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

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

Ladies and gentlemen thank you for standing by. Welcome to the Magic Software Enterprises Ltd. 2016 Third 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 third quarter 2016 financial results. During this call, I would provide selected highlights from the third quarter results and then turn the call 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 to report our third quarter results with record breaking revenue of $54.5 million, reflecting 20% growth year-over-year contributed both by organic activity and by the recent acquisition of Roshtov. We released the latest version of our Magic xpi Integration Platform earlier this month and are seeing the high level production. These gives us a lot of confidence that we're on the right track to increase retention and expand raw material among our existing customer base. We expect this momentum in sales to continue throughout the remainder of the year with our organic growth along both new and existing customers and the potential of ongoing M&A opportunities I am very encouraged about our ability to maintain and improve our future performance and profitability. Now I'd 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 third quarter, I would like to remind you that 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 valuable supplemental information regarding our results of operations. There is a detailed reconciliation to non-GAAP results in tables of the earning press release. As Guy mentioned, our third quarter revenue was $54.5 million compared to $45.3 million for the third quarter last year reflecting 20% year-over-year growth. This quarter we started to consolidate Roshtov in our results. Nevertheless the majority of our growth came from other areas of our business. Looking at geographic breakdown, our revenues we maintained a diverse geographic mix with a slight change this quarter in favor of euro which includes the Israel revenue mostly due to the acquisition of Roshtov. For the third quarter our revenue in North America represented 50% of total revenue, Europe represented 41%, and APAC and the Rest of the World represented 9% of overall revenues. Slightly more than half of our growth in the third quarter came from Europe, while most of the rest came from North America. Turning now to profitability, our non-GAAP gross profit for the third quarter of 2016 was $20.1 million, up 20% compared to $16.7 million in the third quarter of last year. Our non-GAAP gross margin of 36.9% remain virtually unchanged compared to the third quarter of last year and to the previous quarter. Research and development expenses on a non-GAAP basis in the third quarter of 2016 totaled $2.7 million compared to $2.4 million in the same quarter of last year. This increase is mainly attributable to the acquisition of Roshtov. Our non-GAAP operating income for the third quarter increased 17% to $7.7 million from $36.6 million in the same period last year. This reflects 14.2% of total revenues for the quarter compared to 14.6% of total revenues for the third quarter last year and 17.8% in the previous quarter. Our non-GAAP tax expenses this quarter were $1.2 million representing an effective tax rate of 22% compared to tax expenses of $0.9 million in the third quarter of 2015 reflecting an effective tax rate of 15%. We believe that our effective tax rate for the year will range between 20% to 21%. Our non-GAAP net income for the third quarter decreased 7% to $5.3 million or $0.12 to fully diluted share compared to $5.7 million or $0.13 per fully diluted share in the same period last year. The decrease in our net income is due to an increase of $0.5 million in our financial expenses resulting from devaluation of net assets denominated in currencies other than the U.S. dollar and from an increase of $0.7 million in net income attributed to non-controlling interest attributable to entities where we don't expect an 100% ownership. Turning now to the balance sheet, we ended the quarter with approximately $61 million in cash and cash equivalents, short term bank deposit and marketable securities compared to approximately $77 million as of December 31, 2015. The decrease in total cash balance is due to the payment of approximately $26 million mainly for the acquisition of Roshtov and $7.7 million paid to our shareholders in dividends at the beginning of the year. From a cash flow perspective, we generated $5 million of operating activities in the third quarter and $18.4 million due the first nine months of this year. Turning to our 2016 guidance, we are reaffirming our full year revenue guidance in the range of $195 million to $200 million slightly ahead growth rate of 11% to 13%. In fact we expect our full year revenue to currently in the high end of the range we provided. With that, I will turn the call back to Guy for closing comments.

Thank you, Asaf. In summary, our record operating topline and non-GAAP operating profits in Q3 demonstrates the successful execution of Magic strategy to grow our business both organically and through acquisitions. The growth of our existing activity show that we are providing the software and services, with enterprises need to succeed in today's digital world. And we are accelerating our efforts to enhance our portfolio with improved or additional products and services with a few to our enterprise customers and bring profitability to our business. With that, I will now turn the call over to the operator for questions. Operator?

[Operator Instructions] Your first question is from Bhavan Suri of William Blair. Please go ahead.

Hi guys, thanks for taking my question, can you hear me okay?

Yes, we can hear.

Great. Nice job there. I just have first touch on your comment about seeing solid expansion within customers, can you just talk about what’s driving that and then is there specific products that are leading to it or is it across both the integration platform, the mobile platform and the development platform.

I think it relates to all of them, the significant amount that we see coming from the application platform because people need to migrate and prepare themselves for the new role. To some extend we see the movement towards Cloud and some in significant amount coming on mobile.

Got it. And then when you look at the business today and you look at it sort of in the next two years and you see some of that - we talk about this I think almost every quarter, we sort of see the service as work and then you obviously also had some nice announcements of wins with licenses. Do you see that mix shifting or do you think the mix to service licenses still stays the same for at least the next two to three years.

I think we, I can say that we can see the same for the next two or three years. There is a trend in the market, customers are pushing more and more towards solutions rather than to be frankly between license sales and services. At the end of the day our customers ensure not to deal with the software vendors separately from the professional services.

Got it. And feels like the two stakes you guys took and the companies are doing well, may be for Asaf, what was the organic growth in the quarter if I try and back that out from the click contribution or clicks contribution would be great sort of get a sense of that too.

I can say that the majority of our growth came from our existing operation and even if we had excluded the impact of most of results we would still showing a double-digit growth in the quarter and of course for the nine months.

Got it. And then one last one from me, may be two quick ones. One, you had obviously announced the financing change and change of capital structure, just an update guidance sort of the M&A pipeline and sort of - are there larger companies you guys are willing to look to buy, given you still have the decent amount of cash that you decide to take on the debt sort of just look at that pipeline, look like and sort of how amenable you to much larger acquisitions you’ve done in the past?

Okay. So we have few opportunities, I knew that this market will attract some question whether we have something to find more or not - but we thought that the interest rate were quite appealing for us and we said okay, let's prepare for something which is big because I think there was amount of schedule, approximately $19 million, probably $20 million to $25 million we need to keep it with the ongoing capital for the business. So at the end of the value, $55 million to $60 million to work on the M&A side and taking to account the cash that we generate and dividend that we pay and also all-in-all it’s not a lot of cash to go for something big. Okay, we can still get probably different acquisitions but if you want to go for something basic, then we would probably need more. So we felt it’s a good time to prepare ourselves, the interest was [indiscernible] everything we need it, probably get a lot more than that, but let's talk about that and [indiscernible].

Got it, okay. And then quick one, just an update on the telecommunications vertical, as you have some large customers in that space, there's been some challenges to that part because of M&A in that space, a variety of things, but how is that progressing and how is the pipeline look there? That's it from me guys, thank you.

Let's put it this way, the communication sector I can say that all - our main customer which is [indiscernible] that market improvement and some extent maybe a slight one, but from the other we see some positive change. Unfortunately, we are not doing that well today, so and the part that we don’t enjoy the fact that they don't do, but the others - there is a positive change.

Got it. Thanks guys answering my question.

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

Hi, everyone. Thanks for taking my question. Actually most of them were just answered. Thank you for that. The one I wanted to touch on is regards to the cloud projects. I mean this is something where we - many of your competitors are commenting that they see a good traction with more project coming to their cloud? Is that something that you’re seeing as well and what would you say cloud in terms of percentage of your total revenue?

Let's put it this way. We definitely see the trends. More and more projects are coming in, in terms of percentage result of revenue, I think we’ve seen not big, like 10% maybe.

That's not so bad. And do you see the pipeline for next year?

Yes, we’re going all the time.

Yes, okay. And where do you in your best case scenario where do you expect that coming up by the end of 2017?

Just the cloud?

Yes.

It’s very hard to say on that part.

Yes.

I believe anyway it is going to improve.

Okay, that’s very helpful. Thank you very much everyone.

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

Hello everybody. Asaf, you mentioned your geographic breakdown, but the numbers were too quick and well blurry for me. So would you mind off in those again?

Yes, sure. Basically financial - saying those numbers also - but the breakdown of our revenues 50% coming from North America and 41% from Europe which includes also Roshtov and 9% from the Rest of the World.

Okay, thank you. The gross margin has been pretty steady through the first nine months of the year but not really at the level it was last year and I was wondering if you guys could talk to that a little bit.

Yes, sure. Basically it relates to the mix of revenue and the majority of the increase in our revenues come from - still are coming from we drive from the professional services. So despite the fact that with slight improvement both from our technology division and also on the professional service in terms of gross margins we feel the dilution.

Okay. Fair enough. How would you recommend that when you look at that going forward in light of your recent acquisition and changes in the business environment.

I think that on a constant level of our operation the 37% gross margin may or should actually improve by 1% towards next year and again unless we don't do any acquisition in a different mixture.

Okay. I noticed that you had a press release regarding to a company and I was just wondering how you might characterize it. You've had a pretty good steady release of new business wins and I am just hoping maybe you could add some dimensions to it and maybe we could get a feeling for the new business that you are winning versus the ongoing stuff you’ve had with existing companies or existing customers.

This is Itai. I think that our new business is maybe generating what we call, what the market call digital formation. It’s basically the way that business moves from the old generation to the new era and it’s a lot about convergence, convergence of mediums, convergence of systems, integration between stuff and actually the customer, our customer want to see one thing, their end customers want to see one thing and when they want it. I think our new, you can see that in our press releases, you can see that in what we do in the projects that we do and as Guy mentioned we’re going towards solutions. So we’re taking our portfolio of product and our customers are embracing parts of it as a solution and it's helped them. Roshtov is a great example of it. It’s a great company and we’re proud to serve them. I think we have more coming on.

Well, thanks for that color. Guy, so taking a step further can you talk about how your changing your work force, where your employee level is now given that this acquisition is done and maybe offer a little color on where you think you are going to need the strongest skill set within your employee group in order to address the challenges that your customers are placing on you.

I think in terms of changing the people would present us in front we need more skilled high level sales people to teach the customers. It’s not anymore about selling technology or selling a project. It’s the understanding of this whole world of this digital world without anything without any staff then depending the architecture of what the customer has been doing, and where he wants to grow and the ability to be there and striking hard to that. So this is the main change we’re seeing in the third quarter. It will come inside of the consolidated sales.

You see that mostly in presale area where today let's say, you see a change from the person that we used meet, you see the fact who used to do our sales and CTO and CIO of the company and the same was more technological oriented. Now we do the sale to the business to the actual division to the actual users because again as we said we’re moving to a solution sell rather than gas selling technology.

Okay. That helps a lot. As you see your business shifting, are you facing other competitors, do you think you’re seeing more maybe the Anderson Consulting companies that are coming down market, helps smaller companies, position their IT infrastructure to adjust that companies particularly capabilities in meeting its own customers needs. I am just wondering with the changes in lower scale set whether or not it change in the competitive front and making it perhaps even more competitive?

I don’t think so. If you ask whether we see you know, the big extension below it in the competition, not really to the market that we compete. On the other hand, definitely we see starting point for joint ventures and we are reengaging consultative part with the big projects and we do the delivery else.

Okay. All right. Last question for me. Just your perception of how the competitive - not the competitive market, the overall business market maybe changing in Europe versus United States?

A typical change, Europeans are very well concerned with these competitive states, and in the stage you see the cloud trend moving and moving quickly. In Europe, we are more competitive, you take more time, you need to compare, you get a time to offset, prepare. I think it’s being like there for many years.

Okay. So no real changes there?

No.

And is the focus on the professional services and the request for them is that still stronger in the states than it is in the Europe?

No, I think it’s the same. I think in more organizations whether its CIO or whether its management, they prefer not to beat with software vendors from their own project or from their services. There they won't have kind of [indiscernible] someone that will take their whole project and delivery.

Okay. Thanks very much, gentlemen.

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

Yes, so thank you very much all for joining us this quarter and hope to see you next quarter, and we will continue. Thank you.

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