Magic Software Enterprises(MGIC) - 2022 Q3 - Quarterly Report

Third Quarter and Nine-Month 2022 Financial Results Overview Third Quarter 2022 Financial Performance 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] Nine-Month Period 2022 Financial Performance 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] - 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] CEO Commentary 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] - 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] - 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] Non-GAAP Financial Measures Explanation and Purpose 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] - 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] - 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] Reconciliation of GAAP and Non-GAAP Results 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 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] Forward-Looking Statements 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] - Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those stated[16] - 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] Press Contact 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] Conference Call Details 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] - 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] Condensed Consolidated Financial Statements Balance Sheets 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 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 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] - 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] Summary of Non-GAAP Financial Information 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 |