Magic Software Enterprises(MGIC) - 2019 Q3 - Earnings Call Transcript

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]