Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q2 2025 Earnings Call Transcript

Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q2 2025 Earnings Call Transcript August 13, 2025

Magic Software Enterprises Ltd. beats earnings expectations. Reported EPS is $0.26, expectations were $0.24.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprise 2025 Second Quarter Financial Results Conference Call. Magic’s second quarter 2025 earnings release was issued before the market opened this morning, and it has been posted on the company’s website at www.magicsoftware.com. [Operator Instructions] With us on the line today are Magic CEO, Mr. Guy Bernstein; Magic CFO, Mr. Asaf Berenstin; and Magic CTO, Mr. Yuval Lavi. Before we start, I would like to remind everyone that projections or other forward-looking statement may be provided on this conference call, the safe harbor provision provided in the press release issued today also applies to the content of this call. Magic expressly disclaims an obligation to update or advise any of these forward-looking statements, whether because of future events, new information, a change in its view or expectations or otherwise.

Also during the course of today’s call, management will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on the Investor Relations section of the company’s website. I will now turn the call to Mr. Asaf Berenstin, CFO of Magic Software. Please go ahead.

Asaf Berenstin: Thank you, operator, and thank you, everyone, for joining us today as we report our second quarter 2025 financial results. During the call today, I will review highlights from our second quarter results and provide an overview of our outlook. Revenue in the second quarter of 2025 increased to a quarterly all-time record of $151.6 million, up approximately 11.3% from the second quarter of 2024 and sequential growth of 2.8%. This quarter showcase solid execution with Israel delivering a year-over-year double-digit growth of 18.8% with more than 90% organic, primarily resulted from strong demand for our cloud, DevOps and AI services, along with continued strong demand for our services in the defense sector. Our North American operations delivered strong performance this quarter, with revenue increasing approximately 6.5% year-over- year and 6% on a sequential basis.

In the United States results for the first half of 2025 reflected approximately 9% year-over-year revenue growth, driven by agreements executed in late 2024 and early 2025. We are beginning to see signs of improvement in the U.S. market, reinforcing our positive momentum and positioning us for continued growth through the second half of the year. We remain steadfast in our global commitment and confident in our ability to drive continued growth through sales of our world-class product suit and delivery of high-value services. Leveraging our AI low-code/no-code cloud-based platform and managed services, we are well positioned to meet the accelerating demand for automation, digitization and innovative software solutions. Our teams continue to execute with excellence and our customers increasingly recognize the unique value we deliver, engaging us as a preferred partner for transformative digital initiative.

These trends, combined with exciting opportunities across cloud, technology and AI reinforce our positive momentum, position us for a strong second half of the year. At Magic, we are redefining the way organization unlock the full potential of generative AI. As AI continues to reshape industries and everybody’s life, we are at the forefront, transforming our internal operations, reimagining our products and delivering next-generation services that drive measurable business impact. Today, we manage over 270 projects, spanning across more than 20 industries, have expanded our expert team from over 30 to over 50 specialists and also comprehensive end-to-end solutions for successful Gen AI adoption. From proof of concept to large-scale deployment, our customers enjoy a remarkable 70% success rate, nearly 6x higher than the industry average of 12%.

Supported by more than 100 AI-focused events and over 10 strategic alliances with global leaders such as AWS, Azure and Google Cloud, we empower organizations in finance, health care, government, defense and manufacturing to accelerate innovation, enhance productivity and secure the competitive advantage in the AI era. With an average of 3 major AI developments announced weekly, we ensure our clients gain the benefits of the latest breakthrough, while keeping their strategies aligned with core business objectives. Backed by deep expertise and proven success, we see unprecedented opportunities to further expand and elevate our offering. Proceeding to address our second quarter geographic revenue breakdown. In the second quarter of 2025, our revenues in North America increased by 6.5% from $58.4 million to $62.2 million.

Revenue from our Israeli operation totaled $68.7 million, an increase of 18.8% compared to $57.8 million in the same period last year. On a constant currency basis, revenues grew by 13.5%. This performance underscores our strength in the region and reaffirms our long-term strategic focus on mature, stable and technology- driven sectors. Revenues from our Israeli operations accounted for 47% of our overall quarterly revenues. Turning to profitability. Our non-GAAP gross margin for the second quarter of 2025 was 28.7% of revenue, amounting to $43.6 million compared to 29.4% or $40.1 million in the corresponding quarter of 2024. The year-over-year change in gross margin primarily reflects the composition of our revenue mix and the timing of renewals of our term-based software agreements.

In the current fiscal year, the majority of these renewals are scheduled for the fourth quarter with a smaller portion in the third quarter compared to the first and second quarters of the prior year. Sequentially, our gross margin improved by 20 basis points, rising from 28.5% in the first quarter of 2025 to 28.7% in the second quarter. This improvement came despite the timing of the past over holiday, which reduced second quarter billable days by approximately 4.5 days compared to the first quarter. That reduction was equivalent to about 7% of time and material billable capacity in our Israel operations. The breakdown of our revenue mix for the second quarter of 2025 was approximately 17% related to our software solutions with a gross margin of approximately 65% and 83% related to our professional services with a gross margin of approximately 21%.

Compared to 18% related to our software solutions with a gross margin of approximately 64% and 82% related to our professional services with a gross margin of approximately 22% in 2024 as a whole. Our non-GAAP operating income for the second quarter of 2025 increased by 1.9% to $18.6 million compared to $18.2 million in the same period last year. Financial expenses. During the second quarter, we had financial expenses of $700,000 compared to $1.2 million. The decrease in our financial expenses was mainly attributed to the continued decrease of our overall financial debt due in 2024 in the first half of 2025 for an — from an average debt of $72 million during the second quarter of 2024 to $63 million during the second quarter of 2025. The balance of our financial debt as of June 30, 2025, amounts to approximately $70 million.

Net income attributable to noncontrolling interest as our business combination model occasionally relies on keeping former shareholders in acquired entities as minority stakeholders. In addition to their managerial role in such entities, we are allocating a portion of net income to these minority shareholders. Non-GAAP net income attributable to noncontrolling interest decreased to $1.8 million compared to $2 million for the same period last year. Our non-GAAP net income attributable to shareholders for the second quarter increased by 8.7% to $12.7 million or $0.26 per fully diluted share compared to $11.7 million or $0.24 per fully diluted share. Turning to the balance sheet. As of June 30, 2025, cash and cash equivalent and short-term bank deposits amounted to approximately $90 million compared to $112.8 million as of December 31, 2024.

Our total financial debt as of June 30, 2025, amounted to approximately $70 million compared to $60 million as of December 31, 2024. On January 8, 2025, and on May 7, 2025, in accordance with our dividend distribution policy, we paid our shareholders cash dividends on the aggregate of approximately $27.6 million or $0.562 per share for the first and second half of 2024. In addition, today, in accordance with our dividend distribution policy, our Board of Directors declared a semiannual cash dividend amount of $0.296 per share and in the aggregate amount of approximately $14.5 million, reflecting approximately 75% of our distributable profit for the first half of 2025. The dividend is payable on October 22, 2025, to all of the company’s shareholders of record at the close of trading on NASDAQ Global Select Market on October 6, 2025.

Cash flow from operating activities for the first half of 2025 amounted to $21.2 million compared to $41.4 million in the corresponding period of 2024. For the 12-month period ended June 30, 2025, cash flow from operating activities totaled $54.6 million compared to $67.7 million recorded in the respective period. The decline in our first half cash flow from operating activities primarily reflects our increased investment in working capital to support our revenue growth trajectory. This is particularly evident in our record-setting top line performance with second quarter revenues reaching an all-time high. These dynamics do not reflect a deterioration in our underlying performance. On the contrary, both operating income and net income increased compared to the same period last year.

We expect cash conversion to normalize over the coming quarters. Turning to our guidance. For 2025, we continue to observe a healthy demand across our markets and are building a strong and growing pipeline that supports our expectation for sustained growth throughout the year. Accordingly, we revised our full year 2025 revenue guidance, increasing the previous estimate of $593 million to $603 million to a revised range of $600 million to $610 million based on current currency exchange rates. This updated guidance reflects the sustained operational momentum and favorable outlook for the remaining part of the year, representing an anticipated annual revenue growth rate of approximately 8.6% to 10.4% as compared to the prior fiscal year. In conclusion, I would like to reiterate the announcement made in March regarding the signing of a memorandum of understanding to enter into negotiation for the contemplated merger of Magic into Matrix.

This proposed transaction represents a significant inflection point in our corporate journey, one that holds the potential to be transformative for both organizations. The contemplated merger is expected to combine the strength of 2 well-established technology leaders, creating a more diversified and resilient global IT service provider. The combined entity would possess enhanced capabilities to serve a broader range of customers across geographies and industries, faster accelerated innovation and deliver sustainable long-term value to shareholders. We continue advancing through the execution phase of the transaction and anticipate presenting the transaction for shareholders’ endorsement in the fourth quarter of 2025. I will now turn the call over to the operator for questions.

Operator: [Operator Instructions] The first question is from Chris Reimer of Barclays.

Q&A Session

Chris Reimer: 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?

Asaf Berenstin: Overall, it varies, of course, between the different operations that we have in the U.S., but with the major clients that we hold, we see increased demand. We need to remember that for pretty much, almost a year, we saw a segment level of demand. And now from the first quarter to the second quarter and on a — basing on expectations for the remaining of the year, we see some expected recuperation in the demand for our services.

Chris Reimer: Got it. And 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?

Asaf Berenstin: As I mentioned, mainly we were impacted by the timing of the recognition of — or the selling of our term license software, which last year mainly occurred during the first half of the year. And this year, it is much concentrated on the renewal terms, much concentrated on the fourth quarter of the year with a small portion in Q3. This is on 1 hand. On the second hand and more primarily is the mix of our revenues. Basically, we see a significant increase in revenues from our projects and service operations. And these operations, as I mentioned, carry a gross margin of around 21% versus our technology operation that carries a 64% to 65% gross margin. So this quarter and for the second quarter and for the first half of 2025, we saw the entire increase in gross profit coming from the professional service side of the business.

We expect for that to improve in the second half towards the software which will improve the margins that you currently see, and we level them on an annual basis at around 29%.

Chris Reimer: Got it. That’s very helpful. If I could just ask 1 more around cloud. How would you describe the progress of customers transitioning to cloud solutions now, let’s say, versus last year?

Asaf Berenstin: I’ll let Yuval Lavi answer that.

Yuval Lavi: Yes I can take it. We see more and more adoption of cloud from all around. Again, new customers are jumping directly into the cloud and legacy customer, even in our Japanese territory, starting to address and adopt the cloud solution and the cloud offering. So as we are a traditional business, and we have some legacy customers, but we’re starting to see more and more move towards the cloud, and we are looking forward to the bigger cloud adoption.

Operator: The next question is from Maggie Nolan of William Blair.

Margaret Marie Niesen Nolan: 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?

Asaf Berenstin: I think that the significant driver touching given back on the prior question, is coming from cloud and AI. We see — as I mentioned, we have hundreds of projects that are in the midst. We managed to convert those projects in a higher — in a much higher rate than industry standard. Those projects push also for cloud services. We managed to increase our position in that aspect, not only in the Israeli market, not only in the Israeli defense sector, but in many sectors, including the U.S. and also in the — recently also in Canada and the U.K. So this is 1 of the significant drivers that we see today in the business.

Guy Bernstein: Yes. And I can add that the GenAI opportunities are definitely of the type of land and expand, okay? So we see a lot of lending, as you hear, 270 and more projects. But this project is not ending. We keep on expanding. This is just the nature of what GenAI is doing to all of us in the market.

Margaret Marie Niesen Nolan: Understood. And then 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.

Asaf Berenstin: We didn’t acquire any company in July.

Margaret Marie Niesen Nolan: A small manufacturing company?

Yuval Lavi: Axiom, it’s a very small operation. It’s something at around $2.5 million in terms of turnover. It’s a kind of a consultancy firm that we work with them as a partner, and we acquired them in order to push forward our business — FactoryEye AI operation in the U.S.

Operator: [Operator Instructions] There are no further questions at this time. Mr. Bernstein, would you like to make a concluding statement?

Asaf Berenstin: Thank you, everybody, for joining us to the call today. We hope to continue in giving you good news on our upcoming call.

Operator: Thank you. This concludes the Magic Software Enterprises’ 2025 second quarter results conference call. Thank you for your participation. You may go ahead and disconnect.