Financial Data and Key Metrics Changes - Revenue in Q3 2020 increased by 11% to $94.9 million compared to $85.8 million in Q3 2019 [15] - Non-GAAP gross profit for Q3 2020 was $30.7 million, up approximately 6% from $28.9 million in Q3 2019 [17] - Non-GAAP net income for Q3 increased 17% to $9.5 million or $0.19 per fully diluted share, compared to $8.1 million or $0.17 per fully diluted share in the same period last year [22] Business Line Data and Key Metrics Changes - Revenue growth was driven by existing customer relationships and new business, with Israel seeing a 23% increase year-over-year, North America 8%, and Europe 7% [7] - The revenue mix for the nine-month period of 2020 was approximately 24% from software solutions and 76% from professional services, compared to 26% and 74% in 2019 [18] Market Data and Key Metrics Changes - North America accounted for 46% of total revenues in Q3 2020, with Israel at 42%, Europe at 8%, and APAC and the rest of the world at 4% [16] - North America contributed 30% of growth in Q3, while Israel accounted for 65% [16] Company Strategy and Development Direction - The company aims to grow organically and through M&A, focusing on enhancing products and services for the SMB market [14] - Management emphasized the importance of digital transformation trends driven by COVID-19, which are expected to create future opportunities for the company [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the business model's resilience amid COVID-19, with expectations for continued growth as the global economy recovers [25][14] - The company raised its full-year revenue guidance to a range of $358 million to $365 million, reflecting an annual growth rate of 9.9% to 11.5% year-over-year [26] Other Important Information - The company generated $13.3 million from operating activities in Q3, with a high conversion rate from net profit to cash flow [24] - Cash and cash equivalents as of September 30, 2020, amounted to approximately $86 million, down from $92 million in the previous quarter [23] Q&A Session Summary Question: Guidance for Q4 revenue expectations - Management indicated that guidance reflects a conservative outlook due to seasonal impacts from holidays in Israel and North America [29] Question: Demand sources and budget pushbacks - Management noted strong demand from healthcare, financial, and defense sectors, with minimal impact from COVID-19 on these areas [31][32] Question: M&A activity and valuations - Management confirmed ongoing interest in acquisitions, primarily targeting small companies, while acknowledging high valuations in the market [34] Question: 2021 budget outlook from clients - Management reported optimism from clients in healthcare and financial sectors regarding their budgets for 2021 [40] Question: New client additions and growth sources - Management stated that growth was driven by a mix of new and existing clients, with no significant single client impacting the quarter [42] Question: Telecom sector performance - Management indicated a slight improvement in the telecom sector but noted it remains a smaller business compared to previous years [47][49] Question: SG&A expenses increase explanation - Management attributed the increase in SG&A expenses to a return to normalized business activity and rising legal and insurance costs [50] Question: CVS contribution to revenue - Management confirmed that CVS accounts for around 10% of top-line revenue, with expectations for continued growth [53] Question: Next generation product development timelines - Management provided timelines for the next generation of products, expecting full market availability by mid-2021 [59] Question: Remote work impact on operations - Management confirmed that most employees continue to work from home, with adjustments made to maintain company culture [66]

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q2 2020 Earnings Conference Call August 13, 2020 10:00 AM ET Company Participants Guy Bernstein - CEO Asaf Berenstin - CFO Yuval Lavi - VP of Technology and Innovation Conference Call Participants Tavy Rosner - Barclays Kevin Dede - H.C. Wainwright Asaf Barel - Oppenheimer Ted Starck-King - William Blair Maggie Nolan - William Blair Operator Welcome to Magic Software Enterprises 2020 Second Quarter Financial Results Conference Call. At this time, all participant ...

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q1 2020 Earnings Conference Call May 26, 2020 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 Chris Reimer - Barclays Maggie Nolan - William Blair Kevin Dede - H.C. Wainwright Asaf Barel Chandali - Oppenheimer Israel Operator Ladies and gentlemen, thank you for standing by. Welcome to Magic Software Enterprises 202 ...

Company Overview - The company operates as a global provider of proprietary application development and business process integration platforms, with approximately 2,640 employees and a network of over 3,000 independent software vendors[20]. - The company has a diverse portfolio of software solutions, including Magic xpa, AppBuilder, and Magic xpi, which enhance business performance and return on investment[21][22]. - The company is focused on expanding its market presence through a broad channel network, including direct sales representatives and independent distributors[23]. - The company has developed several proprietary software solutions, such as Clicks for healthcare management and Hermes for air cargo management, aimed at improving operational efficiency[26]. - The company emphasizes the importance of continuous evolution of its platforms to incorporate the latest technologies and meet market demands[22]. Financial Performance - Total revenues for 2019 reached $325.63 million, a 14.5% increase from $284.38 million in 2018[44]. - Consulting services generated $266.55 million in revenue, up 16.9% from $227.97 million in 2018[44]. - Gross profit for 2019 was $102.13 million, representing a gross margin of 31.3%[44]. - Net income attributable to Magic's Shareholders was $20.27 million, an increase of 1.9% from $19.88 million in 2018[44]. - Basic earnings per share for 2019 was $0.26, compared to $0.39 in 2018[44]. - Working capital decreased to $138.17 million in 2019 from $158.30 million in 2018[46]. - Total assets increased to $404.61 million in 2019, up from $362.29 million in 2018[46]. - The company has a dividend policy to distribute up to 75% of annual distributable profits, increased from 50%[47]. Growth Strategy - The company is pursuing a growth strategy that includes mergers and acquisitions to enhance its service offerings and market reach[35]. - The company completed over 25 acquisitions in the past decade, with recent acquisitions including NetEffects Inc and Powwow Inc in 2019[54]. - The company has made numerous acquisitions over the past five years, including Datamind, Formula Telecom Solutions, and PowWow Inc., to expand its customer base and service offerings[56]. Market Presence - 49% of revenues in 2019 were generated from North America, 38% from Israel, and 13% from the rest of the world[53]. - A significant portion of the company's revenue is derived from application and integration platforms, vertical software solutions, and related professional services, which are critical for future growth[59]. - The company has experienced significant growth, with employee numbers increasing from 1,181 in 2014 to 2,642 in 2019, which may strain management resources[85]. - 64%, 63%, and 62% of the company's sales in 2017, 2018, and 2019, respectively, were generated outside of Israel, indicating a strong international presence[92]. Risks and Challenges - The company has faced challenges due to the COVID-19 pandemic, which has impacted its operations and financial performance[35]. - The company faces risks associated with mergers and acquisitions, including difficulties in integration and potential disruptions to operations[58]. - Customer satisfaction is crucial, as two customers accounted for 18.2% and 15.8% of revenues in 2018 and 2019, respectively, highlighting the risk of revenue loss if relationships deteriorate[66]. - The company must continuously adapt to rapid technological changes, which may require substantial financial investments and could affect market acceptance of its products[61]. - The lengthy development cycles for new products can take up to two years, potentially delaying revenue generation and impacting financial performance[62]. - The company may face challenges in retaining skilled IT professionals, which could hinder project staffing and affect operational efficiency[65]. - The company faces intense competition in application development platforms, business integration, and BPM tools, which could adversely affect its financial condition[76]. - The company is exposed to economic conditions that impact the telecom industry, which may adversely affect customer demand and revenue generation[81]. Compliance and Security - The company is committed to maintaining high standards of data security and privacy, addressing potential vulnerabilities and regulatory challenges[35]. - Compliance with the European Union General Data Protection Regulation (GDPR) requires significant resources and non-compliance could lead to substantial fines[101]. - The California Consumer Privacy Act (CCPA) imposes new privacy rights and obligations, potentially increasing compliance costs and liability[100]. - Cyber-attacks and breaches of IT security pose risks that could disrupt operations and result in significant expenses or loss of market share[97]. - The company has not experienced material impacts from cyber-attacks to date, but the risk is expected to increase as cloud offerings grow[98]. Technology and Innovation - The company has established strategic partnerships with major firms like Oracle, SAP, and Salesforce to enhance its service offerings[158]. - The low-code development platform market was valued at $5.6 billion in 2018 and is projected to grow at a 45% CAGR to $52.3 billion by 2024[173]. - By 2024, low-code application platforms are expected to account for over 65% of all application development activity[173]. - The demand for mobile and cloud-based applications is driving the need for more complex IT development and integration projects[174]. - The Magic xpa platform allows for rapid development and deployment of applications, significantly reducing time-to-market and project risk[177]. - The company’s technology enables organizations to build powerful applications with little or no coding required, streamlining the development process[186]. Product Development - The company has two major product lines: the Magic xpa Application Platform and the Magic xpi Integration Platform[153]. - The Magic xpi Integration Platform has been enhanced with IMDG architecture to support cloud readiness and high performance[159]. - The AppBuilder platform allows enterprises to build, deploy, and maintain large-scale custom applications without dependency on specific technologies[194]. - Magic xpi Integration Platform, launched in 2003, provides a code-free solution for fast integration and orchestration of business processes, enhancing profitability and customer satisfaction[199]. - In March 2017, Magic xpi version 4.6 was released with new connectors for ServiceMax and OData, improving connectivity and functionality[204].

Financial Data and Key Metrics Changes - The fourth quarter revenue totaled $19.9 million, a decrease from $72.3 million in the same quarter last year and $85.8 million in the previous quarter, reflecting a 26% and 6% decline respectively [12] - Non-GAAP gross profit for the fourth quarter was $29.4 million, up approximately 25% compared to $23.4 million in the fourth quarter of last year [14] - Non-GAAP net income for the fourth quarter increased 10% to $6.4 million or $0.13 per fully diluted share compared to $5.8 million or $0.12 per fully diluted share in the same period last year [19] Business Line Data and Key Metrics Changes - The revenue mix for the 12-month period of 2019 was approximately 26% related to software solutions and 74% related to professional services, compared to 28% and 72% in 2018 [15] - Non-GAAP operating income for the fourth quarter increased 14% to $11.4 million, reflecting an operating margin of 12.6% for this quarter compared to 13.9% in the fourth quarter of 2018 [17] Market Data and Key Metrics Changes - North America accounted for 48% of total revenue in the fourth quarter, with Israel at 38%, Europe at 8%, and APAC and the rest of the world at 6% [13] - Revenues in North America grew 15% year-over-year, while revenues in Israel grew 20% year-over-year for the 12-month period [13] Company Strategy and Development Direction - The company aims to maintain its competitive position as a one-stop shop for digital transformation with enhanced services supported by proprietary software solutions [24] - The acquisition strategy focuses on small to midsize companies with revenues in the range of $20 million to $50 million to expand geographic reach and product offerings [11] Management's Comments on Operating Environment and Future Outlook - The company anticipates revenue in the range of $360 million to $370 million for 2020, reflecting annual growth of 10.6% to 13.6%, although this may be affected by the potential impact of the coronavirus [22] - Management expressed confidence in maintaining a gross margin baseline of 33% for 2020, despite potential disruptions from external factors [28] Other Important Information - The company generated $13.3 million from operating activities in the fourth quarter and $45.9 million during the 12-month period of 2019 [20] - Cash and cash equivalents amounted to approximately $98 million as of December 31, 2019, flat compared to the previous quarter [20] Q&A Session Summary Question: Guidance on margins and outsourcing efforts - Management indicated that margins were flat at 33% in 2018 and 2019, and they expect this to continue into 2020, with potential fluctuations due to external factors like the coronavirus [27][28] Question: Disruptions due to coronavirus - Management is ensuring that key R&D employees can work from home and is equipping those without laptops to mitigate risks [29] Question: Outperformance in 2019 - The company saw increased performance in Israel and Japan, with long-lasting customers utilizing a range of professional services [32][33] Question: Organic growth and guidance for 2020 - Approximately 60% of growth in 2019 came from acquisitions, and the guidance for 2020 includes a mix of M&A and organic growth [34][36] Question: Health of CVS relationship - The relationship with CVS declined from 14% in 2018 to around 10% in 2019, but stability is expected for 2020 following CVS's merger with Aetna [39]

Financial Data and Key Metrics Changes - The company's Q3 2019 revenues totaled $85.8 million, reflecting a 19% increase compared to $72.1 million in Q3 2018 and an 11% increase from $77.1 million in the previous quarter [9] - Non-GAAP gross profit for Q3 2019 was $28.9 million, up approximately 26% from $22.9 million in Q3 2018, with a non-GAAP gross margin of 33.7% compared to 31.8% in the same period last year [18] - Non-GAAP net income for Q3 increased 19% to $8.1 million or $0.17 per fully diluted share, compared to $6.8 million or $0.14 per fully diluted share in Q3 2018 [25] Business Line Data and Key Metrics Changes - The revenue mix for the nine-month period of 2019 was approximately 26% from software solutions and 74% from professional services, compared to 28% and 72% respectively in 2018 [19] - The gross profit mix for the nine-month period was approximately 51% from software solutions and 49% from professional services, consistent with the previous year [20] Market Data and Key Metrics Changes - North America accounted for 48% of total revenue, Israel 37%, Europe 8%, and APAC and the rest of the world 7% [16] - North America contributed 40% of growth for the nine months, while Israel accounted for 52% of growth during the same period [17] Company Strategy and Development Direction - The company is focusing on expanding its footprint through acquisitions, with recent acquisition of NetEffects expected to enhance its U.S. market presence and diversify its client portfolio [12] - The company aims to continue its growth momentum and has revised its full-year 2019 revenue guidance to a range of $317 million to $320 million [28] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the pipeline for the second half of 2019, indicating a positive outlook despite a slowdown in the first half [34] - The company noted that global trends are driving investments in digital transformation, leading to larger project sizes and increased demand [38] Other Important Information - The company has opened new R&D centers in India and St. Petersburg to support its global customer base and drive innovation [22] - The effective tax rate for the full year of 2019 is estimated to range between 19% and 21% [24][62] Q&A Session Summary Question: Contribution of NetEffects in the quarter and future expectations - The contribution to the top line from NetEffects was around $5 million, with projections for next year expected to increase by 8% to 10% [31] Question: Accretive nature of NetEffects and integration investments - Management confirmed that NetEffects is currently accretive and will continue to be so, with ongoing efforts to implement synergies [32] Question: Pipeline details compared to prior years - The company experienced a slow start in the first half but is more positive about the second half, with expectations of compensating for revenue losses during the holiday season in Israel [35][36] Question: Customer base of NetEffects - Management refrained from naming specific customers but indicated that NetEffects has blue chip clients contributing significantly to revenues [40] Question: Revenue potential in Japan - Japan is currently a small market for the company, but there is a positive growth trend observed over the past two years [42] Question: Details on the acquisition payment for NetEffects - The deal involved a down payment of approximately $9 million, with total payments expected to reach around $12 million [45][46] Question: Impact of CVS on margins - Management noted a decline in budget from CVS, resulting in a loss of around $5 million compared to the previous year, but remains optimistic about future business from them [51][53] Question: Development in India and St. Petersburg - The company has a history of operations in St. Petersburg and finds the cost structure favorable for software development [54] Question: SG&A increase in Q3 - Over 50% of the growth in G&A expenses was attributed to the acquisition of NetEffects, with expectations for improved margins through synergies [56][57] Question: Breakdown of revenue and gross profit - The revenue breakdown is 26% from software solutions and 74% from professional services, while gross profit is approximately 51% from software solutions [63][64]

Financial Data and Key Metrics Changes - The company's Q2 2019 revenues totaled $77.1 million, reflecting a 10% increase compared to $70.2 million in Q2 2018 and a 7% increase from $71.8 million in Q1 2019 [8] - Non-GAAP gross profit for Q2 2019 was $25.9 million, up approximately 11% from $23.4 million in Q2 2018, with a non-GAAP gross margin increase to 33.7% from 33.4% [12] - Non-GAAP operating income increased 9% to $10.7 million, with an operating margin of 13.9% compared to 14% in the previous year [17] - Non-GAAP net income for Q2 increased 1% to $7.1 million, or $0.14 per fully diluted share, compared to $7 million or $0.16 per share in the same period last year [20] Business Line Data and Key Metrics Changes - Revenue mix for the first half of 2019 was approximately 28% from software solutions and 72% from professional services, consistent with 2018 [13] - The gross profit mix for the first half of 2019 was approximately 52% from software solutions and 48% from professional services, compared to 54% and 46% respectively in the prior year [13] Market Data and Key Metrics Changes - North America accounted for 48% of total revenues, Israel 36%, Europe 9%, and APAC and the rest of the world 7% [11] - North America contributed 53% of the growth, while Israel contributed 27% [11] Company Strategy and Development Direction - The company is focused on geographic expansion and complementary products, actively seeking small-to-mid sized companies with revenues between $20 million and $50 million for potential acquisitions [25] - The company is investing in offshore R&D capabilities, with approximately 120 employees in India and 150 in St. Petersburg, aimed at improving operational efficiency and supporting future growth [44][46] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving full-year 2019 guidance despite a decline in business with CVS, indicating that new projects with existing clients have compensated for this decline [10] - The company anticipates maintaining operating margins in the range of 13% to 15% in the medium to long term [39] Other Important Information - The company declared a semi-annual cash dividend of $0.156 per share, totaling approximately $7.6 million for the first half of 2019, reflecting about 75% of net income [23] - The company generated $15.9 million from operating activities in Q2 and $26.6 million in the first half of 2019 [22] Q&A Session Summary Question: Performance of PowWow acquisition - Management indicated that PowWow's performance included a significant deal valued at $800,000 with a financial institution, but overall contributions for 2019 are expected to be between $500,000 to $1 million for the second half [30][31] Question: Impact of CVS on revenue - CVS accounted for around 13% to 15% of revenues this quarter, with a decline of approximately $10 million in annual revenues compared to 2018, but new projects have helped maintain profitability [34][35] Question: Offshore R&D presence and margin uplift - The company has 120 employees in India and 150 in St. Petersburg, with expectations that these offshore capabilities will improve margins, albeit with small numbers [44][46] Question: Guidance for 2019 - The company reaffirmed its revenue guidance of $313 million to $319 million, despite the decline in CVS business [64] Question: M&A outlook - Management confirmed they are close to finalizing an acquisition deal and expect it to happen within the current quarter [67][70]

Financial Data and Key Metrics Changes - The company's Q1 2019 revenue increased by 3% to $71.8 million compared to $69.7 million in Q1 2018 [8] - Non-GAAP operating income rose by 4% year-over-year to $10.1 million for the quarter [14] - Non-GAAP gross profit for Q1 2019 was $23.6 million, down approximately 4% from $24.6 million in Q1 2018 [11] - Non-GAAP net income increased by 8% to $6.7 million or $0.14 per fully diluted share compared to $6.2 million or $0.14 per fully diluted share in the same period last year [16] Business Line Data and Key Metrics Changes - The revenue mix for Q1 2019 was 26% from software solutions and 74% from professional services, compared to 28% and 72% respectively in 2018 [13] - Professional services accounted for 85% of the growth in 2018, impacting the gross margin [12] Market Data and Key Metrics Changes - Geographical revenue breakdown showed North America at 48%, Israel at 39%, Europe at 8%, and APAC and the rest of the world at 5% [10] Company Strategy and Development Direction - The acquisition of PowWow SmartUX is aimed at enhancing the company's low-code development platform, which aligns with the demand for digital workplace transformation [9] - The company plans to invest in marketing and localization to integrate PowWow's platform into existing markets [30] Management's Comments on Operating Environment and Future Outlook - Management noted a slowdown in technology sales at the beginning of 2019, which is typical as companies finalize budgets [34] - The company remains confident in achieving its full-year 2019 revenue guidance of $313 million to $319 million, reflecting a growth rate of 10% to 12% [21][22] Other Important Information - The company implemented a new accounting standard, ASC 842, affecting the balance sheet but not the P&L [20] - Cash and cash equivalents decreased to approximately $109 million from $116 million at the end of 2018, primarily due to dividend payments [18] Q&A Session Summary Question: Can you elaborate on the PowWow acquisition and its synergies? - Management highlighted synergies in technology and methodology, emphasizing the alignment of low-code paradigms and user experience improvements [27][28] Question: Why did revenue decelerate during the quarter while maintaining guidance? - Management explained that the slowdown was due to typical seasonal trends and an increase in headcount for professional services, which impacted gross profit [34][35] Question: How will the company maintain stable operating margins with the increasing mix of professional services? - Management indicated that hiring from specific locations and improving technology sales would help maintain gross margins [40][41] Question: Will the PowWow investment be dilutive to EPS in 2019? - Management acknowledged a potential negative impact on EPS between $0.02 to $0.04 due to the subscription model and initial investments [46][47]

[PART I](index=8&type=section&id=PART%20I) This part covers the company's financial performance, business operations, risk factors, and corporate structure [Key Information](index=8&type=section&id=ITEM%203.%20KEY%20INFORMATION) This section provides selected financial data, outlines the dividend policy, and details various business, share-related, and geographic risk factors [Selected Financial Data](index=8&type=section&id=A.%20Selected%20Financial%20Data) This section presents the company's selected consolidated financial data for the five years ended December 31, 2018, highlighting consistent revenue growth and fluctuating net income, along with details on the dividend policy Consolidated Statement of Income Data (2014-2018) | | 2014 | 2015 | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | | (U.S. dollars in thousands, except per share data) | | | | | | **Total revenues** | **164,304** | **176,030** | **201,646** | **258,140** | **284,375** | | **Gross profit** | 64,577 | 62,809 | 68,264 | 82,979 | 88,818 | | **Operating income** | 20,726 | 21,434 | 21,087 | 25,956 | 31,698 | | **Net income** | 25,351 | 17,076 | 16,708 | 17,914 | 24,776 | | **Net income attributable to Magic's Shareholders** | 15,520 | 16,198 | 14,169 | 15,442 | 19,883 | | **Diluted earnings per share** | **$0.36** | **$0.36** | **$0.27** | **$0.35** | **$0.39** | Consolidated Balance Sheet Data (2014-2018) | | 2014 | 2015 | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | | (U.S. dollars in thousands) | | | | | | **Working capital** | 103,049 | 106,945 | 113,668 | 122,403 | 158,301 | | **Cash, cash equivalents, short term deposits and marketable securities** | 84,430 | 76,684 | 87,822 | 90,946 | 113,920 | | **Total assets** | 224,184 | 239,846 | 316,399 | 342,539 | 362,326 | | **Total equity** | 187,724 | 193,106 | 196,641 | 213,563 | 248,369 | - The company's dividend policy was amended on August 9, 2017, to distribute up to **75% of annual distributable profits**, an increase from the previous 50%[39](index=39&type=chunk) - Dividends have been paid consistently since 2012[39](index=39&type=chunk) [Risk Factors](index=11&type=section&id=D.%20Risk%20Factors) The company faces multiple risks in supply chain, regulations, and international trade - **Business & Industry Risks:** - Dependency on a limited number of core product families and services[43](index=43&type=chunk) - Rapid technological changes could render products obsolete[46](index=46&type=chunk) - Intense competition from larger companies with greater resources[57](index=57&type=chunk) - Potential for losses on fixed-price contracts if costs are underestimated[73](index=73&type=chunk) - Reliance on a small number of key customers, with the top five accounting for **27% of revenues in 2017 and 2018**[73](index=73&type=chunk) - Risks associated with integrating numerous business acquisitions made over the past five years[73](index=73&type=chunk) - **Risks Related to Ordinary Shares:** - Dual listing on NASDAQ and TASE may result in price variations and low trading volume could cause volatility[110](index=110&type=chunk) - As a foreign private issuer, the company is exempt from certain SEC rules, providing less disclosure than a domestic U.S. company[113](index=113&type=chunk) - The controlling shareholder, Formula Systems (1985) Ltd., owns approximately **45.21% of outstanding shares**, giving it significant influence over shareholder matters[115](index=115&type=chunk) - Potential adverse U.S. tax consequences if the company is classified as a Passive Foreign Investment Company (PFIC) or a Controlled Foreign Corporation (CFC)[117](index=117&type=chunk) - **Risks Related to Location in Israel:** - Political, economic, and military instability in Israel could disrupt operations[119](index=119&type=chunk) - Obligation of personnel to perform military service may disrupt operations[122](index=122&type=chunk) - Rights of shareholders are governed by Israeli law, which differs from U.S. law, including a shareholder's duty to act in good faith[126](index=126&type=chunk) - Provisions of Israeli law may delay or prevent an acquisition of the company[127](index=127&type=chunk) [Information on the Company](index=29&type=section&id=ITEM%204.%20INFORMATION%20ON%20THE%20COMPANY) This section provides a comprehensive overview of the company's business segments, history of strategic acquisitions, proprietary software platforms, vertical solutions, organizational structure, and leased properties [History and Development of the Company](index=29&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) This section outlines the company's history, including its NASDAQ listing and strategic growth through numerous acquisitions and a significant private placement - The company was organized in Israel in 1983 and has been listed on NASDAQ since 1991[128](index=128&type=chunk) - Its shares also trade on the Tel Aviv Stock Exchange (TASE)[128](index=128&type=chunk) - Significant growth has been achieved through acquisitions, including: - **2014:** Formula Telecom Solutions Ltd. (FTS), a BSS software vendor, for **$5.8 million**[130](index=130&type=chunk) - **2015:** **70% of Comblack IT Ltd.** (mainframe services) and **70% of Infinigy Solutions LLC** (telecom technical solutions)[131](index=131&type=chunk) - **2016:** **60% of Roshtov Software Industries Ltd.** (medical record systems) for **$20.6 million** and **100% of Shavit Software** (professional services) for **$6.8 million**[133](index=133&type=chunk) - **2017:** **100% of Futurewave Systems, Inc.** (IT consulting and outsourcing) for **$3.0 million**[134](index=134&type=chunk) - In July 2018, the company issued **4,268,293 ordinary shares** in a private placement at **$8.20 per share**, raising a total of **$34.6 million net of expenses**[135](index=135&type=chunk) [Business Overview](index=30&type=section&id=B.%20Business%20Overview) This section describes the company's two business segments, key proprietary software platforms, and various vertical software solutions, along with revenue breakdowns by type and geography - The company operates in two reportable business segments: **Software Solutions** (proprietary and non-proprietary software, maintenance, support) and **IT Professional Services**[137](index=137&type=chunk) - Key proprietary software platforms include: - **Magic xpa:** A low-code application platform for developing and deploying business applications[143](index=143&type=chunk) - **AppBuilder:** An application platform for high-end, mainframe-grade business applications[143](index=143&type=chunk) - **Magic xpi:** A platform for application integration[143](index=143&type=chunk) - **Magic xpc:** A hybrid integration platform as a service (iPaaS)[143](index=143&type=chunk) - The company offers several vertical software solutions, including **Clicks** (medical records), **Leap™** (telecom billing), **Hermes Solution** (air cargo management), and **HR Pulse** (human capital management)[143](index=143&type=chunk) Revenues by Type (2016-2018) | Revenue Type | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | | (in thousands) | | | | Software sales | $19,626 | $21,644 | $25,454 | | Maintenance and technical support | $25,885 | $30,386 | $30,951 | | Consulting services | $156,135 | $206,110 | $227,970 | | **Total revenues** | **$201,646** | **$258,140** | **$284,375** | Revenues by Geographical Market (2016-2018) | Geography | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | | (in thousands) | | | | United States | $100,470 | $123,113 | $137,066 | | Israel | $58,079 | $91,917 | $103,850 | | Europe | $23,642 | $26,635 | $28,257 | | Japan | $11,226 | $9,253 | $9,797 | | Other | $8,229 | $7,222 | $5,405 | | **Total revenues** | **$201,646** | **$258,140** | **$284,375** | [Organizational Structure](index=54&type=section&id=C.%20Organizational%20Structure) This section describes the company's global organizational structure, comprising numerous wholly-owned and majority-owned subsidiaries across various regions - As of December 31, 2018, the company has a complex organizational structure with numerous subsidiaries across the globe, including wholly-owned and majority-owned entities in the USA, UK, Israel, Japan, Europe, India, and South Africa[254](index=254&type=chunk) [Property, Plants and Equipment](index=56&type=section&id=D.%20Property%2C%20Plants%20and%20Equipment) This section details the company's leased properties, including its headquarters in Israel and various global office spaces for its subsidiaries - The company's headquarters is a leased **23,841 square foot facility** in Or Yehuda, Israel, with an annual rent of **$0.4 million** under a lease expiring in June 2019[256](index=256&type=chunk) - Subsidiaries lease office space globally, including in the U.S., Europe, Asia, and South Africa, with an aggregate annual cost of **$2.4 million in 2018**[257](index=257&type=chunk) [Operating and Financial Review and Prospects](index=56&type=section&id=ITEM%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes the company's financial performance, liquidity, and capital resources, detailing operating results, cash flows, debt, and critical accounting policies [Operating Results](index=56&type=section&id=A.%20Operating%20Results) This section analyzes the company's financial performance, detailing revenue growth, gross margin changes, and operating income trends across its business segments Segment Performance (2018 vs 2017) | Segment | 2017 Revenues | 2018 Revenues | Growth | 2017 Operating Income | 2018 Operating Income | | :--- | :--- | :--- | :--- | :--- | :--- | | | (in thousands) | (in thousands) | | (in thousands) | (in thousands) | | Software Services | $77,100 | $81,332 | 5% | $13,451 | $17,430 | | IT Professional Services | $181,040 | $203,043 | 13% | $16,482 | $19,058 | - **2018 vs. 2017 Performance:** - Total revenues increased by **10% to $284.4 million**[289](index=289&type=chunk) - Gross margin decreased slightly from **32% in 2017 to 31% in 2018**, primarily due to a higher proportion of lower-margin IT professional services revenue[298](index=298&type=chunk) - Operating income increased **22% from $26.0 million to $31.7 million**[304](index=304&type=chunk) - Net income attributable to shareholders increased from **$15.4 million to $19.9 million**[304](index=304&type=chunk) - **2017 vs. 2016 Performance:** - Total revenues increased by **28% to $258.1 million**[305](index=305&type=chunk) - Gross margin decreased from **34% in 2016 to 32% in 2017**, also due to an increased mix of IT professional services[314](index=314&type=chunk) - Operating income increased **23% from $21.1 million to $26.0 million**[320](index=320&type=chunk) - Net income attributable to shareholders increased from **$14.2 million to $15.4 million**[320](index=320&type=chunk) [Liquidity and Capital Resources](index=65&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) This section reviews the company's financial liquidity, capital resources, cash flow activities, and compliance with debt covenants - As of December 31, 2018, the company had **$113.9 million in cash, cash equivalents, and marketable securities**, with a net working capital of **$158.3 million**[324](index=324&type=chunk) Summary of Cash Flows (2016-2018) | Cash Flow Activity | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | | (in thousands) | | | | Net cash provided by operating activities | $27,955 | $25,508 | $24,050 | | Net cash used in investing activities | ($34,203) | ($7,316) | ($19,554) | | Net cash provided by (used in) financing activities | $20,411 | ($19,414) | $8,426 | - In November 2016, the company obtained a **NIS 120 million loan**, with principal payable in seven equal annual installments through November 2023[322](index=322&type=chunk) - The loan is subject to several financial covenants, with which the company was in full compliance as of year-end 2018[323](index=323&type=chunk) [Tabular Disclosure of Contractual Obligations](index=76&type=section&id=F.%20Tabular%20Disclosure%20of%20Contractual%20Obligations) This section provides a tabular summary of the company's contractual obligations as of December 31, 2018, including lease, acquisition, and debt liabilities Contractual Obligations as of December 31, 2018 | Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | | :--- | :--- | :--- | :--- | :--- | | | (in thousands) | | | | | Operating lease obligations | $6,235 | $2,224 | $3,305 | $706 | | Liabilities due to acquisition activities | $1,004 | $910 | $94 | - | | Severance payments, net | $3,934 | - | - | - | | Short and Long term debt | $28,049 | $8,661 | $10,241 | $9,147 | | **Total contractual obligations** | **$41,397** | **$11,795** | **$13,640** | **$9,853** | [Directors, Senior Management and Employees](index=77&type=section&id=ITEM%206.%20DIRECTORS%2C%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section outlines the company's board and senior management, their compensation, and provides detailed employee statistics by location and activity [Compensation](index=79&type=section&id=B.%20Compensation) This section details the aggregate compensation for directors and executive officers, including a summary for the five most highly compensated individuals in 2018 Aggregate Compensation for Directors and Executive Officers (2018) | Compensation Type | Amount | | :--- | :--- | | Salaries, fees, commissions and bonuses | $3,738,408 | | Pension, retirement and similar benefits | $123,714 | 2018 Summary Compensation Table for 5 Most Highly Compensated Officers | Name and Position | Salary | Bonus | Equity Based Compensation | All Other Compensation | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Arik Kilman, Chairman, Software Group | $399,344 | $577,012 | $64,387 | $0 | $1,040,743 | | Yakov Tsaroya, President, Coretech Consulting Group LLC | $225,000 | $337,000 | $0 | $9,000 | $571,000 | | Arik Faingold, President, Integration Solutions division | $321,139 | $196,529 | $0 | $0 | $517,668 | | Udi Ertel, President, Software Division | $222,142 | $58,078 | $0 | $43,705 | $323,925 | | Hanan Shahaf, CEO of Roshtov Software Industries Ltd | $284,433 | $17,364 | $0 | $0 | $301,797 | [Employees](index=89&type=section&id=D.%20Employees) This section presents employee data by geographic location and activity, showing a growing workforce across various regions and functions Employees by Geographic Location (2016-2018) | Region | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Israel | 843 | 921 | 999 | | North America | 597 | 861 | 933 | | Asia | 122 | 139 | 164 | | Europe | 127 | 115 | 116 | | South Africa | 10 | 16 | 14 | | **Total** | **1,699** | **2,052** | **2,226** | Employees by Activity (2016-2018) | Activity | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Technical support and consulting | 1,238 | 1,615 | 1,761 | | Research and development | 206 | 181 | 198 | | Marketing and sales | 133 | 117 | 140 | | Operations and administrations | 122 | 139 | 127 | | **Total** | **1,699** | **2,052** | **2,226** | [Major Shareholders and Related Party Transactions](index=92&type=section&id=ITEM%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section identifies major shareholders, details the company's control structure, and cross-references related party transactions Major Shareholders (Beneficial Ownership >5%) as of March 31, 2019 | Shareholder | Percentage of Ownership | | :--- | :--- | | Formula Systems (1985) Ltd. | 45.16% | | Clal Insurance Enterprises Holdings Ltd | 7.43% | | Phoenix Holdings | 6.01% | | Yelin Lapidot | 5.86% | | Harel Insurance | 5.58% | - The company is controlled by Formula Systems (1985) Ltd., which in turn is controlled by Asseco Poland S.A. through its share ownership and a shareholders agreement with Guy Bernstein (Magic's CEO and a Formula shareholder)[482](index=482&type=chunk) [Financial Information](index=94&type=section&id=ITEM%208.%20FINANCIAL%20INFORMATION) This section references the consolidated financial statements, discloses ongoing legal proceedings, and details the company's dividend policy and payment history - The company is involved in a lawsuit filed by an Israeli software company seeking damages of **NIS 34,106,000 (approximately $9.4 million)** related to warning letters sent to clients about potential copyright infringement[497](index=497&type=chunk)[498](index=498&type=chunk) - The company is defending against the lawsuit but is unable to estimate the chances of success[498](index=498&type=chunk) - The Board of Directors amended the dividend policy in August 2018 to distribute up to **75% of annual distributable profit**[500](index=500&type=chunk) - The company has a consistent history of paying semi-annual dividends[500](index=500&type=chunk) [Additional Information](index=97&type=section&id=ITEM%2010.%20ADDITIONAL%20INFORMATION) This section provides supplementary corporate information, including Articles of Association provisions and detailed Israeli and U.S. federal income tax considerations for shareholders - Holders of Ordinary Shares have **one vote per share**[524](index=524&type=chunk) - The quorum for a shareholder meeting is at least two shareholders holding at least **one-third of the voting rights**[525](index=525&type=chunk) - **Israeli Tax Considerations:** - The general corporate tax rate in Israel was **23% in 2018**[536](index=536&type=chunk) - The company may benefit from reduced tax rates under the Law for the Encouragement of Capital Investments, including a **12% rate for a "Preferred Technology Enterprise"**[563](index=563&type=chunk) - Dividends paid to non-Israeli residents are generally subject to a **25% withholding tax**, which may be reduced by an applicable tax treaty[579](index=579&type=chunk) - **U.S. Federal Income Tax Considerations:** - Dividends paid to U.S. Holders are generally treated as ordinary income[590](index=590&type=chunk) - Qualified dividends may be taxed at lower long-term capital gain rates[594](index=594&type=chunk) - The company believes it was not a Passive Foreign Investment Company (PFIC) for 2018, but this status is determined annually and could change[603](index=603&type=chunk) - U.S. Holders may be subject to a **3.8% net investment income tax** on dividends and capital gains[605](index=605&type=chunk) [Quantitative and Qualitative Disclosures About Market Risks](index=116&type=section&id=ITEM%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) This section details the company's exposure to market risks, including foreign currency fluctuations, interest rate changes, and equity price risk - The company's earnings are predominantly affected by fluctuations in the value of the U.S. dollar against the NIS, Euro, Japanese Yen, and British Pound[620](index=620&type=chunk) - A hypothetical **10% increase in the value of the NIS** relative to the U.S. dollar in 2018 would have resulted in a **$1.1 million decrease in operating income** for that year[622](index=622&type=chunk) - As of December 31, 2018, the company held **$8.8 million in trading securities**, with a hypothetical **10% decrease in prices** resulting in a potential loss of approximately **$0.8 million**[623](index=623&type=chunk) [PART II](index=117&type=section&id=PART%20II) This part addresses the company's internal controls, disclosure procedures, and corporate governance practices, including audit committee and foreign private issuer considerations [Controls and Procedures](index=117&type=section&id=ITEM%2015.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting as of December 31, 2018 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[628](index=628&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework (2013)[629](index=629&type=chunk) - This assessment excluded the recently acquired Futurewave Systems, Inc[630](index=630&type=chunk) [Corporate Governance](index=118&type=section&id=ITEM%2016.%20CORPORATE%20GOVERNANCE) This section details corporate governance practices, including the audit committee financial expert, code of ethics, accountant fees, and adherence to Israeli home country practices as a foreign private issuer - The Board of Directors has determined that Mr. Ettlinger qualifies as an audit committee financial expert[633](index=633&type=chunk) Principal Accountant Fees (2017-2018) | Services Rendered | 2017 | 2018 | | :--- | :--- | :--- | | Audit | $357,000 | $361,500 | | Tax and other | $46,000 | $201,000 | | **Total** | **$403,000** | **$562,500** | - As a foreign private issuer, the company follows certain Israeli home country governance practices instead of NASDAQ rules, including those related to maintaining a majority of independent directors and shareholder approval for certain equity compensation plans[641](index=641&type=chunk)[642](index=642&type=chunk) [PART III](index=120&type=section&id=PART%20III) This part presents the company's consolidated financial statements for the fiscal year ended December 31, 2018, prepared under U.S. GAAP [Financial Statements](index=120&type=section&id=ITEM%2018.%20FINANCIAL%20STATEMENTS) This section presents the company's consolidated financial statements for the fiscal year ended December 31, 2018, prepared under U.S. GAAP and audited by an independent firm - The consolidated financial statements for the three years ended December 31, 2018, are included in this section, audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global[646](index=646&type=chunk)[653](index=653&type=chunk)

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q4 2018 Earnings Conference Call March 4, 2019 10:00 AM ET Company Participants Amit Birk - Vice President, M&A and General Counsel Guy Bernstein - Chief Executive Officer Asaf Berenstin - Chief Financial Officer Yuval Lavi - Vice President-Technology and Innovation Conference Call Participants Chris Reimer - Barclays Ted Starck-King - William Blair Kevin Dede - H.C. Wainwright Ethan Etzioni - Etzioni Portfolio Management Operator Ladies and gentlemen, thank you ...