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

Bhavan Suri - William Blair & Company Debra Fiakas - Singular Research, LLC. Chris Reimer - Barclays PLC

Ladies and gentlemen thank you for standing by. Welcome to the Magic Software Enterprises Ltd. Fourth Quarter 2015 Results Conference Call. All participants are currently in listen-only mode. Following management’s presentation, instructions will be given for the question-and-answer session [Operator Instructions] I would also like to remind you 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. I’ll now turn the conference over to Mr. Amit Birk of Magic Software. Please begin.

Thank you and good morning to everyone. Our quarterly earnings release was issued before the market opened this morning, and has been posted on the Company’s website at www.magicsoftware.com. Before we start, I would like to remind everyone that this conference call 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. Magic 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. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. The reconciliation schedule showing GAAP versus non-GAAP results has been provided in our 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 over to Guy.

Good morning everyone and thank you for joining us today as we report our fourth quarter and full-year 2015 financial results. During this call I will review the highlights from our fourth quarter and full-year results and then turn it over to Asaf who will provide more detailed financial information. I'll be happy to address any of your questions at the end. We are pleased with our strong fourth quarter performance providing an exciting finish to a record year. Q4 revenues reached $47.9 million reflecting 13% year-over-year growth. Annual revenue for 2015 reached a record breaking $176 million and non-GAAP operating profit for the year reached a record breaking $27.2 million. We exceeded our guidance and achieved these excellent results despite a significant impact of the erosion of foreign currency exchange rates on our top and bottom line. This is [indiscernible] to the strength of our portfolio and our broad global customers. Magic Software solutions and services are becoming increasingly relevant during 2016 as the businesses accelerate their digital transformation initiatives. We continue to invest in our products to enable our customers to innovate and increase competitiveness by mobilizing and optimizing business processes across backend system and by modernizing existing business critical applications. To further accelerate the growth we plan to continue and look for additional mergers and acquisitions that are aligned with our overall growth strategy. We are looking for opportunity to expand our market penetration through acquisitions of companies that will provide us with complementary solutions and expanded customer base. We have a proven history of making prudent acquisition at fair prices and successfully integrating the acquired companies into our business. We will leverage this experience to pursue additional acquisitions. That being said, we remain highly selective regarding the M&A opportunities we pursue. Our ongoing financial performance, healthy balance sheet and strong product portfolio are primary factors in our evaluation and pursuit of potential acquisitions. As a global one-stop shop for both products and services with long-term relationships with our customers we are well positioned to execute our growth opportunities. I would now like to turn the call over to Asaf Berenstin our Chief Financial Officer to discuss the financial results in more detail, Asaf please.

Thank you Guy, good morning everyone. Today we will be analyzing our results on a non-GAAP in constant currency basis, which as mentioned at the beginning of the call supplying valuable supplemental information regarding a report of operation consistent with our re-evaluator performance. As Guy mentioned, our momentum continues with fourth quarter non-GAAP revenue of $47.9 million reflecting 13% growth compared to the fourth quarter of 2014 and non-GAAP operating income of $7.4 million both record high level. While we are pleased with these record breaking numbers had it not been for the negative impact of the erosion of foreign exchange rate we would have shown quarterly revenues of $49.1 million reflecting a 15% increase year-over-year. The foreign currency erosion in Q4 negatively impacted our revenue by approximately $1.2 million compared to the fourth quarter of 2014 mainly due to the devaluation of the Euro and Japanese Yen which decreased by 13% and 6% respectively compared to the fourth quarter of 2014. Let me now turn to the geographic breakdown of our revenue. In the fourth quarter we maintained our traditional geographic mix, North America represents 51% of total revenue, Europe which includes Israel represent 39%, Asia-Pacific 6% and the rest of the world 4%. Most of our growth in the fourth quarter was for North America and Israel, which are strong territories for Magic. Turning now to profitability, our non-GAAP gross profit for Q4 was $18.8 million, up 4% compared to non-GAAP gross profit of $18.2 million in the fourth quarter last year and up 13% compare to non-GAAP gross profit of $16.7 million in the previous quarter. Non-GAAP gross margin was 39.3%, down from 42.8% for the fourth quarter of last year and up from 36.8% for the previous quarter. On a constant currency basis, non-GAAP gross margin for the fourth quarter would have reached 40.2%. The fact that over 80% of our software license and maintenance and support revenue, which carry gross margins of over 85% are generated in currency other than the U.S. dollar means that the currency erosion negatively influenced our gross margin by 0.9% and our gross profit by $0.9 million compared to the fourth quarter last year. Non-GAAP operating income for the Q4 was $7.4 million, up 5% compared to non-GAAP operating income of $7 million in the fourth quarter last year. Non-GAAP operating margin decreased to 15.4% compared to 16.5% in the same period last year. On a constant currency basis, non-GAAP operating income for the fourth quarter would have reached $7.9 million, reflecting an increase of 12% year-over-year with non-GAAP operating margin of 16%. Financial income this quarter totaled approximately $96,000 compared to financial expenses of $840,000 in the fourth quarter of 2014. Our non-GAAP net income was $5.6 million or $0.13 per diluted share based on $44.5 million fully diluted shares outstanding, compared to non-GAAP net income of $5.7 million or $0.13 per diluted share based on $44.5 million fully diluted outstanding in the fourth quarter last year. On a constant currency basis, non-GAAP net income for the quarter would have reached $6.5 million or $0.14 per diluted share reflecting an increase of 7% year-over-year. Non-GAAP tax expenses this quarter was $1.3 million representing an effective tax rate of 18.3% compare to tax expenses of $400,000 in the fourth quarter of 2014. Turning to the results for the year, revenues for the full-year increased 7% to $176 million exceeding our guidance and compare to $164.3 million in 2014. On a constant currency basis, revenues for the 12 months period would have reflected an increase of 13% year-over-year to a record of $185 million. Our non-GAAP gross profit was $68.3 million down slightly compare to non-GAAP gross profit of $68.9 million in 2014. Non-GAAP gross margin for the year was 38.8% compare to 41.9% recorded in 2014. The decrease in non-GAAP gross margin resulted from changes in the mix of revenues towards professional services thus report to maintenance and support and from the negative impact of the erosion of foreign exchange rates. On a constant currency basis, non-GAAP gross margin for the year would have been39.7%. Our non-GAAP operating income for the year was $27.2 million or 15.4% operating margin down 0.4% compared to non-GAAP operating income of $25.9 million or 15.8% operating margin in 2014. On a constant currency basis non-GAAP operating margins for the year would have been 15.8% the same as in 2014. Our non-GAAP net income for the year was $21.7 million or $0.49 per diluted share compare to non-GAAP net income of $20.5 million or $0.47 diluted share. Our non-GAAP net income was negatively impacted by devaluation of cash and other working capital balances denominated mainly in Euro, Japanese yen and New Israeli shekel by approximately $2.5 million or $0.06 per diluted share. Following devaluation of the foreign currency against the U.S. dollar. Turning to the balance sheet, we ended the quarter with approximately $77 million in total cash and short-term investments generating approximately $18 million from operating activities during 2015. 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 dividends. During 2015 we distributed an aggregate of approximately $7.8 million or $17.6 per share. Our current dividend yield is approximately 3.4%. Turning to our 2016 revenue guidance, we expect 2016 full-year revenue in the range of $191 million to $195 million representing growth in the range of 9% to 11%. With that I will turn the call back to Guy for closing comments.

Thank you Asaf. So in summary we are pleased with our record breaking revenue and double-digit profitability. We had our sixth straight year of record revenue and exceeding our revenue guidance with revenues of $176 million. Our non-GAAP operating income for the year also reached record of $27.2 million. While we produced excellent results they could have been even better had we not been hit by foreign currency devaluations. We believe we are well positioned and on track to meet our 2016 revenues guidance. With that I will now turn the call over to the operator for questions.

Thank you [Operator Instructions] the first question is by Bhavan Suri of William Blair. Please go ahead.

Hey guys and Guy and team congratulations, nice job. Just you know you guys have a unique position in the development space. With a lot of companies both software houses and internal organizations within development front. You know there's always concern about macro and global slowdown and lower spending in CapEx and IT. Guy are you seeing anything when you talk to customers are you seeing any softness at all, obviously your numbers don’t indicate it, as you look out are you seeing any change to spending patterns or trends. Whether they impact you or just broadly. Any color given sort of your exposure to that space will be helpful.

I'll try and put it this way Bhavan. When you talk to customers that should make kind of a strategic decision, then I think the sales cycle is probably a bit longer today, but you know 80%, 85% of our business is kind of repeated business, therefore less software from the overall I would say bad mood that we have in the markets.

But just to clarify you're not seeing any pushback on your projects or in any verticals Telco or otherwise, AT&T aside obviously we can discuss that but not on development products.

Specific yes, on the Telco side we definitely see that it's not as it used to be like two years ago, but all-in-all I think we are positioned in a place that usually we save people a lot of money, therefore when we are brought to the table it's kind of final stages meaning they do not pushback on that.

Got it, got it, okay let's focus on the business and obviously nice upside and nice guidance, are you seeing that driven by some of the integration platform, some of the development platform, mobile cloud, what was the driver of the upside and then obviously what's driving the strength you see in 2016.

I think mostly we see, the drivers are definitely from cloud and mobile solutions. All-in-all the big bucks are coming from, mostly from preparation. Because if you look on the mobile side it’s still just…

I was going to say, so it's still more sort of project services based than it is like licensed product today because people still sort of preparing, is that the way to think about it?

In some way yes, you see the you know the first stages of licenses and now we basically we wait for them to expand.

Got it. So obviously with clod and mobile integration especially with core systems has to be important. Help us thing through how your integration your data movement platform starts to play into that or we still ways before people start getting to that point?

I’m not sure I understood the question.

So when you think about mobile and cloud, so people building all these services, those services all connect to legacy core systems right. So I've got e-commerce app but no one is - old e-commerce system or the inventory systems are still legacy systems so you have to move the data back and forth and are thesis would have been that your data integration platform would be the middle part of that data movement back and forth. And you've said that it's mobile and cloud and not but integration platform, so I’m just trying to understand are people using something else or is that something that will happen overtime or are they competitive.

No, no, I was a bit misunderstood. The main drivers in the market are definitely mobile and cloud while talking about the business, we see it all over whether it's preparation projects for mobile or cloud or integration.

Got it. And so when you look at that should the license part of business pick up at some points to give you some margin or is it still pretty much services based?

No, we think it should pick up.

Okay great and then one last one for me, as you look at the sort of things that Microsoft is doing in changing its model to become more cloud-based and you look at some of the other competitors. How do you feel the competitive positioning sits with Magic, has it changed, has it remained the same, has it an advantage, are they going to cloud, how should we think about that?

No, all-in-all, we need to make a lot of changes as well, we're selling more and more as on subscription base, because this is where the market is going. And all-in-all talking about Microsoft, might be less affected by Microsoft even when you talk about the cloud and it's Microsoft are not the one who is pushing the space. You have other competitor way ahead of them.

But do any of them have sort of a development environment that you guys do or is that still something that that's relatively unique to you?

I think it's still relatively unique to us and people are talking a lot about Force.Com, we hardly see them in the competition, but people do talk about them. All-in-all, we are still in most cases we see that to mainstream.

Got it, well that’s helpful Guy. Thanks guys and congrats again, thanks for taking my questions.

Thank you.

The next question is from Robert Maltbie of Singular Research. Please go ahead.

Good morning, this is Debra sitting in for Robert. Thank you for taking my question. I would like to continue the previous line of questioning regarding the drivers of your business. You mentioned in your opening remarks that about 80% to 85% of your business is repeat with existing customers and that you also said that your just waiting for the customers to expand. What is that you see will drive the expansion of these existing customer relationships, what are you observing in their world that makes you think that these relationships will expand?

Okay, so if taken as an example the mobility trend. So in most cases you find yourself in situations when if you're going to close the deal with let's say corporate bank, okay, they will negotiate, because they are afraid that in the long run they will need a lot of licenses. We will have difficult negotiations around the prices on licenses, while the first step in the project is going to be rather small amount of users. After that we need to wait for them to expand, so if they close with you a deal for I don't know 10,000 users, usually they will start with a few hundred.

Okay, so, are you saying then that with these existing customers we're not necessarily waiting for economic growth to turn around and their entire business trends around. It's just a matter of their adoption rate and the pace at which they extend their license with you across all of their existing employees or their existing personnel.

In most cases that's correct.

Okay, very good and then let's talk a little bit about the other 15% to 20% of your business that must be coming from new customers. Are you seeing any particular vertical or geographic area where you are finding particularly receptive interest in your products?

It's hard to say, most cases you see it, we are playing in most of the common industries like you know 40%, 45% coming from the financial sector, 20% maybe today a bit less, is from the telecommunications. It's hard to say whether we see a specific sensor which becomes dominant.

And would you say that it's more Asia, Europe, U.S., or North America.

Probably a bit more towards North America. Although we see some good signs in Japan as well. Europe is okay, but definitely North America is more dominant.

It sounds like to some extent you know sort of the global economic conditions are impacting maybe your new customer acquisitions, whereas with your existing customers it's a matter of your strong execution on your relationship building that's going to drive your sales.

Yes, lot of times yes.

All right very good, thank you for answering my questions I appreciate it.

Thank you.

The next question is from [indiscernible]. Please go ahead.

Hi everybody. Just a quick question from me. Can you please explain what's behind the jump in amortization of other intangible assets in the last quarter.

Basically when we do an acquisition and we did some during the year, we did one acquisition at the beginning of the year, we did another small acquisition towards the beginning of the third quarter. When we finalized the purchase price allocation of the acquisition then sometimes at the end of the year we get the pickup for all the difference, because in the beginning it's still estimations and then when we finalize the purchase price allocation study at the end of the year in order to close the books.

Okay, so as far as I understand the sum that appears in this fourth quarter it's a one-time event. As long as there are no other companies?

No its exaggerated.

For the year no, it's not a one-time event, for the year what you see is that…

No, the jump, the big jump.

Yes, the big jump of course, but if you take the amortization for the year, I presume that for example backlog you know plays a significant portion of the amortization during the year. This is not something to be repeated in the next year, because backlog normally stands for the deals already signed during the first year of the acquisitions. So this amount for around $800,000 in terms of the 2015 amortization expenses. So this amount will be recovered in 2016, won't be repeated.

I was asking you about the gap and thank you for your answer. Thank you.

[Operator Instructions] The question is from Chris Rheimer of Barclays, please go ahead.

Hi, thanks for taking my question. I wanted to ask if you could give any color on margins granted the foreign currency effects have affected them, is there anything else you're working on to improve them?

Basically we're kind of having a natural hedge on the operational in each of the sector that we operate. Meaning in types of professional services there we have people that are doing the consulting job in the areas in the same areas that we generate the revenue. 2015 because of the drop between 2014 in the Euro, Japanese yen and New Israel shekel had significant influence on that aspect. I think let's see as per the moment we don't expect such severe changes to happen in 2016, so we don't expect such amounts to interrupt again in 2016 versus 2015.

Thank you and just on M&A, I think you mentioned something about so looking for companies, is there anything in the pipeline or anything you can give a little color as to maybe a certain region that you feel is stronger that's more of a potential area for you?

I think on the M&A side at any given time we have some opportunities on the table sometimes they mature quickly, sometime it takes a bit more time. Currently we have like three or four, in most cases the acquisition that we're going after are rather small, so we have like two in Israel, we have two in the State, one in Canada and they are all in process. Now to tell you right now what is going to mature, I don't really know, but from our experience, I can say that in most cases from the time we start to talk to company. In some cases we can close quite fast, in some cases it takes like between a year to two years until they are coming back and we can work out something.

Understood. All right thanks you that’s it for me.

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

Yes, so thank you all for joining us and hope we'll continue to deliver more record results. Thank you.

Thank you. This concludes the Magic Software Enterprises Limited fourth quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.