Magic Software Enterprises Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises 2024 First Quarter Financial Results Conference Call. Magic's first 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. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. With us on the line today are MAGIC CEO, Mr. Guy Bernstein, MAGIC CFO, Mr. Asaf Bernstein, and MAGIC CTO, Mr. Yuval Avi. 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. 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 Bernstein, CFO of Magic Software. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us today as we report our first quarter 2024 financial results. During the call today, I will review highlights from our first quarter results and provide an overview of our outlook. Revenues in the first quarter of 2024 decreased to $130.7 million, down approximately 8.2% from the first quarter 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 rates for the three months ended March 31, 2023, Revenues for the first quarter of 2024 would have decreased by approximately 6.4% compared to the first quarter of 2023 to $133.3 million, $2.6 million higher than our reported revenue figure for the quarter. On a sequential basis, revenues for the first quarter increased by 4.1%. As we described in the third quarter results conference call on November 14, 2023, the reduction in our revenues was caused primarily by two 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 $2.56 million for the first quarter. And a substantial and unexpected decline in the demand for professional services for several of our important U.S.-based blue-chip customers which without any advance notification and due to internal reasons unrelated 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 lies the ongoing challenging macroeconomic climate, which did not help our ability to overcome the primary adverse factors that weigh against us. 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 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. Furthermore, even in this challenging environment, our non-GAAP operating margin held strong at approximately 13.9%. of our revenues, 90 basis points higher compared to the margin during the first quarter of 2023 and 50 basis points higher compared to the full year of 2023. 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 initiative software solutions and services. We similarly continue to see excellent execution by our teams. Setting aside the factors that slow 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 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 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 operation and clients' business continuity, enabling our clients to focus on their core competencies. while leaving the management and optimization of their cloud and IT systems environment to us. Our services include NOC as a service, SOC as a service, DevOps as a service, FinOps as a service, and much more. What sets 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 professionals leverages their expertise across the three major cloud platforms, 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. 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 stock market presence and reputation. Proceeding to address our first quarter financial results, In the first quarter of 2024, our revenues in North America amounted to $52.3 million, which is approximately $19.9 million or 27.4% lower compared to Q1 of 2023, and $1.4 million or 2.7% higher compared to Q4 of 2023. Revenues in North America accounted this quarter for 40% of our overall quarterly revenues. Revenues from our Israeli operations amounted to 59.2 million, up by 11.1%, compared to 53.3 million 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. On a constant currency basis, calculated based on average currency exchange rates for the three months ended March 31, 2023, Revenues for the first quarter of 2024 of our Israeli operation would have increased by additional $2.1 million year-over-year to $61.3 million, 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 allows us to partially compensate for the current slowdown we experience in North America. The revenues from our Israeli operations accounted for 45% of our overall quarterly revenues. Turning now to profitability, despite continued currency handwind and the slowdown in the U.S.-based revenues as of the second half of 2023, we were nevertheless able to increase our gross margin for the first quarter of 2024 by 110 basis points to 29.3% of revenues, or $38.3 million, compared to 28.2% in the corresponding quarter of 2023, in which it was $40.1 million. The breakdown of our revenue mix for the first quarter of 2024 was approximately 90% 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%, same as in 2023 as a whole. The breakdown of our gross profit mix for the first quarter 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 first quarter of 2024 fell on an absolute basis while increasing on a percentage basis compared to the corresponding period of 2023. It was $18.1 million compared to $18.5 million in the same period last year. This reflects an operating margin of 13.9% for the quarter compared to 13% in the first quarter of 2023. On a constant currency basis, calculated based on average currency exchange rates for the three-month period ended March 31, 2023, non-GAAP operating income for the first quarter of 2024 would have reached $18.5 million, same as it was in the first quarter of 2023. Financial expenses. During the quarter, we had financial debt interest expenses of $1.5 million related to our $80 million financial debt, compared to $0.7 million of interest expenses recorded in the same quarter last year related to a total financial debt of $50 million. The increase in our financial expenses mainly resulted from the increase in our overall debt during 2023, and in our interest rates level, as the majority of our debt bears variable interest rates, which has been subject to higher interest rates 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 attributed to non-controlling interest slightly decreased to $1.6 million last compared to $1.9 million for the same period last year. Our non-GAAP net income for the first quarter decreased by 10.4% to $11.3 million, or $0.23 per fully diluted share, compared to $12.6 million, 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 million, compared to $107 million as of December 2023. Our total financial debt as of March 31, 2024, amounted to $78 million, compared to $81 million as of December 2023. Our cash flow from operating activities was $27.7 million during the first quarter of 2024, compared to $18.8 million in the same period of 2023, and $12.4 million in the fourth quarter of 2023. 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 of or in the aggregate amount of approximately $10 million, reflecting approximately 70% of our net income for the second half of 2023. The dividend will be paid on July 11, 2024, to shareholders of record as of June 27, 2024. Finally, today, we are reiterating our 2024 guidance. We expect 2024 full-year revenue in the range of $540 million to $550 million. 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 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. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Maggie Nolan of William Blair. Please go ahead. Maggie? Hi, guys.