Magic Software Enterprises Ltd.

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. 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 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 Bernstein, CFO of Magic Software. Please go ahead.

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 outlooks. Revenue in the first quarter of 2024 increased $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 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. 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 teams. Setting aside the factors that slowed us down 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 clients' business continuity, enabling our clients to focus on their core competencies, while leaving the management and optimization of their cloud and IT system environments 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 excellence, 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 result, in the third quarter of 2024, our revenues in North America amounted to $59.3 million, which approximately... 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 on 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 revenues. 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 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. The breakdown of our revenue weeks for the nine-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 nine-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 increased 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 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. Non-GAAP net income attributable to non-controlling 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 nine-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 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. Similarly, in North America, billable days are expected to decrease by two 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. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Please stand by while we poll for your questions. The first question is from Kavi Rosner of Barclays. Please go ahead.