Magic Software Enterprises Ltd. Q3 FY2024 earnings call

· Revenue in Q3 2024 increased to $143 million, up ~10.4% from Q3 2023. · Israel had sequential double-digit growth of 12% (organic), driven by strong demand for cloud, DevOps, AI services, defense sector, and Passover billable days. · North America had mid-single-digit sequential growth of 1.5% with stable client sentiment. · Non-GAAP operating margin for first nine months ending September 30, 2024, was ~13.4% of revenue, 20 basis points higher than last year. · Leveraging digital technologies and cloud platforms for growth. · Managed cloud services with 430 satisfied customers across industries and geographies. · Gross margin for Q3 2024 was 28.7% of revenues, and for the first nine months was 29.1%. · Balance sheet: Cash and cash equivalents and short-term bank deposits were ~$99.7 million as of September 30, 2024; total financial debt was ~$65.8 million as of that date.

In the third quarter of 2024, North America's revenue amounted to $59.3 million, which is a 1.5% sequential increase and 2.7% year-over-year increase, accounting for 41% of overall quarterly revenues. Revenues from Israeli operations were $64.7 million, up 18.1% year-over-year from $54.8 million in the same period last year, accounting for 45% of overall quarterly revenue. Israel had sequential double-digit growth of 12% due to strong demand for cloud, DevOps, AI services, defense sector, and Passover billable days.

· Raised the lower end of 2024 annual revenue guidance to $544 million to $550 million. · Projected Q4 2024 revenue between $134 million and $140 million, with a midpoint of $137 million. · Q4 revenue is lower than Q3 2024 due to reduction in billable days from Jewish New Year holidays and North American holidays.

· Timing of Jewish New Year holidays (Rosh Hashanah and Sukkot) and North American holidays (Thanksgiving, Christmas) reducing billable days. · Macro-economic uncertainties impacting the U.S. market's investment in IT.

Q: Hi, good afternoon. Thank you for the presentation and thank you for taking my questions. I just wanted to talk about the demand in your end markets in general. When you talked about some local weakness here and there. Is it in the pushback that you're getting generally longer sales cycle, i.e., we're very much interested, but let's discuss in a couple of months. And -- or is there anything else? And I guess, is there any specific segment in your end market that are more receptive than others?

A: No, I don't think it's coming from a long revenue sales cycle. I think that currently, we continue to see from the first quarter of 2024 -- from the fourth quarter of 2024 till today, we see our U.S. operation pretty much stagnant with a very small increase, although we get some good signs for the fourth quarter, but we prefer to remain cautious about it. And we believe that once macroeconomic environment will improve, now with the new elections, there is more stability and the horizon seems a little bit more clear. We hope that, that will also reflect towards the companies that we are working with, and they will come back and increase their investment in the IT.

Q: Understood. So it's broadly speaking, right? It's not a specific segment or anything. It's just in general, that's the sense that you're getting from your client base?

A: Only in the U.S., not in Israel. In Israel, we see a significant momentum. We see a double-digit growth quarter-by-quarter, run by the demand from DevOps and development services, to defense services that we provide, to cloud services and so on and so forth.

Q: Hi, everyone. It's Kate Kronstein on for Maggie. Last quarter, you guys sounded pretty positive on the pipeline. So what can you tell us about how some of those large deals you've signed recently are progressing?

A: I think you can see from the top line results that we announced today, the $143 million versus $136 million that we had in the previous quarter, that we managed to close and also execute the new transaction that came into play. I can tell you, for example, in the U.S. market, we signed new -- 24 projects with new clients during the third quarter. Not everything, of course, went into a full -- in Q3, went into recognition in full capacity. So we expect it also to overfold in Q4. But overall, as we said, if we divide our operations between U.S. and the rest of the world. So 60% of our business is doing good and growing with high single-digit or low double-digit growth. And the U.S. market currently is stable, but with a good signs for growth.

Q: Okay. Great. Thank you. That's helpful. And then just one more for me. I know you kind of hit on this with the first question, but can you provide any additional detail about the performance of your U.S.-based blue-chip customers in the professional services space?

A: So I can say that during 2023 second half, due to the raise of the interest, most of them were cutting, let's say, up to 10%, except for CVS that went into this struggle with the merger with Aetna and were cutting a lot of projects. So we suffered quite a bit from CVS. Then first half of 2024, we saw that it is getting stable. Q3, we saw some first signs for hiring again. And we see more for Q4. So we believe that with the recovery of the U.S., we can be back on track and show nice growth.