Welcome to Magic Software Enterprises 2021 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. With us on the line today are Magic’s CEO, Mr. Guy Bernstein; Magic’s CFO, Mr. Asaf Berenstin; and Magic CTO, Mr. Yuval Lavi. Magic 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. Before we start, I’d 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 views or expectations or otherwise. Also, during the course of today’s call, management will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on Magic Software’s Investor Relations section of the company website. I will now turn the call over to Mr. Asaf Berenstin, CFO of Magic Software. Please go ahead.

Thank you, Operator. I’d like to welcome everyone to our call today to review Magic’s fourth quarter and full year 2021 financial results. Magic finished the year on a strong note with fourth quarter revenue growing 27.2% to $133 million and an operating margin of 14.9%, compared to 14.6% in the same period of the previous year. For the full year, revenue increased by 29.4% to $480 million and we deliver an operating margin of 13.9%, compared to 14.2% in the previous year. We maintained profitability despite the increase in employee costs, which our industry in many sectors continued to face. On a constant currency basis, revenue for the fourth quarter grew organically by 15.1%, while revenue for the year grew organically by 13%. These record results are a direct outcome of our talented team, together with the quality and diversity of our products and services validate the success of our strategy and the ability of our business stable, profitable and with high level of visibility. Our strategic priorities are the basis for success, continuous innovation and expansion of our offering, one, organically to new and existing clients, and two, via M&A’s, all in order to provide exceptional value to our customers across the digital transformation journey. These strategic elements provide us with numerous growth levers and allowing us to benefit for the robust and sticky revenue model with a significant percentage of recurring revenue. We have delivered 19% compounded annual revenue growth rate over the past five years and more than doubled our annual operating income during this time from $28.4 million in 2016 to $66.8 million in 2021. Our business is benefiting from global trends that are driving our growth. This includes, first and foremost, the demand for a wide range of top technologies, methodologies and services, and SMBs continue to migrate from legacy systems to modern flexible on-premise or cloud-based solutions, as well as the need for meeting customer’s expectations for digital and more personalized experience. The global trends of accelerating digital transformation and changing customer expectations means that enterprises must continue to modernize their system to remain competitive. We will leverage our strongest year on record witnessing a healthy demand and developing a growing pipeline to deliver continued growth in 2022. On the M&A front, Magic has demonstrated in the past a solid track record of acquisitions that have accelerated topline and bottomline growth. We have proven our ability to successfully integrate acquisitions and improve the operational performance of the combined entities. Through our acquisition strategy, we have expanded the offering from our customer -- for our customers and increase our global footprint. We continue to explore opportunities that we would find fit to our strategy to deploy our current cash position. Turning now to our fourth quarter and annual business performance, I will now review our non-GAAP results followed by comments on the balance sheet, cash flow and end with our outlook for 2022. Our fourth quarter revenue totaled $133 million, compared to $105 million for the fourth quarter of last year and $121 million in the previous quarter, reflecting 27% and 10% year-over-year growth, respectively. Overall, organic growth this quarter was 18%, with 3% resulting from positive impact of currency exchange rates in the amount of $2.5 million. Looking at the geographical breakdown of our revenues, North America accounted for 53% of total revenues, Israel 38%, Europe 6% and APAC and the rest of the world accounted for 3% of our annual and fourth quarter revenues. During the fourth quarter, North America grew by 37% year-over-year, of which 70% organically. Israel grew by 25% year-over-year, of which 70% organically, while being positively impacted by the devaluation of the U.S. dollar versus the new Israeli shekel in the amount of $2.9 million accounting for 28% of Israel region’s growth. For the 12-month period, our revenues in North America grew by 43% year-over-year, of which 50% organically and mainly attributed to our operations with CVS. During 2021, CVS accounted for 14% of our overall revenues, compared to 12% in 2020. Israel grew during 2021 by 21% year-over-year or 15.1% on a constant currency basis, of which 58% organically. Turning now to profitability, our non-GAAP gross profit for the fourth quarter of 2021 was $38.7 million, up approximately 19.2%, compared to $32.5 million in the same period of the previous years. Our non-GAAP gross margin for the fourth quarter of 2021 decreased 200 basis points to 29.1%, compared to 31.1% in the same period last year and up 80 basis points compared to previous quarter. Our non-GAAP gross margin for the 12-month period of 2021 decrease by 230 basis points to 29%, compared to 31.3% in the previous years. The decreasing of gross margin is mainly attributable to; one, the change of our revenue mix related to our software solutions compared to our professional services, accounting for approximately half of the decrease in gross margin; and two, the increase in employee payroll costs due to increased demand for digital, cloud, data and cost system professional experts, which lower the weighted average professional service gross margins to 20% in 2021, compared to 21.3% in 2020. The breakdown of the revenue mix for the 12-month period of 2021 was approximately 19% related to our software solution and 81% related to our professional services. This compared to 23% related to our software and 77% related to our professional services in 2020 as a whole. The increase in the percentage of our professional services due to the continued strong demand for our professional experts driving our professional service revenue stream and the addition of Enable IT acquired during the second quarter of 2021 to our professional service business segments contributing $90 million to our topline this year. Despite a significant change in the mix of our revenues between software solution and professional services, the breakdown of our gross profit mix for the 12 months period of 2021 remained stable, as approximately 45% of our gross profit related to our software solution and 55% related to our professional services in 2021 as a whole, compared to 47% related to our software and 53% related to our professional services in 2020. Moving to operational costs, R&D expenses on a non-GAAP basis in the fourth quarter totaled $3 million, compared to $3.1 million in the same quarter of last year and $3 million in the previous quarter. Our non-GAAP operating income for the fourth quarter increased 29.5% to $19.8 million, compared to $15.3 million in the same period last year. This reflects an operating margin of 14.9% for the fourth quarter, compared to 14.6% in the same period of the previous year and 13.6% in the third quarter of 2021. Our non-GAAP operating income for the year increased 27% to $66.8 million, compared to $52.6 million in the period -- in the prior year. This reflects an operating margin of 13.9% for the year, compared to 14.2% in the prior year. Our non-GAAP tax expenses for the year totaled $11.3 million, compared to $8.8 million in the previous year. Our effective tax rate for the 12-month period was 18% and 17%, respectively, for the prior year. We expect our effective tax rate in 2022 to be in the range of 19$ to 20%. Our non-GAAP net income for the fourth quarter increased 22.5% to $12.6 million or $0.26 per fully diluted share, compared to $10.3 million or $0.21 per fully diluted share in the same period last year. Our non-GAAP net income for the year increased 23.5% to $46 million or $0.94 per fully diluted share, compared to $7 -- $37.2 million or $0.76 per fully diluted share in 2020. Diluted earnings per share for the year reached $0.94, up approximately 24% or 74% in 2022. Turning now to the balance sheet. As of December 31, 2021, our cash and cash equivalents, short- and long-term bank deposit and marketable securities amounted to approximately $97 million, a decrease of $3 million from the prior quarter. Our total financial debt as of December 31, 2021 amounted to $37 million, compared to $43 million in the previous quarter. In our press release issued today, we announced that Magic Software Enterprises Board of Directors has declared the semiannual cash dividend in the amount of $21.06 per share and in the aggregate amount of approximately $10.6 million for the second half of 2021, which together with the dividend distributed for the first half of 2021 in an amount of approximately $11.5 million reflects 75% of our net income and 48% of our non-GAAP net income for the year. From a cash flow perspective, we generated $40.5 million from operating activities for the year, compared to $52.3 million in 2020. The decrease in our cash flow from operating activity was mainly attributable to the increase of our working capital resulting from our topline growth in 2021. I would like to call -- to turn now to our guidance for 2022. As we are witnessing a healthy demand and developing a growing pipeline to deliver continued growth in 2022, we anticipate revenue in the range of between $535 million to $545 million, reflecting annual growth of 11.5% to 13.5%. In summary, this was a strong and -- strong challenging and overall exceptional year of execution on many fronts and we want to congratulate the Magic global team for their outstanding work in 2021. The results we delivered show that our strategy is working and that by focusing on our investment to deliver profitable growth, we can significantly enhance shareholder value. With approximately 3,700 talented employees spread globally, compared to 3,000 at the end of 2020 in our both -- broad portfolio of solutions supported by proprietary software, we have all the tools in place to help our clients reach major milestones in their digital transformation projects and for continued growth. With that, I will turn over -- I will turn the call over to Operator for questions.

Thank you. The first question is from Chris Reimer of Barclays. Please go ahead.

Hi. Thanks for taking my questions and congratulations on the strong results. Just touching on the revenue guidance, I was wondering if you could give us some more color on where you see the growth coming from, you mentioned strong pipeline, but could you give us some color on what verticals you’re seeing that come from and in terms of -- how you feel the company’s positioned in terms of leveraging current customers versus acquiring new customers?

In terms of the verticals, we are very strong and we are very fond on the banking industry, on healthcare, on the high-tech and startups, which by the way, will somewhat improve during 2020 with the COVID situation. We saw recuperation during 2021 and we still see significant demand in 2022. This is in terms of the markets that we operate in. In terms of existing customers versus acquired new customers, 80% of our revenues are normally generated by our existing, a long-term relationship with our customers, seeing us as their preferred vendor of choice to all of their transformation -- digital transformation journey.

Hello.

Hello.

Yeah.

That is the end of the answer for the question.

Hello.

Yes. We can hear you.

Yeah. I didn’t hear the end of the question -- the answer.

We are saying that 80% of our business is relying on our existing relationship with our customers and 20% are resulting from -- every year are resulting from new customers.

Okay. And just touching on the employee levels, you mentioned 3,700? I think that’s up from last year even. But how do you feel about your staffing levels and are you seeing higher levels of attrition?

We definitely see higher levels of attrition. Fortunate enough, we are dealing with that better than what we hear from our colleagues in different companies. But, yes, it’s a struggle. It’s white hair for, yeah, in our business, especially from startups, unicorns and these kinds of guys that are not measured on their bottomline, they are paying like a lot of money, a lot way more than what we are paying. In some way we are managing it, but, yes, it is a struggle.

Okay. Thanks for that. That’s it for me.

There are no further questions at this -- the next question is from Maggie Nolan of William Blair. Please go ahead. Ted Starck-King: Hey. This is Ted on for Maggie. Thanks for taking our question. I want to ask about the guidance. How much conservatism have you included in guidance? In the past, you’ve talked about 10% to 12% growth being kind of the long-term guidance, it sounded like the fourth quarter you are exiting more 18%. So just curious how much conservatism you’ve embedded within the guidance?

Let’s put it this way. I would say, we are usually rather conservative. Taking into account what’s going on right now in Ukraine and Russia, we do have operations in both sides. So one of them is not working currently, the other one is supposed to suffer from sanctions. So, yes, we are quite conservative. Ted Starck-King: Got you. And can you maybe quantify that for us or can you provide us a framework for how much of a drag you are maybe seeing from operations in those two countries, in terms of how many employees you have and just maybe current level of utilization in the countries? Thank you.

In Russia, again, we spoke by the way with all of the customers that are currently engaged with our -- to start from Russia with our Russian employees, all of our agreements are signed between either Israeli or U.S. or European entity, there is no direct link anyway between client -- business link between the client and the interaction entity besides the fact that the actual program it will develop is situated in Russia. Today we have around 200 people in Russia, again, we didn’t hear any of our customers and we spoke with all of them once this whole scenario started, nobody is pushing back on working with our team. If we will be in a situation where there will be some sanctions, we can always try and relocate a necessary amount of people from Russia either to Europe or even to Israel in order to continue the operation. In Ukraine, we are currently having around 100 employees. As we said, it’s not a material site for us. It’s not a material site in terms of size, something around $6 million a year. Currently, as Guy mentioned, the operation is totally ceased for the last few days and we will see how things are evolving. But we can replace -- obviously, we can replace most of the service or some of the service that we are guide -- that we are providing our clients not via our Ukraine operation but rather other -- via other sites.

We also moved our traffic, our internet connectivity from Russia directly to Israel instead of Europe. So any sanctions from that point can be overcome. Ted Starck-King: Got you. That’s helpful. It just maybe misheard. You said your operations have ceased in Ukraine, is that correct?

Yeah. Currently yes.

Yeah. Ted Starck-King: Okay. And then maybe switching gears here, I wanted to talk about maybe just kind of the revenue mix between software and services, and just what’s contemplated your full year guidance and how you expect that to impact gross margins?

Basically, over the last year, we saw a 10% increase in software activity versus a 35% increase in our professional services, which was 50% generated from M&A and 50% from organic activity. Despite the fact that our software is significantly smaller in size than our professional services, we see hopefully this growth that we saw an improvement in our operating margin from 21% in 2020 to 25% in operating margin in 2021. This allowed us, by the way, in opposite on the professional service side our operating margin declined from 21% to 20%. Not material but still a certain decline. This mixture -- this -- the benefit that we got from improvement -- an improve activity in our software side versus on a professional service manager allows us to continue to maintain the 14% operating margins that we show over the last five years and -- or six years. Moving forward, we expect this guidance or this behavior to continue to next year. We anticipate our gross margin to remain at around 29% and our operating margins to remain at around 14% plus. Ted Starck-King: Okay. That’s very helpful. And then maybe just kind of circling back to the attrition commentary, so I understand the high -- I have seen higher level of attrition, maybe can you just touch on the, what you have seen in terms of the attrition trends over the last couple quarters and maybe even just here into January and February of 2022 you’re seeing?

So, I would say that, in most cases, people are getting offers from in all kinds of startups or unicorns that you -- we basically cannot compete. It’s not that much in our case, but still it’s not convenient for us. Same we see it everywhere, we see it in even in India, we see it definitely in Israel, to some extent in the states. I think during January, February 2022, I cannot say, it stopped completely, but there is a slowdown, so we feel it less in 2022. That’s where we stand. Ted Starck-King: Okay. Great. Thanks for that caller. And then maybe just last question for me here. So, housekeeping, what was the organic growth embedded in kind of the full year 2022 guidance? And then what are you seeing in terms of just the M&A pipeline? Thank you.

What we -- the guidance for 22 is just the organic part. We didn’t include any M&A, because as you know, M&A is like either one of zero. It’s happening or not. So we cannot -- we didn’t want to put it as part of the guidance. We’ve put only the organic part. Ted Starck-King: All right. Great. Thanks for taking my questions.

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

Yes. Thank you, everyone, for joining another good quarter of Magic Software. We definitely hope to bring you some more good news in the near future and see you on our next quarterly conference. Thank you.

Thank you. This concludes the Magic Software Enterprises Ltd. fourth quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.