Magic Software Enterprises Ltd. (NASDAQ:MGIC) Q4 2024 Earnings Conference Call March 12, 2025 11:00 AM ET Company Participants Asaf Berenstin - Chief Financial Officer Guy Bernstein - Chief Executive Officer Yuval Lavi - Chief Technology Officer Conference Call Participants Maggie Nolan - William Blair Operator Ladies and gentlemen, thank you for standing by. Welcome to the Magic Software Enterprises 2024 Fourth Quarter and Full Year Financial Results Conference Call. Magic's fourth quarter 2024 earnings re ...

Core Insights - Magic Software Enterprises Ltd. reported strong financial results for Q4 and the full year 2024, highlighting growth in revenues and net income, alongside a strategic merger with Matrix I.T [1][13]. Financial Highlights for Q4 2024 - Revenues increased by 13.6% to $142.6 million compared to $125.5 million in Q4 2023 [2][8]. - Gross profit rose by 13.5% to $42.0 million, with a gross margin of 29.4% [2][8]. - Operating income surged by 28.6% to $16.7 million, resulting in an operating margin of 11.7% [2][8]. - Net income attributable to shareholders increased by 25.2% to $10.6 million, translating to a diluted EPS of $0.22 [2][8]. Financial Highlights for Full Year 2024 - Total revenues for the year grew by 3.3% to $552.5 million from $535.1 million in 2023 [6][7]. - Gross profit for the year was $157.2 million, with a gross margin of 28.4% [6][14]. - Operating income increased by 7.2% to $61.2 million, with an operating margin of 11.1% [6][14]. - Net income attributable to shareholders slightly decreased by 0.4% to $36.9 million, maintaining a diluted EPS of $0.75 [6][14]. Dividend Declaration - The board declared a semi-annual cash dividend of $0.327 per share, totaling approximately $16.1 million, reflecting about 75% of distributable profits for the year [9][10]. Strategic Developments - The company announced a Memorandum of Understanding for a merger with Matrix I.T, which is expected to create a combined entity valued at approximately $2.1 billion [13][15]. - The merger aims to enhance capabilities and drive innovation, positioning the new entity among the largest publicly traded IT services companies in the U.S. and Europe [13][15]. 2025 Revenue Guidance - Magic Software provided revenue guidance for 2025, projecting between $593 million and $603 million, indicating an annual growth of 7.3% to 9.1% compared to the previous year [14].

Financial Performance - Revenues for Q4 2024 increased by 13.6% to $142.6 million compared to $125.5 million in Q4 2023[2] - Operating income for Q4 2024 rose by 28.6% to $16.7 million, up from $13.0 million in the same period last year[3] - Net income attributable to shareholders for Q4 2024 increased by 25.2% to $10.6 million, or $0.22 per diluted share, compared to $8.5 million, or $0.17 per diluted share, in Q4 2023[3] - For the full year 2024, revenues increased by 3.3% to $552.5 million compared to $535.1 million in 2023[4] - Net income for 2024 was $43,291,000, a 1.86% increase from $42,502,000 in 2023[30] Cash Flow and Assets - Cash flow from operating activities for the year ended December 31, 2024, amounted to $74.7 million, up from $69.0 million in 2023[9] - As of December 31, 2024, Magic's cash, cash equivalents, and short bank deposits amounted to $112.8 million[9] - Total current assets increased to $276,199 thousand in Q4 2024, compared to $256,625 thousand in Q4 2023[29] - Total assets as of December 31, 2024, were $540,331 thousand, up from $522,406 thousand in 2023[29] - Cash and cash equivalents at the end of the period rose to $112,779,000, compared to $105,943,000 at the beginning of the period[30] Dividends and Shareholder Returns - The board declared a semi-annual cash dividend of 32.7 cents per share, totaling approximately $16.1 million for the second half of 2024[6] - Dividend paid to Magic's shareholders was $10,016,000, down from $30,798,000 in 2023[30] Strategic Initiatives - The company announced a strategic merger with Matrix I.T, which is expected to create a combined entity with a market value of $2.1 billion[11] - The combined entity is projected to operate in approximately 50 countries and serve around 6,000 active clients[12] Guidance and Projections - Magic Software is providing 2025 annual revenue guidance of between $593 million and $603 million, reflecting an annual growth of 7.3% to 9.1% compared to the prior year[9] Expenses and Financial Health - Research and development expenses for Q4 2024 were $3,988 thousand, up from $2,703 thousand in Q4 2023, indicating a focus on innovation[26] - Total equity increased to $301,069 thousand in Q4 2024, compared to $290,944 thousand in Q4 2023, reflecting strong financial health[29] - Non-GAAP net income attributable to Magic's shareholders for the year 2024 was $45,650 thousand, down from $48,405 thousand in 2023[27] Other Financial Metrics - Gross profit for Q4 2024 was $43,219 thousand, representing a gross margin of 30.3%, compared to 30.8% in Q4 2023[28] - Operating income for Q4 2024 increased to $18,753 thousand, with an operating margin of 13.2%, up from 14.1% in Q4 2023[28] - Net income attributable to Magic's shareholders for Q4 2024 was $11,540 thousand, accounting for 8.1% of revenues, compared to 9.2% in Q4 2023[28] - Basic and diluted earnings per share for Q4 2024 were $0.24, unchanged from Q4 2023[28] Changes in Cash Flow Activities - Payments for business acquisitions net of cash acquired totaled $12,507,000, a decrease from $14,244,000 in 2023[30] - Net cash used in investing activities decreased to $22,409,000 from $27,616,000 in the previous year[30] - Repayment of long-term loans from banks and others increased to $33,695,000, compared to $20,994,000 in the previous year[30] - Increase in cash and cash equivalents for the period was $6,836,000, down from $22,881,000 in 2023[30] - Trade receivables saw a decrease of $4,339,000, contrasting with an increase of $18,426,000 in the previous year[30] - Deferred revenues increased to $7,609,000, compared to $3,779,000 in 2023[30]

Core Viewpoint - Magic Software Enterprises Ltd. has signed a Memorandum of Understanding (MOU) for a proposed merger with Matrix I.T Ltd., which will result in Matrix acquiring the entire share capital of Magic, making it a wholly-owned subsidiary [2][14]. Company Overview - Magic Software Enterprises Ltd. is a global provider of IT consulting services and application development platforms, while Matrix I.T Ltd. is a leading public Israeli IT services company [2][23]. - The combined entity is expected to have an aggregate market value of $2.1 billion (approximately 7.7 billion ILS) and operate in around 50 countries, serving approximately 6,000 active clients with over 15,000 employees [4][6]. Merger Structure and Consideration - The merger will be executed as a reverse triangular merger, with Magic's shareholders receiving Matrix's ordinary shares based on a valuation exchange ratio of 31.125% for Magic and 68.875% for Matrix [14][12]. - The merger consideration will be based on the relative valuations of both companies, and the transaction is expected to be accounted for using the pooling of interest method, avoiding the recognition of original goodwill [14][10]. Strategic Rationale - The merger is seen as a strategic opportunity to enhance market position, expand capabilities, and create operational synergies [5][10]. - Key benefits include enhanced scale, geographic complementarity, and an expanded product and service portfolio, allowing for cross-selling opportunities [5][13]. Financial Profile - The combined entity is projected to generate revenues of $2.1 billion, with a gross profit of approximately $382 million and a net income attributable to non-controlling interests of about $110.6 million [6][4]. - The merger is expected to strengthen the financial profile and growth potential of the combined company, enabling it to invest in innovation and strategic growth initiatives [10][13]. Regulatory and Approval Process - The completion of the merger is subject to negotiations, due diligence, and the signing of a definitive agreement, along with obtaining necessary regulatory approvals [16][20]. - The merger will require the approval of the general meetings of both companies, as well as compliance with Israeli law regarding minority shareholders [20][16].

Core Viewpoint - Magic Software's share price has increased approximately 30% since the beginning of 2024, reaching just under $13 per share, suggesting potential missed investment opportunities for prospective investors [1]. Group 1 - The company's stock performance indicates a significant rise, which may lead to speculation about future growth potential [1].

Core Insights - MGIC specializes in insuring low downpayment mortgages, defined as those with downpayments of less than 20% [1] - The primary risk of default is typically borne by Fannie Mae or Freddie Mac, who are the insured parties in these transactions [1] Company Overview - MGIC operates in the mortgage insurance sector, focusing on mitigating risks associated with low downpayment mortgages [1] - The company plays a crucial role in the housing finance system by providing insurance that allows borrowers to secure loans with lower initial payments [1] Industry Context - The mortgage insurance industry is significantly influenced by the policies and performance of government-sponsored enterprises like Fannie Mae and Freddie Mac, which take on the primary default risk [1] - The demand for low downpayment mortgages is likely to remain strong, given ongoing trends in housing affordability and access to homeownership [1]

Core Viewpoint - MGIC Investment Corporation (MTG) reported strong fourth-quarter 2024 results, with operating net income per share of 72 cents, exceeding estimates and showing a year-over-year increase of 10.2% [1][2]. Financial Performance - Total operating revenues reached $303.1 million, a 6.4% increase year over year, although it fell short of consensus estimates by 1.1% [2]. - Insurance in force rose by 0.6% year over year to $295.4 billion, surpassing the Zacks Consensus Estimate of $294 billion [3]. - Net premiums written increased by 5.9% year over year to $232.1 million, exceeding the estimate of $231.1 million [3]. - Net investment income grew by 6.1% year over year to $61.3 million, though it was below both the estimate of $66.9 million and the Zacks Consensus Estimate of $65 million [4]. - New insurance written surged by 45.9% year over year to $15.9 billion [4]. - Total losses and expenses increased by 23.3% year over year to $66.7 million [4]. Operational Metrics - The loss ratio for the quarter was 3.6%, compared to negative 4.2% in the fourth quarter of 2023 [5]. - The underwriting expense ratio improved by 380 basis points year over year to 20.8 [5]. - Persistency, the percentage of insurance remaining in force from one year prior, decreased to 84.8% from 86.1% in the previous year [4]. Capital Management - The company repurchased 7.8 million shares for $193.3 million in the fourth quarter and paid $200 million in dividends to the holding company [7]. - An additional 3.5 million shares were repurchased in January for $85.5 million [7]. - A dividend of 13 cents per share was declared to be paid on March 5, 2025, to shareholders of record as of February 18, 2025 [8]. Financial Position - Book value per share increased by 11.9% year over year to $20.82 as of December 31, 2024 [6]. - Shareholder equity rose to $5.3 billion, up 4.3% from the end of 2023 [6]. - PMIERs Available Assets totaled $6 billion, exceeding the Minimum Required Assets by $2.5 billion as of September 30, 2024 [6]. - Total assets increased by 2.1% year over year to $6.7 billion, while debt rose slightly to $644 million [6].

Core Insights - MGIC Investment Corporation reported strong financial results for Q4 2024, with net income of $184.7 million or $0.72 per diluted share, and full-year net income of $763.0 million or $2.89 per diluted share [1][3][19] - The company emphasized its commitment to returning capital to shareholders, having paid a dividend of $0.13 per common share and repurchased 7.8 million shares for $193.3 million [2][6] Financial Performance - Q4 2024 net income was $184.7 million, compared to $200.0 million in Q3 2024 and $184.5 million in Q4 2023 [3] - Adjusted net operating income for Q4 2024 was $184.5 million, consistent with Q4 2023 but down from $200.7 million in Q3 2024 [3] - Full-year 2024 adjusted net operating income was $768.5 million, up from $752.5 million in 2023 [1][3] Key Metrics - New insurance written (NIW) for Q4 2024 was $15.9 billion, down from $17.2 billion in Q3 2024 and up from $10.9 billion in Q4 2023 [3][21] - Net premiums earned in Q4 2024 were $241.3 million, compared to $243.3 million in Q3 2024 and $226.4 million in Q4 2023 [3] - The annual persistency rate decreased to 84.8% in Q4 2024 from 85.3% in Q3 2024 and 86.1% in Q4 2023 [3][21] Capital Management - The company maintained PMIERs available assets of $5.8 billion as of December 31, 2024, with excess of $2.2 billion [3] - MGIC paid a total of $400 million in dividends to the holding company [6] - The company executed a 40% quota share transaction with unaffiliated reinsurers covering most of its 2025 and 2026 NIW [6] Delinquency and Losses - Primary delinquency inventory increased to 26,791 loans in Q4 2024 from 25,089 in Q3 2024 [3][24] - The primary IIF delinquency rate rose to 2.40% in Q4 2024 from 2.24% in Q3 2024 [3][24] - Losses incurred, net for Q4 2024 were $8.7 million, compared to a loss of $9.8 million in Q3 2024 [3][19]

Core Viewpoint - MGIC Investment Corporation (MTG) is experiencing strong investor confidence, with shares trading near a 52-week high, indicating potential for further price appreciation [1] Price Performance - MTG shares have increased by 23% over the past year, outperforming the industry growth of 11.1% [2] - The Finance sector and S&P 500 composite returned 24.5% and 24.8%, respectively, during the same period [2] Earnings Performance - The company has consistently beaten earnings estimates in the last four quarters, with an average beat of 16.25% [4] Valuation - MGIC Investment shares are trading at a price-to-book multiple of 1.18, which is lower than the industry average of 2.37 [5] - The insurer has a Value Score of B, suggesting it may be wise to take a position before valuation expands [5] Return on Capital - Return on invested capital (ROIC) has been increasing, currently at 11.4%, significantly higher than the industry average of 2.3% [6] Growth Drivers - The company anticipates strong premium writing due to a robust purchase market and potential share gains from the Federal Housing Administration [7] - The insurance-in-force portfolio is expected to grow, supported by new business and increasing annual persistency [8] Claims and Financial Health - MTG has seen a decline in claim filings, which will strengthen its balance sheet and improve its financial profile [9] - The company is enhancing its capital position through capital contributions and reinsurance transactions [10] Future Revenue Estimates - The Zacks Consensus Estimate for MGIC Investment's 2025 revenues indicates a 2.9% increase from the 2024 estimate [11] Conclusion - Improving housing market fundamentals, higher premiums, and outstanding credit quality are expected to drive growth for MGIC Investment [12] - The company recently increased its quarterly dividend by 13%, marking four consecutive years of dividend increases at a compound annual growth rate of 21% [13]

Group 1 - MGIC Investment Corporation plans to release its fourth quarter 2024 financial results on February 3, 2025, after market close [1] - A conference call/webcast is scheduled for February 4, 2025, at 10:00 a.m. Eastern Time to discuss the quarterly results [1] - Individuals can register for the call to receive dial-in information and are encouraged to join at least 10 minutes early [2] Group 2 - MGIC, the principal subsidiary of MGIC Investment Corporation, provides private mortgage insurance to lenders across the United States [3] - The company aims to facilitate homeownership by making low-down-payment mortgages more accessible [3] - MGIC intends to continue releasing important information through its corporate website and encourages investors to enroll for email alerts [4]