Magic Software Enterprises Ltd (MGIC) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Ltd. second quarter 2015 results conference call.

(Operator Instructions).

I'd also like to remind that this call is being recorded.

With us on the line today are Mr. Guy Bernstein, CEO; Mr. Asaf Berenstin, CFO; Mr. Amit Birk, VP M&A and General Counsel; and Mr. Itai Galmor, VP Global Marketing and Business Development.

I will now turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Good morning, everyone. Our quarterly earnings release was issued before the market opened this morning, and is available on the Company's website at www.magicsoftware.com.

Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements. The Safe Harbor provision provided in this press release issued today, also applies to the contents of this call.

The Company 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 review -- in its view or expectations or otherwise.

On this call today, we will provide you with details about Magic's performance in the second quarter and first half of 2015, including certain non-GAAP financial measures. We provide the non-GAAP financial measures because we believe that they are the most valuable way to review our core operating results. We have provided a reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release.

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 conference over to Guy.

Good morning, everyone, and thank you for joining us today as we report our second quarter 2015 and first half financial results.

I will provide the highlights of our second quarter results, and then turn it over to Asaf, who will provide more detail (inaudible). I will be happy to address any of your questions at the end.

We are pleased with our second quarter results. Revenue for the second quarter reached $42.5 million, with non-GAAP operating income of $6.5 million.

We are experiencing continued growth for our professional services, along with solid demand for our software products, mainly reflecting organic growth. In fact, excluding the negative impact from currency fluctuations, we would have produced record-breaking revenue for the second quarter of $45.2 million and non-GAAP operating income of $7 million, which would have been a year-over-year increase of 16%.

During the second quarter, we also delivered a new major version of our flagship Magic xpa Application Platform with additional mobility features, and performance enhancements based on innovative, in-memory data grid technology to meet the growing needs for rapid cross-platform development. We hope to see increased demand for this.

I would now like to turn the call over to Asaf Berenstin, our CFO, to discuss the financial results in more detail.

Thank you, Guy, and good morning, everyone. Today, we will be analyzing our results on a non-GAAP and constant-currency basis, which, as mentioned at the beginning of the call, provides valuable supplemental information regarding our results of operations consistent with how we evaluate our performance.

As Guy mentioned, our momentum continues in 2015 with our second quarter revenues growing 5% to $42.5 million, compared to $40.6 million for the second quarter last year, and compared to $40.3 million in the first quarter of 2015.

In our previous call, we discussed the negative impact of foreign currency exchange rates versus the US dollar on our top and bottom lines, as we derive approximately half of our revenues from EMEA. Unfortunately, foreign currency erosion in the second quarter negatively our revenue by approximately $2.7 million compared to the second quarter of 2014, mainly due to the devaluation of the new Israeli shekel, euro and Japanese yen, which decreased by 12%, 19%, and 20%, respectively, against the US dollar, compared to the second quarter of 2014.

If we eliminate the negative impact of erosion of foreign exchange currency rates compared to the second quarter of 2014, our revenues for the second quarter would have reached a record-breaking result of $45.2 million, reflecting a year-over-year increase of 11%, of which 65% came from organic activity. The remaining growth came from our latest acquisition, which was announced in February and closed in April of this year.

Turning now to profitability, our non-GAAP gross profit for the second quarter of 2015 was $16.3 million, down 3% compared to non-GAAP gross profit of $16.8 million in the second quarter last year. The decrease in gross profit was mainly attributable to the negative impact of erosion of foreign exchange rates on sales of software licenses and maintenance and support for our Europe and EMEA region, and from the change in the mixture of our revenues in favor of professional services over software products.

Non-GAAP gross margin was 38.3%, down from 41.3% for the second quarter of last year. If we eliminate the negative impact of the erosion of foreign exchange rates compared to the second quarter of 2014, non-GAAP gross margin for the second quarter would have reached 40.2%. Non-GAAP operating income for the second quarter of 2015 was $6.5 million, up 7% compared to non-GAAP operating income of $6 million in the second quarter last year.

Non-GAAP operating margin increased by 40 basis points to 15.2% compared to 14.8% in the same period last year. If we eliminate the negative impact of erosion of foreign exchange rates compared to the second quarter of 2014, non-GAAP operating income for the second quarter would have reached $7 million, reflecting an increase of 16% year over year with non-GAAP operating margin of 16%.

Financial expenses this quarter totaled approximately $70,000 compared to financial expenses of $341,000 in the second quarter of 2014. The financial expenses are solely attributable to the devaluation of monetary assets resulting from currency erosion.

Our non-GAAP net income was $5.2 million or $0.12 per diluted share, based on $45.5 million fully diluted shares of spending, compared to non-GAAP net income of $4.7 million or $0.11 per diluted share, based on 45.5 million diluted shares outstanding in the second quarter last year.

If we exclude the negative impact of the erosion of foreign exchange rates compared to the second quarter of 2014, non-GAAP net income for the second quarter would have reached $5.7 million, reflecting an increase of 20%, year over year, or $0.13 per diluted share.

Turning to the balance sheet, we entered the quarter with $84.2 million in total cash and short-term investments. From a cash flow perspective, we generated $5 million from operating activities in the second quarter of 2015, and $14 million for the first half, a significant improvement from the $11.7 million in the first half of last year.

Our strong financial position, including strong cash flow, enables us to maintain a dividend policy for our shareholders. Our policy is to return up to 50% of our net income in the form of a dividend. During the first quarter, we distributed (inaudible) $3.6 million or $0.081 per share with respect to the second half of 2014, and in accordance with our dividend policy.

Our current dividend yield is approximately 3%.

With that, I will turn the call back to Guy for closing comments.

Thank you, Asaf. So, in summary, with our first-half revenues of $82.8 million and our second half historically is better than the first, we are growing in line with our guidance, which we expect to be between $166 million and $173 million on a constant-currency basis.

We are confident in our growth strategy. We are remaining focused on profitable growth, both from enhancing our organic activities and through strategic acquisitions.

With that, I will now turn the call over to the operator for questions. Operator?

Thank you. (Operator Instructions).

The first question is from Bhavan Suri of William Blair. Please go ahead.

Hey, gentlemen, nice job, and congrats on the numbers there. Thanks for taking my question.

When we look at the space, and the recent release with the in-memory grid and the mobile technology, one of the things that, Guy, you've touched on before is that customers have been somewhat slow to start shifting towards the mobile development platform, because they don't have a concrete mobile strategy, and they're sort of trying to figure out, what do we do, what platform, what operating system?

Has that changed? Are you seeing any change there? And then, how does the new technology play into maybe accelerating that shift to leveraging Magic's technology to do these mobile development projects.

I think you see some more positive change that customers are starting to go into real projects. I think their strategy is, in most cases, not clear yet, but since we provide a kind of a cross-platform, then usually it's not a barrier to go into project with them.

So, we definitely see some first signs of bigger projects, but, still, we are not talking about big money.

Yes, yes. And then how easy is it to sell the integration platform to those guys, or is it a different buyer there?

Many times it's a combination, because usually, you can go and sell the integration platform separately. It's not a problem.

Definitely the -- both the mobile arena and the cloud are definitely triggering more integration between the new and the old world.

Yes, and that's where you have historically sold it in the cloud world. So, that leads to my next question. Sort of just an update on how that's progressing, and what is the pipeline as people continue to use sort of this hybrid approach, what does the pipeline for the integration platform look like, say, over the next 12 to 24 months?

Right now it looks quite positive. We are following our guidance, although we -- based on the top line, it looks a bit conservative, but, still, we try to play it safe rather than to disappoint. So, it's just a product line. So, we see it to open the conversion.

Yes, yes, no one's going to accuse you of not being conservative, Guy.

So, then, turning to acquisitions, obviously, you bought 70% stake in the services business in late February, early March. A) progress -- how is that going, and is it driving business on the app builder side? And then, do you think you'll acquire the remaining 30%?

It's -- first of all, we have to drive more business to the app builder. Second, regarding the 30%, it's always a debate between keeping the founder with a big incentive or buy him out and for him to -- in some ways you may say we lose the incentive.

Yes.

Of course, we have put and call option in place, but the idea is at the end, after he joins the -- really joins the DNA of the Company, of course, to have 100% in the Company.

Sure. Sure. Okay, okay.

And then, overall acquisition pipeline? I know, obviously, you've had private equity be very active, and you, obviously, have a background there, but what do you see in the pipeline, and are you guys still out there, looking for acquisitions?

Yes, we definitely look for acquisitions. I can say it's not ideal, because the prices went up, and it takes you a bit of time to get used to the new level of prices. And, as you know, we are quite cheap on paying to others.

But for the good companies, we tend to increase a bit the price and then try to close it, but it's still a struggle.

Got it. Got it, and one last one for me and I'll turn it over.

Obviously, AT&T DirecTV is now done. How are things with that customer, and have you seen some of the project work come back, or is there still a delay to some of that stuff?

I can say that we -- right now, it's steady. We were lucky enough to increase a lot of the business with other customers, so, it's covered, not all but most of the gaps that we had with AT&T.

Hopefully, we'll start to see some new projects with AT&T, and then it will be a win/win for us.

Got you. That's helpful, guys. Thanks for taking my questions.

Thank you.

The next question is from Tavy Rosner, Barclays Capital. Please go ahead.

Thank you. This is actually [Chris Rymer] on for Tavy. Two questions.

Could you give us some color on margins? Historically you've been higher. I know you mentioned a currency effect, but I was wondering if you could tell us if there was anything else in there, especially regarding operating margins, if there's any plans, organizational plans, to get those back up?

And also, following that, do you see any changes in your mix of business, geographically, that might have an impact on your revenues regarding currency benefit or anything like that, in the future?

Again, currency, based on the constant level of operations that we have today, I would say that the revenues coming from the US will continue to represent approximately 50% of our overall business, and I don't see any significant change happening in the near future, again, unless we do any significant acquisitions, not in the US.

As part as our gross margin, again, this is something we experienced in the past. Our gross margin is very sensitive to the mixture of revenues between professional services and products, and software products. So, for quarters that we have significant higher professional services sales, versus software product sales, then margins tend to go a little bit down. I think that the Company is pretty stable between 38.5% to 40%, 40%-plus, in non-GAAP operating profit, based on its current activity for operating gross margin.

Okay. So, do you see these levels, going forward?

[Broadly], yes.

Okay, thank you very much.

The next question is from Debra Fiakas of Crystal Equity Research. Please go ahead.

Good morning. Thank you for taking my questions, and today I am calling on behalf of Singular Research.

I wondered if I could continue the question just asked by the previous caller about the sales mix. Could you give us, percentage-wise, the mix amongst software, maintenance and consulting?

Yes, in terms of revenues, it's pretty stable. We are -- I can tell you that we are 60% of the business today comes from, let's call it, independent professional services versus 40% from technology sales and direct services, meaning when we sell our Magic xpa or Magic xpi integration platform, then, of course, customers tend to expect services around these projects.

So, the mix share between the technology business or the technology division, as we refer to it, is 40% of the business versus 60% stand-alone professional projects.

And did that mix hold true in this particular quarter?

No. In this particular quarter I think there is kind of a, let's say, 5% change between professional services and software towards the professional services.

I see. And if I understood your response to the previous question, you expect this 5% switch to be the case, or to remain the mix for the rest of the year?

No. No, what I said is that our gross tends to be -- will be between the 38% when we have a significant pie of professional services, versus 40% or 40%-plus gross margin when we have more of the software products.

Okay. Well, I was just trying to get an idea of where you thought the mix was going to be, going forward, or if you think it would go back to the typical 60/40?

It should be, yes.

It should be. Okay, wonderful, thank you.

And then, if I could, just maybe, also return to the discussion about customers and their reactions to the product line, you did mention in your opening remarks about the new Magic xp that was delivered in the quarter, and I just wondered if you could, maybe, give us a bit of color on your customers' reaction to this new introduction? Did it make it possible for you to talk to some new people? Do you think that because of its features that you might be accelerating their decision making? Just a little bit of background on how that went over with your customers?

We launched our Magic xpa in May, and the reaction were pretty good. We've kind of road-showed it in different -- in various regions with our various user groups and customers. It was accepted with great enthusiasm, actually. Our enhanced mobile capabilities answers the needs for some enterprise mobility, and actually enables to start some projects that the customers were thinking of to cope with.

Additionally, our IMDG capabilities, which are -- at the moment is we have a full suite of IMDG capabilities all over our Magic products, both xpa and xpi, gives additional capabilities for our customers to cope with big data, including face data and everything that they need in terms of huge amounts of data, especially derived from mobility, as well.

So, we are -- the customers were pretty enthusiastic about it. The adoption rates are good, but not as -- we think it will pick up towards the end of the year. It usually does. Additionally, we can remember that the Japanese market, which is important for us and has usually launches our product version in a lag between 4 to 8 months. So, this is now -- they're doing the localization, and they're expected to launch it in, hopefully, probably in the fourth quarter somewhere, and this will probably help picking up the moment, which we're really very confident with our product at the moment.

Oh, excellent. Thank you for your response, and I'll get back into the queue with that.

Sure.

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

Yes. So, thank you for joining us today, and we hope we will come up with some good news, and thank you very much, again.

Thank you. This concludes the Magic Software Enterprises Ltd. second quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.