Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q1 2023 Earnings Conference Call May 18, 2023 10:00 AM ET Company Participants Asaf Berenstin - Chief Financial Officer Guy Bernstein - Chief Executive Officer Conference Call Participants Chris Reimer - Barclays Maggie Nolan - William Blair Mike Silver - Kensington Capital Corp Operator Welcome to Magic Software Enterprises 2023 First Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session ...

Exhibit 99.1 PRESS RELEASE Magic Software Reports First Quarter 2023 Financial Results Revenues for the first quarter of 2023 increased by approximately 3% to a record-breaking first quarter result of $142.4 million, compared to $138.7 million in the same period of the previous year. Or Yehuda, Israel, May 18, 2023 – Magic Software Enterprises Ltd. (NASDAQ and TASE: MGIC) ("the Company"), a global provider of IT consulting services and end-to-end integration and application development platforms solutions, ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 20-F ☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ OR ☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 ...

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q4 2022 Earnings Conference Call March 9, 2023 10:00 AM ET Company Participants Guy Bernstein - Chief Executive Officer Asaf Berenstin - Chief Financial Officer Yuval Lavi - Chief Technology Officer Conference Call Participants Chris Reimer - Barclays Kate Cranston - William Blair Operator Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises 2022 Fourth Quarter and Full Year Financial Results Conference Call. Magic's fourth ...

Exhibit 99.1 PRESS RELEASE Magic Software Reports Fourth Quarter and Full Year 2022 Financial Results with Record-Breaking Full Year 2022 Results Recorded Across All Key Financial Indices (Revenues, Gross Profit, Operating Income and Net Income) Net income for the year increased by 38.6% year over year to a record-breaking result of $40.7 million; non-GAAP net income for the year increased by 13% year over year to a record-breaking result of $52.0 million Or Yehuda, Israel, March 9, 2023 – Magic Software En ...

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q3 2022 Earnings Conference Call November 14, 2022 10:00 AM ET Company Participants Asaf Berenstin - Chief Financial Officer Guy Bernstein - Chief Executive Officer Yuval Lavi - Vice President of Technology and innovation Conference Call Participants Chris Reimer - Barclays Bank PLC Operator Welcome to Magic Software Enterprises??? 2022 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and ...

Third Quarter and Nine-Month 2022 Financial Results Overview [Third Quarter 2022 Financial Performance](index=1&type=section&id=1.1.%20Third%20Quarter%202022%20Financial%20Performance) Magic Software achieved record revenue and net income growth in Q3 2022, with GAAP revenue up 19.1% to $144.0 million Key Financial Data for Q3 2022 (GAAP vs. Non-GAAP) | Metric | Q3 2022 (GAAP) | Q3 2021 (GAAP) | % Change (GAAP) | Q3 2022 (Non-GAAP) | Q3 2021 (Non-GAAP) | % Change (Non-GAAP) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $144.0M | $120.9M | 19.1% | $144.0M | $120.9M | 19.1% | | Gross Profit | $39.4M | $32.6M | 20.6% | $40.5M | $34.2M | 18.5% | | Operating Income | $16.1M | $12.0M | 33.7% | $18.5M | $16.2M | 14.4% | | Net Income | $11.5M | $7.5M | 53.3% | $13.5M | $11.8M | 14.9% | | Diluted EPS | $0.23 | $0.15 | 53.3% | $0.28 | $0.24 | 16.7% | - On a constant currency basis, Q3 revenue grew **23% to $148.8 million**, with **19.1% organic growth**; operating income grew **40.6% to $16.9 million**, with **37.7% organic growth**; and non-GAAP operating income grew **19.2% to $19.3 million**, with **15.4% organic growth**[3](index=3&type=chunk) [Nine-Month Period 2022 Financial Performance](index=2&type=section&id=1.2.%20Nine-Month%20Period%202022%20Financial%20Performance) For the first nine months of 2022, the company reported strong results with GAAP revenue reaching $419.6 million, a 20.8% increase Key Financial Data for the First Nine Months of 2022 (GAAP vs. Non-GAAP) | Metric | 9 Months 2022 (GAAP) | 9 Months 2021 (GAAP) | % Change (GAAP) | 9 Months 2022 (Non-GAAP) | 9 Months 2021 (Non-GAAP) | % Change (Non-GAAP) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $419.6M | $347.3M | 20.8% | $419.6M | $347.3M | 20.8% | | Gross Profit | $113.5M | $95.6M | 18.7% | $117.6M | $100.3M | 17.2% | | Operating Income | $46.8M | $37.0M | 26.6% | $55.0M | $47.1M | 16.8% | | Net Income | $30.6M | $22.8M | 34.1% | $38.1M | $33.4M | 14.1% | | Diluted EPS | $0.59 | $0.46 | 28.3% | $0.77 | $0.68 | 13.2% | - Cash flow from operations for the first nine months reached **$37.5 million**, compared to $34.2 million in the prior year period[6](index=6&type=chunk) - The company raised its full-year 2022 revenue guidance for the third time to **$555 million to $565 million**, reflecting annual growth of 15.6% to 17.6%[6](index=6&type=chunk) [CEO Commentary](index=3&type=section&id=1.3.%20CEO%20Commentary) The CEO highlighted record Q3 results with double-digit growth across all key financial metrics, driven by strong global demand - CEO Guy Bernstein expressed satisfaction with the **record-breaking performance and double-digit growth** across all key financial metrics in Q3, including revenue, gross profit, operating income, and net income[7](index=7&type=chunk) - Strong results were driven by growing investments in digital technologies and cloud platforms by global enterprises, creating high demand for the company's innovative software solutions and services[7](index=7&type=chunk) - The company will continue to invest in its service lines both organically and inorganically to build innovative capabilities and drive long-term profitable growth and shareholder value[7](index=7&type=chunk) Non-GAAP Financial Measures [Explanation and Purpose](index=3&type=section&id=2.1.%20Explanation%20and%20Purpose) The company utilizes non-GAAP financial measures to provide useful information to management and investors for assessing performance - Non-GAAP measures include non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, and non-GAAP basic and diluted earnings per share[10](index=10&type=chunk) - Management uses these non-GAAP metrics for trend analysis, determining executive compensation, and budget planning, believing they provide additional tools for investors to evaluate ongoing operational performance[11](index=11&type=chunk) - Management presents non-GAAP financial measures alongside GAAP results and urges investors to review the reconciliation tables, as non-GAAP measures exclude significant expenses and income required by GAAP[12](index=12&type=chunk) [Reconciliation of GAAP and Non-GAAP Results](index=7&type=section&id=2.2.%20Reconciliation%20of%20GAAP%20and%20Non-GAAP%20Results) This section provides detailed reconciliation tables from GAAP to non-GAAP metrics, clarifying adjustments for transparency Reconciliation of GAAP to Non-GAAP Gross Profit (in thousands of USD) | Item | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | GAAP Gross Profit | $39,363 | $32,626 | $113,534 | $95,619 | | Amortization of capitalized software and acquired technology | $1,051 | $1,394 | $3,307 | $4,244 | | Amortization of other intangible assets | $79 | $156 | $745 | $466 | | **Non-GAAP Gross Profit** | **$40,493** | **$34,176** | **$117,586** | **$100,329** | Reconciliation of GAAP to Non-GAAP Operating Income (in thousands of USD) | Item | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | GAAP Operating Income | $16,111 | $12,049 | $46,786 | $36,951 | | Gross profit adjustments | $1,130 | $1,550 | $4,052 | $4,710 | | Amortization of other intangible assets | $1,776 | $1,737 | $6,158 | $5,040 | | Change in valuation of contingent consideration | $(177) | $660 | $(283) | $678 | | Capitalization of software development | $(724) | $(723) | $(2,329) | $(2,345) | | Acquisition-related costs | $317 | $745 | $376 | $1,232 | | Equity-based compensation | $70 | $155 | $210 | $802 | | **Non-GAAP Operating Income** | **$18,503** | **$16,173** | **$54,970** | **$47,068** | Reconciliation of GAAP to Non-GAAP Net Income (in thousands of USD) | Item | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | GAAP Net Income attributable to Magic's shareholders | $11,493 | $7,497 | $30,598 | $22,820 | | Operating income adjustments | $2,392 | $4,124 | $8,184 | $10,117 | | Expenses attributable to non-controlling interests and redeemable non-controlling interests | $(124) | $(225) | $(444) | $(558) | | Change in fair value of unsettled contingent consideration | $111 | $505 | $833 | $1,673 | | Deferred taxes on the above items | $(350) | $(130) | $(1,093) | $(687) | | **Non-GAAP Net Income attributable to Magic's shareholders** | **$13,522** | **$11,771** | **$38,078** | **$33,365** | | Non-GAAP Basic EPS | $0.28 | $0.24 | $0.78 | $0.68 | | Non-GAAP Diluted EPS | $0.28 | $0.24 | $0.77 | $0.68 | Company Information [About Magic Software Enterprises](index=4&type=section&id=3.1.%20About%20Magic%20Software%20Enterprises) Magic Software Enterprises Ltd is a global provider of IT consulting services and end-to-end integration and application development platforms - Magic Software Enterprises Ltd is a leading global provider of IT consulting services, specializing in end-to-end integration and application development platform solutions[14](index=14&type=chunk) [Forward-Looking Statements](index=4&type=section&id=3.2.%20Forward-Looking%20Statements) This release contains forward-looking statements based on current management assumptions, which are not guarantees of future performance - Certain statements in this press release constitute "forward-looking statements" based on management's current views and assumptions about future events[16](index=16&type=chunk) - Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those stated[16](index=16&type=chunk) - The company undertakes no obligation to update or revise any forward-looking statements and advises investors to refer to the risk factors detailed in its Form 20-F annual report filed with the SEC[16](index=16&type=chunk) [Press Contact](index=4&type=section&id=3.3.%20Press%20Contact) Media and investors can contact CFO Asaf Berenstin for additional information - The press contact is Asaf Berenstin, CFO, who can be reached at ir@magicsoftware.com[18](index=18&type=chunk) [Conference Call Details](index=3&type=section&id=3.4.%20Conference%20Call%20Details) Management held a conference call on November 14, 2022, to discuss the company's performance, with replay details provided - Magic Software's management held a conference call on November 14, 2022, at 10:00 a.m. Eastern Time to discuss the company's performance[8](index=8&type=chunk) - A replay of the conference call is available on the Investor Relations section of Magic Software's website for those unable to attend the live broadcast[9](index=9&type=chunk) Condensed Consolidated Financial Statements [Balance Sheets](index=5&type=section&id=4.1.%20Balance%20Sheets) As of September 30, 2022, total assets were $496.5 million, a slight increase from year-end 2021 Condensed Consolidated Balance Sheets (in thousands of USD) | Item | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $82,762 | $88,090 | | Trade receivables, net | $143,776 | $142,071 | | Total current assets | $243,128 | $246,779 | | Identifiable intangible assets and goodwill, net | $211,946 | $198,193 | | Total long-term assets | $253,360 | $245,266 | | **Total Assets** | **$496,488** | **$492,045** | | **Liabilities and Equity** | | | | Short-term debt | $21,378 | $17,032 | | Total current liabilities | $123,230 | $108,265 | | Long-term debt | $37,727 | $20,155 | | Total long-term liabilities | $83,554 | $77,680 | | Equity attributable to Magic Software Enterprises | $251,845 | $265,248 | | **Total Liabilities, Redeemable Non-Controlling Interests and Equity** | **$496,488** | **$492,045** | [Statements of Income](index=6&type=section&id=4.2.%20Statements%20of%20Income) The income statements for Q3 and the first nine months of 2022 show significant growth in revenue and net income Condensed Consolidated Statements of Income (in thousands of USD, except per share data) | Item | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $143,963 | $120,870 | $419,646 | $347,323 | | Cost of revenues | $104,600 | $88,244 | $306,112 | $251,704 | | Gross profit | $39,363 | $32,626 | $113,534 | $95,619 | | Operating income | $16,111 | $12,049 | $46,786 | $36,951 | | Net income | $12,907 | $8,762 | $34,960 | $26,640 | | Net income attributable to Magic's shareholders | $11,493 | $7,497 | $30,598 | $22,820 | | Basic and diluted net earnings per share attributable to Magic's shareholders | $0.23 | $0.15 | $0.59 | $0.46 | [Statements of Cash Flows](index=8&type=section&id=4.3.%20Statements%20of%20Cash%20Flows) The cash flow statement for the first nine months of 2022 reflects positive operating cash flow and key investment activities Condensed Consolidated Statements of Cash Flows (in thousands of USD) | Item | 9 Months 2022 (Unaudited) | 9 Months 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,533 | $34,151 | | Net cash used in investing activities | $(27,316) | $(11,968) | | Net cash used in financing activities | $(8,696) | $(12,009) | | Effect of exchange rate changes on cash and cash equivalents | $(6,849) | $(1,137) | | Increase (decrease) in cash and cash equivalents | $(5,328) | $9,037 | | Cash and cash equivalents at end of period | $82,762 | $97,164 | - Cash used in investing activities primarily included **$23.1 million** in cash paid for acquisitions and **$2.3 million** for capitalized software development costs[22](index=22&type=chunk) - Cash used in financing activities primarily included **$24.8 million** in dividend payments and **$4.6 million** for deferred and contingent consideration related to acquisitions, partially offset by **$30.5 million** in short and long-term loans received[22](index=22&type=chunk) [Summary of Non-GAAP Financial Information](index=9&type=section&id=4.4.%20Summary%20of%20Non-GAAP%20Financial%20Information) This section summarizes key non-GAAP financial metrics for Q3 and the first nine months of 2022, showing core business profitability Summary of Non-GAAP Financial Information (in thousands of USD, except per share data) | Item | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $143,963 | $120,870 | $419,646 | $347,323 | | Gross Profit | $40,493 (28.1%) | $34,176 (28.3%) | $117,586 (28.0%) | $100,329 (28.9%) | | Operating Income | $18,503 (12.9%) | $16,173 (13.4%) | $54,970 (13.1%) | $47,068 (13.6%) | | Net Income attributable to Magic's shareholders | $13,522 (9.4%) | $11,771 (9.7%) | $38,078 (9.1%) | $33,365 (9.6%) | | Basic EPS | $0.28 | $0.24 | $0.77 | $0.68 | | Diluted EPS | $0.28 | $0.24 | $0.77 | $0.68 |

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q2 2022 Earnings Conference Call August 11, 2022 10:00 AM ET Company Participants Guy Bernstein - CEO Asaf Berenstin - CFO Yuval Lavi - VP, Technology and Innovation Conference Call Participants Tavy Rosner - Barclays Maggie Nolan - William Blair Operator Ladies and gentlemen, thank you for standing by. Welcome to Magic Software Enterprises 2022 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being reco ...

[Introduction](index=4&type=section&id=Introduction) Magic Software Enterprises Ltd. offers global software services, IT outsourcing, and proprietary low-code platforms for application development and integration across various industries [Company Overview](index=4&type=section&id=Company%20Overview) Magic Software Enterprises Ltd. offers global software services, IT outsourcing, and proprietary low-code platforms for application development and integration across various industries - The company operates in four main business areas: (i) software and IT outsourcing services, (ii) application development and integration platforms, (iii) vertical software solutions, and (iv) cloud-based digital transformation services[21](index=21&type=chunk) - Key proprietary platforms include **Magic xpa** and **AppBuilder** for low-code application development, and **Magic xpi** for application integration[26](index=26&type=chunk) - The company offers specialized vertical software solutions such as **Clicks™** for healthcare, **Leap™** for telecom billing, and **Hermes** for air cargo management[24](index=24&type=chunk)[28](index=28&type=chunk) - As of the report date, the company has approximately **3,677 employees** and operates through a network of over **3,000 independent software vendors (ISVs) and partners** in about **50 countries**[25](index=25&type=chunk) [Forward-Looking Statements](index=7&type=section&id=Forward-Looking%20Statements) This section highlights that the annual report contains forward-looking statements subject to various risks, including M&A integration, competition, cybersecurity, and geopolitical instability in Israel - Key risks highlighted include challenges in integrating acquired companies, lengthy and complex sales cycles, competition, cybersecurity breaches, the impact of the COVID-19 pandemic, and risks associated with global operations and the company's location in Israel[37](index=37&type=chunk) [Key Information](index=10&type=section&id=ITEM%203.%20KEY%20INFORMATION) The company identifies significant risks across its business, industry, operations, and location [Risk Factors](index=10&type=section&id=D.%20Risk%20Factors) The company faces significant risks across its business, industry, and operations, including M&A integration, product dependence, intense competition, and geopolitical instability in Israel [Risks Related to Our Business and Our Industry](index=10&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Our%20Industry) The company faces business and industry risks from M&A integration, product dependence, intense competition, customer concentration, and geopolitical conflicts - The company's M&A growth strategy involves significant risks related to integrating acquired businesses, operations, and employees[56](index=56&type=chunk) - A significant portion of revenues comes from a limited number of core product families (e.g., Magic xpa, Magic xpi, AppBuilder) and vertical solutions (e.g., Clicks, Leap, Hermes)[66](index=66&type=chunk)[67](index=67&type=chunk) - The company faces intense competition from multinational IT providers, offshore firms, and in-house IT departments[83](index=83&type=chunk) - The two largest clients accounted for **21.2% of revenues in 2021**, and the five largest accounted for **27.5%**, indicating significant customer concentration risk[77](index=77&type=chunk) - The ongoing military conflict between Russia and Ukraine poses geopolitical and economic risks, as the company employs approximately **220 people in Russia** and **104 in Ukraine**[89](index=89&type=chunk) - The company relies on a combination of contractual provisions and intellectual property law, rather than patents, to protect its proprietary technology[122](index=122&type=chunk) [Risks Related to Our Ordinary Shares](index=30&type=section&id=Risks%20Related%20to%20Our%20Ordinary%20Shares) Risks related to ordinary shares include dual listing price variations, limited liquidity, foreign private issuer status, and significant influence from a controlling shareholder - The company's ordinary shares are dual-listed on NASDAQ (MGIC) and the Tel Aviv Stock Exchange, which may result in price variations due to different currencies, time zones, and trading days[134](index=134&type=chunk) - As a foreign private issuer, the company is exempt from certain SEC rules, including proxy solicitations and Section 16 "short-swing" profit recovery provisions, resulting in less public disclosure compared to U.S. domestic companies[137](index=137&type=chunk) - As of April 1, 2022, controlling shareholder Formula Systems (1985) Ltd. beneficially owns approximately **45.58% of outstanding ordinary shares**, giving it controlling influence over matters requiring shareholder approval[139](index=139&type=chunk) [Risks Related to Our Location in Israel](index=33&type=section&id=Risks%20Related%20to%20Our%20Location%20in%20Israel) The company's Israeli location exposes it to regional political and military instability, potential operational disruptions, and specific legal provisions affecting acquisitions - The company's principal executive offices and R&D facilities are located in Israel, making it susceptible to political, economic, and military instability in the region[145](index=145&type=chunk) - Many Israeli employees are obligated to perform annual military reserve duty, and their absence during a military conflict could disrupt operations[148](index=148&type=chunk) - Provisions of Israeli corporate law regarding mergers and tender offers may delay, prevent, or complicate a potential acquisition of the company[151](index=151&type=chunk) [Information on the Company](index=35&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section provides an overview of the company's history, business operations, organizational structure, and property, plants, and equipment [History and Development of the Company](index=35&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) Founded in 1983, the company's shares are dual-listed, and it pursues growth through strategic acquisitions, with recent capital expenditures noted - The company's shares are dual-listed on the NASDAQ Global Select Market (since 2011) and the Tel Aviv Stock Exchange (since 2000)[153](index=153&type=chunk) - Recent acquisitions as part of its M&A strategy include **EnableIT**, **Menarva**, and **Soft IT** in 2021, and **Aptonet** and **Stockell** in 2020[159](index=159&type=chunk)[160](index=160&type=chunk)[161](index=161&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk) Capital Expenditures | Year | Capital Expenditures (in millions) | | :--- | :--- | | 2019 | $1.4 | | 2020 | $2.8 | | 2021 | $1.4 | [Business Overview](index=36&type=section&id=B.%20Business%20Overview) The company offers software platforms, vertical solutions, and IT services, leveraging strategic partnerships and industry trends like low-code and cloud for growth - The business model is based on three pillars: software technology platforms, vertical software packages, and professional software/IT services[166](index=166&type=chunk)[173](index=173&type=chunk)[175](index=175&type=chunk) - The company's low-code platforms (Magic xpa, AppBuilder, SmartUX) and integration platform (Magic xpi) are designed to reduce development time and cost for enterprise applications[171](index=171&type=chunk)[172](index=172&type=chunk) - Strategic partnerships include **Oracle** (Platinum Partner), **SAP** (Gold Partner), **Salesforce** (Premier ISV Partner), and **Microsoft** (Gold Competency)[179](index=179&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk)[182](index=182&type=chunk) - The company's growth strategy includes expanding within its existing customer base, capitalizing on trends like mobile and cloud, attracting new customers with new offerings, and pursuing complementary acquisitions[254](index=254&type=chunk) Revenue by Type (2019-2021) | Revenue Type | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Software sales | $30,934 | $24,272 | $28,084 | | Maintenance and technical support | $36,149 | $33,181 | $30,996 | | Consulting services | $413,242 | $313,741 | $266,550 | | **Total revenues** | **$480,325** | **$371,194** | **$325,630** | Revenue by Geography (2019-2021) | Geography | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | United States | $254,342 | $177,882 | $158,095 | | Israel | $180,462 | $149,094 | $124,523 | | Europe | $30,085 | $26,947 | $25,788 | | Japan | $11,443 | $12,643 | $12,499 | | Other | $3,993 | $4,628 | $4,725 | | **Total revenues** | **$480,325** | **$371,194** | **$325,630** | [Organizational Structure](index=62&type=section&id=C.%20Organizational%20Structure) This section details the company's global organizational structure, listing numerous wholly-owned and majority-owned subsidiaries across key regions - The company operates through a complex structure of numerous subsidiaries across the globe, with significant operations in the US, Israel, Japan, and Europe[297](index=297&type=chunk)[299](index=299&type=chunk) [Property, Plants and Equipment](index=64&type=section&id=D.%20Property,%20Plants%20and%20Equipment) The company's headquarters and global subsidiaries operate from leased facilities, with total annual rent for all locations reaching $5.4 million in 2021 - The company's principal executive office is a leased facility in Or Yehuda, Israel. The lease expires in June 2033 with options to extend[300](index=300&type=chunk) - The aggregate annual rent for all leased office facilities worldwide was **$5.4 million** for the year ended December 31, 2021[301](index=301&type=chunk) [Operating and Financial Review and Prospects](index=64&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section provides a comprehensive analysis of the company's financial performance, liquidity, capital resources, research and development efforts, and critical accounting policies [Operating Results](index=64&type=section&id=A.%20Operating%20Results) In 2021, total revenues grew 29% to $480.3 million, driven by professional services, though gross margin declined due to revenue mix shift, while operating and net income increased Financial Performance Summary (2020 vs. 2021) | Metric | 2021 (in millions) | 2020 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $480.3 | $371.2 | +29% | | Gross Profit | $133.0 | $109.6 | +21% | | Gross Margin | 27.7% | 29.5% | -1.8 p.p. | | Operating Income | $51.2 | $40.6 | +26% | | Net Income (to Shareholders) | $29.3 | $25.2 | +16% | - The revenue mix shifted in 2021, with professional services accounting for **81% of total revenue**, up from 77% in 2020. This shift contributed to the decline in overall gross margin[319](index=319&type=chunk) - Despite the revenue mix shift, the gross profit mix remained relatively stable, with software solutions contributing **45% of gross profit** in 2021 (vs. 47% in 2020) and professional services contributing **55%** (vs. 53% in 2020)[320](index=320&type=chunk) Research & Development Costs (Net) | Year | Gross R&D Costs (in thousands) | Capitalized Costs (in thousands) | Net R&D Expenses (in thousands) | | :--- | :--- | :--- | :--- | | 2021 | $12,188 | $(3,193) | $8,995 | | 2020 | $12,091 | $(3,302) | $8,789 | | 2019 | $12,382 | $(4,143) | $8,239 | [Liquidity and Capital Resources](index=73&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with $94.8 million in cash and $138.6 million in net working capital, financing operations through cash flow, investments, and debt, while adhering to a dividend policy Liquidity Position (as of Dec 31) | Metric | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Cash, cash equivalents & marketable securities | $94.8 | $89.7 | | Net working capital | $138.6 | $126.4 | | Long-term debt | $20.2 | $13.4 | Cash Flow Summary (2019-2021) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $37,810 | $52,296 | $45,948 | | Net cash used in investing activities | $(16,854) | $(9,604) | $(15,440) | | Net cash used in financing activities | $(20,735) | $(39,647) | $(36,980) | - The decrease in operating cash flow in 2021 was primarily driven by a **$27.4 million increase in trade receivables**[364](index=364&type=chunk) - The company has a dividend policy to distribute up to **75% of its annual net income** attributable to shareholders, distributed on a semi-annual basis[374](index=374&type=chunk) [Research and Development](index=77&type=section&id=C.%20Research%20and%20Development) The company prioritizes R&D, investing $12.2 million in 2021, with a team of 228 employees primarily based in Israel, India, and Russia R&D Investment (Gross) | Year | R&D Investment (in millions) | | :--- | :--- | | 2019 | $12.4 | | 2020 | $12.1 | | 2021 | $12.2 | - As of December 31, 2021, the R&D team consisted of **228 employees**, with the majority located in Israel (87), India (114), and Russia (21)[379](index=379&type=chunk) [Critical Accounting Policies and Estimations](index=77&type=section&id=E.%20Critical%20Accounting%20Policies%20and%20Estimations) This section details critical accounting policies, including revenue recognition, business combinations, goodwill impairment testing, and the capitalization and amortization of research and development costs - Revenue Recognition (ASC 606): The company recognizes revenue when control of goods or services is transferred. Software licenses are typically recognized at a point in time, while services and customized solutions are recognized over time[382](index=382&type=chunk)[385](index=385&type=chunk) - Business Combinations (ASC 805): The company allocates the purchase price of acquisitions to the fair value of assets and liabilities, requiring significant estimates for intangible assets like customer relationships and technology[398](index=398&type=chunk)[399](index=399&type=chunk) - Goodwill: Goodwill is tested for impairment annually at the reporting unit level using a discounted cash flow model. No impairment losses were identified in 2019, 2020, or 2021[402](index=402&type=chunk)[405](index=405&type=chunk)[406](index=406&type=chunk) - Research and Development Costs: R&D costs are expensed until technological feasibility is established. Subsequent costs are capitalized and amortized over the product's estimated useful life (typically 5 years)[392](index=392&type=chunk)[395](index=395&type=chunk) [Directors, Senior Management and Employees](index=84&type=section&id=ITEM%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section outlines the company's leadership, compensation practices, board structure, employee demographics, and share ownership [Directors and Senior Management](index=84&type=section&id=A.%20Directors%20and%20Senior%20Management) This section lists the company's directors and executive officers, including key figures like CEO Guy Bernstein and CFO Asaf Berenstin, noting the board's composition with external directors - Guy Bernstein is the Chief Executive Officer and a Director. He also serves as the CEO of the parent company, Formula Systems[430](index=430&type=chunk)[433](index=433&type=chunk) - Asaf Berenstin serves as the Chief Financial Officer for both Magic Software and Formula Systems[430](index=430&type=chunk)[438](index=438&type=chunk) [Compensation](index=86&type=section&id=B.%20Compensation) Total compensation for directors and executive officers was approximately $3.45 million in 2021, with a detailed breakdown provided for the five most highly compensated officers - Total compensation for all 13 directors and executive officers as a group was **$3,361,141 in salaries/bonuses** and **$87,971 in pension/benefits** for the year ended December 31, 2021[447](index=447&type=chunk) 2021 Summary Compensation Table (Top 5 Officers) | Name and Position | Salary (in USD) | Bonus (in USD) | Equity Based Compensation (in USD) | All Other Compensation (in USD) | Total (in USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Arik Kilman, Chairman, Software Group | $278,620 | $416,720 | $956,000 | - | $1,651,340 | | Yakov Tsaroya, President, Coretech | $400,000 | $1,189,000 | - | $54,000 | $1,643,000 | | Arik Faingold, President, Integration Solutions | $669,000 | $196,820 | - | - | $865,820 | | Yuval Baruch, CEO of Hermes Logistics | $275,525 | $176,300 | - | - | $323,925 | | Hanan Shahaf, CEO of Roshtov Software | $317,520 | - | - | $8,100 | $325,620 | [Board Practices](index=88&type=section&id=C.%20Board%20Practices) The company's board, comprising five directors including two external directors, operates with Audit and Compensation Committees, adhering to Israeli law for governance and related-party transaction approvals - The board of directors is currently composed of **five members**, including two external directors as required by Israeli Companies Law[456](index=456&type=chunk)[459](index=459&type=chunk) - The company has an Audit Committee and a Compensation Committee, both comprised of independent directors, to oversee financial reporting, internal controls, and executive compensation[470](index=470&type=chunk)[472](index=472&type=chunk) - Transactions with controlling shareholders or office holders require a stringent approval process involving the audit/compensation committee, the board of directors, and often a special majority of non-interested shareholders[479](index=479&type=chunk)[480](index=480&type=chunk) [Employees](index=98&type=section&id=D.%20Employees) The company's workforce grew to 3,677 employees in 2021, primarily in North America and Israel, with most in technical support and consulting roles, emphasizing retention strategies Employees by Geographic Location | Region | 2021 (Number of Employees) | 2020 (Number of Employees) | 2019 (Number of Employees) | | :--- | :--- | :--- | :--- | | Israel | 1,268 | 1,184 | 1,133 | | Asia | 190 | 204 | 186 | | North America | 1,709 | 1,513 | 1,194 | | South Africa | 12 | 12 | 14 | | Europe | 498 | 126 | 115 | | **Total** | **3,677** | **3,039** | **2,642** | Employees by Activity | Activity | 2021 (Number of Employees) | 2020 (Number of Employees) | 2019 (Number of Employees) | | :--- | :--- | :--- | :--- | | Technical support and consulting | 3,137 | 2,506 | 2,126 | | Research and development | 228 | 233 | 212 | | Marketing and sales | 166 | 161 | 158 | | Operations and administrations | 146 | 139 | 146 | | **Total** | **3,677** | **3,039** | **2,642** | [Share Ownership](index=100&type=section&id=E.%20Share%20Ownership) As of April 1, 2022, directors and executive officers held 260,775 ordinary shares, with equity awards granted under the 2007 Incentive Compensation Plan, extended to 2027 - As of April 1, 2022, directors and executive officers as a group (13 persons) beneficially owned **260,775 Ordinary Shares**[505](index=505&type=chunk)[514](index=514&type=chunk) - The company's 2007 Incentive Compensation Plan allows for equity grants to employees, directors, and consultants and is set to terminate in August 2027[506](index=506&type=chunk)[508](index=508&type=chunk) [Major Shareholders and Related Party Transactions](index=103&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details the company's major shareholders and outlines its policies and procedures for related party transactions [Major Shareholders](index=103&type=section&id=A.%20Major%20Shareholders) Formula Systems (1985) Ltd. is the controlling shareholder with 45.58% ownership, alongside other major institutional shareholders, all possessing equal voting rights - Formula Systems (1985) Ltd. is the controlling shareholder, holding **45.58% of outstanding shares** as of April 1, 2022. Formula Systems is controlled by Asseco Poland S.A[516](index=516&type=chunk) Major Shareholders (as of Dec 31, 2021) | Shareholder | Percentage of Ownership | | :--- | :--- | | Formula Systems (1985) Ltd. | 45.59% | | Harel Insurance | 9.37% | | Clal Insurance Enterprises Holdings Ltd. | 7.51% | [Financial Information](index=106&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section provides an overview of the company's consolidated financial statements, legal proceedings, and dividend policy [Consolidated Statements and Other Financial Information](index=106&type=section&id=A.%20Consolidated%20Statements%20and%20Other%20Financial%20Information) This section details a $1.6 million arbitration ruling against the company in 2021 and outlines its dividend policy to distribute up to 75% of annual net income - In July 2021, an arbitrator ruled that the company must pay **$1.6 million in damages** related to a lawsuit filed in 2016 by an Israeli software company concerning alleged copyright infringement warnings[528](index=528&type=chunk) - The company's dividend policy is to distribute up to **75% of its annual net income** attributable to shareholders, subject to board discretion and applicable law[529](index=529&type=chunk) [The Offer and Listing](index=107&type=section&id=ITEM%209.%20THE%20OFFER%20AND%20LISTING) This section describes the markets where the company's ordinary shares are traded [Markets](index=107&type=section&id=C.%20Markets) The company's ordinary shares are dual-listed and traded on the NASDAQ Global Select Market and the Tel Aviv Stock Exchange - The company's ordinary shares are listed on the **NASDAQ Global Select Market (MGIC)** and the **Tel Aviv Stock Exchange (TASE)**[533](index=533&type=chunk)[535](index=535&type=chunk) [Additional Information](index=108&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section provides additional details, including the company's taxation policies and their implications for shareholders [Taxation](index=109&type=section&id=E.%20Taxation) This section outlines Israeli and U.S. tax implications for shareholders, including corporate tax rates, dividend withholding, capital gains, and the company's non-PFIC status for 2021 - The general corporate tax rate in Israel is **23%**, but the company benefits from reduced rates under the Law for the Encouragement of Capital Investments, with some income qualifying for rates as low as **12% or 6%**[552](index=552&type=chunk)[564](index=564&type=chunk)[567](index=567&type=chunk) - For non-Israeli resident shareholders, dividends are generally subject to a **25% withholding tax**, which may be reduced by an applicable tax treaty. Dividends from income under preferred tax regimes may be subject to lower rates (e.g., 15% or 20%)[581](index=581&type=chunk) - For U.S. Holders, dividends are generally taxable as ordinary income but may qualify for lower long-term capital gain rates if the company is considered a "qualified foreign corporation"[588](index=588&type=chunk)[591](index=591&type=chunk) - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2021 taxable year, but its status is determined annually and cannot be guaranteed for future years[595](index=595&type=chunk) [Quantitative and Qualitative Disclosures about Market Risks](index=120&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) This section details the company's exposure to market risks, primarily from interest rate and foreign currency fluctuations, and its strategies for mitigation [Market Risk Analysis](index=120&type=section&id=Market%20Risk%20Analysis) The company faces market risks primarily from interest rate fluctuations and significant foreign currency exposure, particularly to the NIS, Euro, JPY, and GBP, which it mitigates with hedging - The company's main market risks are interest rate fluctuations affecting its investment portfolio and foreign currency exchange risk[612](index=612&type=chunk) - The company's earnings are predominantly affected by fluctuations of the U.S. dollar against the **New Israeli Shekel (NIS)**, **Euro**, **Japanese Yen**, and **British Pound**[616](index=616&type=chunk) - A hypothetical **10% increase** in the value of the NIS relative to the U.S. dollar in 2021 would have increased operating income by **$2.7 million**, while a **10% decrease** would have reduced it by **$2.2 million**[618](index=618&type=chunk) [Controls and Procedures](index=121&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) This section details management's assessment of the company's disclosure controls and internal control over financial reporting [Management's Assessment](index=121&type=section&id=Management%20Assessment) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, excluding recently acquired businesses - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective[624](index=624&type=chunk)[626](index=626&type=chunk) - The assessment of internal controls did not include companies acquired in 2021 (Menarva, Soft IT, and Enable IT), which represented **6% of revenues** for the year[627](index=627&type=chunk) [Corporate Governance and Other Information](index=122&type=section&id=ITEM%2016.%20Corporate%20Governance%20and%20Other%20Information) This section covers principal accountant fees and the company's corporate governance practices as a foreign private issuer [Principal Accountant Fees and Services](index=122&type=section&id=ITEM%2016C.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) This section details the fees paid to the principal independent accounting firm, Kost Forer Gabbay & Kasierer, totaling $468,000 in 2021, with all services pre-approved Accountant Fees (2020-2021) | Services Rendered | 2021 (in USD) | 2020 (in USD) | | :--- | :--- | :--- | | Audit | $376,000 | $365,000 | | Tax and other | $92,000 | $92,000 | | **Total** | **$468,000** | **$457,000** | [Corporate Governance](index=123&type=section&id=ITEM%2016G.%20CORPORATE%20GOVERNANCE) As a foreign private issuer, the company adheres to Israeli home country corporate governance practices, diverging from certain NASDAQ rules regarding independent directors and shareholder approvals - The company follows Israeli home country practices in lieu of certain NASDAQ rules, such as not requiring a majority of independent directors on the board and not requiring regularly scheduled meetings of only independent directors[639](index=639&type=chunk)[642](index=642&type=chunk) [Financial Statements](index=124&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section includes the independent auditor's report and the company's consolidated financial statements [Report of Independent Registered Public Accounting Firm](index=127&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor issued unqualified opinions on financial statements and internal controls, identifying goodwill valuation as a Critical Audit Matter due to complex estimations - The independent auditor issued an **unqualified opinion** on both the consolidated financial statements and the effectiveness of internal control over financial reporting[653](index=653&type=chunk)[664](index=664&type=chunk) - A Critical Audit Matter (CAM) was identified related to the **Valuation of Goodwill**. The audit of this area was considered complex and highly judgmental due to the significant estimations required for the discounted cash flow analysis, including projections of future revenues, operating margins, and discount rates[659](index=659&type=chunk)[661](index=661&type=chunk) [Consolidated Financial Statements](index=131&type=section&id=Consolidated%20Financial%20Statements) This section presents the company's detailed consolidated financial statements for 2021, prepared under U.S. GAAP, including balance sheets, income statements, and cash flow statements Consolidated Balance Sheet Highlights (As of Dec 31, 2021) | Account | Amount (in thousands) | | :--- | :--- | | **Total Assets** | **$492,045** | | Cash and cash equivalents | $88,090 | | Goodwill | $146,803 | | **Total Liabilities** | **$185,945** | | **Total Equity** | **$275,668** | Consolidated Statement of Income Highlights (Year Ended Dec 31, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Revenues | $480,325 | | Gross Profit | $132,994 | | Operating Income | $51,235 | | Net Income | $34,904 | | Net Income (to Magic Shareholders) | $29,332 | | Basic and Diluted EPS | $0.52 |

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q1 2022 Earnings Conference Call May 12, 2022 10:00 AM ET Company Participants Guy Bernstein - Chief Executive Officer Asaf Berenstin - Chief Financial Officer Yuval Lavi - Vice President, Technology and Innovation Conference Call Participants Tavy Rosner - Barclays Operator Welcome to Magic Software Enterprises 2022 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. With us on the line toda ...