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Magic Software Reports First Quarter 2024 Financial Results

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Magic Software reported its Q1 2024 financial results, highlighting a decline in revenues by 8.2% year-over-year to $130.7 million. Gross profit decreased by 5.6% to $36.7 million, and net income dropped by 13% to $8.8 million. Diluted EPS fell from $0.21 to $0.18. The company reiterated its annual revenue guidance of between $540 million and $550 million. Despite the revenue decline, cash flow from operations increased significantly to $27.7 million. A semi-annual dividend of 20.4 cents per share was declared, payable on July 13, 2024. The decrease in revenue was attributed to a reduction in demand from major U.S. clients.

Positive
  • Q1 2024 gross margin improved by 80 basis points to 28.1%.
  • Operating margin increased by 20 basis points to 11%.
  • Cash flow from operating activities rose to $27.7 million, up from $18.8 million.
  • Magic Software has $125.9 million in cash, cash equivalents, and bank deposits.
  • Reiterated 2024 revenue guidance remains between $540 million and $550 million.
  • Declared a dividend of 20.4 cents per share, reflecting 70% of distributable profits.
Negative
  • Revenues decreased by 8.2% year-over-year to $130.7 million.
  • Gross profit decreased by 5.6% to $36.7 million.
  • Operating income fell by 6% to $14.4 million.
  • Net income attributable to shareholders dropped by 13% to $8.8 million.
  • Diluted EPS decreased from $0.21 to $0.18.
  • Non-GAAP net income fell by 10.4% to $11.3 million.
  • Increased interest expenses due to higher bank interest rates and financial debt.

Insights

Magic Software's financial results for Q1 2024 indicate a 8.2% decline in revenues compared to the same period last year. This drop is attributed significantly to decreased demand from key U.S.-based customers who unexpectedly suspended projects. However, $130.7 million in revenues is still robust and the 4.1% increase from the previous quarter suggests some recovery.

The company's operating margin improved slightly by 20 basis points (GAAP) and 90 basis points (Non-GAAP), indicating better cost management or shifts in the revenue mix favoring higher-margin activities. Despite this, net income fell by 13.0% to $8.8 million, impacted by higher interest expenses amidst rising bank interest rates.

Investors should note the consistent guidance of $540 million to $550 million in annual revenue, which, if met, indicates potential recovery and growth in the subsequent quarters. Pay attention to the stated dividend of 20.4 cents per share, reflecting the company's confidence in generating distributable profits despite recent challenges.

The decrease in demand from U.S.-based customers underscores a pivotal trend affecting Magic Software's immediate revenue outlook. The sudden suspension of projects by blue-chip clients highlights potential vulnerability to client-specific risks. However, there's a silver lining as the firm reports increased engagement from other clients, suggesting diversified resilience.

The increase in cash flow from operating activities to $27.7 million from $18.8 million year-over-year is a positive indicator of the company's liquidity and operational efficiency. This could provide a buffer against future uncertainties. Despite the net income decline, the substantial cash reserves of $125.9 million juxtaposed with $78.4 million in financial debt demonstrate a strong financial position capable of weathering short-term disruptions.

OR YEHUDA, Israel, May 16, 2024 (GLOBE NEWSWIRE) -- Magic Software Enterprises Ltd. (NASDAQ and TASE: MGIC) (“the Company”), a global provider of IT consulting services and end-to-end integration and application development platforms solutions, announced today its financial results for the first quarter ended March 31, 2024.

Summary Results for the First Quarter 2024 (USD in millions, except per share data)

      
 GAAP  Non-GAAP 
 Q1 2024Q1 2023% Change Q1 2024Q1 2023% 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%)
        
(*) Attributable to Magic Software’s shareholders.
 

Financial Highlights for the first Quarter Ended March 31, 2024

  • Revenues for the first quarter of 2024 decreased by 8.2% to $130.7 million, compared to $142.4 million in the same period of the previous year. On a constant currency basis (calculated based on average currency exchange rates for the three months ended March 31, 2023), revenues for the first quarter of 2024 would have decreased by 6.4% to $133.3 million. As described in the pre-announcement of our third quarter results on November 8, 2023, in the third quarter of 2023, we experienced a substantial and unexpected decline in demand for our professional services from several of our important U.S.-based blue-chip customers which, without any advance notification, decided to immediately suspend significant parts of their active time-and-materials-based projects. This reduced demand had a negative impact on our first quarter revenues compared to the same period of the previous year of approximately $20.4 million. Compared to the fourth quarter of 2023, revenues for the first quarter increase by 4.1%.
  • Operating income for the first quarter of 2024 decreased by 6.0% to $14.4 million, compared to $15.3 million in the same period of the previous year. On a constant currency basis (calculated based on average currency exchange rates for the three months ended March 31, 2023), operating income for the first quarter of 2024 would have decreased by 3.7% to $14.8 million.
  • Non-GAAP operating income for the first quarter of 2024 decreased by 1.7% to $18.1 million, compared to $18.5 million in the same period of the previous year. On a constant currency basis (calculated based on average currency exchange rates for the three months ended March 31, 2023), non-GAAP operating income for the first quarter of 2024 would have reach $18.5 million, same as in the same quarter for the previous year.
  • Net income attributable to Magic Software’s shareholders for the first quarter of 2024 decreased by 13.0% to $8.8 million, or $0.18 per fully diluted share, compared to $10.1 million, or $0.21 per fully diluted share, in the same period of the previous year. The decrease in our net income attributable to Magic Software’s shareholders was primarily attributable to the decrease in our operating profit and increase in interest expenses resulting from the increase of bank interest rates and increase in overall financial debt.
  • Non-GAAP net income attributable to Magic Software’s shareholders for the first quarter of 2024 decreased by 10.4% to $11.3 million, or $0.23 per fully diluted share, compared to $12.6 million, or $0.26 per fully diluted share, in the same period of the previous year.  
  • Cash flow from operating activities for the first quarter ended March 31, 2024, amounted to $27.7 million compared to $18.8 million in the same period last year.
  • As of March 31, 2024, Magic’s cash, cash equivalents and short and long-term bank deposits amounted to $125.9 million and total financial debt amounted to $78.4 million.
  • Magic is reiterating 2024 annual revenue guidance of between $540 million and $550 million.

Declaration of Dividend for the Second Half of 2023

  • In accordance with its dividend distribution policy, the Company’s board of directors declared a semi-annual cash dividend in an amount of 20.4 cents per share and in an aggregate amount of approximately $10.0 million, reflecting approximately 70% of its distributable profits for the second half of 2023.
  • The dividend is payable on July 13, 2024, to all of the Company’s shareholders of record at the close of trading on the NASDAQ Global Select Market on June 27, 2024.
  • In accordance with Israeli tax law, the dividend is subject to withholding tax at source at the rate of 30% (if the recipient of the dividend is at the time of distribution or was at any time during the preceding 12-month period the holder of 10% or more of the Company’s share capital) or 25% (for all other dividend recipients) of the dividend amount payable to each shareholder of record, subject to applicable exemptions.
  • The dividend will be paid in US dollars on the ordinary shares of Magic Software Enterprises that are traded both on the Tel Aviv Stock Exchange and the NASDAQ Global Select Market

Guy Bernstein, Chief Executive Officer of Magic Software, said: “Despite the slowdown we faced during the second half of 2023 resulting from the headwind facing by some of our customers in certain sectors in the U.S., we see that the vast majority of our customers continues to value our unique proposition and resume to engage us to an increasing degree as a preferred partner for innovative digital transformation initiatives. We eagerly anticipate the fruition of our ongoing efforts in cultivating cutting-edge capabilities that are poised to propel us toward sustained, long-term profitability, thereby delivering enduring value to our esteemed shareholders.”

Conference Call Details

Magic Software’s management will host a conference call on Thursday, May 16, 2024, at 10:00 am Eastern Daylight Time (17:00 Israel Daylight Time) to review and discuss Magic Software’s results.

To participate, please call one of the following teleconferencing numbers. Please begin placing your calls at least 5 minutes before the conference call commences. If you are unable to connect using the toll-free numbers, call the international dial-in number.

NORTH AMERICA: +1-866-652-8972

UK: 0-800-917-9141

ISRAEL: 03-918-0650

ALL OTHERS: +972-3-918-0650

For those unable to join the live call, a replay of the call will be available in the Investor Relations section of Magic Software’s website, www.magicsoftware.com.

Non-GAAP Financial Measures

This press release contains the following non-GAAP financial measures: non-GAAP gross profit, non-GAAP operating income, non-GAAP net income attributable to Magic Software’s shareholders and non-GAAP basic and diluted earnings per share.

Magic Software believes that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Magic Software’s financial condition and results of operations. Magic Software’s management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining executive and senior management incentive compensation and for budgeting and planning purposes. These measures are used in financial reports prepared for management and in quarterly financial reports presented to the Company’s board of directors. The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with other software companies, many of which present similar non-GAAP financial measures to investors.

Management of the Company does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents non-GAAP financial measures together with GAAP results. Magic Software urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing quarterly financial results, including this press release, and not to rely on any single financial measure to evaluate the Company’s business.

Non-GAAP measures used in this press release are included in the financial tables of this release. These non-GAAP measures exclude the following items:

  • Amortization of purchased intangible assets and other related costs;
  • In-process research and development capitalization and amortization;
  • Cost of share-based payment;
  • Costs related to acquisition of new businesses;
  • The related tax, non-controlling interests’ effects of the above items;
  • Change in valuation of contingent consideration related to acquisitions;
  • Change in deferred tax assets on carry forward tax losses.

Reconciliation of the most comparable GAAP financial measures to the non-GAAP financial measures used in this press release are included in the financial tables of this release.

About Magic Software Enterprises

Magic Software Enterprises Ltd. (NASDAQ and TASE: MGIC) is a global provider of end-to-end integration and application development platforms solutions and IT consulting services.

For more information, visit www.magicsoftware.com.

Forward Looking Statements

Some of the statements in this press release may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934 and the United States Private Securities Litigation Reform Act of 1995. Words such as “will,” “look forward”, “expect,” “believe,” “guidance” and similar expressions are used to identify these forward-looking statements (although not all forward-looking statements include such words). These forward-looking statements, which may include, without limitation, projections regarding our future performance and financial condition, are made based on management’s current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. These statements speak only as of the date they were made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We operate in a changing environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in our Annual Report on Form 20-F for the year ended December 31, 2023, which filed on May 13, 2024, and subsequent reports and filings made from time to time with the Securities and Exchange Commission.

Magic® is a registered trademark of Magic Software Enterprises Ltd. All other product and company names mentioned herein are for identification purposes only and are the property of, and might be trademarks of, their respective owners.

Press Contact:

Ronen Platkevitz
Magic Software Enterprises
ir@magicsoftware.com

 
MAGIC SOFTWARE ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
U.S. Dollars in thousands (except per share data)
   
  Three months ended
  March 31,
  2024 2023
  Unaudited
Revenues $130,720  $142,440 
Cost of Revenues  94,021   103,555 
Gross profit  36,699   38,885 
Research and development, net  2,793   2,539 
Selling, marketing and general and  administrative expenses  19,174   21,164 
Increase (decrease) in valuation of contingent consideration related to acquisitions 306   (165)
Total operating expenses  22,273   23,538 
Operating income  14,426   15,347 
Financial expenses, net  (1,758)  (564)
Increase (decrease) in valuation of consideration related to acquisitions  114   (135)
Income before taxes on income  12,782   14,648 
Taxes on income  2,729   2,813 
Net income $10,053  $11,835 
Share of profit of companies accounted for at equity, net  (64)  - 
Net income attributable to non-controlling interests  (1,192)  (1,727)
Net income attributable to Magic's shareholders $8,797  $10,108 
     
     
Weighted average number of shares used in    
computing net earnings per share    
     
Basic  49,099   49,093 
     
Diluted  49,099   49,136 
     
Basic and diluted earnings per share attributable    
to Magic's shareholders $0.18  $0.21 
     


 
MAGIC SOFTWARE ENTERPRISES LTD.
RECONCILIATION OF GAAP AND NON-GAAP RESULTS
U.S. Dollars in thousands (except per share data)
  
 Three months ended
 March 31,
 2024 2023
 Unaudited
    
GAAP gross profit$36,699  $38,885 
Amortization of capitalized software and acquired technology 1,107   975 
Amortization of other intangible assets 503   245 
Non-GAAP gross profit$38,309  $40,105 
    
    
GAAP operating income$14,426  $15,347 
Gross profit adjustments 1,610   1,220 
Amortization of other intangible assets 1,514   2,064 
Increase (decrease) in valuation of contingent   
consideration related to acquisitions 306   (165)
Capitalization of software development (748)  (711)
Costs related to acquisitions 144   74 
Cost of share-based payment 891   622 
Non-GAAP operating income$18,143  $18,451 
    
    
GAAP net income attributable to Magic's shareholders$8,797  $10,108 
Operating income adjustments 3,717   3,104 
Expenses attributed to non-controlling interests   
and redeemable non-controlling interests (452)  (147)
Increase (decrease) in valuation of consideration   
related to acquisitions 114   (135)
Deferred taxes on the above items (899)  (347)
Non-GAAP net income attributable to Magic's shareholders$11,277  $12,583 
    
    
Non-GAAP basic and diluted net earnings per share$0.23  $0.26 
Weighted average number of shares used in computing basic   
net earnings per share 49,099   49,093 
    
Non-GAAP diluted net earnings per share$0.23  $0.26 
Weighted average number of shares used in computing diluted   
net earnings per share 49,099   49,158 
    


 
Summary of Non-GAAP Financial Information
U.S. Dollars in thousands (except per share data)
   
  Three months ended
  March 31,
  2024
 2023
  Unaudited Unaudited
         
Revenues $130,720  100% $142,440  100%
Gross profit  38,309  29.3%  40,105  28.2%
Operating income  18,143  13.9%  18,451  13.0%
Net income attributable to        
Magic's shareholders  11,277  8.6%  12,583  8.8%
         
Basic and diluted earnings per share $0.23    $0.26   
             


 
MAGIC SOFTWARE ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
U.S. Dollars in thousands
    
 March 31, December 31,
 2024
 2023
 Unaudited  
    
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$125,803  $105,943 
Short-term bank deposits 49   751 
Trade receivables, net 126,329   131,098 
Other accounts receivable and prepaid expenses 21,565   18,833 
Total current assets 273,746   256,625 
    
LONG-TERM ASSETS:   
Deferred tax assets 10,784   6,729 
Right-of-use assets 24,228   25,718 
Other long-term receivables and Investments in companies accounted for at equity 7,731   8,623 
Property and equipment, net 7,707   7,988 
Intangible assets and goodwill, net 212,321   216,723 
Total long term assets 262,771   265,781 
    
TOTAL ASSETS$536,517  $522,406 
    
LIABILITIES AND EQUITY   
    
CURRENT LIABILITIES:   
Short-term debt$36,763  $28,941 
Trade payables 27,126   28,415 
Accrued expenses and other accounts payable 43,993   41,492 
Current maturities of lease liabilities 5,975   4,406 
Liability in respect of business combinations 7,082   6,656 
Put options for non-controlling interests 18,831   18,252 
Deferred revenues and customer advances 21,813   13,537 
Total current liabilities 161,583   141,699 
    
LONG TERM LIABILITIES:   
Long-term debt 41,628   52,267 
Deferred tax liability 14,579   11,610 
Long-term lease liabilities 20,072   23,101 
Long-term liability in respect of business combinations 1,076   1,049 
Put options of non-controlling interests -   620 
Employee benefit liabilities 1,094   1,116 
Total long term liabilities 78,449   89,763 
    
    
EQUITY:   
Magic Software Enterprises shareholders' equity 272,317   265,981 
Non-controlling interests 24,168   24,963 
Total equity 296,485   290,944 
    
TOTAL LIABILITIES AND EQUITY$536,517  $522,406 
    


 
MAGIC SOFTWARE ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. Dollars in thousands
  
 Three months ended March 31,
 2024 2023
 Unaudited Unaudited
Cash flows from operating activities:   
    
Net income$9,989  $11,835 
Adjustments to reconcile net income to net cash provided   
by operating activities:   
Depreciation and amortization 4,889   5,052 
Cost of share-based payment 584   622 
Change in deferred taxes, net (754)  1,351 
Capital gain on sale of fixed assets 13   - 
Effect of exchange rate on of cash and cash equivalents held   
in currencies other than the functional currency 170   731 
Changes in value of short-term and long-term loans from banks   
and others and deposits, net (819)  76 
Working capital adjustments:   
Trade receivables 3,709   (5,773)
Other current and long-term accounts receivable (1,333)  1,612 
Trade payables (983)  1,354 
Accrued expenses and  other accounts payable 3,704   (5,565)
Deferred revenues 8,508   7,458 
Net cash provided by operating activities 27,677   18,753 
    
Cash flows from investing activities:   
    
Capitalized software development costs (748)  (711)
Purchase of property and equipment (280)  (431)
liabilities related to business combinations -   (10,151)
Payments for business acquisitions, net of cash acquired (249)  - 
Proceeds from sale of property and equipment 15   - 
Purchase of financial assets at fair value through profit or loss (1,000)  323 
Investment in long-term deposits 296   (269)
Proceeds from short-term bank deposits 701   - 
Net cash used in investing activities (1,265)  (11,239)
    
Cash flows from financing activities:   
    
Exercise of employees’ stock options   
Dividend to Magic's shareholders   
Dividend paid to non-controlling interests (2,086)  (1,526)
Repayment of lease liabilities (1,460)  (1,380)
Purchase of redeemable non-controlling interest (314)  - 
Receipt of short-term and long-term loans from banks and others 5,006   23,749 
Repayment of short-term and long-term loans (6,574)  (7,323)
Net cash used in financing activities (5,428)  13,520 
    
Effect of exchange rate changes on cash and cash equivalents (1,124)  (1,590)
    
Increase (decrease) in cash and cash equivalents 19,860   19,444 
Cash and cash equivalents at the beginning of the period 105,943   83,062 
Cash and cash equivalents at end of the period$125,803  $102,506 
    

FAQ

What were Magic Software's Q1 2024 revenues?

Magic Software's Q1 2024 revenues were $130.7 million, an 8.2% decrease from the previous year.

How did Magic Software's net income change in Q1 2024?

Net income for Q1 2024 decreased by 13% to $8.8 million.

What is Magic Software's Q1 2024 EPS?

Magic Software's diluted EPS for Q1 2024 is $0.18, down from $0.21 in Q1 2023.

Did Magic Software declare a dividend for 2023?

Yes, Magic Software declared a semi-annual dividend of 20.4 cents per share, payable on July 13, 2024.

What is the financial outlook for Magic Software in 2024?

Magic Software reiterated its annual revenue guidance of between $540 million and $550 million for 2024.

What factors contributed to the revenue decline in Q1 2024 for Magic Software?

The revenue decline was mainly due to reduced demand from major U.S. clients.

What was Magic Software's cash flow from operations in Q1 2024?

Magic Software's cash flow from operations increased to $27.7 million in Q1 2024.

Magic Software Enterprises Ltd

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