The share price of Magic Software Enterprises (TASE: MGIC; Nasdaq: MGIC) fell by 19.8% yesterday and by a further 1.84% today after the company reported disappointing preliminary third quarter results, and warned that the fourth quarter too would be weaker than expected. The company, which provides application development and business integration solutions, said that third quarter revenue would be $129.3 million, which compares with previous guidance of $142.4 million to $143.1 million. Parent company Formula Systems, which holds 46% of Magic, fell 8.4% yesterday and 1.91% today.
Magic Software now expects fourth quarter revenue to be in the range of $115 million to $125 million; the consensus analysts’ estimate was $149 million. This means that Magic’s revenue for 2023 will be around $529 million, 6.6% less than in 2022, whereas the market expected revenue growth of 1.4%.
"During the latter half of the third quarter of 2023, we experienced a substantial and unexpected decline in demand for our software services from several of our important US-based blue-chip customers which, without any advance notification, decided to immediately suspend active time and materials based projects. This reduced demand had a negative impact on our third quarter revenues and will also impact partially our fourth quarter top line", said Magic CEO Guy Bernstein
"As a result, third quarter revenue will be below the low end of the prior guidance range. Despite this unexpected decline in demand, it did not have a material impact on our profitability, and we expect our non-GAAP operating margin for the third quarter to be approximately 13.2%, which mimics such margin for the first half of 2023," Bernstein said.
200 employees mobilized
Besides the decline in demand, Magic reported that the outbreak of war in Israel on October 7 had led to about 200 of its employees being drafted into the IDF reserves, and therefore unavailable for work. At the end of 2022, the company employed 1,415 people in Israel, which means that the employees mobilized represent 14% of its Israeli workforce and 4.8% of its total workforce.
The company also states that its business is very exposed to shekel exchange rates, and was hard hit by the depreciation of the shekel against the US dollar, "which has caused further deterioration to the Company’s fourth quarter results of operations," the company said, and concluded, "All of the foregoing factors, together with the uncertain global macroeconomic environment, have caused the Company to anticipate significantly lower revenues."
Non-GAAP operating income is now expected to be approximately $17.1 million in the third quarter of 2023, approximately 13.2% as a percentage of revenue, similar to the result fort the first half of 2023. For the first half, Magic reported revenue of $280 million, 1.6% more than in the first half of 2022, and posted a net profit of $21.4 million on a GAAP basis and $26.4 million on a non-GAAP basis.
Magic has a market cap of $419 million, after a 45% decline in its share price so far this year.
Published by Globes, Israel business news - en.globes.co.il - on November 9, 2023.
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