Guy Bernstein - CEO Asaf Berenstin - CFO Itai Galmor - VP, Global Marketing and Business Development Amit Birk - VP, M&A and General Counsel

Tavy Rosner - Barclays Bhavan Suri - William Blair Kevin Dede - Rodman & Renshaw

Ladies and gentlemen thank you for standing by. Welcome to the Magic Software Enterprises Ltd. 2016 First Quarter Financial Results Conference Call. With us on line today are Mr. Guy Bernstein, CEO; Mr. Asaf Berenstin, CFO; Mr. Itai Galmor, VP, Global Marketing and Business Development; and Mr. Amit Birk, VP, M&A and General Counsel. I will now turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Thank you and good morning 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.

Thank you, Amit. Good morning everyone and thank you for joining the call today as we report our first quarter 2016 financial results. During this call I would provide selected highlights from our first quarter 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 double digit revenue growth with Q1 revenues reaching $44.7 million, reflecting 11% growth year-over-year and with non-GAAP operating income for the quarter amounting to $6.7million. We are continuing to maintain our solid 15% operational margin despite some deferral of software license transactions to the second half of this year. This has been offset by the growth of our professional services revenues. Cash flows from operations reached $11.2 million contributing to our strong total cash position of $81million. We are receiving tremendously positive customer feedback and seeing strong uptick to our recent Magic xpa 3.1 release and continue to experience the strong demand to our professional services in all areas including cloud and mobility, our current offering the most comprehensive in our company's history. This wide range of services and strong delivery capabilities enable us to compete more effectively in today’s digital age. Now I'd 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, and good morning everyone. Before I jump into our results for the first quarter, as a reminder we are presenting our results on a non-GAAP basis, which as mentioned at the beginning of the call gives a clear view into the operational state of the business and provides the valuable supplemental information regarding the results of operations, consistent with our re-evaluator performance. There is a detailed reconciliation to non-GAAP results in the financial tables of the earning press release. As Guy mentioned, our first quarter revenue was $44.7 million compared to $40.3 million for the first quarter last year reflecting 11% year-over-year growth. Looking at the geographic breakdown of our revenue, our geographic mix remains pretty steady during the first quarter. North America represents 52% of total revenue, Europe which includes Israel revenues represent 38% of total revenue, and APAC and the rest of the world represent 10% of total revenue. Most of our growth in the first quarter was from North America and Israel, which are strong territories for Magic. Turning now to profitability, our non-GAAP gross profit for first quarter of 2016 was $16.7 million, up 1% compared to $16.5 million in the first quarter last year. Our gross margin declined to 37.3% down from 41% from the first quarter of last year and from 38.8% for 2015 as a whole. The decrease in our non-GAAP gross margin resulted mainly from changes in the mix of revenues towards professional services that is the software and maintenance and support. Our non-GAAP operating income for the first quarter of 2016 was $6.7million reflecting 14.9% of total revenues for the quarter. Compared to non-GAAP operating income of $6.7million or 16.6% operating margin in the first quarter last year and 15.4% operating margin for 2015 as whole. Non-GAAP tax expenses this quarter was $1.4million representing an effective tax rate of 21% compared to tax expenses of approximately $400,00 in the first quarter of 2015 reflecting an effective tax rate of only 6%. Our non-GAAP net income was $4.8million or $0.11 per diluted share, compared to non-GAAP net income of $5.2million or $0.12 per diluted share in the first quarter last year. Turning to the balance sheet, as of March 31, 2016 we had cash and cash equivalents, short-term bank deposit and marketable securities of approximately $81 million compared to approximately $77 million as of December 31, 2015. We generated approximately $11.2 million from operational activities during the quarter. I would like to remind everyone that during the first quarter we paid the cash dividend in an aggregate amount of approximately $4 million or $0.09 per share with respect to our 2015 second half results of operation and in accordance with our dividend policy for our shareholder returning up to 50% of our net income in the form of the dividend. Our current dividend yield is approximately 2.6%. With that I will turn the call back to Guy for closing comments.

Thank you, Asaf. So in summary we are pleased to report another quarter with year-over-year double-digit revenue growth and solid operational profitability. Our financials remained strong. This quarter cash flow from operations reached $11.2 million contributing to our total cash position of $81 million. We are confident that our portfolio provide the softer, end of services, enterprises, need to succeed in today digital age and that we are well position to achieve 2016 revenue guidance of $191 million to $195 million representing growth in the range of 9% to 11%. With that, I will now turn the call over to the operator for questions.

[Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

Hi, thanks for taking my question. You mentioned a change in the mix compared to the first quarter of last year, I believe you said there is a bit more professional service than license. Is it mix expected to continue for the rest of 2016 or just - last quarter was just particular for more licenses?

I think as it looks now, we think that some of the technology sales have shifted a bit towards the second half of the year. We could have give a bit more discount and push them to the first half but we felt this is not good position to bid. So we believe that we will close it later on this year.

Okay, that’s helpful. And more broadly on the market, do you feel more competitive pressure coming from the larger players and if so, does that push a bit pressure on the prices or you don’t feel that all?

The overall feeling is that, there is a constant pressure all the time. The thing is you know we usually compete in places where they have limitations of either budget or mostly timing issues. But yes, you here and there you'll see some of the big players becoming a bit more aggressive but it changes all the time.

Okay. And then lastly on your cash balance you mentioned $81 million in cash -

Yes.

Is that something you would redeploy into M&A and do you have any color to give us on, perhaps valuation in industry anything that could be -

In terms of the cash that we have we continue to look for more deals on the M&A side especially kind of more significant deals. The problem is, in today's market is that the private equity funds are very aggressive and they are willing pay prices that we cannot even compete as a strategic buyer, therefore, we seek challenge. On the small one, we continue to look for more opportunities although it doesn’t make a lot of change in terms of the cash position that we have because we generate a lot of cash as well.

Thank you I appreciate.

The next question is from Bhavan Suri of William Blair. Please go ahead.

Hi Guy, Asaf thank you for taking my question and sorry for the background noise, I'm in airport. But just a couple - just to follow-up on the first question, when you look at the back half for the year, and you look at sort of the commitments. What gives you the confidence that we should see that sort of renewal? Are they sort of statements of work or are there sort of project plans that laid that out? How should we think about your high degree of confidence that we see some of that work in the back half of year?

I'm not sure if I understood the question.

Let me try and answer that. Basically, we are working with more than 3000 partners. And as you know, we are pretty much familiar with planning for the year. Second, as I mentioned, because there are issues with the negotiation trying to push prices, so we have our customers let’s say intentions and this is something that we know that is interfering in the making. So the question is, if it would fall in the second quarter or third quarter, you know this is something that we are really good at.

This is mostly on the technology sales. And by the way, Bhavan, usually when we start the year, I would say probably 80% to 85%, we know exactly where will come from, with kind of repeated business.

Yes. I think I was just looking for just if that 80% to 85% is still remaining consistence, and then I think Asaf answered it, it might be Q2, might be Q3. But given intentions, you guys have some level of visibility into those closings. So I just wanted to get some of that color. That's helpful.

Definitely.

Yes. And then when you look at the app builder technology that was released, as you look at that particular product, have you seen that either improve sales cycles or the sales cycle for this product are little longer? Just help me understand how we should think about that for a sort of growth perspective for the app builder offering.

I think app builder offering is based on specific clients with turnover of ordering more and more. We know exactly where their contracts are endings and whenever they are going to renew it - it’s kind of - both side know exactly what expect. We are talking about big customers. It's not -

Yes. No, that's the point. So if sales cycles were shorter, you might see a little pick up in license. That's what I was trying to get to but they seem to be typical of your typical sales cycle.

By the way this quarter we pushed one of them because of prices. No doubt it will come in. The thing was that we were not willing to give the discount but it was negotiating for.

Got it. And then a quick one just on - if you look at the cloud business, you’ve mentioned this now, this quarter is again, certainly last quarter - is there any way of thinking about how much of your business is coming from cloud deployment applications? Like how much of revenue you say is related to cloud based either projects or activity and how much is still traditional in-house software development type of work?

I'd say that probably most of the new projects we are coming in are in some way related to either cloud or mobility. The majority of the project is taking care of the legacy systems but the trigger to the project is coming from either cloud or mobility.

Got it. Okay. And then one last one maybe for Asaf here. Differed revenue grew particularly well this quarter, and given that it’s not sort of big maintenance, how should we think about what drove the growth for differed?

Most of it comes from maintenance and support agreement that we have. We usually collect all of the annual maintenance and support revenues by the end of second quarter. Here you see that we already collected approximately 75% of maintenance and support.

What you see here Bhavan is that, we are issuing most of the invoices between the end of last year and beginning of this year. So you’ll see most of the differed revenues coming from maintenance because of invoicing.

Got it. No, that's helpful. I was just wondering because we grew nicely even year-over-year. That’s it for me guys, thanks for taking the question. That was very helpful.

The next question is from Kevin Dede of Rodman & Renshaw. Please go ahead.

Hi guys. You mentioned strength primarily or growth primarily in North America and Israel. There are many reports coming from Europe about the economy strengthening there and given that, as you said 80% to 85% of your business you have clear visibility on. I'm just wondering what you think of growth prospects in Europe?

Well, I can become a bit cynical a bit about this one and ask what exactly is Europe because from what I see in Europe, it's basically Germany. But if I'm left cynical about it, then we have our ongoing business in all over Europe, in Germany, in France, in the Netherlands, in the U.K. and we are working with our partners for many, many years. So nothing has changed. We see the business, in some cases you see that there is more demand, in some cases you see that there is less demand, overall same thing. In Germany by the way as I mentioned, we saw a stronger quarter, in France as well, Netherlands in full flow, U.K. was a bit weak, it depends. But Germany is quite strong for the past few years, yes.

We can say that this quarter in the big economies that we operating in Japan, in the Netherland - in Japan, in France, in Germany, in the U.S. in these territories the atmosphere was positive and our results were in line of our expectations.

Okay, thank you. Now would you say that the focus for customers on mobile and cloud, I mean aside from the legacy work is consistent also from a geographic perspective?

Yes definitely.

I think that for us was more encouraging in this quarter and we can say coming from - let’s say from the second half of 2015 into 2016 is the mobile pickup that we also seen in our Japanese market. So this is something that is very encouraging.

Okay. Is that work to the consistent with one of those announcements you made last year in Brazil with a company just pushing to build there an extension of their enterprise capability to mobile or is that or people looking at completely different things.

No. In the most cases this is the scenario.

Right, okay. The other thing I was curious about is, if you could talk a little bit to the mix of business that you're seeing in North America from a customer perspective, necessarily from a professional service versus license but from a customer perspective clearly there was a lot of emphasis and the potential growth in telecom, and I'm just curious to see if you could talk about your customer verticals from an industry perspective.

Okay, so as you mentioned we were - we have some heavy business in the telecom industry, we still have, we saw that after the merger between AT&T and DIRECTV we will start to see some pick up in this sector. Unfortunately, we didn't see any, any time, every time we think that we hit the bottom, but it appears that we didn't. So we've started to shift the business towards other factors as well, as you know we walk a lot in the pharmaceuticals, in the financial sector. So in terms of the revenues, I think, we've succeed in covering for the lot of revenues in the telecom, but still it's a bit disappointment, because we thought it would pick up and we'll have it in addition. And unfortunately we didn't.

So, is the thinking now that you’re - what not trying to pursue it or are you still staying attached in some way, what do you think the prospects are at this point?

I don’t think in these aspects it's something that is in a way - in our hands, meaning we are available for the customer, we still continue and maintain the partnership and the business relationship that we have with them. What we experience in the telecom, I think that we see that this is something that affected not just us, but the entire service level of this - over this industry. So it's not something that we feel that was specific affected only us. But one thing is the industry will pick up for this specific customer, the business will again pickup, I'm sure that we will benefit from that as well.

Very good. Okay, I think that I would agree, I don't think that specific to you guys either I think it’s tough in telecom across the country.

We’re looking on the bright side. We've probably lost 50% in the telecom business, and we've succeeded in covering for more than 50% from other sectors.

And that's primarily pharma and financial services?

Yes.

Okay, all right. So one previous question were asked about the M&A side of things and you're continuing to see a tough valuation environment, but you - at one point noted not to run though that there were four or five potential – U.S. actuarial closed on and I'm kind of curious where your emphasis is, where you think you are with regard to getting that work done or those deals done and how you think we should think about that and what's sort of timeline we should hold you to.

Okay. So usually the timeline is such that if we are in a mature stage in the process, meaning, we started negotiations, due-diligence and so, we usually take probably three to six months. Out of the four that we talked about last time we are - one of them is left and we are feeling negotiations with - two of them, one of them we're still considering whether it profit or not.

All right. So one is cancelled, two you're continuing to deal with – I'm sorry the fourth was -

The fourth we are – it's in our hands and we still have discussions in-house whether to go after it or not.

I see, okay. So you're still considering it, but you haven't made a decision. Is that something you expect to have during the current quarter, you be able to talk about it at the close of the June quarter or -

I would say probably between second and third quarter.

Okay. Then you haven't really added anything since at small company that you bought to deal with mainframe work in Israel, is that correct just so that I’m up-to-date?

Yes.

Okay, all right. Well very good, thanks gentlemen.

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

Yes, so again thank you for joining us for this call and I hope that we will continue in bringing you more good news. Thank you all.

Thank you. This concludes the Magic Software Enterprises Ltd. first quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.