Magic Software Enterprises Ltd (MGIC) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Magic Software Enterprises 2021 First Quarter Financial Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

With us on the line today are Magic's CEO, Mr. Guy Bernstein; and Magic's CFO, Mr. Asaf Bernstein; and Magic's Vice President of Technology and Innovation, Mr. Yuval Lavi.

Magic's quarterly 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 expectation 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 schedule 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 over the call 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 2021 financial results.

During the call today, I will review highlights for our first quarter result and provide an overview of our achievements.

Our first quarter results demonstrate our continued focus on supporting our existing customers and closing new deals and the continued solid execution of our priorities of top line growth as we reported 26% year-over-year growth in the quarter with sales mainly coming from the continued expansion of our business in North America and in Israel.

Our first quarter revenue totaled $107.3 million compared to $85.2 million for the first quarter last year, reflecting a year-over-year growth of 26% compared to the first quarter of 2020.

The organic revenue growth was 15.8% with the balance of 10.1% resulting from the consolidation of acquired entities, which were completed after the first quarter of 2020.

This achievement delivered a 37% increase in operating income, with operating margin reaching 14%, up from 12.9% last year.

Magic Software is a global company operating across multiple markets and offering broad IT business service portfolio.

Our strategy allows us to balance our growth, resources, investment and risk across regions and markets.

Over the past quarter, we continued to experience strong demand for our digital transformation offering.

We are currently increasing resources in order to support existing transformation projects as well as new business towards the second half of the year, while carefully managing and controlling our expenses.

In summary, our Q1 solid results validate our strategy of building a broad business portfolio to provide the foundation of Magic's continued performance and growth.

Looking ahead to 2021, since the outbreak of COVID-19, Magic has been dedicated to business continuity and mitigating the pandemic's impact on the company, while maintaining our growth momentum as life is returning to normal in many of the regions in which we operate, with employees continue to work remotely or from client site without disruption.

We are extremely proud of the success we continue to demonstrate from our organic growth.

With more than 3,000 talented employees spread globally, we have all the tools in place for continuous growth.

The disruptors of COVID-19 and the rapid industry shift to digital are driving SMBs to speed up their digital transformation project.

We are looking ahead to land new customers and expand existing customer business.

Moving to our financial results, starting with the geographical breakdown of our revenues.

During the first quarter, North America accounted for 50% of total revenue; Israel 38%; Europe 7%; and APAC and the rest of the world accounted for 5% of our first quarter revenue.

Most of our growth in absolute numbers was traditionally from North America and Israel, which continue to be our progress territory.

North America accounted for 62% of our growth in the first quarter and Israel accounted for 28% of our growth in the first quarter.

Turning now to profitability.

Our non-GAAP gross profit for the first quarter of 2021 was $31.7 million, up approximately 19% compared to $26.7 million in the first quarter of last year.

Our non-GAAP gross margin for the first quarter of 2021 decreased by 180 basis points from 31.4% in the first quarter of 2020 to 29.6% in the first quarter of 2021.

Gross margin for the first quarter of 2021 was negatively impacted by the Jewish holiday season, which took place during March versus April in the respective period last year, and the Israel election day, which together accounted for a decrease of 4.7% in the amount of billable days.

The breakdown of our revenue mix for the 3 months period of 2021 was approximately 21% related to our software solution and 79% related to our professional services compared to 22% related to our software and 78% related to our professional services in the same period last year.

The breakdown of our gross profit mix for the 3 months period of 2021 was approximately 46% related to our software solution and 54% related to our professional services compared to 45% related to our software solutions and 55% relating to our professional services in the same period last year.

Moving to operational cost.

R&D expenses on a non-GAAP basis in the first quarter of 2021 totaled $3 million, similar to our investment in the same period of last year and in the previous quarter.

Our non-GAAP operating income for the first quarter of 2021 increased 37% to $15 million compared to $11 million in the same period last year.

This reflects an operating margin of 14% for this quarter compared to 12.9% in the first quarter of 2020 and 14.6% in the fourth quarter of 2020.

Our non-GAAP tax expenses this quarter totaled $2.6 million compared to a tax expense of $1.5 million in the first quarter of 2020.

Our effective tax rate for the 3-month period of 2021 was approximately 18% compared to 19% recorded in 2020 as a whole.

We expect our effective tax rate in 2021 to be in the range of 20% and 21%.

Our non-GAAP net income for the first quarter increased 9.5% to $10.3 million or $0.21 per fully diluted share compared to $9.4 million or $0.19 per fully diluted share in the same period last year.

Turning now to the balance sheet.

As of March 31, 2021, cash and cash equivalents, short and long-term bank deposits and marketable securities amounted to approximately $100.8 million compared to $92 million in the previous quarter.

Our total financial debt as of March 31, 2021, amounted to $23 million compared to $25 million in the previous quarter.

On April 7, 2021, we paid our shareholders a cash dividend of approximately $10.3 million or $0.21 per share for the second half of 2020 and in accordance with our dividend policy.

From a cash flow perspective, we generated $15.9 million from operating activities in the first quarter.

In closing, I would like to turn to our guidance for the remainder for the 2021 year.

Given the high growth in North America and in Israel, we are revising our 2021 annual revenue guidance to a new range of $425 million to $435 million from a range of $420 million to $430 million, reflecting annual growth rate of 13.5% to 17.2%.

With that, I would like now to turn the call over to the operator for questions.

(Operator Instructions) The first question is from Maggie Nolan of William Blair.

This is Ted on for Maggie.

I wanted to follow-up on your statement about increasing resources for transformation.

So we've been hearing a lot about the war for talent and some peers in the industry are facing headwinds from wage inflation.

Could you provide an update on your hiring plans for 2021?

And any color around what you're seeing from a wage standpoint.

For us, at the end, it is based on our pipeline and projects.

So definitely, if we continue to grow, like, I don't know, 15%, 20% per annum, we need to increase forces.

It's a battle out there.

Salaries are increasing all the time.

And we are looking for creative ways to find people overseas, whether it's in India, whether it's in Eastern Europe.

We are checking all the possibilities.

But yes, it's a struggle.

All right.

That's helpful.

And then in terms of guidance, can you talk about just kind of the revenue cadence for the rest of 2021?

It sounds like maybe with that new business in the second half, it may be back half loaded?

Just any thoughts around the cadence.

I think that since we are still at the beginning of the year -- and although in Israel, it seems that we are pretty much managed to overcome the negative impact of the COVID-19, we still see some struggles in the U.S., although in the clients that we at least provide services, it's not something that impact the business or that we saw that, that reduces our backlog with them.

I think we are a little bit conservative, but -- and most likely, we will even update the revenue guidance also in the next quarter.

But it's a very strange period of time for us.

So we prefer to remain conservative.

Definitely.

What do you view as the medium-term and long-term sustainable organic growth rates for software and for professional services?

The way, I'd say, in the previous years, it was, I would say, probably between 10% and 12%, something like that, organic.

And the rest came from M&A.

I believe we can keep on doing so.

Okay.

Any thoughts regarding kind of the software piece of that organic growth rate.

I think it's the same.

We may face like a better year or a year which is less good.

But all in all, if we check it over, I would say, 5 years, you will see that it's the same.

The next question is from Tavy Rosner of Barclays.

This is [Chris Reimer] for Tavy.

Regarding operating expenses, can you give some color around expenses this quarter relating to maybe if anything was impacted still from COVID items?

Or if anything was under or over something that would be more sustainable?

Or if the levels we're seeing this quarter is sustainable going forward?

I think that what we see today -- I mean we can even see it in the results of the company, where we are doing -- the fourth quarter of every year is considered to be our strongest quarter.

And we see that in the first quarter, we started in a very strong momentum, and we are showing pretty much the same level of operation as we had in the fourth quarter.

It is something that was across the organization, on the software division and our professional service division.

I think that the level of expenses that we see today is pretty much sustainable for the near future.

Surely we benefit from the fact that employees are still working from home in kind of a hybrid model or from client side.

We don't expect this to change at least during the coming year.

I guess we will see starting from the second half of the year more events.

People will try -- will get back flying once again.

But I don't think it's something that is supposed to be material in terms of our level of operation.

Okay.

Regarding customers, where do you see demand coming from in terms of verticals?

And has there been any major changes as we move to a post-corona environment, for example, in terms of customer budgets or spend around in projects, et cetera?

I think we see across the board one sector that was a bit -- that started a bit less.

We felt some weakness with the pandemic -- was the start-up companies that we serve.

So it was -- it started with a slowdown at the beginning of the pandemic, and now it's picking up again.

So overall, we see it across the board.

Organizations are going faster towards the transformation, and we enjoy it.

And then just touching on M&A, if I can.

Have you seen anything relevant in the pipeline?

And have any of the dynamics changed maybe around valuation or competition levels?

Mostly, we see small companies -- that we swallow them like easily.

We don't have anything which is material in size.

The next question is from Asaf Barel Chandali from Oppenheimer.

Congrats on another great quarter.

Maybe just to kind of start on the updated guidance.

You mentioned that maybe there's some conservatism kind of baked in.

But obviously, if we take the 1Q run rate and we multiply it by 4 we're getting to roughly the full year guide.

So is there anything that you're seeing in 2Q that would imply any sort of sequential decline?

Any commentary you can give on how you're seeing the quarter so far.

No, we don't see any decline.

I think what we do see is that we see a strong demand, but something that we expect.

And as we said, that we are hiring just for that, is supposed to make it -- make the difference over the second half of the year.

This is why we said that for the time being we feel comfortable that it will be something very close to the upper part of our range of guidance.

And most likely, we will update it in the second -- at the end of the second quarter.

Okay.

Great.

In terms of currency impact, what was the -- if you guys have it in front of you, I didn't hear it on the call.

Let me know if I missed it.

The constant currency revenue growth.

And then what would the constant currency number be for the full year guide?

Again, it wasn't material in most -- I think except for in -- especially if you compare Q4 and the Q1, currency exchange impact was close to none, especially not material.

Versus the first quarter, it was something around $2 million in the top line, but it reduces to around a few hundred thousand dollars on the bottom line because of -- because most of the work that we do, we have a foot on the ground in the territories where we generate the projects.

So if we work in Europe, so we have people in Europe.

If we work in the state, the same.

And if we work in Israel, the same.

So the company is not exposed to exchange rate differences between its cost and the currency it's revenue is denominated.

Okay.

Great.

Yes, very clear.

Any commentary you can maybe give us on end markets, other than the health care, telco, defense, anything you guys are seeing?

I know it's a big market, and these are relatively small revenue figures for the broader kind of maybe professional services market, but do you feel you're taking share?

Any maybe kind of commentary on the competitive front.

As you said, Magic is characteristic by the fact that we don't have -- except for CVS, which is around, let's say, 13% of our revenues, we don't have a material -- another material customer.

So we spread it out in many different customers in the different sectors that we -- the sectors that we operate in.

Overall, we see stability and we see growth in the clients that we operate in.

We try to -- once we land an account, we try to expand in the different type of services that we can offer him for its -- let's call it digital journey with us.

And this is something that translated to the growth that you see.

Most of the business that we generated this quarter is very -- is construed for by existing customer base.

I think that around 60% -- I think around 50% of the growth in Q1 versus the respective period was from organic activity, as I said, around close to 16%, and most of it comes from existing clients.

So we see the demand.

We see that we have the ability to grow within the community that we land, and we stay optimistic with that.

Okay.

Great.

And then just on gross margins here.

You mentioned some onetime items that depressed the gross margin this quarter.

And obviously, year-over-year, that number is going to maybe kind of trend down slightly over time as the revenue mix shift towards professional services.

But just kind of on a normalized sustained basis, at least for '21, '22, can we assume for the rest of the year we see kind of the 22% to 23% margin for professional services and closer to 66% number for software?

That would imply around 31-ish percent.

Obviously, we've seen similar numbers in late 2020.

Just to kind of confirm, there's no kind of structural change.

There's no such a change, and the gross profit is pretty much in the area that you mentioned for the software and for the services.

I guess it will be something between the 30%.

It will be the over 30%, so something between the 30% and the 31% gross profit -- gross margin.

Okay.

Great.

That's all for me.

And again, congrats on a very strong performance.

Next question is from Kevin Dede of H.C. Wainwright.

Curious on the breakdown just by customers.

Can you give us a little bit more insight on where you're seeing the bulk of the professional services versus software?

I mean I'm sure it hasn't changed much from last year, but...

So it hasn't changed much.

Last year, it was around 22% that originated from our software division and versus 78% that was from our professional service division.

In this quarter, it was 21% and 79%.

We had a very decent quarter in terms of sales of licenses despite being the first quarter after a very good fourth quarter.

Significant -- though 20% of the growth came from the software division in terms of the revenues.

In terms of the profit, 54% of the growth came from the software division.

And this is why we say that this is a hybrid company and the success of the software gives us the ability to maintain a higher level of margin compared to our peers.

And it's pretty the same way as we were in the fourth quarter of 2020, and we keep the momentum.

Okay.

Traditionally, you've done -- you're doing a lot of work in health care and telecom.

Can you look at the revenue from that perspective?

There's no real change in the allocation between...

Customer mix.

Yes, between the mix.

And again, you can see it also from the top line.

You can see that we did $107 million in Q1.

We did $104 million, $105 million in the fourth quarter.

And the revenue mix was pretty much the same.

Some of your customers have been holding back, though, on account of COVID.

And now what you're saying is you're still seeing a little bit of that, but maybe not as much.

I think that we started to see them releasing more projects at the end of the -- first of all, at the second half of 2020.

And now we see it more still at the pipeline level.

This is why we expect the second half to be better than the first half.

Yet to be seen.

Okay.

Any sort of influence on the Sprint and T-Mobile merger?

Is that -- where is that going as you guys see that?

I think that it's not material.

They did a very stable quarter, very similar to what we did in the Q4.

Ericsson was stable and the same as T-Mobile and our telecom projects.

So no change.

So there wasn't any -- so the growth didn't came from the telecom business.

It came more from the defense.

It comes more from the financial service sector.

It comes from the health care sector.

I would say that it's stable on the telecom side.

Okay.

That's helpful.

Yuval is still on the call.

Yuval, can you give us an update on where you are with the PowWow integration?

And when you expect the next xpi version to be released?

Are you guys still on track for that?

I know last time we talked about it you expected it sort of springtime, early summer.

Yes.

We're still looking to keep it on track.

The challenge -- and Asaf mentioned, in most of our territories, we managed to overcome the challenges of COVID.

But this project specifically is located with the team in India, where there is a big challenge there with COVID, but we're still trying to overcome those challenges and keep it on track.

Okay.

Have you released like an alpha or beta or anything?

And have you gotten any feedback on it?

We have -- we're in the alpha stage, which is purely internal yet with our branches and not with the customers.

We are looking forward, like in the next 2 months, to start sharing it with kind of house player customers, as we call them.

Okay.

So you really don't have any sort of commercial feedback on it yet, still too early?

Yes, it's a bit too early for that.

Okay.

Fair enough.

All right, gentlemen.

Asaf, one question.

Just on the debt.

There's $23 million.

What are you guys paying on that?

What's the plan.

Given that you're generating so much cash, why are we carrying the debt at this point?

First of all, most of it comes -- let's say, a big chunk of it comes from a debt that we took in 2016 where we wanted to finance one of the acquisitions that -- one of the more larger, let's say, type of acquisition that we did when we acquired Roshtov in Israel.

So this is something that still is on our balance sheet.

We pay around 2.6%, a fixed rate of 2.6%.

So it's not heavy on our cash flow.

It allows us to be -- to give the flexibility of our companies to do the acquisitions that they want to do and stick with the 75% dividend policy that we maintained for -- since 2012.

Okay.

I know part of the M&A policy is to buy a little bit into a deal and then buy the entire company over time as operations work out for you.

Where are you on...

Yes, I don't think this is the right way to describe it.

So normally, when we buy an asset -- a company, we want to keep the managers, the founders motivated.

They are billable people.

They see the opportunity of joining forces with our existing teams.

As we normally say, these companies come from the division managers that are working inside of Magic.

So these are partner of our companies that we are familiar with their businesses.

So for them, it creates a good future, and it creates a good upside.

So we see -- you create like a balance in terms of internal expectations, both from us with the price that we want to pay and the seller side and the upside that he can achieve.

And this is why most of the acquisitions that we do, it turns out that they were rather small, but we managed to multiply it and increase them significantly over the long term.

So I know you said there's nothing material near term.

Is there anything maybe smaller?

I was a little confused by Guy's remarks.

I can't tell if anything happened in turn in the March quarter.

Yes, we expect...

Of if there's anything you expect...

One thing to keep in mind is that in every given year, we manage to close between 1 or 2 small companies that we take in.

I expect one company to -- that we will manage to close by the -- during, let's say, or by the end of the second quarter.

And there is another very small company that is a long Magic partner of our application company, but it is very small.

They are doing like something like $1.5 million in terms of revenues.

They don't have any continued generation to take over the company.

We know.

We support them for many, many years.

So for us, in order to step in is very easy and then try and upsell to the clients that they have is something that we do over time.

And it's best for us.

Okay.

Our -- well, one you mentioned was an application company.

So that's support on the software side?

Yes, but very small.

As I said, it's only $1.5 million in terms of revenue.

It's not significant.

Okay.

Okay.

Any features or functionality there that are interesting to note?

No.

It's -- again, it's very vertical.

It's not a technology.

It's an application.

So for us, we see, first of all, the opportunity to continue to support their customers and continue the lifespan of the application on one hand.

And on the second half give access to our experts and try to get more business in other areas of their business, mostly in the IP.

(Operator Instructions) There are no further questions at this time.

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

So thank you again for joining us for the quarterly call, and we sure hope to see you on the next call and bring you some more good news.

Thank you.

Thank you.

This concludes the Magic Software Enterprises Limited First Quarter 2021 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.