Magic Software Enterprises Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprise 2025 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 star zero. As a reminder, this conference is being recorded. With us on the line today are Magic CEO, Mr. Guy Bernstein, Magic CFO, Mr. Asaf Bernstein, and Magic VP of Technology and Innovation, Mr. Yuval Avi. Magic's first quarter 2025 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, 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.

Thank you, Operator, and thank you, everyone, for joining us today as we report our first quarter 2025 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 2025 increased to a first quarter all-times record of $147.3 million, up approximately 12.7% from the first quarter of 2024. 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 theories acquired in April 2024. Excluding theories, revenues in North America remain 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. We continue to plow forward with our worldwide dedication and confidence that we can continue to execute on sales of our world-class tools of product 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 U.S. 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 platforms to create strong demand for innovative software solutions and services. We similarly continue to see excellent execution by our team, together with exciting opportunities and growth potential in the dynamic realm of cloud technology, managed services, and AI. At Magic, we are redefining how organizations harness generated AI. As AI transforms industries and everybody's everyday life, we are leading the charge, revamping our internal operation, 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 adoptions. 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, healthcare, government, defense, and manufacturing to accelerate innovation, boost productivity, and stay ahead in the AI era. As Israel consistently ranks among the top 10 countries in the world in terms of private investment and R&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 offerings. On top of this, the Israeli government launched a multi-year government of AI leadership and independence where Matrix IT has also a very big footprint. We believe that once and if the contemplated measure with Matrix IT, which we announced back in March, is concluded, together we will be a stronger and 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 2025, our revenues in North America increased by 11.1%, from $52.9 million to $58.7 million. Excluding M&A, our revenues in North America remained unchanged and accounted for 40% of our overall quarterly revenues. Revenues from the Israel operation amounted to $69.9 million, up by 17.7%, compared to 59.3 million reported on the same period last year. These developments have transformed performance in the region and reconcerns 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. So, in terms of profitability, Arnon Gap's gross margin for the first quarter of 2025 was 28.5% of revenues, amounting to $41.9 million. This compares to a gross margin of 29.3% of $38.3 million 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 term-based software license agreements. 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 2025 was approximately 17% related to our software solutions, with a gross margin of approximately 62%, and 83% 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 64%. and 82% related to our professional services with a gross margin of approximately 22% in 2024 as a whole. Our non-GAAP operating income for the first quarter of 2024 increased by 1.9% to $18.5 million compared to $18.1 million in the same period last year. Financial expenses. During the first quarter, we had financial expenses of $600,000 compared to $1.5 million 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 2025, from $78 million as of March 31, 2024, to $56 million as of March 31, 2025. Net income attributed to non-controlling interest, as our business combination model occasionally relies on keeping former shareholders In acquired entities of minority stakeholders, in addition to their managerial role in cash entities, we are allocating a portion of our net income to these minority shareholders. Non-GAAP net income attributed to controlling interest increased to $2.4 million compared to $1.6 million for the same period last year. Our non-GAAP net income for the first quarter increased by 8.3%. to $12.2 million or $0.25 per fully diluted share, compared to $11.3 million or $0.23 per fully diluted share. Turning now to the balance sheet. As of March 31, 2025, cash and cash equivalents and short-term bank deposits amounted to approximately $105 million, compared to $112.8 million as of December 31, 2024. Our total financial debt as of March 31, 2025, amounted to approximately $56.3 million, compared to $59.3 million as of December 31, 2024. On January 8, 2025, in accordance with our dividend policy, we paid our shareholders a cash dividend of approximately $11.6 million, or $0.236 per share, for the first half of 2024. In addition, on May 8, 2025, in accordance with our dividend policy, we paid our shareholders a half-dividend of approximately $16.1 million, or $0.327 per share, for the second half of 2024. Altogether, these two payments accounted for 75% of our 2024 distributable profits. Cash flow from operating activities for the first quarter of 2025 amounted to $14.9 million compared to $27.7 million in the corresponding period of 2024. For the 12-month period ended March 31, 2025, cash flow from operating activities totaled $62.1 million compared to $74.8 million for the year ended December 31, 2024. The decline in our first quarter cash flow from operating activities primarily reflects our increased investment in working capital to support our revenue growth trajectory. 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 quarter. Turning to our guidance for 2025, we continue to observe healthy demand across our market and are building a strong and growing pipeline that supports our expectations for sustained growth throughout the year. Accordingly, we reiterate our full year 2025 revenue guidance in the range of $593 million to $603 million. 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 Passover 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 an Israeli operation. These dynamics represent a temporary headwind to operational activity in the period. While the precise impact on the financial result 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 operations. 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 combined entity will possess enhanced capabilities to serve a broader range of customers across geographies and industries, faster accelerate 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 2025, subject to the satisfaction of customary closing conditions, including the receipt of all necessary regulatory approvals. Following completion, we believe the merge 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.

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 answer your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received.

Please stand by while we poll for your questions. The first question is from Chris Reimer of Barclays.

Please go ahead.

Hi, thanks for taking my questions, and congratulations on a strong quarter. I was wondering if you could comment. You mentioned on the press release and in your comments a indication that momentum is changing in the U.S. and there may be some initial coming back to the table. 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.

Thinking more as 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 U.S. market. So when you look at most of them, and especially at the 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 stagnant in their operations. So in that aspect, after experiencing in the second half of 2023 a significant reduction in the operation, after now we see that we have four consecutive quarters that were a pretty segment, and now first quarter that we see a change and we're starting to see an up, you know, a rising deal flowing in, we see it as a positive sign to continue the expansion during the second half of the year.

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

As you know, 17% to 18% of our business is based on software, software solutions, where we sell term-based licenses. Between the years, there is, you know, the timing, different timing of the renewal process, of such transactions, especially those that refer to the more large customers. In 2025, Q3, to a lesser extent, but to more extent, and most significantly, Q4, as I mentioned, we 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 our gross margins at the beginning of the year, which I anticipate to continue improving and to be able to over 29%, so something between the 29%, 21.1%, 29.2% gross margin. Got it. Thank you.

That's it for me.

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2.

Please stand by while we poll for more questions. There are no further questions at this time.

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

Excellent. Thank you, everyone, for joining one more call. We hope to bring you some more good news in the next one. Thank you very much.

Thank you. This concludes the Magic Software Enterprises LTE 2025 First Quarter Results Conference Call. Thank you for your participation. You may go ahead and disconnect.