker 1

Thinking more as if we see and, again, this was basically, we were influenced by existing customers and what we currently see, and we have around 400 customers in the in The US market. So when you look at the when you look at most of them, especially as the bigger bigger part of our customers, the ones that account for the significant portion of our business, then we see either improvement or we continue to see some segment segments in the operation. So in that aspect, after, you know, experiencing in second half of twenty twenty three, a significant reduction in the operation. And after now, we see that we have four consecutive quarters that were previous segments and now first quarter that we see a change, and we're starting to see an up you know, rising deals flowing in, we see it as a as a positive sign to continue the expansion during the second half of the of the year.

Speaker 2

Got it. And operating margin this quarter just a little bit lower than historically. Is that due mainly to higher higher higher payrolls, or is there any other trends working there?

Speaker 1

No. As you as you know, 18 17 to 18% of our business is based on software, software solution, where we sell term based licenses. Between the years, there is, you know, the timing different timing when of the renewal of such transaction, those that we sell to the more large customers. This indeed in in 2025, q '3, to a lesser extent, but to more extent and more significantly, q four, as I mentioned, will have the significant amount of renewals compared to 2024 where it was more concentrated during the first and the second quarter. So that, you know, reduces a bit of our gross margins at the beginning of the year, which I anticipate to continue improving and to be able to over 29%.

Speaker 1

So, you know, something between the 29, 20 one point one, 20 one 29.2% gross margin.

Speaker 2

Got it. Thank you. That's it for me.

Operator

If there are any additional questions, please press 1. If you wish to cancel your request, please press 2. Please stand by while we poll for more questions. There are no further questions at this time. Mr.

Operator

Bernstein, would you like to make a concluding statement?

Speaker 1

That's all. Thank you, everyone, for joining one more call. We hope to be to bring you some more good news in the next quarter. Thank you very much.

Operator

Thank you. This concludes the Magic Software Enterprises Ltd twenty twenty five first quarter results conference call. Thank you for your participation. You may go ahead and disconnect.

Powered by Quartr

Key Takeaways

  • Record Q1 revenue: Magic reported $147.3 million in first-quarter 2025 revenue, up 12.7% year-over-year, driven by 17.7% growth in Israel (80% organic) and an 11.1% increase in North America including the Theory Inc. acquisition.
  • Strong AI and cloud momentum: Demand for cloud, DevOps and AI services remains robust, with over 200 generative AI projects across 20 industries and a 62% success rate versus the 12% industry average.
  • Profit and margin trends: Non-GAAP net income rose 8.3% to $12.2 million ($0.25 per share) and operating income edged up to $18.5 million, while gross margin dipped to 28.5% due to license renewal timing.
  • Solid balance sheet: Cash and equivalents stood at $105 million against $56 million in debt, and Q1 operating cash flow was $14.9 million (impacted by working capital), with a $16.1 million dividend paid.
  • Reiterated guidance and strategic deal: The company maintained full-year 2025 revenue guidance of $593 million–$603 million (+7.3%–9.1%), noted a temporary Q2 billing headwind from fewer Israeli workdays, and is advancing a proposed merger with Matrix IT to bolster global scale.
A.I. generated. May contain errors.
Earnings Conference Call
Magic Software Enterprises Q1 2025
00:00 / 00:00