Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q2 2019 Earnings Conference Call - Final Transcript

Aug 13, 2019 • 10:00 am ET

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Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q2 2019 Earnings Conference Call - Final Transcript

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Presentation
Executive
Asaf Berenstin

7% of our annual revenues. Most of our growth in 2019 is in absolute numbers was traditionally from North America and Israel, which continued to be our strongest territories. North America accounted for 53% of our growth and Israel for 27%.

Turning now to profitability. Our non-GAAP gross profit for the second quarter of 2019 was $25.9 million, up approximately 11% compared to $23.4 million in the second quarter of last year. Non-GAAP gross margin increased to 33.7% compared to 33.4% in the second quarter of last year. The breakdown of our revenue mix for the first half of 2019 was approximately 28% related to our software solutions and 72% related to our professional services, same as 2018 as a whole. The breakdown of our gross profit mix for the first half of 2019 was approximately 52% related to our software solutions and 48% related to our professional services, compared to 54% related to software solutions and 46% related to professional services in the respective period. Our solid performance continued to be driven by the increasing demand for diverse portfolio of innovative software solutions and professional services, evidenced by a ever expanding base of new customers and strategic partnership with major organization and ecosystems.

Moving to operational cost. R&D expenses on a non-GAAP basis in the second quarter of 2019 totaled $3.1 million compared to $2.7 million in the same quarter of last year. The increase in R&D expenses related mainly to the first time consolidation of PowWow. As evidenced in many other software development companies in recent years, Magic has also been moving into development efforts to India and open a new R&D center in St. Petersburg to support its growing base of global customers. These centers are aimed to help us drive innovation and provide support for new existing projects across our product portfolio providing scale to our organization with an efficient cost structure and is critical to support our future growth.

Our non-GAAP operating income for the second quarter increased 9% to $10.7 million compared to $9.8 million in the same period last year. This reflects an operating margin of 13.9% for this quarter compared to 14% in the second quarter of 2019[Phonetic] and in the first quarter of 2019. Our operating income for the second quarter included a first time consolidation of PowWow, our recent acquisition and the creator of SmartUX, rapid low-code development platform, which was completed on April 1st. As we indicated on the announcement of the deal, PowWow is not expected to be accretive to our results during the first 12 months to 18 months following additional investment in opening new markets as well as intensive sales and marketing efforts.

Our non-GAAP tax expenses this quarter totaled $2 million compared to a tax expense of $1.6 million in the second quarter of 2018. Our effective tax rate for the first half of 2019 was approximately 18%, compared to 19% for the first half of 2018. We estimated that our effective tax rate for