Magic Software Enterprises Ltd.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Welcome to Magic Software Enterprises 2021 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. With us on the line today are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Berenstin; and Magic VP of Technology and Innovation, Mr. Yuval Lavi. Magic's quarterly earnings release was issued before the market opened this morning, and it has been posted on the Company's website at www.magicsoftware.com. Before we start, I'd like to remind everyone that this conference call may contain projections or other forward-looking statements. The Safe Harbor provision provided in the press release issued today also applies to the content of this call. Magic expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations or otherwise. Also, during the course of today's call, management will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on our Investor Relations section of the Company website. I will now turn the call over to Mr. Asaf Berenstin, CFO of Magic Software. Please go ahead.

[Asaf Berenstin:]

Thank you, operator, and thank you, everyone, for joining us today as we report our second quarter 2021 financial results. During the call today, I will review the highlights from our second quarter results and provide an overview of our achievements. Our second quarter results demonstrate our continued focus on supporting our existing customers and closing new deals and the continued solid execution of our priorities of top line growth as we reported 38% year-over-year growth in the quarter and 32% year-over-year growth in the first half, with sales mainly coming from the continued expansion of our businesses in North America and in Israel. Our second quarter revenues reached a record high of $119 million compared to $86.5 million for the second quarter last year, reflecting a year-over-year growth of 37.7% compared to the second quarter of 2020. The organic revenue growth was 22.6%, which reflects 60% of our year-over-year growth in the second quarter, with a balance of 15.1% resulting from the consolidation of acquired subsidiaries. This achievement delivered a 30.2% year-over-year increase in our non-GAAP operating income in the second quarter with operating margin reaching 13.4% for the second quarter, down from 14.1% in the same period last year. Our non-GAAP operating margin for the first half of 2021 was 13.6%, up 10 basis points compared to the same period last year. Magic Software is a global company operating across multiple markets and offering broad IT business service portfolio. Our strategy allows us to balance our growth, resources, investment and risk across regions and markets. Over the past quarter, we continued to experience strong demand for our digital transformation offerings. We are constantly increasing resources in order to support existing transformation projects as well as new business towards the second half of the year while carefully managing and controlling our expenses. In summary, our solid execution in the second quarter delivering double-digit growth across all key financial indices

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin a question-and-answer session The first question is from Tavy Rosner of Barclays. Please go ahead.

[Tavy Rosner:]

Congrats on the strong results. Asaf, you talked about the difference in growth between organic and M&A contribution. I wanted you to dig a little bit into the contribution this quarter. What particular acquisition contributed the most? And any color would be appreciated.

[Asaf Berenstin:]

We mentioned in the past that we acquired a company called , which is a starting company in the U.S. So again, last year, we acquired during the second half of the year, and this year, it is now consolidated for the first half. So we -- during the quarter, it contributed approximately $4 million to our revenues. Additionally, during the second quarter, we acquired another consulting company in the U.S. As we do in any given year, we manage to acquire between one to two, we call, small companies that operate around our aerospace, and we acquired another company called Enable IT in the U.S. with approximately 100 FTEs. And we generated approximately 5 -- between $5 million and $6 million in revenues during the second quarter.

[Tavy Rosner:]

Okay. And then as a follow-on, you mentioned the gross margin decline, partly attributable to the M&A. I guess looking ahead, what kind of gross margin should we be modeling in for the remainder of '21 and looking into '22?

[Asaf Berenstin:]

We are looking at 30% gross margin. Again, we expect the second half to be better than the first half, also in the software division and the software and technology division. Basically, this year, 2021 started very strong. We sold more licenses and increased our maintenance versus 2020. But the increase, once we are acquiring companies, the increase of our professional services tops the contribution that we made from the technology and software. On top of that, we have one of our largest accounts, which is CVS. We have implemented -- they have implemented with us a rebate mechanism, which is subject to the businesses that we have with them. Last year, the discount, the rebate was approximately 10%. This year, it can be something between even 16% to -- can reach even 18% rebate that we are applying over our financial statements when we report our revenue. So just looking at the increase of our operation this year versus last year, we have 6-more percent in our revenues that we are discounting for the client. We are doing our best to increase the -- our bill rate and to all as much as we can also back to the customer, but it's still impaired on gross margin.

[Tavy Rosner:]

Congrats on the strong results.

[Operator:]

The next question is from Maggie Nolan of William Blair.

[Maggie Nolan:]

Congrats on the results. I wanted to ask about the back half of the year here. What kind of opportunity do you think there is to see upside surprise, given that you're kind of modeling flat from this strong quarter that you just had in the back half of the year?

[Asaf Berenstin:]

I don't think that we are trying even to be too conservative. Of course, we are trying to be at the high end of the range that we are giving. You need to remember that 40% of our revenues and approximately even 50% of our profit comes from the Israeli market. Q3 is not considered as a strong quarter for the Israeli market because of the Jewish holiday season, the New Year, the Jewish New Year. Having said that, we still expect, in absolute numbers, to manage to cover that and this is why we expect the second half to be still better in terms of absolute number than the first half from other businesses that we create to grow more in the U.S., to sell more license and technology during the second half that will still allow us to reach the high end of the target that we reported.

[Maggie Nolan:]

Very good. And then when you think about the remote working environment, current talent supply constraints, what are your latest thoughts on the delivery model and any opportunity to expand into new geographies or change how you've delivered in the past?

[Asaf Berenstin:]

We become very, very custom, and we even think that it is something that we like, as a company, as an organization and our employees are also starting to even when we interview new candidates, they are expecting this hybrid work of -- the hybrid working model. So even now when there are some noises in Israel for perhaps another lockdown period, this is not something that we expect to have any implication on our operations. People are working hybridly from home and from the Company, from client site or off-site. We have offerings where the client is even relying on us as an offshore or nearshore vendor for services. So this is something that, for us, seems to be very attractive.

[Operator:]

The next question is from Spencer Kirschman of H.C. Wainwright.

[Spencer Kirschman:]

This is Spencer Kirschman in for Kevin Dede. Congrats on the quarter. So a question on kind of how you see that hybrid work environment moving forward, given the surge of infections in Israel and what your customers are kind of saying about that? Do they want those professional service employees to be on site or are they more okay with that hybrid model?

[Asaf Berenstin:]

I think I just said exactly that, that we see it from -- both on the employee side and from the -- we also see it from the customer side, and of course, we see it from us as managing the operations, something that we find very, very good to the Company, very good to the organization. It allows people to be more productive instead of wasting time in traffic. They are working instead of being 24/7 in the office. They are also balancing their work-life balance. So for us, it made our employees happier. It made us -- it made them more productive. And the customers also prefer to do that, especially, as I said, we are also offering our customers offshore and near-shore service solutions. So this is something that anyway is accustomed for working from outside premises.

[Spencer Kirschman:]

Okay, that's great color. And how do you see the competitive atmosphere going forward? Do you see some of your larger competitors potentially moving to smaller and more midsized companies?

[Guy Bernstein:]

Yes, we definitely see -- first and foremost, we see the fight or the talent. This is a big issue all over the place, in Israel, in the States, in other places, even in -- wherever we have like offshore companies, whether it's in India or in Ukraine, Russia. I think this is the biggest concern because we are doing our best but we cannot compete with Amazon, Google and the rest of them. So it is an issue. Until now, somehow, we succeeded in keeping the employees and create like a good work environment but it's really a challenge.

[Spencer Kirschman:]

Yes. And final question. How is that software development going? I remember that PowWow acquisition, I think it was supposed to make the coding process a little more streamlined.

[Yuval Lavi:]

We are still in the process of adopting it more and more into our platform. In parallel, we also have an opportunity, specifically on the PowWow platform themselves as a new customer coming into the platform via a partnership that we have in the U.S. with and other partners. So we are adopting the platform towards customer requirement and towards our own internal requirements.

[Operator:]

There are no further questions at this time. Mr. Bernstein, would you like to make your concluding statement?

[Guy Bernstein:]

Yes. So once again, thank you all for joining our quarter release, and we sure hope to bring you some more good news in the next quarters to come. Thank you.

[Operator:]

Thank you. This concludes the Magic Software Enterprises Ltd. Second Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.