Magic Software Enterprises Ltd. Q2 FY2025 earnings call

• Second quarter 2025 revenue was a quarterly all-time record, up 11.3% y-o-y and 2.8% sequentially.
• Israel had 18.8% y-o-y growth, primarily from cloud, DevOps, AI services, and defense sector demand. North America had 6.5% y-o-y revenue growth.
• Managed over 270 AI projects across over 20 industries, with a 70% success rate (nearly 6x industry average).
• Backed by over 100 AI-focused events and 10 strategic alliances with global leaders like AWS, Azure, Google Cloud.
• Declared a semiannual cash dividend of $0.296 per share, payable on October 22, 2025.
• Cash flow from operating activities in the first half of 2025 was $21.2 million, but expected to normalize in coming quarters.

In the second quarter of 2025, revenue reached a quarterly all-time record of $151.6 million, up approximately 11.3% year-over-year from the second quarter of 2024 and 2.8% sequentially. Israeli operations saw year-over-year double-digit growth of 18.8% with over 90% organic, driven by strong demand for cloud, DevOps, AI services, and defense sector services. Revenue from Israeli operations totaled $68.7 million, accounting for 47% of overall quarterly revenues. North American operations had revenue increasing approximately 6.5% year-over-year and 6% sequentially, with U.S. first half 2025 revenue up ~9% year-over-year. The revenue mix for the second quarter of 2025 was approximately 17% related to software solutions with a gross margin of ~65% and 83% related to professional services with a gross margin of ~21%. Non-GAAP gross margin for the second quarter was 28.7% of revenue, amounting to $43.6 million.

• Revised full year 2025 revenue guidance from $593 million to a revised range of $600 million to $610 million, representing an anticipated annual revenue growth rate of approximately 8.6% to 10.4% compared to the prior fiscal year.
• Sustained healthy demand across markets and a strong growing pipeline support the revised guidance.

Q: Congratulations on the strong results. Can you give us any color on customer behavior in the U.S. and perhaps to what degree, if any, you're seeing a recovery in IT spend in that region?

A: Overall, it varies between different operations in the U.S., but with major clients, there's increased demand and signs of improvement in the U.S. market.

Q: Can you talk about some of the drivers that are impacting margins? And how do you see these drivers evolving towards the end of the year through the year-end?

A: Mainly impacted by timing of term license software renewals and revenue mix. Significant increase in revenues from projects and service operations with lower gross margins. Expect improvement in the second half towards software to raise margins to around 29% annually.

Q: How would you describe the progress of customers transitioning to cloud solutions now, let's say, versus last year?

A: More and more adoption of cloud from new customers jumping directly in and legacy customers starting to address and adopt cloud solutions, including in Japanese territory.

Q: I'm hoping you could give us a little more commentary on how the pipeline is building, maybe the size and types of deals that you're seeing from customers?

A: Significant driver is cloud and AI. Hundreds of projects in progress, higher conversion rate than industry standard, pushing for cloud services, and expanding in various regions including U.S., Canada, U.K.

Q: Can you comment a little on the strategy behind the acquisition that was done in July and the contribution to the financials for this year?

A: Acquired Axiom, a small consultancy firm, to push forward FactoryEye AI operation in the U.S., with turnover around $2.5 million.