Magic Software Enterprises Ltd (MGIC) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Ltd. Fourth Quarter 2015 Results Conference Call. All participants are currently in a listen-only mode. (Operator Instructions). I'd also like to remind you 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. I will now turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Thank you and good morning, everyone.

Our quarterly earnings release was issued before the market opened this morning and has been posted 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 provisions provided in the press release issued today also apply 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 view or expectation or otherwise.

Also during course of today's call, we will refer to certain non-GAAP financial measures. The reconciliation schedule showing GAAP versus non-GAAP results have been provided in our press release issued before the market opened this morning. The 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 Guy.

Good morning, everyone and thank you for joining us today as we report our fourth quarter and full year 2015 financial results.

During this call, I will review the highlights from our fourth quarter and full year results and then turn it over to Asaf who will provide more detailed financial information. I'll be happy to address any of your questions at the end.

We are pleased with our strong fourth quarter performance, providing an exciting finish to a record year. Q4 revenues reached $47.9 million, reflecting 13% year-over-year growth. Annual revenues for 2015 reached a record-breaking $176 million and non-GAAP operating profit for the year reached a record-breaking $27.2 million. We exceeded our guidance and achieved these excellent results despite the significant impact of the erosion of foreign currency exchange rates on our top and bottom line, which is thanks to the strength of our portfolio and our broad global [customer base].

Magic's software solutions and services are becoming increasingly relevant during 2016 as businesses accelerate their digital transformation initiatives. We continue to invest in our products to enable our customers to innovate and increase competitiveness by mobilizing and optimizing business processes across backend systems and by modernizing existing business-critical applications.

To further accelerate our growth, we planned to continue and look for additional mergers and acquisitions that are aligned with our overall growth strategy. We are looking for opportunities to expand our market penetration through acquisitions of companies that will provide us with complementary solutions and expanded customer base. We have a proven history of making [prudent] acquisitions at fair prices and successfully integrating the acquired companies into our business. We will leverage this experience to pursue additional acquisitions.

That being said, we remain highly selective regarding the M&A opportunities we pursue. Our ongoing financial performance, healthy balance sheet and strong product portfolio are primary factors in our evaluation in pursuit of potential acquisitions. As a global one-stop shop for both products and services, with long-term relationships with our customers, we are well positioned to execute our growth opportunities.

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

Thank you, Guy and good morning, everyone.

Today, we'll be analyzing our results in a non-GAAP and constant currency basis, which as mentioned at the beginning of the call, provides valuable supplemental information regarding our results of operation consistent with how we evaluate our performance.

As Guy mentioned, our momentum continues with fourth quarter non-GAAP revenue of $47.9 million, reflecting 13% growth compared to the fourth quarter of 2014 and non-GAAP operating income of $7.4 million both record high level. While we are pleased with these record-breaking numbers, had it not been for the negative impact of the erosion of foreign exchange rate, we would have shown quarterly revenues of $49.1 million, reflecting a 15% increase year-over-year. The foreign currency erosion in Q4 negatively impacted our revenue by approximately $1.2 million compared to the fourth quarter of 2014, mainly due to the devaluation of the euro and the Japanese yen, which decreased by 13% and 6% respectively compared to the fourth quarter of 2014.

Let me now turn to the geographic breakdown of our revenue. In the fourth quarter, we maintained our traditional geographic mix. North America represents 51% of total revenue; Europe, which includes Israel represents 39%; Asia-Pacific 6% and the rest of the world, 4%. Most of our growth in the fourth quarter was from North America and Israel which are strong territories for Magic.

Turning now to profitability. Our non-GAAP gross profit for Q4 was $18.8 million, up 4% compared to non-GAAP gross profit of $18.2 million in the fourth quarter last year, and up 13% compared to non-GAAP gross profit of $16.7 million in the previous quarter. Non-GAAP gross margin was 39.3%, down from 42.8% for the fourth quarter of last year and up from 36.8% for the previous quarter. On a constant currency basis, non-GAAP gross margin for the fourth quarter would have reached 40.2%. The fact that over 80% of our software license and maintenance and support revenues, which carry gross margin of over 85% are generated in currencies other than the US dollar, means that the currency erosion negatively influenced our gross margins by 0.9% and our gross profit by $0.9 million compared to the fourth quarter last year.

Non-GAAP operating income for Q4 was $7.4 million, up 5% compared to non-GAAP operating income of $7 million in the fourth quarter last year. Non-GAAP operating margin decreased to 15.4% compared to 16.5% in the same period last year. On a constant currency basis, non-GAAP operating income for the fourth quarter would have reached $7.9 million, reflecting an increase of 12% year-over-year with non-GAAP operating margin of 16%.

Financial expenses this quarter totaled approximately $96,000 compared to financial expenses of $840,000 in the fourth quarter of 2014. Our non-GAAP net income was $5.6 million or $0.13 per diluted share based on 44.5 million fully diluted shares outstanding, compared to non-GAAP net income of $5.7 million or $0.13 per diluted share based on 44.5 million fully diluted outstanding in the fourth quarter last year.

On a constant currency basis, non-GAAP net income for the quarter would have reached $6.1 million or $0.14 per diluted share, reflecting an increase of 7% year-over-year. Non-GAAP tax expenses this quarter was $1.3 million, representing an effective tax rate of 18.3% compared to tax expenses of $400,000 in the fourth quarter of 2014.

Turning to the results for the year, revenues for the full year increased 7% to $176 million, exceeding our guidance and compared to $164.3 million in 2014. On a constant currency basis, revenues for the 12-month period would have reflected an increase of 13% year-over-year to a record $185 million. Our non-GAAP gross profit was $68.3 million, down slightly compared to non-GAAP gross profit of $68.9 million in 2014. Non-GAAP gross margin for the year was 38.8% compared to 41.9% recorded in 2014. The decrease in non-GAAP gross margin resulted from changes in the mix of revenues toward professional services that's software maintenance and support and from the negative impact of the erosion of foreign exchange rates. On a constant currency basis, non-GAAP gross margin for the year would have been 39.7%.

Our non-GAAP operating income for the year was $27.2 million or 15.4% operating margin, down 0.4%] compared to non-GAAP operating income of $25.9 million or 15.8% operating margin in 2014. On a constant currency basis, non-GAAP operating margin for the year would have been 15.8%, the same as in 2014.

Our non-GAAP net income for the year was $21.7 million or $0.49 per diluted share compared to non-GAAP net income of $20.5 million or $0.47 per diluted share. Our non-GAAP net income was negatively impacted by devaluation of cash and other working capital balances denominated mainly in euro, Japanese yen and New Israeli shekel by approximately $2.5 million or $0.06 per diluted share, following the devaluation of these foreign currencies against the US dollar.

Turning to the balance sheet. We ended the quarter with approximately $77 million in total cash and short-term investments, generating approximately $18 million from operating activities during 2015. Our strong financial position including strong free cash flow enabled 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 dividend. During 2015, we distributed an aggregate of approximately $7.8 million or $0.176 per share. Our current dividend yield is approximately 3.4%.

Turning to our 2016 revenue guidance. We expect 2016 full-year revenue in the range of $191 million to $195 million, representing growth in the range of 9% to 11%.

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

Thank you, Asaf.

So in summary, we are pleased with our record-breaking revenue and double-digit profitability. We had a fixed rate year of record revenue and exceeded our revenue guidance with revenues of $176 million. Our non-GAAP operating income for the year also reached a record of $27.2 million. While we produced excellent results, there could have been even better, had we not been hit by foreign currency devaluations. We believe we are well positioned and on track to meet our 2016 revenue guidance.

With that, we'll now turn the call over to the operator for questions.

(Operator Instructions) Bhavan Suri, William Blair.

Just, you guys have a unique position in the development space with a lot of companies both software houses and internal organizations on the development front, there is always concern about macro and global slowdown and lower spending in CapEx and IT. Guy, are you seeing anything when you talk to customers, are you seeing any softness at all, obviously your numbers don't indicate it, but as you look out do you see any change to spending patterns or trends whether that impact you or just broadly any color given sort of your exposure to that space will be helpful?

I'll try and put it this way, Bhavan, when you talk to customers that should may kind of a strategic decision, then I think the sales cycle is probably a bit longer today, but we are now 80%, 85% of our business is kind of repeated business, therefore less softer from the overall, I would say, [bad mood] that we have in the markets.

But just to clarify, you are not seeing any push back on your projects or in any verticals telco or otherwise, AT&T aside, obviously we can discuss that, but not on development projects?

Specifically on the telco side, we definitely see that it's not that it used to be like two years ago. But all in all, I think, we are positioned in a place that usually we say people have a lot of money therefore, when we are brought to the table, it's kind of the final stages, meaning they do not push back on that.

Got it, got it. Let's focus on the business and obviously nice upside and nice guidance, are you seeing that driven by some of the integration platform, some of the development platform, mobile cloud, sort of what was the driver of the upside and then obviously what's driving the strength you see in 2016?

I think mostly we see the drivers are definitely from cloud and mobile solutions. All in all, the big boxes are coming from -- mostly form preparations because if you look on the mobile side, it's still just (multiple speakers).

I'm going to say, so it's still more sort of project services based than it is like licensed product today because people still sort of preparing, is that the way to think about it?

They are in some way, yes. You see the first stages of licenses and now we basically, we wait for them to expand.

Got it, got it. So, obviously with cloud and mobile integration especially with core systems has to be important, help us think through how your integration, your data movement platform starts to play into that or are we still ways before people start getting to that point?

I'm not sure I understood the question.

So when you think about mobile and cloud, so people building all these services, those services all connect to legacy core systems right, so I've got a e-commerce app, but no one -- the old e-commerce system or the inventory systems are still legacy systems, you have to move the data back and forth and our thesis would have been that your data integration platform would be the middle part of that data movement back and forth and you just said that it's mobile and cloud and not the integration platform. So, I'm just trying to understand are people using something else or is that something that will happen over time or are they (multiple speakers)?

No, I was a bit misunderstood. The main drivers in the market are definitely mobile and cloud. While talking about the business, we see it all over, whether it's preparation projects for mobile or cloud or integration.

Got it, got it. And so, when you look at that, should the license part of the business pick up at some point to give you some margin or is it still pretty much services based?

No, we think it should pick up.

Okay, great. And then one last one from me, as you look at the sort of things that Microsoft is doing and changing its model to become more cloud-based and you look at some of the other competitors. How do you feel the competitive positioning sits with Magic, has it changed, has it remained the same, is it an advantage, are they going to cloud, how should we think about that?

No, all in all, we need to make a lot of changes as well. We are selling more and more on a subscription base because this is where the market is going. All in all, talking about Microsoft -- we are less affected by Microsoft. Even when you talk about the cloud arena, it's Microsoft [is not the only one] pushing the space, so you have other competitors that are way ahead of them.

But do any of them have sort of a development environment that you guys do or is that still something that's relatively unique to you?

I think it's still relative unique to us, when we -- people are talking a lot about Force.com. We hardly see them in the competition, but people do talk about them. All in all, we are still -- in most cases, we see the two main stream.

Robert Maltbie, Singular Research.

This is Debra sitting in for Robert. Thank you for taking my questions. I'd like to continue the previous line of questioning regarding the drivers of your business. You mentioned in your opening remarks that about 80% to 85% of your business is repeat with existing customers and you also said that you're just waiting for the customers to expand. What is it that you see will drive the expansion of these existing customer relationships? What are you observing in the overall that makes you think that these relationships will expand?

Okay. If I take as an example the mobility trends, so in most cases, you find yourself in a situation when if you approach -- if you are going to close a deal with, let's say, corporate bank, they will negotiate because they're afraid that in the long run they will need a lot of licenses. So they will -- we will have difficult negotiations around the prices on licenses. While the first step in the project is going to be rather small amount of users, after that we need to wait for them to expand. So if they close with you a deal for, I don't know, 10,000 users, usually they will start with a few hundreds.

Okay. So, are you saying then that with these existing customers we are not necessarily waiting for economic growth to turn around and their entire business turns around, it's just a matter of their adoption rate and the pace at which they extend their license with you across all of their existing employees or their existing personnel?

In most cases, that's correct.

Okay, very good. And then, let's talk a little bit about the other 15% to 20% of your business that must be coming from new customers. Are you seeing any particular vertical or geographic area where you're finding particularly receptive interest in your products?

It's hard to say. In most cases, you see it we are playing in most of the common industries like 40% to 45% are coming from the financial sector, 20% maybe today, a bit less is from the telecommunication. It's hard to say whether we see a specific sensor which becomes dominant.

And would you say that it's more Asia, Europe, US or North America?

Probably, a bit more towards North America, although we see some good sign in Japan as well. Europe is okay, but definitely North America is more dominant.

It sounds like to some extent, sort of the global economic conditions are impacting maybe your new customer acquisitions whereas with your existing customers, it's a matter of your strong execution and your relationship building that's going to drive your sales.

Yes, a lot of times, yes.

Yaniv Rahimi, [Ramco].

Just a quick question from me. Can you please explain what's behind the jump in amortization of other intangible assets in the last quarter?

Basically, when we do an acquisition and we did some during the year, we did one acquisition at the beginning of the year, we did another small acquisition towards the end of the second quarter, towards the beginning, I'm sorry, of the third quarter. When we finalized the purchase price allocation of the acquisitions and sometimes at the end of the year, we get the pickup for all the differences because at the beginning, it's still estimations and then when we finalize the purchase price allocation study, at the end of the year in order to close the books.

So as far as I understand, the sum that appears in this fourth quarter is a one-time event, as long there are no other.

For the year, no, it's not a one-time event. For the year, what you see is that (multiple speakers).

No, the jump -- the big jump.

Yes, the big jump of course, but if you'll take the amortization for the year, I presume that, for example, backlog plays a significant portion of the amortization during the year. This is not something to be repeated in the next year because backlog normally stands for the deals already signed during the first year of the acquisition. So this amount for around $800,000 in terms of the 2015 amortization expenses. So, this amount won't be recovered in 2016 -- won't be repeated.

I was asking about the [gap] and thank you for your answer. Thank you.

(Operator Instructions) [Kris Rymer, Barclays].

I wanted to ask if you could give any color on margins [granted] the foreign currency FX has affected them. Is there anything else you're working on to improve them?

Basically, we're kind of having a natural hedge in the operation in each of the sectors that we operate, meaning in terms of professional services that we have people that are doing the consulting job in the same areas that we generate revenue. 2015 because of the drop between 2014 in the euro, Japanese yen and New Israeli shekel had significant influence on that aspect. I think that, let's say that as for the moment, we don't expect such severe changes to happen in 2016. So we don't expect such amounts to influence us again in 2016 versus 2015.

Thank you. And just on M&A, I think you mentioned something about still looking for companies. Is there anything in the pipeline or anything you can give a little color as to maybe a certain region that you feel is stronger, that's more of a potential area for you?

I think on the M&A side, at any given time, we have some opportunities on table, sometimes they mature quickly, sometimes it takes a bit more time. Currently, we have like three or four. In most cases, the acquisitions that we are going after are rather small. So, we have like two in Israel, we have two in the states, one in Canada, they all are in process. Clearly right now, what is going to mature, I don't really know. But from our experience, I can say that in most cases, from the time we start to talk to a company, in some cases, we can close quite fast. In some cases, it takes like between a year to two years until they are coming back and we can work out something.

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

Yes. Thank you all for joining us and hope we will continue to deliver more record results. Thank you.

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