Magic Software Enterprises Ltd (MGIC) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Limited 2016 Fourth Quarter Financial Results Conference Call. With us online today are Mr. Guy Bernstein, CEO; Mr. Asaf Berenstin, CFO; Mr. Itai Galmor, VP, Global Marketing and Business Development; and 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 provision provided in the press release issued today also applies to the content of this call. Magic expressly disclaims any obligations to update or revise any of these forward-looking statements whether because of future events, new information, and change in its view or expectations or otherwise.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has 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 section of the Company's website. I will now turn the call over to Guy.

Thank you, Amit. Good morning, everyone, and thank you for joining us today as we report our fourth quarter and full-year 2016 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 will be happy to address any of your questions at the end.

We are pleased that we exceeded our full-year revenue guidance, delivering record-breaking revenues for the year of $202 million, which reflects 15% year-over-year growth. We are also pleased with our operating cash flow, which grew by 43% year-over-year to $28.1 million for the year.

We were aware that our margins were going to be affected this year due to the software licensing renewal lifecycle, which meant that some of our large enterprise customers running mission-critical applications are only due to renew their software agreement licenses starting next year. I'm pleased that we were able to compensate for this.

Magic had a very busy year with the acquisition of Roshtov, different product releases, significant customer enhancements for enterprise mobility and digital transformation solutions, as well as a number of partner certifications, awards and new initiatives. We believe all of these, along with our high visibility to the business, our diverse portfolio and the upturn in the software license renewal lifecycle make us very positive about our ability to accelerate growth and ramp up operating profits in 2017.

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

Asaf, please.

Thank you, Guy, and good morning, everyone. Before I jump into our results, I would like to remind you that we are presenting our results on a non-GAAP basis, which as mentioned at the beginning of the call, gives a clear view into our operational state of business and provides valuable supplemental information regarding our results of operations. There is a detailed reconciliation to non-GAAP results in the financial tables of the earnings press release.

Our fourth quarter revenue was $55.1 million compared to $47.9 million for the fourth quarter last year, reflecting 15% year-over-year growth. Looking at the geographical breakdown of our revenue, we maintained a diverse geographic mix. For the fourth quarter, our revenues in North America represented 48% of total revenue. Europe, including Israel, which showed the strongest regional growth this quarter due to our strong momentum in the Israeli market and the addition Roshtov to our portfolio, represented 43% and APAC and the rest of the world represented 9% of overall revenue.

Turning now to profitability. Our non-GAAP gross profit for the fourth quarter was $19.3 million, up 3% compared to $18.8 million in the fourth quarter of last year. Our non-GAAP gross margin was 35.1%, down from 39% for the fourth quarter of last year and 37% in the previous quarter. The decrease in our gross margin resulted mainly from the shift in our revenue mix from software toward the professional services and the software renewal lifecycle among some of our larger enterprise customers, which were not due for renewal this year. The breakdown of our revenue mix for the fourth quarter was 35% software and 65% of professional services versus 38% software and 62% services in 2015.

R&D expenses on a non-GAAP basis in the fourth quarter totaled $2.7 million compared to $2.2 million in the same quarter last year. Our non-GAAP operating income for the fourth quarter decreased 1% to $7.3 million compared to $7.4 million in the same period last year. This reflects operating margin of 13.2% for the quarter compared to 15.4% for the fourth quarter last year and 14.2% in the previous quarter. The decrease in our operating margin resulted mainly from software renewal lifecycle among some of our larger enterprise customers, which as I mentioned earlier, are only due for renewal starting next year.

Our non-GAAP tax expenses this quarter were $1.6 million, representing an effective tax rate of 22% compared to tax expenses of $1.3 million in the fourth quarter of 2015, reflecting an effective tax rate of 18%. We believe that our effective tax rate for the full year of 2017 will range between 20% and 21%.

Our non-GAAP net income for the fourth quarter decreased 24% to $4.3 million or $0.10 per fully diluted share compared to $5.6 million or $0.13 per fully diluted share in the same period last year. The decrease in our net income is mainly due to an increase in our tax expenses and in our net income attributable to non-controlling interest amounting to $1.1 million or $0.025 per fully diluted share.

Turning to the results for the year. Revenues for the full-year increased 15% to $201.6 million, above our guidance, and compared to $176 million in 2015. Our non-GAAP gross profit was $73.6 million compared to non-GAAP gross profit of $68.3 million in 2015. Non-GAAP gross margin for the year was 35.5% compared to 38.8% in the 2015. Just like in the quarterly results, the decrease in our gross margin resulted mainly from the shifting in our revenue mix from software towards professional services, and from the software renewal lifecycle among some of our larger enterprise customers, which were not due for renewal this year.

Our non-GAAP operating income for the year was $28.2 million or 13% operating margin, up 4% compared to non-GAAP operating income of $27.2 million or 15.4% operating margin in 2015. Our non-GAAP net income for the year was $19.6 million or $0.44 per diluted share compared to non-GAAP net income of $21.7 million or $0.49 per fully diluted share last year. The decrease in our net income is mainly due to an increase in our tax expenses and in our net income attributable to non-controlling interest amounting to $3.6 million or $0.08 per fully diluted share.

Turning now to the balance sheet, we ended the year with approximately $87.8 million in cash and cash equivalents, short-term bank deposits and marketable securities compared to approximately $77 million as of the December 31, 2015.

The increase in our total cash balance is mainly due to our strong cash flow from operating activities amounting to $28 million for the year and $31.5 million loan obtained to support our growth, offset by the payment of approximately $32 million mainly towards the acquisition of Roshtov, and $7.8 million in dividend paid to our shareholders since the beginning of the year, which reflects an annual dividend yield of 2.5%.

Turning to our 2017 guidance, we expect 2017 full-year revenue to be in the range of $225 million to $230 million, reflecting an annual growth rate between 12% to 14%.

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

Thank you, Asaf. We are pleased to have produced our seventh straight year of record revenue and to have exceeded our revenue guidance with revenue of $202 million despite some challenges. We have worked hard during 2016 and believe that all these efforts will have a snowball effect picking up steam during 2017. In addition, the high visibility we have into the business, along with our diversified portfolio and the upturn in software license renewal lifecycle make us very positive and optimistic about our ability to accelerate growth and ramp up operating profits in 2017.

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

(Operator Instructions) Bhavan Suri, William Blair.

This is Maggie Nolan in for Bhavan. You talked a little bit about gross margins being down. Can you give a little more color and why they were down? And also, do you expect margins longer term to be in this new range or based on where margins are now, does that change your longer-term expectation for gross margins at all?

Okay. So we mentioned during the call that we had this -- basically, we had this lifecycle of renewal of big agreements, technology agreements with some of our biggest enterprises. Unfortunately, this year we didn't have that much renewals and we expect starting next year to have better results in terms of technology sales as a result of that, so this is -- this should improve the gross margin.

Other than that, I think it all goes to the mixture between software sales and services. So if we keep the same level of sales between software and services, then I believe that margins should go up to the same level they were last year.

And then, from a segment perspective, was there any churn in your banking and insurance segment, and then how much visibility do you have and do you expect customers in that segment to be renewing as well?

[Insurance and banking sector], over the last six years, seven years, we only had one client that stopped using the software following the fact that it was acquired by another entity and therefore they changed the use of application. Other than that, we never had a situation where those customers that we mentioned, at least the large one, didn't renew their license. We are speaking about companies that are using our software for mission-critical platform. So there wasn't any case that (inaudible) to renew the licenses.

The vast majority of them are banks and insurance companies.

And last one from me, can you talk a little bit about demand in the quarter across your integration business and how mobile and cloud is progressing? Thanks.

Basically, we keep on seeing strong demand towards mobile and integration projects. This year, we have some significant projects for multi-million dollar worth of spending from the customer side. So we see a pickup. It's still not something that is significant towards our $202 million total revenues, but this is something that adds up. In addition, the integration is always complementary to the mobile. When a customer wants to develop a mobile application, they usually need to connect it back to the back office system and this also brings us a new integration project.

This is Itai. I would like to add that our momentum with mobility and cloud is backed up by industry analysts that have started covering us in the mobility enterprise (technical difficulty) and integration platforms. We have been covered with Gartner and Forrester in the coming years. So I think we got a very positive momentum and I think it will probably have a good effect on our business over 2017 and 2018.

Tavy Rosner, Barclays.

Just a follow-up with regards to the renewal of the licensing part. Do you have a sense of why so many of these customer didn't renew in 2016 and will do so in 2017? Was there anything specific that kind of pushed their decision away by a few months?

Hi, Tavy. It's not about pushing their decisions, it's about the way it was planned from the beginning because usually what happens that with most of them we have agreements for between three years to five years. And after they ended the three years to five years, they need to renew it. So apparently, this year, the number of renewals that we had when we started the year was quite low compared to previous years. So it has nothing to do with the customers postponing their renewals. It's more about -- it's a technical thing that when [we plan to renew that] we are going to take this.

Luckily enough, we were able to compensate for all of that from other places, but because next year we already know what we have to renew for, we already know the list and the year is going to be much better.

Right. So as it's more timing decision, so therefore next year, you should probably anticipate to have a stronger (multiple speakers)?

It's a pure timing issue.

Right. So this software -- the mix of software will be stronger in 2017 most likely?

Yes.

Tavy, it's pure backlog. For this time in 2017, this time it's pure backlog.

Right. So logically, the mix will be stronger in 2017 than in 2016 and your margins will reflect that?

Exactly. Probably in 2021, we will have the same issue of renewals.

Good to know. And just a last one on the M&A side. So you did a few acquisitions last few quarters, but you still have a positive net cash balance, you guys still see a pipeline of acquisition on your radar?

I must say that we have two or three at the moment, but some of them are early stage; one of them is maybe a bit more progressed, but still an attractive one (inaudible) and at the end, we look for good acquisitions for different price. Most of the things that we see in the markets right now are quite overpriced. (multiple speakers) but I believe next year we will probably close something, at least on the small ones; and the bigger ones that we have currently, one of them we can close, I am not sure we want to close it at the current prices, so we will see.

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

Well, thank you very much everyone for joining us, and we hope to come with good news in the next quarter. Thank you.

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