Ladies and gentlemen, welcome to Magic Software Enterprises 2020 Third Quarter Financial Results Conference Call. At this time, all participants are present in a listen-only mode. A brief question-and-answer session will follow the formal presentation . As a reminder, this conference is being recorded. Magic's quarterly earnings release was issued before the market opened this morning and it has been posted on the company's website at www.magicsoftware.com. Representing Magic Software today are Magic’s CEO, Mr. Guy Bernstein; Magic’s CFO, Mr. Asaf Berenstin; and Magic’s VP of Technology and Innovation, Mr. Yuval Lavi.

Thank you, operator and thank you everyone for joining us today as we report our third quarter 2020 financial results. Magic continues to deliver strong execution across all upfront as we advance our business globally, signing new business and increasing our revenue from existing customers. During the third quarter, revenue grew by 11%, driven by our solid strategic performance to expand in Israel and in North America and leverage our existing customer relationships to upsell additional services. This quarter we increased our revenue in Israel by 23% year-over-year, North America by 8%, and Europe by 7%. These results were driven by the expansion of work for our existing customers and the addition of new ones during the quarter and demonstrates our ability to deliver our Software Solutions and Services to our existing customers and closed new deals alongside our continued solid execution of our priorities of top line growth, despite continued global impact of the COVID-19 on business decision making. Overall COVID-19 continues to leave only a small impact over our business results. As we prioritized our performance, we continue to work closely with our large customer base, supporting them in their daily challenges that they face. As markets are trying to normalize after the initial impact of COVID-19, we see that the current business disruption related to the pandemic pushes organization to embrace profound digital transformation to migrate from legacy system to more than flexible on-premise or cloud based solutions, as well as the need for meeting customers' expectations for digital and more personalized experience, while improving the operational efficiency.

Thank you. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. The first question is from Tavy Rosner of Barclays. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. I just wanted to touch on guidance. So your updated guidance kind of imply flat Q4 in terms of revenue or roughly 4% year-over-year in Q4. So I'm just wondering, if you guys are being conservative, or if you are expecting some kind of slowdown in Q4 compared to Q3?

We always – we are always conservative, but you need to remember that October, for example, there is the New Year's holiday season in Israel, which today account for over 40% of our revenue stream and also in November with the American with North America holiday season and Christmas also have some impact on the revenue. We always – we hope that, we will meet the higher end of our guidance, but I guess that we remain conservative, by the way as we were in the second quarter, where I think that everybody knew that we will update our guidance.

That's helpful. And then I just want you to talk about your customers' a little bit. So where do you see most of the demand coming from in terms of vertical and conversely, where do you call kind of pushing back in terms of budget during the corona time, like what's driving most of the business at the moment?

I think that Magic is today very oriented to the healthcare sector, to the financial sector, to the defense sector. We are also oriented a little bit to the sector, which a little bit is in parallel to our results this year, we expected it to be much better than we saw a recovery, a slight recovery during the third quarter. So in defense, we see a solid demand, I think that all of these sectors, the financial sector, the defense and the hotel sector are the ones that were the minimum hit from the COVID-19. You need to remember that the financial restrict works and invest a lot of money in order to update the legacy system. We have tens of common people working on Israeli banks and Israeli insurance companies, and credit card companies to update their legacy system, same with start-up. Every start-up in Israel that today we see it, and we feel that every start-up in Israel that start to generate revenues and start to grow its business, in everything that goes around the Big Data and cloud services in our domain and the approaches and with that we manage also to grow business. Same with the healthcare, CVS, the two Israeli biggest and now largest healthcare providers, are also in the midst of investment due to the COVID-19 and handling the winter, which also contributed to our business. So all of that are drivers for the increase in our activity, and I'm sure that, they will also continue in 2021.

Thank you, Asaf. That's helpful. And maybe a last one, if I may on the M&A. So you reiterated your commitment to future acquisitions. Have you guys seen anything relevant lately in the pipeline and perhaps valuations are too high or there is a lot of competition for kind of trophy assets. Any color you could add?

I will answer that, Asaf. Yes, we do have a lot of transaction in the pipe. Most of them or other very small companies as we don't work through bankers, most of the businesses we acquire are coming by our businesses. The branches around the world and therefore they are way more conservative in the way we do it, because we are talking about companies that we know, companies that we compete with. But the disadvantage is that most of them are rather small, so this is how we do it. Still, we are looking for the one which is like a game changer. Apparently prices are – will be high, but we are still looking.

All right, that's helpful. Thanks, Guy and Asaf.

Your next question is from Maggie Nolan of William Blair. Please go ahead.

Hi. Congrats on the strong quarter. I'm sensing some kind of preliminary optimism on 2021. Can you maybe give us some preliminary thoughts just based on the conversations you've had with clients around what they are seeing in terms of their budgets for 2021 and how that may translate into your outlook for both software and services?

Nolan.

Okay. Go ahead Guy, sorry.

Yes, so I would probably say that, in the sectors we work in -- like the healthcare is definitely, they all have like a lot of plans for 2021. About the financial sector, they always have plans and they always invest. So we're trying to expand as much as we can within the existing customers and of course, to gain some more new logos. So all in all, currently they all are pretty positive about 2021, yet to be seen. We are not sure where this all pandemic is going to.

Ms. Nolan.

Thank you. I do have a follow-up. So for this quarter -- the September quarter, can you give us a little more detail on the new client additions and kind of the breakout of the growth coming from new clients versus your existing client base? Thank you.

I think it would be proudly rather tough to give you like a list of clients, because as you know, Magic is working -- most of the deals are rather small deals in the range of like a few tens to a few hundred thousand dollars and therefore there is no significant client that is making a strong impact in the quarter. So it's probably between a few tens of clients. We definitely see the expansion in the healthcare and in the financial sector.

Okay, thank you for taking my question.

Thank you.

The next question from Kevin Dede of H.C. Wainwright. Please go ahead.

Good morning, gents, sorry afternoon over there. So Asaf you touched on telecom and a resurgence there, I suspect that you were alluding to Sprint, T-Mobile. Can you give us little more color, how is that going? Are they sort of full throttle yet? Do you expect them to go may be full throttle in the next stage of their integration next year and do you think Magic will be more involved?

We hope to be more involved. I can tell you that starting from the second half or mostly in the third quarter of 2019, T-Mobile, basically stopped everything, because of this merger with the Sprint. We do see improvement, but it's far, far from where we were in previous year. I think – in previous years. I think that the 5G once it will start driving in more investments in the telecom industry, we will also benefit and ride on that. But currently, it's a very small – it became a smaller business for us. We manage, also adjust our cost relatively to that, if you look at on our OpEx, on our sales and G&A expenses versus last year, the entire deduction of around $800,000 comes from the telecom sector that shrinked significantly from where we were in prior years. So to your question, we don't see any – we see a slight improvement, but most where we were in prior years.

I'm glad you mentioned, the SG&A Asaf. It was up almost $2 million from the June quarter. Is that just because of sales mix and increase in sales or?

It was – not, 25% of that – roughly 30% of that is from the up – going back to normalized activity. All other refers to some legal stuff, insurance, D&O that prices went up from last year where our premium was around $50,000, today it’s close to $300,000. So we got some hit on the insurance and legal, some customers that – clients that we've saw are not making payments on time. So we made some – we had to do some buyback provision of around $0.6 million and bonuses, when the business does well, still people are getting paid for. So this is also part of the increase. So I would say 50% comes from going back to normalized business and improvement of our financial results and 50% legal, insurance and bad debt.

All right. So do you think this sort of a new run rate or so does it settle back down somewhere closer to first half levels?

In terms of what, in terms of the OpEx expenses?

G&A. Yes, SG&A, yes. Just for the December quarter.

Yes, I think that it would even reduce for the Q4. Again I don't – we said that we are conservative. I don't – we don't give any guidance on that, but I think that this is pretty much the level yes to your question.

Okay, all right. Can you give us the same sort of color on CVS too. I mean, I know both you and Guy mentioned healthcare, and I'm wondering if that's sort of the bucket that you've talked with CVS deal into?

We see, yes, the healthcare we also, we have very strong operation in Israel on the healthcare sector. But yes, CVS today accounts for around 10% of our top line. We view – again on the profit side, it is not that profitable, because there is rebate from CVS and stuff like that, but still we managed to bring in absolute numbers, increased level of business, so it pays out also to us and to the client.

Okay. So is that sort of more normalized now too? Is that a fair way to look at it?

We hope that it will continue to grow.

Okay. Okay. I think that's a better way to phrase it. Is – I think the operator mentioned that Yuval is on, is he on the call?

Yes.

Okay. Could you give us a little more insight on the next generation of xpa and the integration of PowWow? How's that going? Have you run beta, have any of your customers looked at it? What sort of insight can you give us and how you think it emerges in sort of the competitive world?

We are in the midst of kind of the R&D effort. We are – prepared the two platform on each side of what needs to be connection and now we are kind of building the, what I call the developer journey in the joint platform. And yes, definitely going to be a competitive offering to other products in the market. This is where we also see a big opportunity to jump on new customers consuming this platform. Also in the Japanese market, we are, as opposed to our usual behavior where we first come to the global market is only after that coming to Japanese market. Since we have a big demand on the Web Client development has down grow our technology, and we are going to look at bringing it to Japan earlier with some prospect or customer that are talking thoughts about implementing it to million concurrent user platform where usually, it never used to be our playground, but now we see that our partner is kind of pulling us there. And we are answering the challenge, definitely.

Okay. Yuval, thanks for the color. Can you give us -- can you speak a little bit more to timelines, and I don't know if you have early customer feedback or if you're at 80 yet. Can you just sort of give us your perspective on timelines? And when we might expect to see it in the market full blown?

Full-blown, it will be somewhere second Q next year. Okay? The idea is to start having the kind of design partners that are working with us or early adopter better sites mid of Q1 around February, and then, start in taking up to customer mid of Q2, with doing the full blown marketing and global availability beginning of half-two.

Okay, fair enough. Yes. That sounds like you -- I think the way you portrayed it on the August call, so it seems like you're sticking to your timelines. Now you mentioned going into Japan early. Are you going to release it globally across your entire network or, are you still thinking in terms of geographic release?

We are going to global -- all over the globe. What I said is that again traditionally the Japanese market prefer us to go with 0.0 version to the global market and not take it into Japan. And Japan is taking 0.1 and 0.2 version, et cetera, because there are -- when we say, it's perfect for them, it's still not perfect. But yeah, it's -- Japanese is by but again, we have such a huge demand there from the communities that we are going to kind of put an extra effort with the Japanese branch in order to shorten the gap between the global availability or the rest of the world and Japan, only to be between weeks to a month and not more than that.

Okay. On the development side, I mean, if I understand correctly, you've got developers in Israel and then somewhere in Central Europe, too. So imagine it's a combined team effort. Are you having any trouble finding the resources that you need to stay on track?

Not really, because, again, I think we can say that we had and we overcome it by actually emerging the existing team to the new team. So we are working with partly in the technical people in the U.S. and with firewall, the team in the Ukraine, that we have in computer world, but also a big team in India that we are shifting form our existing R&D of xpa and pulling them to follow technology, which again they're going to be merged as one technology. So, we managed to overcome the challenge of bringing new talents in this time of the COVID-19, with actually shifting a little bit focus so far in other products internally.

Okay. Thanks Yuval. Asaf, can you give us maybe -- I mean it seems like Israel is really bouncing back, and I think the big question in my mind is, how many of your consultants are actually going on-site versus working remotely? Did that change at all in the September quarter? I know when we talked about it in August, it seemed to me that most of your guys were still remote. But I know, I mean, I know this pandemic is really intensified. And I'm just wondering if it's sort of changed your operating perspective at all?

Of course, it did change us our operating imperative, let's say, most of our people are working from home. We are now doing the call from home, except for the defense sector, when we have -- when we must, you know, due to security reason have our people either on-site or away -- in our offices, all other -- most of all other people are working from home. First -- most and foremost, because we don't want to have a situation where when one gets infected or tested positive and everybody else need to go home or infected themselves. So this is something that surely as changed and I don't think that it is for the short time is not going to change back. Israel, you need to remember is still on the second phase of going back to normal. So we went into a shutdown and we are now gradually only getting out of the shutdown and people also saw us saying back that, the government is now also saying back that they want to do another curfew. Stop -- everything at 7 O'clock PM. So, yeah, we changed this, we move to smaller offices where we could by the way, and you also see us on the -- on our margins. It is more, by the way, the problem with that is that we trying to call it because we have very gifted people and you want to continue having them -- relate to the business and once they are working from home, they're are losing some of their DNA with the business. So to keep them identified with the Magic way -- and it's something that for us is now more challenging. It's something that we didn't handle until today because everybody work together and there was like it camaraderie feeling.

Yes, no, understood. I think all businesses are facing that, you know..

Yes.

Company culture issue. I know we are, I mean, I haven't been in our New York office since March. I guess, my question was really whether or not things have changed from the second quarter and I guess they haven't, right? You're still maintaining the same, sort of, operating conditions with everybody working from home?

Yes. We are changing that mostly with the client. The clients are now more willing, you don't hear people are saying, let's stop the project or let’s reuse the capacity. This is what have changed from the client side.

Okay.

Kevin, I think from the second quarter, the clients understood that this is basically the new reality. So if that the second quarter, we faced some pushbacks on new projects. It's not the case anymore.

Well, yes, obviously, Guy, I think you did a great job. I mean, sales were up 10%, almost 10% sequentially. So clearly you're -- what you said in August stands through, right? Because you said that. You said your clients aren't really holding back. So congratulations on the quarter. Thank you very much for taking my question.

Thank you.

The next question is from Asaf Barel of Oppenheimer. Please go ahead.

Hey, guys. Congrats again on the strong quarter. Just to start off with maybe a housekeeping question. Can we get an organic growth number for the quarter?

Yes, on the top-line we were, Q-versus-Quarter, we were 40% percent non-organic, 60% organic.

Okay. Do you mean that sequentially or year-over-year?

Year-over-year.

Okay, great. Great. Okay. And then on product mix. You guys had noted -- what you guys had noted on the breakdown implies a pretty strong results for the software business. Is there any update you can give us on that front. I know it's just kind of something we speak about less on the conference call? Also if there was any impact from the Magic-Hands acquisition that was closed? So, any color would be helpful?

Again the Magic-Hands acquisition its a very small operation. It’s a company that does little bit under €2 million a year. The logic behind the acquisition was to bring in around 20 Magicians to and bringing a partner that has some kind of the advent application built using the Magic tool, but take the management in, take the magicians in and upgrade our Dutch activity, our Dutch branch, following the leave of -- the retirement of one of the managers there, the branch manager there. So that was the logic behind it. It's not material in terms of our business. It is material in terms of our prospects from the Dutch market.

Okay. So maybe I'll just kind of reiterate the first part of my question, which is more important. It sounds like the software business is growing again. I mean, you tell me if I'm doing the math wrong here, especially when I compare 3Q versus 2Q this year. So, any color on the software business would be helpful.

Yes. The software business is growing and grew versus last year. You don't see it so much of -- you see an improvement on the margins, but not so much because the capacity of professional services is still huge versus the 75% or the revenues still comes from the professional services. We did sell something like 20% more than last year in terms of our software. And this is what also have to bring to improve the bottom line.

Okay. Any kind of drivers there or is it just kind of a logical next step in terms of people trying to become more and more digital?

I think that people are trying to get more digital. I feel we see it on the project side. We see it on the software side and so it is what it is.

Okay. Okay. Great. Gross margins were quite strong this quarter. Well above kind of the post-acquisition rates of 4Q'19 and even stronger versus first half of 2020. Any one-time effects here? Can we actually expect this kind of number to continue or do we need to take it back down moving forward?

Let's say that still its conservative. Let's say that we -- normally the fourth quarter is a stronger quarter in terms of professional services and also in terms of software. So I hope, so I don't expect any significant changes for this year. For next year, first of all, because of the type of prospect that we have on the M&A side, I would assume that Magic should range between the 31% to -- 31.5% to 32.5% on the gross profit.

Okay. Great. That's very helpful. That's all from me. Thanks for taking my questions.

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

Well, thank you everyone for joining our call this quarter and we definitely hope to bring you some more good news next quarter. Thank you very much.

Thank you. This concludes the Magic Software Enterprises Ltd. third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.