Magic Software Enterprises(MGIC) - 2024 Q1 - Quarterly Report

Financial Performance Overview Magic Software's financial performance in 2023 saw revenue declines in Q4 and full year, driven by reduced U.S. customer demand, yet demonstrated improved operational efficiency and positive 2024 growth guidance Fourth Quarter 2023 Financial Performance In the fourth quarter of 2023, Magic Software experienced a significant revenue decline of 14.7% to $125.5 million, primarily due to an unexpected and immediate suspension of projects by several key U.S. blue-chip customers, which impacted revenues by approximately $24.8 million. Despite the revenue drop, both GAAP and Non-GAAP gross and operating margins improved year-over-year. GAAP net income fell 11.2% to $8.5 million, and Non-GAAP net income decreased by 13.1% to $11.6 million Q4 2023 vs. Q4 2022 Financial Results (USD in millions) | Metric | Q4 2023 (GAAP) | Q4 2022 (GAAP) | % Change | Q4 2023 (Non-GAAP) | Q4 2022 (Non-GAAP) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $125.5 | $147.1 | (14.7)% | $125.5 | $147.1 | (14.7)% | | Operating Income | $13.0 | $14.2 | (8.4)% | $17.7 | $18.7 | (5.7)% | | Operating Margin | 10.3% | 9.6% | +70 bps | 14.1% | 12.7% | +140 bps | | Net Income | $8.5 | $9.6 | (11.2)% | $11.6 | $13.4 | (13.1)% | | Diluted EPS | $0.17 | $0.19 | (10.5)% | $0.24 | $0.27 | (11.1)% | - The revenue decrease was primarily driven by an unexpected decline in demand for professional services from several important U.S.-based blue-chip customers, who suspended significant projects. This resulted in a revenue impact of approximately $24.8 million in Q4 2023 compared to Q4 2022[5] - The decrease in net income was attributed to lower operating profit and higher interest expenses, which resulted from increased bank interest rates and a larger overall financial debt[5] Full Year 2023 Financial Performance For the full year 2023, revenues decreased by 5.6% to $535.1 million, impacted by a $40.8 million reduction in demand from key U.S. customers starting in the third quarter. GAAP and Non-GAAP net income also declined. However, the company demonstrated strong operational efficiency, with cash flow from operating activities increasing significantly to $77.9 million from $56.6 million in the prior year Full Year 2023 vs. 2022 Financial Results (USD in millions) | Metric | 12M 2023 (GAAP) | 12M 2022 (GAAP) | % Change | 12M 2023 (Non-GAAP) | 12M 2022 (Non-GAAP) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $535.1 | $566.8 | (5.6)% | $535.1 | $566.8 | (5.6)% | | Operating Income | $57.1 | $61.8 | (7.5)% | $71.8 | $74.5 | (3.7)% | | Operating Margin | 10.7% | 10.9% | (20) bps | 13.4% | 13.1% | +30 bps | | Net Income | $37.0 | $40.5 | (8.5)% | $48.4 | $51.7 | (6.5)% | | Diluted EPS | $0.75 | $0.82 | (8.5)% | $0.99 | $1.05 | (5.7)% | - The full-year revenue decline was caused by a substantial and unexpected drop in demand for professional services from U.S. blue-chip customers beginning in Q3, resulting in a negative impact of approximately $40.8 million for the year[7] - Cash flow from operating activities for 2023 increased significantly to $77.9 million, compared to $56.6 million in 2022[7] Management Commentary and Outlook Despite the slowdown in the second half of 2023, CEO Guy Bernstein expressed optimism about resuming growth, citing the company's diversified portfolio and focus on innovation. The company is pursuing both organic and inorganic expansion. For 2024, Magic Software introduced annual revenue guidance of $540 million to $550 million, which represents 7.5% to 9.5% growth based on the annualized fourth-quarter 2023 revenue - The CEO stated that despite headwinds, the company will pursue both organic and inorganic expansion, embracing innovation to drive long-term profitability and restore growth[8] - The company provided 2024 annual revenue guidance of between $540 million and $550 million. This reflects an annual growth of 7.5% to 9.5% when measured against the annualized revenue of Q4 2023[12] - As of December 31, 2023, the company held cash, cash equivalents, and bank deposits of $107.1 million, with total financial debt at $81.2 million[12] Detailed Financial Statements This section presents Magic Software's comprehensive GAAP financial statements, including consolidated statements of income, balance sheets, and cash flows, along with a reconciliation to non-GAAP measures, providing a detailed view of the company's financial position and performance Condensed Consolidated Statements of Income The consolidated statements of income detail the company's financial performance on a GAAP basis for the fourth quarter and full year of 2023, with comparisons to 2022. Key line items show a year-over-year decrease in revenues, gross profit, and net income attributable to shareholders for both the quarter and the full year Consolidated Income Statement Highlights (USD in thousands) | Line Item | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $125,545 | $147,146 | $535,052 | $566,792 | | Gross Profit | $36,960 | $41,821 | $152,987 | $155,355 | | Operating Income | $12,983 | $14,177 | $57,108 | $61,762 | | Net Income Attributable to Magic's Shareholders | $8,483 | $9,558 | $37,031 | $40,470 | Reconciliation of GAAP to Non-GAAP Results This section provides a detailed reconciliation from GAAP to Non-GAAP financial measures for the fourth quarter and full year of 2023 and 2022. It quantifies adjustments for items such as amortization of intangible assets, share-based payment costs, and acquisition-related expenses to derive Non-GAAP gross profit, operating income, and net income, offering a view of underlying operational performance FY 2023 Operating Income Reconciliation (USD in thousands) | Description | Amount | | :--- | :--- | | GAAP operating income | $57,108 | | Amortization of intangible assets (Gross profit & other) | $13,449 | | Cost of share-based payment | $3,798 | | Capitalization of software development | ($3,183) | | Other adjustments | $612 | | Non-GAAP operating income | $71,784 | FY 2023 Net Income Reconciliation (USD in thousands) | Description | Amount | | :--- | :--- | | GAAP net income attributable to Magic's shareholders | $37,031 | | Total Operating income adjustments | $14,676 | | Other adjustments (non-controlling interests, deferred taxes, etc.) | ($3,302) | | Non-GAAP net income attributable to Magic's shareholders | $48,405 | Condensed Consolidated Balance Sheets As of December 31, 2023, the company's balance sheet shows total assets of $524.4 million, up from $505.1 million at year-end 2022. The increase was supported by higher cash and cash equivalents. Total liabilities also grew, primarily due to an increase in long-term debt, while total equity saw a modest increase Balance Sheet Highlights (USD in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $257,327 | $249,098 | | Cash and cash equivalents | $106,354 | $83,062 | | Total Assets | $524,420 | $505,141 | | Total Current Liabilities | $141,983 | $156,053 | | Total Liabilities | $233,476 | $228,830 | | Total Equity | $290,944 | $276,311 | Condensed Consolidated Statements of Cash Flows For the year ended December 31, 2023, Magic Software generated $77.9 million in net cash from operating activities, a substantial improvement from $56.6 million in 2022. Net cash used in investing activities was $35.9 million, largely for business acquisitions. Financing activities used $17.9 million, mainly for dividend payments to shareholders, partially offset by net proceeds from new loans. The company's cash and cash equivalents increased by $23.3 million during the year - Net cash provided by operating activities increased to $77.9 million in 2023 from $56.6 million in 2022[24] - Investing activities used $35.9 million, including $17.9 million for business acquisitions and $14.2 million for deferred payments related to past business combinations[24] - Financing activities used $17.9 million, which included $30.8 million in dividend payments to shareholders and was partially offset by a net $28.5 million in proceeds from loans[24] Supplementary Information This section provides additional context on Magic Software's financial reporting, including the rationale for using non-GAAP financial measures and details regarding the investor conference call for the 2023 results About Non-GAAP Financial Measures The company utilizes non-GAAP financial measures to offer management and investors insights into financial and business trends, excluding certain items to better reflect ongoing operational performance. These measures are used for internal analysis, planning, and comparison with industry peers. Key adjustments include the exclusion of amortization of acquired assets, share-based payment costs, and acquisition-related expenses - Management uses non-GAAP measures for trend analyses, determining executive compensation, and for budgeting and planning purposes[12] - The company believes non-GAAP measures provide an additional tool for investors to evaluate ongoing operating results and compare financial performance with other software companies[12] - Items excluded from GAAP results to arrive at non-GAAP measures include amortization of purchased intangible assets, cost of share-based payment, and costs related to acquisitions[19] Conference Call Information Magic Software's management scheduled a conference call for Wednesday, March 13, 2024, at 11:00 am Eastern Time to discuss the fourth quarter and full-year 2023 results. The press release provides specific dial-in numbers for participants from North America, the UK, Israel, and other international locations - A conference call was scheduled for March 13, 2024, at 11:00 am Eastern Daylight Time to discuss the financial results[9] - Specific teleconferencing numbers were provided for participants in North America (+1-866-652-8972), the UK (0-800-917-9141), Israel (03-918-0650), and other locations (+972-3-918-0650)[10]