Magic Software Enterprises Ltd. Q1 FY2025 earnings call

• Revenue in Q1 2025 is an all-time record, up ~12.7% y-o-y. Israel had double-digit y-o-y growth of 17.7% and sequential growth of 11.3% with over 80% organic, driven by strong demand for cloud, DevOps, AI services, and defense sector services. - North America grew ~11.1% due to Theoris acquisition; excluding it, North American revenues were stable. - AI low-code, no-code, and service offerings are critical as customers automate and digitize. - Leveraging digital technologies and cloud-based platform for strong demand. - Non-GAAP gross margin for Q1 2025 was 28.5% of revenues, down from 29.3% in Q1 2024, due to revenue mix composition and renewal timing. - Cash and cash equivalents and short-term bank deposits as of March 31, 2025, were ~$105 million; total financial debt was ~$56.3 million. Cash flow from operating activities in Q1 2025 was $14.9 million, down from $27.7 million in Q1 2024, mainly due to increased working capital investment to support revenue growth.

In the first quarter of 2025, Magic Software Enterprises' revenue reached an all-time record of $147.3 million, up ~12.7% from Q1 2024. North American revenue increased by ~11.1% to $58.7 million, accounting for 40% of overall quarterly revenues. Excluding Theoris, Inc. acquisition, North American revenues remained stable. Israel operation revenue was $69.9 million, up 17.7% compared to Q1 2024, accounting for 47% of overall quarterly revenues. Revenue mix: ~17% Software Solutions with ~62% gross margin, ~83% Professional Services with ~21.5% gross margin.

• Reiterates full-year 2025 revenue guidance in the range of $593 million to $603 million, reflecting y-o-y growth of 7.3% to 9.1%. - Second quarter will have approximately 4.5 fewer billable days compared to the first quarter due to Passover holiday timing, equivalent to a ~7% reduction in time and material billable capacity in Israeli operation, which is a temporary headwind.

Q: Could you comment on what's causing the change in momentum in the U.S. market?

A: In our aspects, we see that most of our customers, especially the significant portion of our business, are showing improvement or we continue to see some stagnant in their operations. After experiencing significant reduction in operations in the second half of 2023, we see four consecutive quarters of pretty stagnant and now first quarter we see a change with rising deals flowing in, which is a positive sign for continued expansion during the second half of the year.

Q: Why was operating margin this quarter a little lower than historically?

A: The fluctuation in gross margin is primarily attributable to the composition of our revenue mix and the timing of renewals of our term-based software license agreements. In 2025, renewals are predominantly scheduled for the fourth quarter and to a lesser extent the third quarter compared to the first and second quarter of the prior year, which reduces a bit our gross margins at the beginning of the year, but we anticipate it to continue improving and be over 29%.