Magic Software Enterprises Ltd (MGIC) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Ltd. 2017 Third Quarter Financial Results Conference Call. With us online today are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Berenstin; Magic Software division VP of Technology and Innovation, Mr. Yuval Lavi; and Magic's VP M&A and General Counsel, Mr. Amit Birk. I will now turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Thank you, and good day, everyone. Our 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 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 call, Magic will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP result has been provided in the press release. A replay of this call will be available after the call on our Investor Relations section of the company website.

I will now turn the conference over to Mr. Guy Bernstein, CEO of Magic Software. Please go ahead.

Thank you, Amit. Good morning, everyone, and thank you for joining us today, as we report our third quarter 2017 financial results. I'm very pleased with the results of our third quarter, as we continue to experience consistent growth and increased level of profits. Revenues for the third quarter reached $65.7 million, reflecting 21% year-over-year growth, and non-GAAP operating income increased 17% to $9.1 million for the quarter. We expect our strong sales momentum to continue throughout the remainder of the year. And as a result, we've removed -- we've narrowed our revenue guidance to be in the range of $250 million to $255 million. Our growth, which was mainly driven by organic expansion, is a direct result of the increasing demand for our software and professional services in all regions and highlight the relevance of our solutions, as companies continue to drive digital transformation across their organizations.

Today, Magic is positioned as an innovative software solution provider, offering end-to-end solution, while creating greater value for our customers and shareholders. With respect to our market opportunity, we are investing in new products and services to complement our core offerings and entering new service models to give customers more flexibility. I'm confident that the recent addition of Magic xpc, our new iPaaS Platform to our integration suite, further strengthens our position to expand our footprint in the fast-growing integration market. As a result of our focus on this market, this quarter, we continued to win new projects and expand our customer base. Now I would like to turn the call over to Asaf, our Chief Financial Officer, to discuss our financial results and outlook for 2017. Asaf, please?

Thank you, Guy. And good morning, everyone. As Guy mentioned, our quarter revenue totaled $65.7 million, up 21% compared to $54.5 million for the third quarter last year, mainly driven by our organic expansion. Analyzing our revenue growth, our organic growth rate was approximately 15%, accounting for 70% of our third quarter year-over-year growth. I would like to emphasize that compared to the 2 most recent quarters, all of our growth is organic.

Looking at the geographical breakdown of our revenues, our geographic mix remained steady during the third quarter. North America accounted for 49% of total revenues. Europe, which includes Israel, 45%, and APAC and the rest of the world accounted for 6% of our quarterly revenues. Most of our goals in 2017 as well as in the third quarter was for North America and Israel, which are our strongest territories.

Turning now to profitability, our non-GAAP gross profit in dollars for the third quarter of 2017 was $22.8 million, up approximately 13% compared to $20.1 million in the third quarter of last year, and up 2% compared to the second quarter of 2017. Our non-GAAP gross margin was 34.7%, down from 36.9% for the third quarter of last year and 34% in the previous quarter. The continued decrease in our gross margin compared to the respective quarter resulted mainly from the shift in our revenue mix from software towards professional services. The breakdown of our revenue mix for the first 9 months was 30% related to our software solution and 70% related to our professional services versus 35% software solutions and 65% professional services in 2016, as a whole.

Moving to operational cost. R&D expenses on a non-GAAP basis in the third quarter of 2017 totaled to $2.5 million compared to $2.7 million in the same quarter of last year. The decrease in R&D expenses is due to allocating a portion of our R&D workforce to our offshore facilities in India and St Petersburg, which carries lower cost. Our non-GAAP operating income for the third quarter increased 17% to $9.1 million compared to $7.7 million in the same period last year. This reflects an operating margin of 17.8% for the quarter, compared to 14.2% for the same quarter last year and 13.8% compared to the trailing 2 quarters. This decrease in our operating margin compared to the respective period is consistent with the decrease in our gross margin.

Our non-GAAP tax expenses this quarter totaled $2.1 million, representing an effective tax rate of approximately 24% compared to the tax expense of $1.2 million in the third quarter of 2016, reflecting an effective tax rate of 15%. We estimate that our effective tax rates for the full year of 2017 will be approximately 22%. Our non-GAAP net income for the third quarter decreased 2% to $5.2 million or $0.12 per fully diluted share, compared to $5.3 million or $0.12 per fully diluted share in the same period last year. The decrease in net income was mainly attributable to the increase in our effective tax rate.

Turning now to the balance sheet. As of September 30, cash and cash equivalents, short-term bank deposit and marketable securities amounted to approximately $89 million, compared to approximately $88 million at the end of 2016. Our total financial debt as of September 30, amounted to $42.4 million, compared to $35.4 million at the end of 2016. From a cash flow perspective, we generated $2.7 million from operating activities in the third quarter and $17.8 million during the first 9 months of this year.

Lastly, turning to our 2017 guidance. Due to a better visibility, we are narrowing our full year revenue guidance to be in the range of $250 million to $255 million on a constant-currency basis, as from prior guidance of $245 million to $255 million, reflecting a revised annual growth rate of 24% to 26%. Our revised guidance is a result of our strong business momentum in recent quarters and our visibility into the last quarter of the year. With that, I will turn the call back to Guy to closing comments.

Thank you, Asaf. In summary, we are pleased to report that we delivered another strong performance in the third quarter with solid year-over-year double-digit growth and profitability on both our top and bottom lines. As we see our growth trend successfully moving forward, we remain excited about our market opportunity and continue to pursue additional growth through acquisitions, where it makes business sense for new products, new markets and even new partners who can help us gain new customers. With that, I will now turn the call over to the operator for questions. Operator?

(Operator Instructions) The first question is from Bhavan Suri of William Blair.

I just wanted to touch a little bit on the upside, you've now had a couple of quarters where you've seen nice upside. And maybe, Guy, you can address as the -- where is that coming from? What types of projects? Is there a pattern there? Is it some of the platform? What's, sort of, driving that upside? Because you're beating your expectations, certainly our expectations, just hoped to understand a little more?

I think, it's coming from all over the place. A lot of organizations are preparing themselves for -- to go digital. A lot of transformation projects, as a result, a lot of integration projects. So it's all over.

Any specific industry, Guy, or geography or anything like that?

Geography, I would say, mainly the States and probably Israel as well are becoming quite strong. Sector wise, this -- the usual suspects, the financial sector is very dominant.

Got it, got it. And then I wanted to touch -- and I know we tried to chat about this, but we haven't caught up, but I wanted to touch on this partner business unit you've built out. Sort of, just a little color on, sort of, who're we targeting here? And as you think about these integration channel partners, that's going to compete with your services business? So help me understand the dynamic there a little bit?

In that aspect, what we're trying to do is, we tried to expedite the recruitment of more software houses that -- or system integrators that -- especially in the work of integration, that can utilize our technology and the experience that we absorb during the years and help us with the service -- of our technology. Currently more integration -- currently a significant portion of our integration sales are being sold directly. We want to increase that, first of all, through an agreement that we signed with [Ecosystem], such as Salesforce, such as SAP, OVERKILL, to provide us with a much greater lead in the short term. This is one thing, and the other thing is to utilize their system integrators to use our technology in order to facilitate their projects.

The idea is to come up with ready-made -- The what?

So after this -- go ahead.

The idea is to come up with ready-made solutions for ecosystems of different vendors. So for example, the joint -- the partnership that we have with Salesforce is, of course, we bring them to the table technology that can integrate between Salesforce and SAP, Salesforce and Dynamic, Salesforce and you name it. So for their partner, it's quite attractive.

Yes. So let me delve into that a second. So does that -- so when those guys sell it, I mean, I would expect then license revenue for Magic to start increasing. Because obviously, that's, kind of, what you're going to have them sell. But then, do you think you'll see a similar decline in your services business, your project business? How should we think about that balance? That's what I'm trying to get to.

What we believe we will see is -- definitely, we hope to see an increase on the licenses sales. I don't think, it will cannibalize the services, because the services are mostly sold directly and here, you're talking about sales that are indirect and probably, the work is going to be done by the other partners.

Got it, got it. And Asaf, one last one for you. Just on gross margins, if we think about the gross margins, our assumption is that license and maintenance are roughly 90% gross margin. Is that a reasonable assumption? And is that how we should think about it going forward, if this partner business unit or once the partner business unit starts, sort of, kicking into gear, understand, it's early, maybe something in '18, maybe more in '19, but is that a reasonable gross margin assumption, as we think about, sort of, how those might trend over the medium term?

If it starts to kick off, yes.

And the 90% is a good number for the software or maintenance gross margins, Guy?

Yes. This is what we're doing today.

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

Yes. So thank you all for joining us today, and we hope to continue and bring you more good news next quarter. Thank you.

Thank you. This concludes the Magic Software Enterprises Ltd Third Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.