Guy Bernstein – Chief Executive Officer Asaf Berenstin – Chief Financial Officer Itai Galmor – Vice President, Global Marketing and Business Development Amit Birk – Vice President, M&A and General Counsel

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

Ladies and gentlemen thank you for standing by. Welcome to the Magic Software Enterprises Ltd. 2016 Second Quarter Financial Results Conference Call. With us on line today, we have 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 second quarter 2016 financial results. During this call, I would provide selected highlights from the second 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 yet another strong quarter highlighted by double digit revenue growth. Revenue for the second quarter reached $47.4 million, reflecting 11% growth year-over-year. This growth comes despite the fact that we continue to experience a decline in the Telco sector. Our diversified portfolio enables us to compensate this decline by winning new business. So I'm confident that we will continue this positive sales momentum and continue to deliver double digit growth and improve profitability throughout 2016. Following the delivery of our latest version our application platform Magic xpa 3.1 during Q1, this quarter we launched the latest version of our Magic xpi Integration Platform. Magic xpi 4.5 includes and updated studio, a new connector to facilitate IoT projects and a Connector Builder SDK that enables partners and users to build their own full-featured connectors. While just in the market, we are already hearing great feedback and gaining new partners. We are seeing a growing number of customers using our software and professional services for cloud and mobility projects. All this shall make our portfolio to provide solutions that meet the market needs and satisfy our customers. At the same time we're excited to have executed on our M&A strategy. With the recent acquisition of the Clicks Development Platform, which we announced in the second quarter and closed only recently, Clicks further broadened our portfolio enabling us to target the healthcare market and brings higher margin associated with those assets. Now, I would like to turn the call over to Asaf, our CFO to discuss the financial results in more detail. Asaf, please.

Thank you, Guy, and good morning, everyone. As usual, before I jump into our results for the second quarter, I would like to remind you that we are presenting our results on a non-GAAP basis, which as mentioned on the beginning of the call gives a clear view into the operation operational state of the business and provides valuable supplemental information regarding the results of operations. There is a detailed reconciliation to non-GAAP results in the financial tables of the earning press release. As Guy mentioned, our second quarter revenue was $47.4 million compared to $42.5 million for the second quarter last year reflecting 11% year-over-year growth. Looking at the geographic breakdown of our revenue, our geographic mix remains steady during the second quarter. North America represents 50% of total revenue, Europe which includes Israel revenues represent 39% of total revenue, and APAC and the rest of the world represent 11% of total revenue. Half of our growth in the second quarter came from North America, while the rest of the growth was evenly distributed across all other regions. Turning now to profitability, our non-GAAP gross profit for second quarter of 2016 was $17.5 million, up 7% compared to $16.3 million in the second quarter last year. Our non-GAAP gross net margin declined to 36.9% down from 38.3% in the second quarter of last year. The decrease in our non-GAAP gross margin resulted mainly from the shift in our revenue mix from software towards professional services. This includes hiring more than 100 new employees in professional services segment during the first six months of the year. Having just been on boarded, these new hires have yet to reach the maximum productivity. Our non-GAAP operating income for the second quarter remained constant at $6.5 million compared to the same period last year, reflecting the 13.8% of total revenues for the quarter compared to 16.2% of total revenues for the second quarter last year. Our non-GAAP tax expenses this quarter was $1 million representing an effective tax rate of 15% compared to tax expense of $900,000 in the second quarter of 2015 reflecting an effective tax rate of only 14%. We believe that our effective tax rate will continue to push it towards 20% to 21%. Our non-GAAP net income for the second quarter remained constant at $5.2 million or $0.12 per diluted share, compared to the same period last year. Turning to the balance sheet, we ended the quarter with approximately $82 million in cash and cash equivalent, short-term bank deposit and marketable securities compared to approximately $77 million as of December 31, 2015. From a cash flow perspective, we generated $2.3 million from operating activities in the second quarter and $13.4 million during the first half of this year. Turning to our 2016 guidance, we are raising our guidance for 2016 full year revenue to $195 million to $200 million from $191 million to $195 million, reflecting a revised annual growth rate of 11% to 13%. Our revised guidance is the result of our visibility into our second half of the year along with our recent Clicks Development Platform acquisition. With that, I will turn the call back to Guy for closing statements.

Thank you, Asaf. So in summary we are pleased to report another quarter with year-over-year double-digit revenue growth. Our financials remained strong during the first half, cash flow from operations reached $13.4 million contributing to our total cash position of $82 million. We are happy that our diversified portfolio provide the software and the services, enterprises need to succeed in today digital age. With that, I will now turn the call over to the operator for questions.

[Operator Instructions] The first question is from Bhavan Suri of William Blair.

Thanks for taking my question. Just to start off first with the acquisition Roshtov there. Obviously in the healthcare space, I guess just a little more color about the size of the Company, its growth rate would be helpful. And then also just, as you think about it, this is a first sort of very specific vertical acquisition you made. Is this a strategy you guys plan on doing going forward, sort of being more vertical specific?

Hi Bhavan. In general the size of the acquisition is – it's rather not – it's not a big company. It's a small company specified in the healthcare market, while the Clicks itself the generic platform, meaning we need to check and to see how to take it further from here, while at the same time going deeper into the healthcare industry.

Got it. So I guess the different way to think about it Guy, and maybe this is for Asaf too, when you saw the beat in the quarter and the raise, was that largely inorganic or a mix of organic or inorganic sort of revenue? So was it your core business or is it Roshtov's that actually drove some of the upside?

First of all Roshtov, when we announced the transaction during the second quarter, the closing was done just recently, so we didn't have any impact of Roshtov numbers in our number, this is one thing. On the other hand, if you compare the second quarter activity to the third quarter, then all of the growth practically is organic.

Great. That's really helpful. Thanks, Asaf. Then, before we turn over to more fundamentals, just on numbers quickly, operating margin came down a little bit. Could you just go through the puts and takes there? What was the reasoning there?

We explained in the – during probably the last two to three years, we are suffering from the telecommunication sector, heavy. And at some point, we need to compensate for that. So when you hire new employees and you put them up to speed, it takes a bit of time, until they get into full production, this is one thing. And the other thing, we have to give up a bit on the margins in order to gain new projects because at the end of the day, you are someone, probably the Company won't able and mitigate the risk and not to disappoint. So, it affected a bit the margins. I think during the second half, we will see it coming back.

Got it. Okay. Then just turning to fundamentals really quickly on the competitive environment, you know with the launch of the connector, the connect building, for xci specifically. Are you seeing, we've always talked about sort of the some of the older legacy players. Are you seeing any of these new players like MuleSoft or Talend or anyone else in that space at all sort of doing the application integration or data integration?

It varies between the projects. When we go for the enterprising projects then the answer is no. When we go after the new trends, then yes, definitely we see the new project.

Got it.

The other one is small scale on the new trend.

Then just one last one from me, you know, you guys have decent exposure globally and the Telco weakness, I suspect is your old long-time customer. But just any color if you are seeing anything from Brexit, anything from European customers in the space, or that might suggest a slowdown there or some uncertainty?

No. Let say most of customers are mid-sized companies, software houses, so this is not something that we saw any impact. And also in term of currency rate with the devaluation of the British pound, this is something that, for that matter we're compensated well by the strengthening of the Japanese Yen. So, it didn't have any impact on our revenues or should we expect to have an impact.

But not significant.

That's really helpful guys. A nice job on the beat in the quarter. Thank you.

Thank you.

The next question is from Tavy Rosner of Barclays. Please go ahead.

Thanks for taking my question. A bit of follow-up on the question regarding the acquisitions. Can you just expand a little bit about the investment rational, what do you expect from this acquisition, is it more too penetrated medical market, let say abroad to export this solution to different players outside of Israel or is it just on the technological side that you can just take Clicks and apply it to different verticals?

Say that we look at it from three different angles. In terms of the acquisition itself, I would say that it's we secured the downside, meaning the company probably will deliver different return on investment, so in terms of talking about the downside of the acquisition. The second angle is going after the healthcare industry. They have a lot to offer in this sector and probably it will take time to grow deeper into the sector, but we definitely believe that we have a lot to offer there. And the third thing is to see how we can use the economics of scale and do things together and boost the technology.

Do you have a sense of what's the size of the opportunity on the healthcare side?

It's huge, but it needs a lot of force because currently you need to break the whole thing into components in order to be able and penetrated, because in each country, this healthcare industry is highly regulated in most of the countries. So, in order to penetrate, you need to break the whole thing into components and go with a smaller proposition and know that you are to do some business. We need some work.

And you mentioned that you were hiring new people when you talked about the impact on the operating margin. Can you give a sense of where you are hiring and for what function, and are you happy with your current workforce size?

We had to compensate for the declining business in the Telco industry. Therefore we had to go after other projects, in some cases compromise on the margins in order to recover some of the revenues. So, I guess this is the mostly mix significant quarter, and as you know when you hire people it takes you time to bring them up to speed and into production. So, this is what we saw. The outlook is still much better in terms of where we are.

The next question is from Kevin Dede of Rodman.

Just again to go back to Clicks. Can you give us sort of the profile of their current customer base, maybe give us a feeling for their revenue run rate and how it was and how you pay for it?

Most of the customers are big healthcare organizations in Israel, and when I say big, I don't know if you know the Israeli market, I think if you take, one of the customers is probably the second largest healthcare organization in the world. Because in Israeli it was a bit different, so this is why I am saying when you work with such big organizations in order to penetrate in other countries, you need to break it down into components so you can penetrate easier. And this is what we are going to do.

So, I think there are all sort of different types of healthcare organizations. Are we talking a drug company, are we talking hospitals, insurance?

We are talking about healthcare – big healthcare organizations and hospitals.

How about a view in to revenue that the Company is generating and what you paid?

What we paid we already announced. In terms of revenue, this company is not a big company. It's rather a small company in terms of revenue. We believe it will be highly profitable.

How about the headcount?

100 plus of employees.

So that's on top of the 100 that you mentioned in your prepared remarks that you hired to the first six months.

Yes. As Asaf mentioned, nothing is included in Q2 results.

No, no, no. I understood – I understand. Could you give me the headcount at the end of the quarter for the total company and what it was at the beginning of the year?

1,300, we are at the end of the second quarter versus close to 1,200 in at the end of the year.

OpEx was little bit higher, is that anything that we should expect to continue going forward? Was there something unusual in that, or…

Can you repeat the question?

Okay. I guess I'm wondering what you'd expect going forward, do you think it sort of settles in it, that's $11 million level?

The what?

Your operating expenses.

I think that's – basically that's – if we speak about operating margins that was easier for me. Kevin, I think that for the second half and towards next year, we are expected to account those to again to the 15% and over.

Okay. Good. Fair enough. Gross margin, I guess given the sort of the change toward professional services, is that something that you think will be sort of consistent with where you fell out in the June quarter and even the March quarter a little bit?

I think that we should improve that in the second half, because you the second half usually is more towards software sales. So, in the second half it should be a bit better on the gross margin.

Given your one deals here, I think last time we talked about it, you mentioned that there were a few that you were working on and I was wondering if you could sort of review your acquisition pipeline and how you see the market. I mean I know that commentary has typically been that you've seen a lot of probably equity chasing businesses too, and just kind of wondering if you think any of that has changed and how your pipeline looks now?

In terms of pipeline we still have like three companies in the pipe this year in negotiations. In terms of the cycles, I must say that, because there is a lot of demand for companies and that these are paying much higher amount, it's not getting easier, but on the other hand the one that we are in negotiation, it looks like we will be able to close at least one of them. And it's not getting an easier in terms of prices, in terms of multiples, in terms of what people are expecting.

Do you see, I think maybe more software incubation in Europe, or do you think that's changed at all? I guess what I'm trying to ask is sort of the origin of some of these smaller companies. You see them developing in Europe, or is it still – I don't know in most part Israel and U.S.?

Most probably around U.S.

Right. Okay. The overall market, I mean I guess you commented on a little bit, but there doesn't seem to be much in effect from prices. Are you still trying to push mobile applications to your customer base and how – across your customer base? How do you see that progressing? Is that still something that your customers are interested in doing or, is there more resilience to it?

I think for most of our customers, you see a lot of interest around mobile capabilities. In some territories we see that it's growing faster in terms of the project, in terms of the size of the project, we definitely we expand in Japan. I think Europe is, it depends where Europe, probably in the U.K. we're seeing a more customers are turning towards mobile and it's very significant.

Fair enough. Our last question for me, your view on the second half's obviously improved. Can you speak to some of the drivers there, specifically what types of applications, number one, and then number two which geographies?

No sure, I understand the question.

Okay. Well. Your view on the second half of this year is obviously improved, right, with your raise in guidance. And I'm curious to know and you know which applications you think your customers are more interested in deploying now then you saw them in the earlier this year. So what's changed from an applications perspective, and which geographies do you think are stronger now?

Okay. So, in terms of the application, you know it's – from long time it's an ongoing business. I mean we work a lot with our partners and therefore they get their own pipeline and we share their pipeline. So we see the pipeline and we know what to expect from them. It is one thing. In terms of the applications, you see the same all over from mobile projects, cloud projects, all kind of preparation projects for both mobile and cloud, or kind of projects migrating from one – from previous versions to newer versions. We see all of that. In terms of territory, so definitely see an improved trend in Japan. I think we see in the U.S., we see a good trend. In Israel we see good business. In Europe it's very different. We have a strong business in Germany. So, it depends on what territory we are talking and what kind of projects. On the other hand, the momentum we saw from the telecommunication sector and we had to recover from places.

I understand. Do you think that this increase in business is something that will continue into next year, or do you think this is just a surge in spending because companies have a budget they have to flush out?

Very hard one, I won't say this one. If I hand the answer, I could make a lot of money. Based on what we see in the spike, it looks like a trend. But all this product is like what happened in the U.K. and unexpected one, they had some impact on the business. So, for now I can say yes. It looks like a trend.

Is Amit, still there?

Amit, can you give me a call later today, when you have a minute?

No problem.

Thank you very much. Okay, gentlemen, congrats on a nice job and thanks for taking all my questions. Appreciate it greatly.

Thank you very much.

[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 everyone for joining our call and we sure hope to see you on our next teleconference call, next quarter. Thank you very much.

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