Magic Software Enterprises(MGIC) - 2024 Q2 - Quarterly Report

Q1 2024 Financial Performance Overview Magic Software's Q1 2024 saw revenue decline, but improved margins and strong operating cash flow, with full-year guidance reiterated Summary of Financial Results Magic Software experienced an 8.2% revenue decline in Q1 2024, with GAAP net income down 13.0%, yet gross and operating margins improved Q1 2024 Financial Results Summary (USD in millions, except per share data) | Metric | Q1 2024 GAAP | Q1 2023 GAAP | % Change | Q1 2024 Non-GAAP | Q1 2023 Non-GAAP | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $130.7 | $142.4 | (8.2)% | $130.7 | $142.4 | (8.2)% | | Gross profit | $36.7 | $38.9 | (5.6)% | $38.3 | $40.1 | (4.5)% | | Gross margin | 28.1% | 27.3% | +80 bps | 29.3% | 28.2% | +110 bps | | Operating income | $14.4 | $15.3 | (6.0)% | $18.1 | $18.5 | (1.7)% | | Operating margin | 11.0% | 10.8% | +20 bps | 13.9% | 13.0% | +90 bps | | Net income (*) | $8.8 | $10.1 | (13.0)% | $11.3 | $12.6 | (10.4)% | | Diluted EPS | $0.18 | $0.21 | (14.3)% | $0.23 | $0.26 | (11.5)% | Key Financial Highlights Q1 2024 revenues declined 8.2% due to reduced U.S. customer demand, while operating cash flow significantly increased and the balance sheet remained strong - Revenues for Q1 2024 decreased by 8.2% to $130.7 million, impacted by a $20.4 million decline in demand from key U.S. blue-chip customers[2] - GAAP net income attributable to shareholders fell 13.0% to $8.8 million, primarily due to lower operating profit and higher interest expenses[4] - Cash flow from operating activities significantly increased to $27.7 million in Q1 2024, compared to $18.8 million in the same period last year[4] - As of March 31, 2024, the company held $125.9 million in cash, cash equivalents, and bank deposits, with total financial debt at $78.4 million[5] 2024 Full Year Guidance Magic Software reiterates its 2024 full-year revenue guidance, projecting revenues between $540 million and $550 million - The company reaffirms its 2024 annual revenue guidance to be between $540 million and $550 million[5] Shareholder Returns The company declared a semi-annual cash dividend of 20.4 cents per share, totaling $10.0 million, representing 70% of H2 2023 distributable profits Dividend Declaration A semi-annual cash dividend of 20.4 cents per share, totaling $10.0 million, was declared for H2 2023, payable July 13, 2024 - A semi-annual cash dividend of 20.4 cents per share was declared, amounting to a total of approximately $10.0 million[6] - The dividend is payable on July 13, 2024, to shareholders of record as of June 27, 2024[6] - This distribution reflects approximately 70% of the company's distributable profits for the second half of 2023[6] Management Commentary CEO Guy Bernstein acknowledged U.S. headwinds but affirmed continued customer engagement and focus on long-term profitability through cutting-edge capabilities CEO Statement CEO acknowledged H2 2023 U.S. headwinds but affirmed strong customer engagement and commitment to long-term profitability through innovation - The CEO acknowledged a slowdown in H2 2023 due to headwinds with certain U.S. customers[7] - He emphasized that most customers continue to view Magic Software as a preferred partner for digital transformation[7] - The company is focused on developing cutting-edge capabilities to ensure long-term profitability and shareholder value[7] Financial Statements This section presents the condensed consolidated statements of income, balance sheets, and cash flows for Q1 2024, detailing the company's financial position and performance Condensed Consolidated Statements of Income Q1 2024 revenues decreased to $130.7 million, with net income attributable to shareholders at $8.8 million and diluted EPS of $0.18 Q1 2024 vs Q1 2023 Income Statement (USD in thousands) | Line Item | Q1 2024 (Unaudited) | Q1 2023 | | :--- | :--- | :--- | | Revenues | $130,720 | $142,440 | | Gross profit | $36,699 | $38,885 | | Operating income | $14,426 | $15,347 | | Financial expenses, net | ($1,758) | ($564) | | Income before taxes | $12,782 | $14,648 | | Net income | $10,053 | $11,835 | | Net income attributable to Magic's shareholders | $8,797 | $10,108 | | Diluted EPS | $0.18 | $0.21 | Condensed Consolidated Balance Sheets As of March 31, 2024, total assets increased to $536.5 million, driven by higher cash, with total equity reaching $296.5 million Balance Sheet Summary (USD in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $125,803 | $105,943 | | Total current assets | $273,746 | $256,625 | | Total assets | $536,517 | $522,406 | | Liabilities & Equity | | | | Total current liabilities | $161,583 | $141,699 | | Total long term liabilities | $78,449 | $89,763 | | Total equity | $296,485 | $290,944 | | Total liabilities and equity | $536,517 | $522,406 | Condensed Consolidated Statements of Cash Flows Q1 2024 operating cash flow significantly increased to $27.7 million, leading to a $19.9 million rise in cash and cash equivalents Cash Flow Summary for Q1 (USD in thousands) | Cash Flow Activity | Q1 2024 (Unaudited) | Q1 2023 (Unaudited) | | :--- | :--- | :--- | | Net cash provided by operating activities | $27,677 | $18,753 | | Net cash used in investing activities | ($1,265) | ($11,239) | | Net cash (used in) provided by financing activities | ($5,428) | $13,520 | | Increase in cash and cash equivalents | $19,860 | $19,444 | | Cash and cash equivalents at end of period | $125,803 | $102,506 | Non-GAAP Financial Measures This section explains and reconciles non-GAAP financial measures, providing a clearer view of Magic Software's underlying business performance Explanation of Non-GAAP Measures Non-GAAP measures are used to provide a clearer view of ongoing business performance by excluding specific non-recurring or non-cash items - The company believes non-GAAP measures provide useful information to management and investors regarding financial and business trends[9] - Key items excluded from non-GAAP calculations include: - Amortization of purchased intangible assets - Cost of share-based payment - Costs related to acquisitions - Change in valuation of contingent consideration - Related tax and non-controlling interests' effects[11] Reconciliation of GAAP to Non-GAAP Results Detailed reconciliation of Q1 2024 GAAP to non-GAAP results, adjusting for items like amortization and share-based payments, yielding a non-GAAP diluted EPS of $0.23 Reconciliation of GAAP to Non-GAAP Operating Income for Q1 2024 (USD in thousands) | Description | Amount | | :--- | :--- | | GAAP operating income | $14,426 | | Gross profit adjustments | $1,610 | | Amortization of other intangible assets | $1,514 | | Increase in valuation of contingent consideration | $306 | | Capitalization of software development | ($748) | | Costs related to acquisitions | $144 | | Cost of share-based payment | $891 | | Non-GAAP operating income | $18,143 | Reconciliation of GAAP to Non-GAAP Net Income for Q1 2024 (USD in thousands) | Description | Amount | | :--- | :--- | | GAAP net income attributable to Magic's shareholders | $8,797 | | Operating income adjustments | $3,717 | | Expenses attributed to non-controlling interests | ($452) | | Increase in valuation of consideration related to acquisitions | $114 | | Deferred taxes on the above items | ($899) | | Non-GAAP net income attributable to Magic's shareholders | $11,277 |