Guy Bernstein - Chief Executive Officer Asaf Bernstein - Chief Financial Officer Yuval Lavi - Vice President of Technology and Innovation Amit Birk - Vice President, M&A and General Counsel

Bhavan Suri - William Blair

Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprise Ltd. 2017 Third Quarter Financial Results Conference Call. With us on line today are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Bernstein; Magic's Software Division VP of Technology and Innovation, Mr. Yuval Lavi; and Magic's VP, M&A and General Counsel, Mr. Amit Birk. I will now turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Thank you, and good day, everyone. Our quarterly earnings release was issued before the market opened this morning, and it has been posted on the Company's Web site 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, Magic will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release. A replay of this call will be available after the call on our Investor Relations section of the Company's Web site. I will now turn the conference over to of Mr. Guy Bernstein, CEO of Magic Software. Please go ahead.

Thank you, Amit. Good morning, everyone and thank you for joining us today as we report our third quarter 2017 financial results. I'm very pleased with the results of our third quarter as we continue to experience consistent growth and increased level of growth. Revenues for the third quarter reached $65.7 million, reflecting 21% year-over-year growth and non-GAAP operating income increased 17% to $9.1 million for the quarter. We expect our strong sales momentum to continue throughout the remainder of the year. And as a result we've removed -- we’ve narrowed our revenue guidance to be in the range of $250 million to $255 million. Our growth, which was mainly driven by organic expansion, is a direct result of the increasing demand for our software and professional services in all regions and highlights the relevant of our solutions as companies continue to drive digital transformation across the organizations. Today, Magic is positioned as an innovative software solution provider, offering end-to-end solutions while creating greater value for our customers and shareholders. With respect to our market opportunity, we are investing in new products and services to complement our core offerings. And entering new service models to give customers more flexibility. I'm confident that the recent addition of Magic xpc, a new iPaaS platform, to our integration suite further strengthened our position to expand our footprint in the fast growing integration markets. As a result of our focus on this market, this quarter we continued to win new projects and expand our customer base. Now, I would like to turn the call over to Asaf, our Chief Financial Officer, to discuss our financial results and outlook for 2017. Asaf, please.

Thank you, Guy and good morning everyone. As Guy mentioned, our quarter revenue totaled $65.7 million, up 21% compared to $54.5 million for the third quarter last year, mainly driven by organic expansion. Analyzing our revenue growth, our organic growth rate was approximately 15%, accounting for 70% of our third quarter year-over-year growth. I would like to emphasize that compared to the two most recent quarters all of our growth is organic. Looking at the geographical breakdown of our revenues, our geographic mix remains steady during the third quarter. North America accounted for 49% of total revenues; Europe, which include Israel, 45%; and APAC and the rest of the world accounted for 6% of our quarterly revenues. Most of our growth in 2017, as well as in the third quarter, was from North America and Israel, which are our strongest territories. Turning now to profitability. Our non-GAAP gross profit in dollars for the third quarter of 2017 was $22.8 million, up approximately 17% compared to $20.1 million in the third quarter of last year, and up 2% compared to the second quarter of 2017. Our non-GAAP gross margin was 34.7%, down from 36.9% for the third quarter of last year and 34% in the previous quarter. The continued decrease in our gross margin compared to the respective quarter resulted mainly from the shift in our revenue mix from software towards professional services. The breakdown of our revenue mix for the first nine months was 30% related to our software solution and 70% related to our professional services versus 35% software solutions and 65% professional services in 2016 as a whole. Moving to operational costs. R&D expenses on a non-GAAP basis in the third quarter of 2017 totaled to $2.5 million compared to $2.7 million in the same quarter of last year. The decrease in R&D expenses is due to allocating a portion of our R&D workforce to our offshore facilities in India and St. Petersburg, which carries lower costs. Our non-GAAP operating income for the third quarter increased 17% to $9.1 million compared to $7.7 million in the same period last year. This reflects an operating margin of 17.8% for the quarter compared to 14.2% for the same quarter last year, and 17.8% compared to the trailing two quarters. This decrease in our operating margin compared to the respective period is consistent with the decrease in our gross margin. Our non-GAAP tax expenses this quarter totaled $2.1 million, representing an effective tax rate of approximately 24% compared to the tax expense of $1.2 million in the third quarter of 2016, reflecting an effective tax rate of 15%. We estimate that our effective tax for the full year of 2017 will be approximately 22%. Our non-GAAP net income for the third quarter decreased 2% to $5.2 million or $0.12 per fully diluted share compared to $5.3 million or $0.12 per fully diluted share in the same period last year. The decrease in net income was mainly attributable to the increase in our effective tax rate. Turning now to the balance sheet. As of September 30th, cash and cash equivalents, short-term bank deposits and marketable securities amounted to approximately $89 million compared to approximately $88 million at the end of 2016. Our total financial debt as of September 30th amounted to $42.4 million compared to $35.4 million at the end of 2016. From a cash flow perspective, we generated $2.7 million from operating activities in the third quarter and $17.8 million during the first nine months of this year. Lastly, turning to our 2017 guidance. Due to better a better visibility, we are narrowing our full year revenue guidance to be in the range of $250 million to $255 million on a constant currency basis, up from prior guidance of $245 million to $255 million, reflecting a revised annual growth rate of 24% to 26%. Our revised guidance is a result of our strong business momentum in recent quarter and our visibility into the last quarter of the year. With that, I will turn the call back to Guy for closing comments.

Thank you, Asaf. In summary, we are pleased to report that we delivered another strong performance in the third quarter with solid year-over-year double digit growth and profitability on both, our top and bottom lines. As we see our growth ramp successfully, moving forward, we remain excited about our market opportunity and continue to pursue additional growth through acquisitions, where it makes business sense; for new products new markets and even new partners who can help us gain new customers. With that, I will now turn the call over to 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.

I just want to touch a little bit on the upside. You now had a couple of quarters where you’ve seen nice upside, and may be Guy, you can address. Where is that coming from? What types of projects? Is there a pattern? Is it some of the platform? What driving that upside? Because you’ve beaten your expectations, certainly our expectations, just want to understand a little more.

I think it's coming from all over the place, lot of organizations are preparing themselves for to go digital, a lot of transformation project. As a result, a lot of integration projects. So it's all over.

Any specific industry Guy or geography or anything like that?

Geography, I would say, mainly the states and probably Israel as well, are becoming quite strong. Sector wise, the usual suspects; the financial sector is very dominant.

And then I wanted to touch and I know we try to chat about this, but we haven't caught up. But I wanted to touch on this partner business unit you’ve built out. Just a little color on who we targeting here, and you think about these integration channel partners, that’s going to compete with your services business? So help me understand the dynamic there a little bit? Thanks.

In that aspect, what we’re trying to do is we try to expedite the recruitment of more software houses system integration is that, especially in the world of integration that can utilize our technology and the experience that we observe during the year and help us with the several new technologies. The integration of course is significant portion of our integration sales are being sold directly. We want to increase that, first of all, through a agreement that we signed with ecosystem, such as sales force, such as ACP [12.25] to provide us with much greater lead in the short-term. This is one thing. And the other thing is to utilize their system integrators to use our technology in order to facilitate their projects.

The idea is to come up with readymade solutions for ecosystems of different vendors. For example, the joint partnership that we have with Salesforce is of course is we bring them to the table technology that can integrate between sales force, sale SAP, sales force and dynamics, sales force and you name it. So for their partner this is quite attractive.

So let me delve into that a second. So does that -- so when those guys sell it, I mean I would expect the license revenue for Magic just start increasing, because obviously that's what you really have them sell. But then do you think you'll see a similar decline in your services business, your project business? How should we think about that balance, that's what I'm trying to get to?

What we believe we will see is definitely we hope to see an increase on the licenses sales. I don't think it will cannibalize these services because these services are mostly sold directly. And here, you’re talking about sales that are indirect and probably the work is going to be done by the other partners.

And Asaf, one last one for you, just on gross margins. If we think about the gross margins, our assumption is that license and maintenance are roughly 90% gross margin. Is that a reasonable assumption? And is that how we should think about it, going forward, if this partner business units, or once the partner business unit, starts kicking to understand it's early maybe something in '18, maybe more in '19? But is that a reasonable gross margin assumption as we think about how those might trend over the medium term?

If it starts looking cautious...

And the 90% is a good number for the software or maintenance gross margin, Guy?

Yes, this is what we are doing today.

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

Yes. So thank you all for joining us today. And we hope to continue and bring you more good news next quarter. Thank you.

Thank you. This concludes the Magic Software Enterprise Ltd third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.