Magic Software Enterprises Ltd.'s (MGIC) CEO Guy Bernstein on Q3 2021 Results - Earnings Call Transcript

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Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q3 2021 Earnings Conference Call November 15, 2021 10:00 AM ET

Company Participants

Guy Bernstein - Chief Executive Officer

Asaf Berenstin - Chief Financial Officer

Yuval Lavi - Vice President, of Technology and Innovation

Conference Call Participants

Maggie Nolan - William Blair

Operator

Welcome to Magic Software Enterprises 2021 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

With us on the line today are Magic’s CEO, Mr. Guy Bernstein; Magic’s CFO, Mr. Asaf Berenstin; and Mr. -- and Magic VP of Technology and Innovation, Mr. Yuval Lavi. Magic’s 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’d like to remind everyone 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 views or expectations or otherwise.

Also, during the course of today’s call, management will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on Magic Software Investor Relations section of the company website.

I will now turn the call over to Mr. Asaf Berenstin, CFO of Magic Software. Please go ahead.

Asaf Berenstin

Thank you, Operator. And thank you, everyone, for joining us today as we report our third quarter 2021 financial results. During the call today, I will review highlights from our third quarter results and provide an overview of our achievements.

Our results for the third quarter serves as another record quarter, which far -- which further adds to our strong 2021 momentum and outlines our continued focus on supporting our existing customers, the success of our strategy and the visibility of our business. Stable, profitable and with high level of visibility, as we reported 27% year-over-year growth in the quarter and 30% year-over-year growth for the first nine months of 2021.

Magic Software is a global company, operating across multiple markets and also in broad IT business service portfolio. Our strategy allows us to balance our growth, resources, investment and reach across regions and markets.

Over the past quarter we continue to demonstrate our continued focus on the execution of our growth strategy as our customers increasingly engaging us as a preferred partner for implementing fastest growing technologies such as digital, cloud, data and AI, creating significant value in managing, streamlining, accelerating and making their business thrive.

We are constantly increasing resources in order to support existing transformation project, as well as new business towards the final quarter of the year, while carefully managing and controlling our expenses. Our goal is to continue to offer our customers innovative, diverse and flexible solutions empowering them to gain a significant competitive advantage.

Our third quarter revenues reached a record high of $120.9 million, compared with $94.9 million for the third quarter last year, reflecting a year-over-year growth of 27.4%. We deliver these results despite the holidays of the Jewish month of Tishrei, which this year have entirely coincided with the third quarter as opposed to spreading over the third and fourth quarters in the previous year and reduced our time and material available billable hours in our operations in Israel by approximately 7%.

The organic revenue growth for the quarter was 14.1%, of which 2.5% resulting mainly from the devaluation of the U.S. dollar versus the new Israeli shekel and which reflects 52% of our year-over-year growth in the third quarter, with a balance of 13.3% resulting from the consolidation of acquired subsidiaries.

This achievement delivered the 14% year-over-year increase in non-GAAP operating income in the third quarter, with an operating margin reaching 13.4% for the third quarter, down from 14.9% in the same period last year. The decrease in operating margin was mainly attributable to the effect of the holidays of the Jewish month of Tishrei, which this year have entirely coincided with the third quarter, as opposed to spreading over the third and the fourth quarters in the previous year, therefore reducing our operating margin in the third quarter of 2021 by 110 basis points.

We are extremely proud of the success we continue to demonstrate for my organic growth. With 3,500 talented employees currently spread globally versus approximately 3,000 at the end of the third quarter of 2020, we have all the tools in place for continued growth. These disruptors -- the disruptors of COVID-19 and the rapid industry shift to digital are driving SMBs to speed up their digital transformation project. We are looking ahead to land new customers and extend existing customer business.

Moving to geographical breakdown of our revenues, during the third quarter, North America accounted for 55% of our total revenue, Israel 36%, Europe 6% and the APAC and the rest of the world accounted for 3% of our third quarter revenue. Most of our growth in absolute number is traditionally for North America and Israel, which are our strongest territory. This quarter, North America accounted for 86% of our growth and Israel accounted for 16%, as previously stated, mainly resulted from the negative impact of the holidays of the Jewish month of Tishrei.

Turning now to profitability, our non-GAAP gross profit for the third quarter of 2021 was $34.2 million, up approximately 11%, compared to $30.7 million in the third quarter of last year. Our non-GAAP gross margin for the third quarter of 2021 decreased by 410 basis points from 32.4% in the third quarter of 2020 to 28.3% in the third quarter of 2021.

The decrease in a gross margin is mainly attributable to; one, the change of our revenue mix related to our software solutions compared to our professional services; two, the increase in employee payroll costs due to increased demand for digital, cloud, data, cyber and core professional experts; and last, from the impact of the holiday of the Jewish month of Tishrei, which this year have entirely coincided with the third quarter, with the latter reducing our gross margin by approximately 70 basis points.

The breakdown of our revenue mix for the nine months period of 2021 was approximately 19% related to our software solution and 81% related to our professional services, compared to 24% related to our software solutions and 76 related to our professional services in the same period last year.

The breakdown of our gross profit mix for the nine months period of 2021 was approximately 45% related to our software solutions and 55% related to our professional services, compared to 50% related to our software solutions and 50% related to our professional services in the same period last year.

Moving to operational cost, R&D expenses on a non-GAAP basis in the third quarter of 2021 totaled $3 million, compared to $3.2 million in the second quarter of 2021 and $3.1 million in the same period of last year.

Our non-GAAP operating income for the third quarter of 2021 increased 14% to an all time high of $16.2 million, compared to $14.2 million in the same period last year and $15.9 million in the second quarter of 2021. This reflects an operating margin of 13.4% for the third quarter of 2021, compared to 14.9% in the third quarter of 2020 and 13.3% in the second quarter of 2021. Excluding the negative impact of the holidays of the Jewish month of Tishrei, our operating income for the third quarter -- operating margin for the third quarter of 2021 would have been 14.4%.

Our non-GAAP tax expenses this quarter totaled $2.3 million, compared to a tax expense of $3 million in the third quarter of 2020. Our effective tax rate for the nine month period of 2021 was approximately 18%, compared to 17% recorded in the -- in 2020 as a whole.

Our non-GAAP net income for the third quarter increased 24.5% to $11.8 million or $0.24 per fully diluted share, compared to $9.5 million or $0.19 per fully diluted shares in the same period last year.

Turning now to the balance sheet, as of September 30, 2021, cash and cash equivalents, short- and long-term bank deposit and marketable securities amounted to approximately $100 million, compared to $106 million in the previous quarter. Total financial debt as of September 30, 2021, amounted to $43 million, compared to $37 million in the previous quarter.

From a cash flow perspective, we generated $37 -- $34.2 million from operating activities in the first nine months of 2021.

In summary, the third quarter further establishes 2021 as a record breaking year in Magic history, delivering double-digit growth and record high results across all key financial indices, revenues, gross profit, operating income, net income and EBITDA. This performance demonstrates the important all Magic Software plays in its customer’s business, as the increasingly engages as a preferred partner for implementing fastest growing technologies such as digital, cloud, data, cyber and AI, creating significant value in managing, streamlining, accelerating and making the business slide.

In closing, I would like to turn to our guidance for 2021. Given the strong momentum we are experiencing in our pipeline we are revising for the third time this year our 2021 revenue guidance to a new range of $470 million to $475 million from a range of $450 million to $460 million, reflecting annual growth of 26.6% to 28% for the year.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Maggie Nolan of William Blair. Please go ahead.

Maggie Nolan

Thank you. When you’re thinking about your operating margins and you normalize for the impact of the holidays in the quarter, is that a good level that we should expect for, when we’re thinking about Q4 or 2022, is that the right run rate for the business or how should we be thinking about where costs may go in the next couple of quarters to year?

Asaf Berenstin

The last quarter of every year is normally characterized with a higher margin, because we intend to sell much more software, which of course, impacts our gross profit -- gross margin and operating margin. And same for professional services, I think that this quarter was, again, as I said, negatively impacted by the holiday season, which in oppose just in terms of billable days. So in Q3 -- in Q2, we had 63 billable days, this quarter we had 58 billable days and next quarter we have expected to have again around 62 billable days or 63 billable days. So just from that we expect to have better profit in the fourth quarter and better margins in the fourth quarter.

Maggie Nolan

Okay. Thank you. That’s helpful. And then will you talk about headcount positions in the quarter, what you’re seeing in terms of utilization of your employee base and attrition trends?

Asaf Berenstin

I think that Magic for many years use excel -- is excelling in the utilization that we managed to get for our personnel. We keep it for many, many years at the highest rate. We -- I think that the only times that we found ourselves with people with the reduced level of utilization was, if something has happened in the market, like, we -- like few years ago with the telecom market and last year with the COVID, where we found our self sitting -- having people sitting on the bench waiting for -- waiting to see the change in the market is something that is for a long-term or short-term, but normally we managed to utilize our people for the maximum.

Maggie Nolan

Okay. Thank you for taking my questions.

Operator

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

Guy Bernstein

Yes. So I would like to thank everybody for joining the call. We definitely see a promising outlook ahead of us. So we hope to bring you some more good news in the near future. Thank you.

Operator

Thank you. This concludes the Magic Software Enterprises Limited third quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.

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