Magic Software Enterprises Ltd. Q1 FY2024 earnings call

• Revenue in Q1 2024 decreased by 8.2% year-over-year, with currency fluctuation and a substantial decline in demand for professional services from U.S.-based blue-chip customers being primary factors. On a constant currency basis, revenue decrease was 6.4%.
• Non-GAAP operating margin held strong at 13.9% of revenues, 90 basis points higher than Q1 2023 and 50 basis points higher than full year 2023, showcasing business model scalability and defensibility.
• Leveraging digital technologies and cloud-based platforms to create demand for software solutions and services. Strong execution in Israeli market with continued revenue growth. Focus on helping businesses with cloud migration strategies, offering managed cloud services including NOC as a Service, SOC as a Service, etc.
• GenAI is a game changer, and Magic is strategically positioned to leverage cloud vendors' solutions and offer value-added services to customers.

In the first quarter of 2024, revenues in North America amounted to $52.3 million, which is approximately $19.9 million or 27.4% lower compared to Q1 of 2023 and $1.4 million or 2.7% higher compared to Q4 of 2023. North America accounted for 40% of overall quarterly revenues. Revenues from Israeli operations amounted to $59.2 million, up by 11.1% compared to the same period last year. On a constant currency basis, revenues from Israeli operations would have increased by an additional $2.1 million year-over-year to $61.3 million, reflecting a 15% real-term year-over-year growth. Israeli operations accounted for 45% of overall quarterly revenues. The breakdown of revenue mix for Q1 2024 was approximately 19% related to software solutions with a 64% gross margin and 81% related to professional services with a 21% gross margin. Non-GAAP operating income for Q1 2024 was $18.1 million, an absolute decrease but a 13.9% operating margin, compared to $18.5 million and 13% in Q1 2023.

• Expect 2024 full year revenue in the range of $540 million to $550 million.
• Expect the second half of 2024 to be much stronger than the first half, with 80% of growth coming from the second half.

• Significant impact of currency fluctuation on revenues. Uncertainty in demand for professional services from U.S.-based customers. Challenging macroeconomic climate affecting ability to overcome adverse factors.

Q: How did this quarter compare to expectations and what gives confidence in achieving full year guidance?

A: This quarter met expectations. Backlog is increasing, strong demand for services, good execution by teams. Confidence comes from seeing the second half being much stronger than the first half with 80% of growth in the second half.

Q: Elaborate on execution seen. Any proud aspects in sales or delivery organization?

A: Things are working in plan. Adjustments made in U.S. operations due to customer situation. Strong push in Israeli market with visible revenue contribution from investments there.

Q: Talk about the strategic decision behind the acquisition of the U.S. subsidiary and whether pivoting to more of a services company?

A: Not a pivot. Traditionally acquire in U.S. staffing area to acquire market share, integrate easily with current operations, improve margins and push business forward. May continue to look for additional opportunities.

Q: Compare this quarter to expectations and confidence in full year guidance?

A: Same as first question answer.

Q: Elaborate on execution and proud aspects?

A: Same as second question answer.

Q: Strategic decision behind U.S. subsidiary acquisition and pivot?

A: Same as third question answer.

Q: Talk about pipeline strength and U.S. customers potentially coming back?

A: Strong demand in Israeli operation and Europe, especially in cloud and digital areas. U.S. customers stabilized, started hiring but more cautious. Small businesses have strong demand, bigger ones will take time but reduction in force stopped.

Q: Color on AI strategy and use cases?

A: GenAI brings big change with short journey to results. Partnerships with AWS, Azure and GCP, implementing technology combination to customers, bringing value via data and cloud-related areas.