Formula Systems (1985) .(US:FORTY)2025-05-14 21:45Part I This section details the company's key risks, business operations, financial performance, governance, and market risk exposures Key Information This section outlines the principal risks of investing in the company, including business, intellectual property, international operations, and investment factors Risks Related to Our Business, Our Industry and Our Financial Condition The company faces risks from its M&A strategy, technology development, macroeconomic factors, talent retention, and customer concentration - The company's M&A growth strategy involves significant integration risks due to numerous acquisitions across its subsidiaries in 2024 and 2025414243 - Macroeconomic headwinds, including inflation and high interest rates, have adversely affected customer capital budgets, potentially impacting revenues, profitability, and cash flows5354 - The company faces intense competition for skilled technology professionals, potentially leading to talent shortages and increased wage expenses affecting profitability626364 - A significant portion of revenue comes from a few large customers, with 13.2% of Sapiens' and Magic Software's 2024 revenue from their largest clients, posing a risk if business is lost79 - The company is pursuing a potential merger between Matrix and Magic Software, which involves integration risks and requires shareholder and regulatory approvals120121122 Risks Related to Intellectual Property The company faces significant intellectual property risks, including potential infringement claims, insufficient protection of its own IP, and risks from open-source software use - The company may face costly litigation from third-party infringement claims on patents, copyrights, or trademarks, potentially resulting in significant damages or unfavorable royalty agreements124125126 - Protection of the company's own intellectual property relies on contractual provisions and trade secret law, which may not be fully effective, potentially leading to unauthorized use of its products127 - The use of open-source software poses a risk that the company might be required to release the source code of its proprietary software, potentially diminishing its value130131 Risks Relating to Our International Operations The company's international operations expose it to foreign currency fluctuations, regulatory complexities, and geopolitical risks, particularly in Israel and India - Approximately 37% of revenues in 2024 were derived from outside Israel, exposing the company to risks from foreign currency fluctuations, varying regulatory requirements, and geopolitical instability135 - Fluctuations in exchange rates between the USD, NIS, GBP, and Euro can significantly impact reported revenues and profitability, with NIS depreciation negatively affecting 2023 revenues133 - The ongoing war between Israel and terrorist groups poses a material risk to operations, potentially affecting workforce availability, supply chains, and business continuity152153154 - The company's significant presence in India (48% of Sapiens' employees) exposes it to challenges such as volatile economic conditions, poor IP protection, and compliance with anti-corruption laws169170 Risks Related to an Investment in Our Traded Securities and to Our Consolidated Holdings Investing in the company's securities involves risks such as limited trading volume, influence from the largest shareholder, and potential adverse tax consequences - There is limited trading volume for the company's ADSs on Nasdaq and ordinary shares on the TASE, which can reduce liquidity and increase price volatility for investors140 - Asseco Poland S.A., the largest shareholder with approximately 25.82% ownership as of May 1, 2025, can significantly influence shareholder votes and major corporate transactions146 - A material weakness in internal control over financial reporting was identified at the subsidiary Magic Software as of December 31, 2024, related to revenue cycle documentation148 - As a foreign private issuer, the company follows certain Israeli corporate governance practices instead of Nasdaq requirements, potentially resulting in less information and protection for shareholders176177 Information on the Company Formula Systems is a global IT company operating through its investees, detailing its history, M&A strategy, and subsidiary operations A. History and Development of the Company This section details the company's M&A-driven growth strategy and recent acquisition activities by Formula and its subsidiaries since 2022 - Formula's growth strategy is centered on M&A to expand its customer base, geographic footprint, and service offerings191 Recent M&A Activity (2024-2025) | Acquiring Entity | Target Company | Date | Deal Value / Details | | :--- | :--- | :--- | :--- | | Sapiens | AdvantageGo | April 2025 (Announced) | GBP 43.0 million (approx. $55.9 million) enterprise value | | Sapiens | Candela Labs | April 2025 (Announced) | $22.0 million cash | | Matrix | Gav Systems Ltd. & Gav Expert Ltd. | Feb 2025 | Acquired 70% for approx. $12.5 million | | Matrix | Alacer Group | Nov 2024 | Acquired 51% for approx. $1.95 million cash + contingent consideration | | Matrix | Moshe Ort Holdings Ltd. (Ortec) | Dec 2024 | Approx. $5.4 million cash + contingent consideration | | Magic Software | Theoris Group Inc. | April 2024 | $13.1 million (including deferred payments) | | Magic Software | Executive Life Ltd. | Oct 2024 | $1.5 million (including deferred payment) | | Michpal | Formally Smart Form System Ltd. | March 2025 | Acquired remaining shares for approx. $7.7 million | | Michpal | Meida Computers Software Solutions | July 2024 | Acquired 60% for approx. $12.49 million + contingent consideration | | Michpal | Y-IT Ltd. | Oct 2024 | Acquired 60% for approx. $22.2 million + contingent consideration | | Michpal | Paperless Ltd. | Dec 2024 | Acquired 70% for approx. $2.3 million + contingent consideration | | Formula | Hashahar Telecom and Electricity Ltd. | Oct 2024 | Acquired 51% for $1.3 million | - A non-binding Memorandum of Understanding (MOU) was signed in March 2025 for a potential merger between subsidiaries Matrix and Magic Software196 B. Business Overview Formula Systems is a global IT company providing software consulting, proprietary software solutions, and IT services through its group of investees - The company operates through a group of subsidiaries and affiliates, with the largest being Matrix, Sapiens, and Magic Software, where Formula directs overall strategy233236237 - The business is divided into two main activities: IT Services (custom software development, implementation, outsourcing) and Proprietary Software Solutions (design, development, and marketing of niche software)233235 Geographical Revenue Distribution (2023-2024) | Region | 2024 Revenue (in thousands) | 2023 Revenue (in thousands) | | :--- | :--- | :--- | | Israel | $1,745,132 | $1,600,763 | | United States | $612,196 | $644,918 | | Europe | $336,285 | $315,081 | | Africa | $26,935 | $26,035 | | Japan | $13,678 | $11,881 | | Other (mainly Asia pacific) | $23,285 | $22,225 | | Total | $2,757,511 | $2,620,903 | - The global economic environment in 2024 was marked by moderate growth, reduced inflation, and stabilized interest rates, with the Israeli economy growing by 1% despite the ongoing war238241 C. Organizational Structure Formula Systems operates as the parent company of the Formula Group, holding controlling or significant interests in several publicly traded and private companies Ownership of Directly Held Investments (as of April 30, 2025) | Subsidiary/Affiliate | Country of Incorporation | Percentage of Ownership | | :--- | :--- | :--- | | Matrix IT Ltd. | Israel | 48.14% | | Sapiens International Corporation N.V. | Cayman Islands | 43.50% | | Magic Software Enterprises Ltd. | Israel | 46.71% | | Michpal Micro Computers (1983) Ltd. | Israel | 100.0% | | TSG IT Advanced Systems Ltd. | Israel | 42.34% | | InSync Staffing Solutions, Inc. | Delaware | 90.09% | | Ofek Aerial Photography Ltd | Israel | 80% | | Zap Group Ltd. | Israel | 100% | | Shamrad Electronic (1997) Ltd | Israel | 100% | | Hashahar Telecom and Electricity Ltd | Israel | 51.0% | | Other associated company | Israel | 21.45% | D. Property, Plants and Equipment The company and its subsidiaries lease office spaces globally, with headquarters in Israel and significant operations in India, the US, and Europe 2024 Annual Rent Costs for Major Subsidiaries | Subsidiary | 2024 Rent Cost (USD) | | :--- | :--- | | Matrix | ~$20.1 million | | Sapiens | ~$8.4 million | | Magic Software (incl. Formula) | ~$4.2 million ($0.7 million + $3.5 million) | | Michpal | ~$1.4 million | | Zap Group | ~$1.0 million | - In 2024, Matrix relocated its headquarters to a new, large campus in Kfar Saba, Israel, under a lease expiring in 2032582 Operating and Financial Review and Prospects This section analyzes the company's financial performance, liquidity, capital resources, market trends, and critical accounting policies A. Operating Results For 2024, total revenues increased by 5.2% to $2.76 billion, driven by growth in both software services and proprietary software segments, leading to higher operating and net income Consolidated Statement of Profit or Loss (2023 vs. 2024) | (U.S. dollars, in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Revenues | $2,757,511 | $2,620,903 | | Gross profit | $684,683 | $643,711 | | Operating income | $270,521 | $239,368 | | Net income | $193,790 | $165,732 | | Attributable to Equity holders | $79,670 | $64,014 | | Attributable to Non-controlling interests | $114,120 | $101,718 | Revenue by Category (2023 vs. 2024) | Revenue Category | 2024 Revenue ($ in thousands) | 2023 Revenue ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Proprietary software products and related services | 724,900 | 693,426 | +4.5% | | Software services and other | 2,032,611 | 1,927,477 | +5.5% | - The increase in software services revenue was primarily driven by Matrix, whose revenues in this stream grew by 6.4% (in NIS) due to expansion in its Israeli IT solutions and services segment610611 - The increase in proprietary software revenue was led by Sapiens, whose revenues grew by 5.4% to $542.4 million, and Michpal, whose revenues grew by 19.8% to $34.2 million616617618 B. Liquidity and Capital Resources The company finances operations through cash from operations, debt, and equity, with cash and short-term investments totaling $563.2 million and total debt at $479.4 million as of December 31, 2024 Liquidity Position (as of Dec 31) | (U.S. dollars, in millions) | 2024 | 2023 | | :--- | :--- | :--- | | Cash and cash equivalents & short-term investments | $563.2 | $528.2 | | Total Indebtedness (banks and debentures) | $479.4 | $541.3 | Cash Flow Summary (2023 vs. 2024) | (U.S. dollars, in millions) | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $324.5 | $295.0 | | Net cash used in investing activities | ($78.2) | ($139.2) | | Net cash used by financing activities | ($185.0) | ($243.2) | - In September 2024, Formula issued NIS 150.0 million (approx. $39.8 million) of Series D Secured Debentures to finance its operations693 - Significant cash outflows for financing in 2024 included $85.1 million in dividends ($66.3 million to non-controlling interests, $18.8 million to Formula shareholders) and net repayment of debt718 D. Trend Information The company's performance is influenced by global IT spending recovery, the Israeli high-tech sector slowdown, and increased demand for defense and cybersecurity solutions - Global IT spending is recovering, with Gartner forecasting 7.7% growth in 2024 and 9.8% in 2025, driven by software, data centers, and cloud services735737 - The Israeli high-tech sector faced a slowdown in 2024 due to geopolitical issues, leading to a decline in investments and demand for tech personnel742743 - Heightened geopolitical tensions and the "Iron Swords" War are driving strong demand for defense and cybersecurity solutions, benefiting the company's subsidiaries752758760 - Key trends in the insurance technology market include a focus on application modernization, integration technologies, Generative AI, and a shift to cloud-based SaaS models, aligning with Sapiens' offerings766773774 E. Critical Accounting Policies and Estimates The company's financial statements, prepared under IFRS, require significant judgments and estimates, particularly for 'effective control' over subsidiaries, long-term contract revenue recognition, and goodwill impairment - A key judgment is the determination of 'effective control' over subsidiaries like Matrix, Sapiens, and Magic Software, where the company holds less than 50% of voting rights, based on factors like holding size and board influence7931241 - Revenue from long-term, fixed-price contracts is recognized over time using a cost-based input method (percentage of completion), which requires significant management estimates of total costs to complete the project7941272 - Goodwill and intangible assets are tested for impairment annually, with recoverable amounts determined using discounted cash flow projections sensitive to assumptions about discount rates and future growth8631304 - Put options granted to non-controlling interests are classified as a financial liability and remeasured at fair value, with changes affecting equity or profit and loss depending on the option's nature8741311 Directors, Senior Management, and Employees This section details the company's leadership, compensation, board practices, and employee information, including key management remuneration and workforce 2024 Compensation of Key Management | Name and Position | Salary ($, in thousands) | Benefits & Perquisites ($, in thousands) | Variable Compensation ($, in thousands) | Equity Based Compensation ($, in thousands) | | :--- | :--- | :--- | :--- | :--- | | Guy Bernstein – CEO | 578 | - | 3,641 | 6,438 | | Asaf Berenstin – CFO | - | - | - | 249 | | Tammy Ohana Koll – CTO | 315 | 75 | 108 | - | | Maya Solomon-Ella – COO | 175 | 39 | 68 | 343 | - Total remuneration for directors and executive officers in 2024 was approximately $12.4 million, including $7.0 million in share-based compensation expenses922 Average Number of Employees by Subsidiary (2024) | Subsidiary | 2024 Average Employees | | :--- | :--- | | Matrix | 11,570 | | Sapiens | 4,850 | | Magic Software | 3,787 | | Insync | 949 | | TSG Systems | 784 | | Michpal | 321 | | Zap Group | 277 | | Ofek | 120 | | Total (incl. others) | 22,720 | Major Shareholders and Related Party Transactions This section details the company's major shareholders and outlines significant related party transactions, including the potential Matrix-Magic Software merger Major Shareholders (as of March 31, 2025) | Name | Percentage of Ownership | | :--- | :--- | | Asseco Poland S.A. | 25.82% | | Guy Bernstein | 11.73% | | Harel Insurance Investments & Financial Services Ltd. | 7.72% | | Menora Mivtachim Holdings Ltd. | 7.10% | | Phoenix Holdings Ltd. | 6.97% | | Yelin Lapidot Holdings Management Ltd. | 6.71% | | Clal Insurance Enterprises Holdings Ltd. | 5.38% | - A non-binding Memorandum of Understanding (MOU) was signed on March 11, 2025, for a potential merger between subsidiaries Matrix and Magic Software, where Magic Software would become a private, wholly-owned subsidiary of Matrix1025 - The company maintains a Directors & Officers (D&O) liability insurance policy with a total coverage of $70 million for February 2025 to February 2026, with an annual premium of $1.2 million for the group1018 Financial Information This section covers other financial information, including ongoing legal proceedings and the company's dividend policy - A derivative action challenging the CEO's RSU grant was dismissed in December 2023, but the plaintiff filed an appeal in January 2024, with a hearing scheduled for March 202610351036 - Subsidiary Zap Group is involved in a class action lawsuit regarding its price comparison website and another claim alleging monopolistic practices, both covered by indemnification from former shareholders10391040 - Formula and its publicly traded subsidiaries (Matrix, Sapiens, Magic Software) have active dividend policies and all declared and paid dividends during 2024 and early 20251043104810521059 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from foreign currency exchange rate fluctuations, interest rate changes, and subsidiary security price volatility - The company is significantly exposed to foreign currency exchange risk; a hypothetical 10% devaluation or appreciation of foreign currencies against the US dollar would have impacted 2024 sales revenues by approximately $197 million or $232 million, respectively1120 - The company is exposed to interest rate risk on its variable-rate loans; a 1% increase in interest rates would have increased the combined financial expenses of Matrix, Magic Software, Zap Group, and Michpal by approximately $1.6 million in 20241124 - The company holds securities of its publicly traded subsidiaries (Magic Software, Sapiens, Matrix, TSG Systems) and is exposed to fluctuations in their market prices, but typically does not hedge this exposure1125 Part II This section details the company's internal controls, disclosure procedures, and other governance information, including audit committee expertise and cybersecurity Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2024 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 20241136 - Based on an evaluation against the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 202411371138 Other Information This section covers governance and compliance, including audit committee expertise, auditor fees, and cybersecurity risk management - The company's board of directors has determined that Mr. Tomer Jacob qualifies as the "audit committee financial expert"1142 Principal Accountant Fees (in thousands USD) | Auditor | Year | Audit Fees | Tax and Other Fees | Total | | :--- | :--- | :--- | :--- | :--- | | EY Israel | 2023 | $2,556 | $494 | $3,050 | | EY Israel | 2024 | $835 | $517 | $1,352 | | BDO Israel | 2024 | $1,736 | $182 | $1,918 | - The company follows Israeli home country practice in lieu of certain Nasdaq corporate governance rules, including those related to majority board independence, director nominations, and shareholder approval for certain dilutive events11591163 - The company has a cybersecurity risk management program overseen by the board of directors and managed by the CFO, designed to identify and manage material risks from cybersecurity threats116411671168 Part III This section presents the company's audited consolidated financial statements for 2024, prepared under IFRS, including key financial statements and notes Financial Statements This section contains the company's audited consolidated financial statements for 2024, prepared under IFRS, including auditor reports and detailed financial statements Consolidated Statement of Financial Position (Assets) | (U.S. dollars, in thousands) | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current assets | $1,487,045 | $1,375,856 | | Cash and cash equivalents | $507,799 | $451,946 | | Trade receivables, net | $803,235 | $721,008 | | Total non-current assets | $1,527,851 | $1,436,745 | | Goodwill | $975,080 | $936,581 | | Intangible assets, net | $217,076 | $206,928 | | Total assets | $3,014,896 | $2,812,601 | Consolidated Statement of Financial Position (Liabilities and Equity) | (U.S. dollars, in thousands) | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current liabilities | $1,138,476 | $985,663 | | Total long-term liabilities | $487,075 | $518,753 | | Total liabilities | $1,625,551 | $1,504,416 | | Total equity | $1,389,345 | $1,308,185 | | Equity attributable to Formula shareholders | $679,338 | $625,762 | | Non-controlling interests | $710,007 | $682,423 | | Total liabilities and equity | $3,014,896 | $2,812,601 |