Magic Software Enterprises Ltd

NASDAQ:MGIC

Earnings Call Analysis

Magic Software Reports Strong Revenue Growth with Positive Outlook

In Q3 2024, Magic Software achieved $143 million in revenue, a 10.4% increase year-over-year. Israel saw robust growth at 12%, driven by high demand for cloud and AI services. North America posted stable growth of 1.5%, indicating potential for future improvement. The company raised its 2024 revenue guidance to $544-$550 million, signaling confidence despite macroeconomic challenges. Operating margins remained strong at 13.4%, up from the previous year. Scheduled for Q4, revenues are expected to range from $134 million to $140 million, affected by fewer billable days due to holiday timings【4:1†source】【4:6†source】.

Strong Revenue Growth and Strategic Focus

In the third quarter of 2024, Magic Software achieved a revenue of $143 million, marking a substantial increase of approximately 10.4% compared to the same quarter last year. A notable driver of this growth was the performance in Israel, which saw an impressive 12% sequential growth, primarily fueled by strong demand for cloud services, DevOps, and AI offerings, as well as an uptick in billable days influenced by the Jewish holiday season.

Challenges in the North American Market

Despite the impressive overall results, growth in North America remained subdued, with only a mid-single-digit increase of 1.5%. The client sentiment within this region is stable but cautious, as many companies are grappling with macroeconomic pressures. Although Magic Software does not currently factor in any macroeconomic improvements in their guidance, signs of potential recovery are evident.

Operating Margins and Profitability Metrics

Magic Software maintained a strong non-GAAP operating margin of around 13.4% for the first nine months of the year, showing a slight improvement of 20 basis points compared to last year. In tandem, the gross margin for Q3 stood at 28.7%, down from 29.4% a year ago. This indicates that while revenue generation is robust, profit retention may face challenges as the company navigates complex operational landscapes.

Financial Performance Beyond Revenue

Non-GAAP net income rose to $11.1 million or $0.23 per fully diluted share, reflecting a 6.9% increase from the same period last year. Financial expenses decreased significantly due to the company’s ongoing debt repayment strategy, which mitigated interest costs, thus bolstering the overall financial health of the organization.

Guidance and Expectations for Future Growth

Looking forward, Magic Software raised the lower end of its 2024 revenue guidance, now estimating full-year revenues between $544 million and $550 million. In particular, Q4 revenue projections fall in the range of $134 million to $140 million due primarily to reduced billable days resulting from the Jewish New Year holidays. This translates to a year-over-year growth of approximately 9.2% compared to $125.5 million from the previous year.

Impact of Market Dynamics on Business Strategy

The management articulated a comprehensive strategy aimed at harnessing digital technologies and cloud-based platforms to drive future demand. With approximately 430 satisfied customers, Magic is committed to delivering robust cloud services that not only address immediate business needs but also position it well for ongoing growth in the increasingly competitive cloud market.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprise 2024 Third Quarter Financial Results Conference Call. Magic's Third 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. [Operator Instructions] with us on the line today are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Berenstin; and Magic's CTO, Mr. Yuval Lavi.

Before we start, I would like to remind everyone that projections or other forward-looking statements maybe provided on this conference call. 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. 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 Berenstin, CFO, of Magic Software. Please go ahead.

[Asaf Berenstin, executive]

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 of our third quarter results and provide an overview of our outlook. Revenue in the third quarter of 2024 increased to $143 million, up approximately 10.4% from the third quarter of 2023. This quarter showcased solid execution with Israel delivering sequential double-digit growth of 12%, all organic, primarily resulted from: a, 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.

North America delivered sequential mid-single-digit growth of 1.5% with client sentiment in the U.S. remaining stable with no significant changes. While we have not yet seen material market improvement, we believe that an improving U.S. economy could serve as a catalyst for growth in our U.S. operations. Although our full year guidance does not currently account for any macroeconomic improvement, we are confident that we are on the right path and momentum is building. 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 code, no 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 an increasing degree as a preferred partner for innovative digital transformation initiatives.

Furthermore, even in this challenging environment, our non-GAAP operating margin for the first 9 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. This shows the inherent scalability and defensibility 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 to create strong demand for our innovative software solutions and services. We similarly continue to see excellent execution by our team. Setting aside the factors that slowed us 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. 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 their best cloud migration strategy and avoid the pitfalls associated with moving to the cloud. We apply industry-leading best practices to ensure that our clients' cloud deployments meet the highest standards of performance, scalability, security and reliability.

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 competencies while leaving the management and optimization of their cloud and IT system environment to us. We have approximately 430 satisfied customers across various industries and geographies who trust us with their cloud journey. We are committed to delivering excellent innovation and value to our customers, and we are confident that we can help them achieve their cloud goals.

Proceeding to address our third quarter financial results. In the third quarter of 2024, our revenues in North America amounted to $59.3 million, which is approximately $1.6 million or 2.7% higher compared to Q3 of 2023 and $0.9 million or 1.5% higher compared to Q2 of 2024. Revenues in North America accounted for 41% of our overall quarterly revenues. Revenues from our Israeli operations amounted to $64.7 million, up by 18.1% compared to $54.8 million reported in the same period last year. 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 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 revenue.

Turning to profitability. Our 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. On a 9-month basis, our gross margin for the first 9 months of 2024 amounted to 29.1% or $119.4 million, down 20 basis points from 29.3% in the same period last year. The breakdown of our revenue mix for the 9-month period of 2024 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%. The breakdown of our gross profit mix for the 9-month period of 2024 was approximately 42% related to our software solutions and 58% related to our professional services.

Our non-GAAP operating income for the third quarter of 2024, operating income increased 7.2% to $18.5 million compared to $17.2 million in the same period last year. Financial expenses, during the quarter, we had financial debt interest expenses of $1.2 million related to our $65 million financial debt 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.

Net income attributable to noncontrolling interest as our business combination model occasionally relies on keeping former shareholders in acquired entities as minority shareholders. In addition to the managerial role in such entities, we are allocating a portion of our net income to these minority shareholders. Non-GAAP net income attributable to noncontrolling interest increased to $2.4 million compared to $2 million for the same period last year. Our non-GAAP net 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.

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. Our total financial debt as of September 30, 2024, amounted to approximately $65.8 million compared to $81.2 million as of December of 2023. Our cash flow from operating activities during the 9-month period of 2024 was $49.1 million compared to $65.5 million in the same period of 2023.

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. 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. 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. 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 compared to the third quarter of 2024 and by 3 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 2 quarters. Similarly, in North America, billable days are expected to decrease by 2 billable days due to the Thanksgiving and Christmas holidays consistent with 2023.

I will now turn the call over to the operator for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Tavy Rosner of Barclays.

[Tavy Rosner, analyst]

I just wanted to talk about the demand in your end markets in general. When you talked about some local weakness here and there. Is it in the pushback that you're getting generally longer sales cycle, i.e., we're very much interested, but let's discuss in a couple of months. And -- or is there anything else? And I guess, is there any specific segment in your end market that are more receptive than others?

[Asaf Berenstin, executive]

No, I don't think it's coming from a long revenue sales cycle. I think that currently, we continue to see from the first quarter of 2024 -- from the fourth quarter of [ 2024 ] (sic) [ 2023 ] till today, we see our U.S. operation pretty much stagnant with a very small increase, although we get some good signs for the fourth quarter, but we prefer to remain cautious about it. And we believe that once macroeconomic environment will improve, now with the new elections, there is more stability and the horizon seems a little bit more clear. We hope that, that will also reflect towards the companies that we are working with, and they will come back and increase their investment in the IT.

[Tavy Rosner, analyst]

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.

[Asaf Berenstin, executive]

Only in the U.S., not in Israel. In Israel, we see a significant momentum. We see a double-digit growth quarter-by-quarter, run by the demand from DevOps and development services, to defense services that we provide, to cloud services and so on and so forth. So in the Israeli market, we see the opposite.

[Guy Bernstein, executive]

In the U.S., we work predominantly with Fortune 500. The minute the interest went up, 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 in some of the projects. Then it stabilized. And now we see some first positive signs for Q4. But in the rest of the world, we did pretty well, and we covered for the U.S. And hopefully, in Q4, we'll be able to show growth again in the U.S.

[Operator]

The next question is from Maggie Nolan of William Blair.

[Kathleen Kronstein, analyst]

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?

[Asaf Berenstin, executive]

I think you can see from the top line results that we announced today, the $143 million versus $136 million that we had in the previous quarter, that we managed to close and also execute the new transaction that came into play. I can tell you, for example, in the U.S. market, we signed new -- 24 projects with new clients during the third quarter. Not everything, of course, went into a full -- in Q3, went into recognition in full capacity. So we expect it also to overfold in Q4. But overall, as we said, if we divide our operations between U.S. and the rest of the world. So 60% of our business is doing good and growing with high single-digit or low double-digit growth. And the U.S. market currently is stable, but with a good sign for growth.

[Kathleen Kronstein, analyst]

Okay. Great. 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 professional services space?

[Asaf Berenstin, executive]

You were cut off. Can you repeat the question?

[Kathleen Kronstein, analyst]

Yes. I said 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?

[Guy Bernstein, executive]

So 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%, except for CVS that went into this struggle with the merger with Aetna and were cutting a lot of projects. So we suffered quite a bit from CVS. Then first half of 2024, we saw that it is getting stable. Q3, we saw some first signs for hiring again. And we see more for Q4. So we believe that with the recovery of the U.S., we can be back on track and show nice growth.

[Operator]

[Operator Instructions] There are no further questions at this time. Mr. Bernstein, would you like to make your concluding statement?

[Guy Bernstein, executive]

So thank you, everyone, for joining our call again and wish sure hope that we can bring you some good news during Q4. Thank you very much.

[Operator]

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.