Magic Software Enterprises Ltd. Q4 FY2023 earnings call

• Revenue decline in Q4 2023 was due to currency fluctuations, unexpected drop in U.S. professional services demand, and challenging macroeconomic climate. Also, ~200 Israeli employees were drafted for military service due to the Israeli war with Hamas. • Fourth quarter non-GAAP operating margin was ~14.1% of revenues, 80 basis points higher than first half 2023 and 140 basis points higher than corresponding period last year. • Leveraging digital technologies and cloud-based platforms, focusing on helping clients transition to cloud, enhance SaaS capabilities, and offer managed cloud services. • Israeli operation performed strongly, with sectors like healthcare (20%), high-tech (25%), defense (10%), finance (15%), and public sector (5%) contributing to partial compensation for North America slowdown.

In the fourth quarter of 2023, revenue was $125.5 million, down ~14.7% from Q4 2022. On a constant currency basis, it would have been $130.6 million, down ~11.2%. North America revenue in Q4 2023 was $51.3 million, ~37% lower than Q4 2022 and ~12% lower than Q3 2023. Israeli operation revenue was $54.3 million, up 9.5% y-o-y; on constant currency basis, it would have increased by $5.6 million to $59.9 million, reflecting a 20.8% real growth. For 2023 full year, revenue was $535.1 million, down ~5.6% from 2022. Software solutions accounted for approximately 19% of 2023 revenue with a gross margin of ~64%, and professional services accounted for 81% with a gross margin of ~21%.

• Anticipates 2024 revenues to be in the range of $540 million to $550 million based on current currency exchange rates. • This guidance reflects an annual growth of 7.5% to 9.5% when measured against 2023 fourth quarter annualized revenue on a go-forward basis. • Optimistic about returning to normalized historical growth rate in mid-term once major part of Israel war is behind.

• Significant currency fluctuations which impacted revenues. • Substantial and unexpected decline in demand for professional services from important U.S.-based blue-chip customers. • Ongoing challenging macroeconomic climate including high interest rates, persistent inflation, and reduced capital spending. • Outbreak of Israeli war leading to drafting of approximately 200 employees to active military service, affecting business operations.

Q: Please provide color on the outlook and contributing factors in arriving at the revenues range.

A: Separated U.S. (North American) market and Israeli market. Israeli market had strong momentum in 2023 despite events in Israel. Guidance for 2024 growth assumes mid-term return to normalized historical growth rate with second half expected to be significantly higher than first half.

Q: Talk about talent management and utilization and margin targets for 2024 given changes in client base and draft in Israel.

A: Gross margins should remain relatively stable at around 29%. Software side gross margin around 64%, professional services around 21%-22%. Operating margin aiming to be around 13%.

Q: What are the foreign currency assumptions baked into the 2024 revenue guidance?

A: Use current level of currency exchange rate, not trying to anticipate currency fluctuation. The average in 2023 was around 3.69, current exchange rate is 3.65, with no significant difference except for Q4 where average rate was around 3.8.