Amit Birk - Vice President, M&A and General Counsel Guy Bernstein - Chief Executive Officer Asaf Berenstin - Chief Financial Officer

Bhavan Suri - William Blair & Company Chris Reimer - Barclays Capital Debra Fiakas - Singular Research

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises Ltd. Second Quarter 2015 Results Conference Call. All participants are currently in a listen-only mode. Following management’s presentation, instructions will be given for the question-and-answer session. [Operator Instructions] I’d also like to remind that this call is being recorded. With us on the line today are Mr. Guy Bernstein, CEO; Mr. Asaf Berenstin, CFO; Mr. Amit Birk, VP, M&A and General Counsel; and Mr. Itai Galmor, VP, Global Marketing and Business Development. I’ll now turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Thank you and good morning, every one. Our quarterly earnings release was issued before the market opened this morning, and is available on the company’s website at www.magicsoftware.com. Before we start, I would like to remind you everyone that this conference call is may contain projections or other forward-looking statements. The Safe Harbor provision provided in the press release issued today also applies to the content of this call. The company expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in its view or expectations or otherwise. On this call today, we will provide you with details about Magic’s performance in the second quarter and first-half of 2015, including certain non-GAAP financial measure. We provide the non-GAAP financial measures because we believe that they are the most valuable way to review our core operating results. We have provided a reconciliation of non-GAAP measures to the comparable GAAP measures in our earnings release. 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 conference over to Guy.

Good morning, everyone. And thank you for joining us today as we report our second quarter 2015 and first-half financial results. I will provide the highlights of our second quarter results, and then turn it over to Asaf, who will provide more detailed financing information. I will be happy to address any of your questions at the end. We are pleased with our second quarter results. Revenue for the second quarter reached $42.5 million with non-GAAP operating income of $6.5 million. We are experiencing continued growth for professional services along with solid demand for our software products, mainly reflecting organic growth. In fact, excluding the negative impact from currency fluctuations, we would have produced record-breaking revenues for the second quarter of $45.2 million and non-GAAP operating income of $7 million, which would have been a year-over-year increase of 16%. During the second quarter, we also delivered a new major version of our flagship Magic xpa Application Platform, with additional mobility features and performance enhancements based on innovative in-memory data grid technology to meet the growing need for rapid cross-platform development. We hope to see increased demand for this one. I’d now like to turn the call over to Asaf Berenstin, our CFO, to discuss the financial results in more detail. Asaf, please?

Thank you, Guy, and good morning, everyone. Today, we’ll be analyzing our results on a non-GAAP in constant currency basis, which as mentioned at the beginning of the call provide valuable supplemental information regarding our results of operation, consistent with our reevaluate our performance. As I mentioned, our momentum continues in 2016 with our second quarter revenue growing 5% to $42.5 million, compared to $40.6 million for the second quarter last year and compared to $40.3 million in the first quarter of 2015. In our previous call, we discussed the negative impact of foreign currency exchange rate versus the U.S. dollar on our top and bottom lines, as we derive approximately half of our revenues from EMEA and APAC. Unfortunately, foreign currency erosion in the second quarter negatively impacted our revenues by approximately $2.7 million, compared to the second quarter of 2014, mainly due to the devaluation of the New Israeli shekel, Euro and Japanese yen, which decreased by 12%, 19% and 20% respectively, against the U.S. dollar compared to the second quarter of 2014. If we eliminate the negative impact of erosion of foreign exchange currency rate compared to the second quarter of 2014, our revenues for the second quarter would have reached a record breaking result of $45.2 million, reflecting a year-over-year increase of 11%, of which 65% came from organic activity. The remaining growth came from our latest acquisition, which was announced in February and closed in April of this year. Turning now to profitability, our non-GAAP gross profit for the second quarter of 2015 was $16.3 million, down 3% compared to non-GAAP gross profit of $16.8 million in the second quarter last year. The decrease in gross profit was mainly attributable to the negative impact of the erosion of foreign exchange rates on sales of software licenses and maintenance and support for our Europe and EMEA region and from the change in the mixture of our revenues in favor of professional services and other software products. Non-GAAP gross margin was 38.3%, down from 41.3% for the second quarter of last year. If we eliminate the negative impact of the erosion of foreign exchange rate compared to the second quarter of 2014, non-GAAP gross margin for the second quarter would have reached 40.2%. Non-GAAP operating income for the second quarter of 2015 was $6.5 million, up 7% compared to non-GAAP operating income of $6 million in the second quarter last year. Non-GAAP operating margin increased by 40 basis points to 15.2%, compared to 14.8% in the same period last year. If we eliminate the negative impact of erosion of foreign exchange rate compared to the second quarter of 2014, non-GAAP operating income for the second quarter would have reached $7 million, reflecting an increase of 16% year-over-year with non-GAAP operating margins of 16%. Financial expenses this quarter totaled approximately $70,000, compared to financial expenses of $321,000 in the second quarter of 2014. The financial expenses are fully attributable to the devaluation of monetary assets resulting from currency erosion. Our non-GAAP net income was $5.2 million, or $0.12 per diluted share, based on 45.5 million fully diluted shares outstanding, compared to non-GAAP net income of $4.7 million, or $0.11 per diluted share, based on 45.5 million diluted shares outstanding in the second quarter last year. If we exclude the negative impact of the erosion of foreign exchange rate compared to the second quarter of 2014, non-GAAP net income for the second quarter would have reached $5.7 million, reflecting an increase of 20% year-over-year, or $0.13 per diluted share. Turning to the balance sheet. We ended the quarter with $84.2 million in total cash and short-term investments. From a cash flow perspective, we generated $5 million from operating activities in the second quarter of 2015, and $14 million for the first-half, a significant improvement from the $11.7 million in the first-half of last year. Our strong financial position including strong free cash flow enabled us to maintain a dividend policy for our shareholders. Our policy is to return up to 50% of our net income in the form of a dividend. During the first quarter, we distributed on aggregate approximately $3.6 million, or $0.081 per share, with respect to the second-half of 2014, and in accordance with our dividend policy. Our current dividend yield is approximately 3%. With that, I’ll turn the call back to Guy for closing comments.

Thank you, Asaf. So in summary, with first-half revenues of $82.8 million and our second-half historically even better than the first, we’re growing in line with our guidance, which we expect to be between $166 million to $173 million on a constant currency basis. We are confident in our growth strategy, we are remaining focused on profitable growth, both by enhancing our organic activities and through our strategic acquisition. With that, I will now turn the call over to the operator for questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Bhavan Suri of William Blair. Please go ahead.

Hey, gentlemen, nice job, and congrats on the numbers there. Thanks for taking my question. When we look at the space in the recent release with the in-memory grid and the mobile technology, one of the things that Guy, you’ve touched on before is that in customers have been somewhat slow to start shifting towards the mobile development platform, because they don’t have a concrete mobile strategy and they’re sort of trying to figure out, what do we do, what platform, what operating system. Has that changed? Are you seeing any change there? And then how does the new technology play into maybe accelerating that shift to leveraging Magic’s technology to do these mobile development projects?

I think, you’ll see some of small positive change that customers are starting to go into real projects. I think the strategy in most cases it’s not clear yet, but since we provide kind of a cross-platform then usually not a barrier to go into a project with them. So we definitely see some signs of bigger projects, but still we’re not talking about big money.

Yes, yes. And then, how easy is it to sell the integration platform to those guys, or is it a different buyer there?

Many times is a combination, because usually, you can go and sell the integration platform separately, it’s not a problem. Definitely the - both the mobile arena and the cloud definitely are triggering more integration between the new and the old rules.

Yes. And that’s why you’ve historically sold it in the cloud world. So, at least, my next question sort of just an update on how that’s progressing and what is the pipeline? As people continue to use sort of this hybrid approach, what is the pipeline for the integration platform look like, say, over the next 12 to 24 months?

Right now it looks quite positive. We are following our guidance, although we - based on the pipeline, it looks a bit conservative, but still we’re try to face, rather than to disappoint. So it’s just a pipeline for - we intimate to work on the conversions.

Yes, yes. No one is going to squeeze you, not being a conservative, Guy.

Yes.

So then, turning to acquisitions, obviously, you bought 70% stake in the services business in late February, early March, any progress, how is that going? And is it driving business on the AppBuilder side? And then do you think it will acquire the remaining 30%?

First of all, we have to drive more business will be AppBuilder. Second, regarding the 30% of - it’s always big between keeping the founder with the big incentive, or by mouth and someway you may say below the incentive.

Yes.

Of course, we have put in call options in place, but the idea is, at the end after he joins - he really joins the D&A of the company, he’s is, of course, to have 1% in the company.

Sure, sure, okay, okay. And then, overall acquisition pipeline, I know obviously you had - private equity be very active and you obviously have a background there. But what are you seeing in the pipeline and are you guys still out there looking for acquisitions?

Yes. We definitely look for acquisitions like, we say, it’s not as easy because the prices went up and it takes you a bit of a time to get used to the new level of prices. And as you know, we’re quite cheap on paying to others. But for the good companies, we tend to increase the bid prices and try to close it. But it’s still a struggle.

Got it, got it. And one last one from me and I’ll turn it over. Obviously, AT&T-DirecTV is now done. How are things with that customer and have you seen some of the project work come back or is there still a delay to some of that stuff?

I can say that we - right now it’s steady. We were lucky enough to increase lot of the business with other customers. So it covers not all but most of the gaps that we had with AT&T. Hopefully, we’ll start to see some new projects with AT&T and then it would be a win-win for us.

Got you, got you. That’s helpful, guys. Thanks for taking my questions.

No problem.

The next question is from Tavi Rovner with Barclays Capital. Please go ahead.

Thank you. This is actually Chris Reimer on for Tavi. Two questions. Could you give us some color on margins? Historically, it’d been higher. I know you mentioned the currency effect, but I was wondering if you could tell us if there was anything else in there, especially regarding operating margins, if there is any plans, organizational plans to get those back up. And also following that, do you see any changes in your mix of business geographically that might have an impact on your revenues regarding currency benefit or anything like that in the future?

Again, currently based on the constant level of operations that we have today, I would say that the revenues coming from the U.S., we continue to represent approximately 50% of our overall business. And I don’t see any significant change happening in the near future, again, unless we do any significant acquisitions not in the U.S. As part of our gross margin, again, and this is something that we experienced in the past and our gross margin is very sensitive to the mixture of revenues between professional services and then products and software products. So, for the quarter that we have significant higher professional services stake versus software product sales, then margins tend to grow a little bit down. I think that the company is pretty much stable between the 38.5% to 40%-plus non-GAAP operating profit based on its current operating gross margin.

Okay. So, do you see these levels going forward?

Currently, yes.

Okay. Thank you very much.

The next question is from Debra Fiakas of Crystal Equity Research. Please go ahead.

Good morning. Thank you for taking my questions. And today, I am calling on behalf of Singular Research. I wondered if I could continue the question just asked by the previous caller about the sales mix. Could you give us a percentage why is the mix amongst software, maintenance and consulting?

Yes. In terms of revenue, it’s pretty stable, we are - I can tell you that we have 60% of the business today coming from, let’s call it, independent professional services versus 40% that are from technology, sales, and direct software services. Meaning, when we sell our Magic xpa or Magic xpi Integration Platform, then, of course, customers tend to expect services around these projects. So, the mixture between the technology business or the technology division, as we referred, which is 40% of the business versus 60% stand alone in professional and projects.

And did that mix hold true in this particular quarter?

No. In this particular quarter, I think there is kind of, let’s say, 5% change between the professional services and software towards the professional services.

I see. And if I understood your response to the previous question, you expect this 5% switch to be the case or to remain the mix for the rest of the year?

No, no. What I said is that our gross margins tend to be - will be between the 38% when we have a significant higher professional services versus 40% or 40%-plus gross margin, when we have more of software products.

Okay, okay. Well, I was just trying to get an idea of where you thought the mix was going to be going forward or you think it would go back to the typical 60-40?

It should, yes.

It should be, yes.

It should be. Okay, wonderful. Thank you. And then, if I could just maybe also return to the discussion about customers and their reactions to the product line you did mention in your opening remarks about the new Magic xpa that was delivered in the quarter. And I just wondered, if you could maybe give us a bit of color on your customers’ reaction to this new introduction. Did it make it possible for you to talk to some new people? Do you think that because of its features that you might be accelerating their decision-making? Just a little bit of background on how that went over with your customers?

We launched our Magic xpa in May. And the reactions were pretty good. We’ve kind of road-showed in different - in various regions with our first user groups and customers. It was accepted with great enthusiasm actually, our enhanced mobile capabilities answers the needs from enterprise mobility and actually enabled to start some projects that the customers are thinking how to cope with. Additionally, our IMDG capabilities, which are at the moment is, we have a full suite of IMDG capabilities all over our Magic products both xpa and xpi, and gives additional capabilities for our customers to cope with big data including phase data and everything that they need. And in terms of huge amount of that, especially the derived for mobility as well. So, we are - the customers were pretty enthusiastic about it and the adoption rates are good. But not as - we think it will pick up towards the end of the year. It usually does. Additionally, if we can remember, that the Japan - which we need the market, which is important for us, and has usually launches products version and it is delayed between four to eight months. So, this is now, they are doing their localization and they expect it to launch it in, hopefully, probably in the fourth quarter somewhere. And this would probably help picking up the momentum. We’re feeling very confident with our products at the moment.

Oh, excellent. Thank you for your response and I’ll get back into the queue with that.

Sure.

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

Yes. So, thank you for joining us today. And we hope next time we will come up with some good news. And thank you very much again.

Thank you. This concludes the Magic Software Enterprises Ltd.’s Second Quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.