Magic Software Enterprises Ltd (MGIC) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Limited 2016 First Quarter Financial Results Conference Call. With us on line today are Mr. Guy Bernstein, CEO; Mr. Asaf Berenstin, CFO; Mr. Itai Galmor, VP, Global Marketing and Business Development; and Amit Birk, VP, M&A and General Counsel.

I'll 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 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 view or expectations or otherwise.

Also, during the course of today's call, we will refer to contain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results have been provided in our press release issued before the market opened this morning. A replay of this call will be available after the call on the Investor Relations sections of the Company website.

I will now turn the call over to Guy.

Thank you, Amit. Good morning, everyone, and thank you for joining the call today as we report our first quarter 2016 financial results. During this call, I would provide selected highlights from our first quarter 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 double-digit revenue growth with Q1 revenues reaching $44.7 million, reflecting 11% growth year-over-year and with our non-GAAP operating income for the quarter amounting to $6.7 million. We are continuing to maintain our solid 15% operational margins despite some deferral of software license transactions to the second half of this year. This has been offset by the growth of our professional services revenues. Cash flow from operations reached $11.2 million, contributing to our strong total cash position of $81 million. We are receiving tremendously positive customer feedback and seeing a strong uptake to our recent Magic xpa 3.1 release and continue to experience strong demand to our professional services in all areas, including cloud and mobility. Our current offerings are the most comprehensive in our Company's history. This wide range of services and strong delivery capabilities enable us to compete more effectively in today's digital age.

Now, I'd 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. Good morning, everyone. Before I jump into our results for the first quarter, as a reminder, we are presenting our results on a non-GAAP basis, which as mentioned in the beginning of the call, gives a clear view into the operational state of the business and provides the valuable supplemental information regarding our results of operation, consistent with how we evaluate our performance. There is a detailed reconciliation to non-GAAP results in the financial tables of the earnings press release.

As Guy mentioned, our first quarter revenue was $44.7 million compared to $40.3 million for the first quarter last year, reflecting 11% year-over-year growth. Looking at the geographic breakdown of our revenues, our geographic mix remained pretty steady during the first quarter. North America represents 52% of total revenues. Europe, which includes Israel revenues represents 38% of total revenue, and APAC and the rest of the world represent 10% of total revenue. Most of our growth in the first quarter was from North America and Israel, which are strong territories for Magic.

Turning now to profitability, our non-GAAP gross profit for the first quarter of 2016 was $16.7 million, up 1% compared to $16.5 million in the first quarter of last year. Our gross margin declined to 37.3%, down from 41% in the first quarter of last year and from 38.8% for 2015 as a whole. The decrease in our non-GAAP gross margin resulted mainly from changes in the mix of revenues toward professional services versus software and maintenance and support. Our non-GAAP operating income for the first quarter of 2016 was $6.7 million, reflecting 14.9% of total revenues for the quarter, compared to non-GAAP operating income of $6.7 million or 16.6% operating margin in the first quarter last year and 15.4% operating margin for 2015 as a whole.

Non-GAAP tax expenses this quarter was $1.4 million, representing an effective tax rate of 21% compared to tax expenses of approximately $400,000 in the first quarter of 2015, reflecting an effective tax rate of only 6%. Our non-GAAP net income was $4.8 million or $0.11 per diluted share compared to non-GAAP net income of $5.2 million or $0.12 per diluted share in the first quarter last year.

Turning to the balance sheet, as of March 31, 2016, we had cash and cash equivalents, short-term bank deposits and marketable securities of approximately $81 million compared to approximately $77 million as of December 31, 2015. We generated approximately $11.2 million from operational activities during the quarter. I would like to remind everyone that during the first quarter, we paid a cash dividend in an aggregate amount of approximately $4 million or $0.09 per share, with respect to our 2015 second-half results of operation and in accordance with our dividend policy for our shareholders, returning up to 50% of our net income in the form of a dividend. Our current dividend yield is approximately 2.6%.

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

Thank you, Asaf. So in summary, we are pleased to report another quarter with year-over-year double-digit revenue growth and solid operational profitability. Our financials remain strong. This quarter, cash flow from operations reached $11.2 million, contributing to our total cash position of $81 million. We are confident that our portfolio provides the software and the services enterprises need to succeed in today's digital age and that we are well positioned to achieve our 2016 revenue guidance of $191 million to $195 million, representing growth in the range of 9% to 11%.

With that, 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. (Operator Instructions). Tavy Rosner, Barclays.

Hi. Thanks for taking my question. You mentioned the change in the mix compared to the first quarter of last year. I believe you said there's a bit more professional service than license. Is it -- mix expected to continue for the rest of 2016, or last quarter was just (multiple speakers) more licenses?

I think as it looks now, we think that some of the technology sales have shifted a bit towards the second half of the year. We could give a bit more discount and push them to the first half, but we thought this is not a good position to be in. So we believe that we will close it later on this year.

Okay. That's helpful. And more broadly on the market, do you see more competitive pressure coming from the larger players? And if so, does that push a bit pressure on prices or you don't feel that at all?

The overall feeling is that there is a constant pressure all the time. The thing is, we usually compete in places where they have limitations of either budget or mostly timing issues. But yes, here and there, you see some of the big players becoming a bit more aggressive, but it changes all the time.

Okay. And then, lastly, on your cash balance, you mentioned $81 million in cash.

Yes.

Is that something you would redeploy into M&A and do you have any color to give us on perhaps valuation in the industry, anything that would --?

So, in terms of the cash that we have, we continue to look for more deals on the M&A side, especially kind of more significant deals. The problem is, as you know, in today's market is that the private equity funds are very aggressive and they're willing to pay prices that we cannot even compete as a strategic buyer. Therefore, it's a challenge. On the small ones, we continue to look for more opportunities, although it doesn't make a lot of change in terms of the cash position that we have, because we generate a lot of cash as well.

Thank you. Appreciate it.

Bhavan Suri, William Blair.

Hey, Guy. Hey, Asaf. Thank you for taking my question and sorry for the background noise, I'm in an airport, but just a couple, just a follow-up on the first question. When you look at the back half of the year and you look at sort of the commitments, what gives you the confidence that we should see that sort of renewal? Are there sort of statements of work or are there sort of project plans that sort of lay that out? How should we think about sort of your high degree of confidence that we see some of that work in the back half of the year?

I'm not sure I understood the question.

Let me try to answer that. Basically, we are working with more than 3,000 partners and as you know, we are pretty much familiar with their planning for the year. Second, as Guy mentioned, because there are issues with the negotiation trying to push prices. So we have our customers', let's say, intention and this is something that we know that is in the making. So the question is, if it would fall in the second quarter or in the third quarter, this is something that we have been [doing].

This is mostly on the technology sales. And by the way, Bhavan, you know that usually when we start the year, I would say probably 80% to 85% we know exactly where we will come from. We've kind of repeated business.

Yes, yes, yes. I think, I was just looking for sort of just, if that 80% to 85% is still remaining consistent? And then I think Asaf answered it, it might be Q2, might be Q3, but given intentions, you guys have some level of visibility into those closings. So I just wanted to get some of that color.

Definitely.

That's helpful.

Yes.

Yes, yes. And then, when you look at the AppBuilder technology that was released, as you look at that particular product, have you seen that either improve sales cycles or the sales cycle for this product a little longer? Just help me understand how we should think about that from a sort of growth perspective for the AppBuilder offering.

I think, the AppBuilder offering is based on specific clients, with a turnover of ordering more and more. We know exactly where their contracts are ending and whenever they are going to renew it, it's kind of both sides know exactly what to expect. We are talking about big customers, it's not (multiple speakers).

No, that's the point. Yes. So if sales cycles were shorter, you might see a little pickup in the license, that's what I was trying to get to. But they seem to be typical of your typical sales cycle.

By the way, this quarter, we pushed one of them because of prices. No doubt, it will come in, the thing was that we were not willing to give the discount that it was negotiating for.

Got it. Got it. And then, a quick one just on, if you look to the cloud business, you've mentioned this now this quarter, again certainly last quarter, is there any way of thinking about sort of how much of your business is coming from cloud deployment integrations, on-premise applications, like how much of the revenue today is related to cloud-based either projects or activity, and how much is still sort of the traditional in-house software development type of work?

I would say that probably most of the new project that are coming in are in some way related to either cloud or mobility. The majority of the project is taking care of the legacy systems, but the trigger to the project is coming from either cloud or mobility.

Got it. Got it. Okay. And then, one last one maybe for Asaf here. Deferred revenue grew particularly well this quarter. And given that it's not sort of big maintenance, how should we think about what drove the growth for deferred?

Basically --

Mostly maintenance.

Yes, most of the revenue comes from maintenance and support agreement that we have. We usually collect all of the annual maintenance and support revenues by the end of the second quarter. Here, you see that we already collected approximately 75% of our maintenance and support.

What you see, Bhavan, is that we are issuing most of the invoices between the end of last year and the beginning of this year, so you've seen most of the deferred revenues coming from maintenance because of invoicing.

Got it. Got it. No, that's helpful. I was just wondering because it grew nicely even year-over-year. That's it from me, guys. Thanks for taking the questions. That was very helpful.

Thank you, Bhavan.

Kevin Dede, Rodman & Renshaw.

Hi, guys. Guy, you mentioned strength primarily -- or growth primarily in North America and Israel. There are many reports coming from Europe about the economy strengthening there, and given that as you said 80% to 85% of your business you have clear visibility on, I'm just wondering what you think of growth prospects in Europe?

Well, I can become a bit cynical a bit about this one and ask what exactly is Europe, because from what I think Europe here is basically Germany. But if I'm less cynical about it, then, we have our ongoing business in all over Europe, in Germany, in France, in The Netherlands, in the UK; and we are working with our partners for many, many years. So nothing has changed. We see the business. In some cases, you see that there is more demand; in some cases, you see that there is less demand; overall, it's same thing. In Germany, by the way, as I mentioned, we saw a stronger quarter; in France as well; Netherlands is so-so; UK was a bit weak; it depends. Now, Germany is quite strong for the past few years, yes.

We can say that, this quarter, in the big economies that we operate in, in Japan, in The Netherlands -- in Japan, in France, in Germany, in the US, in these territories, the atmosphere was positive and our results were in line of our expectations.

Okay. Thank you. Now, would you say that the focus of your customers on mobile and cloud, I mean, aside from the legacy work, is consistent also from a geographic perspective?

Yes, definitely.

I think that for us, what is more encouraging in this quarter and we can say coming from 2000 -- let's say, from the second half of 2015 into 2016 is the mobile pickup that we also see in our Japanese market. So this is something that is very encouraging.

Okay. It worked sort of consistent with one of those announcements you made last year in Brazil with a company just pushing to build an extension of their enterprise capability to mobile or is that -- or are people looking at completely different things?

No. In the most cases, this is the scenario.

Right. Okay. I guess the other thing I was curious about is, if you could talk a little bit to the mix of business that you're seeing in North America from a customer perspective, not necessarily from a professional service versus license, but from a customer perspective? Clearly, there was a lot of emphasis in the potential growth of telecom, and I'm just curious, if you could talk about your customer verticals from an industry perspective?

Okay. So as you mentioned, we had some heavy business in the telecom industry, we still have. We saw that after the merger between AT&T and DirecTV, we will start to see some pickup in this sector. Unfortunately, we didn't see any. Any time -- every time we think that we hit bottom, but it appears that we didn't. So we started to shift the business towards other sectors as well. As you know, we work a lot in the pharmaceuticals, in the financial sector. So in terms of the revenues, I think we've succeeded in covering for the loss of revenues in the telecom, but still it's a bit disappointment, because we thought it will pick up and we will add it in addition. And unfortunately, it didn't.

So, is the thinking now that you're, whatnot, going to kind of pursue it or are you still staying attached in some way? What do you think the prospects are at this point?

I don't think that in these aspects, it's something that is in our hands, meaning we are available for the customer, we still continue and maintain the partnership and the business relationship that we have with them. What we experienced in the telecom, I think that we see that this is something that affected not just us, but the entire service level of this -- over this industry. So, it's not something that we feel that was specific, affected only us.

Yes. It was a generalized trend.

Once if this industry will pick up for this specific customer, the business will again pick up, I'm sure that we will benefit from that as well.

Very good. Okay. I think I would agree. I don't think it's specific to you guys either, I think that it tough in telecom across the country.

No. Look on the bright side, we've probably lost 50% in the telecom business, and we have succeeded in covering for more than 50% from other sectors.

And that's primarily at pharma and financial services.

Yes, yes.

Okay. Alright. So I know, one previous questioner asked about the M&A side of things and you're continuing to see a tough valuation environment, but you at one point noted and not too long ago that there were four or five potential deals that you were close on and I'm kind of curious where your emphasis is, where you think you are with regard to getting that work done or those deals done, and how you think we should think about that and what sort of timeline we should hold you to?

Okay. So, usually, the timeline is such that if we are in a mature stage in the process, meaning we started the negotiation, due diligence and so, we usually take say probably three to six months. Out of the four that we talked about last time, we are -- one of them is left and we are still in negotiations with two of them; one of them we're still considering whether it's worth it or not.

Alright. So one is canceled; two, you're continuing to deal with; and I'm sorry, the fourth was?

The fourth, we are -- it's in our hands and we still have discussions in-house, whether to go after it or not.

I see, okay. So you're still considering it, but you haven't made the decision.

Yes.

Is that something you expect to have during the current quarter? You may able to talk about it at the close of the June quarter or --?

I would say, it's probably between second quarter and third quarter.

Okay. Then, you haven't really added anything since that small company that you bought to deal with Mainframe work in Israel, is that correct, just so that I'm up-to-date?

Yes.

Okay. Alright. Well, very good. Thanks, gentlemen.

Thank you.

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

Yes. So again, thank you for joining us for this call and I hope, that we will continue bringing you more good news. Thank you.

Thank you. This concludes the Magic Software Enterprises Limited first quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.