While shares of business software and application development solutions provider Magic Software’s (MGIC) stock held up relatively well on what was a terrible day for stocks, my guess is shareholders were expecting more. After all, the company’s Q4 results released this morning showed revenues for the period climbed 10.6% year-over-year to $147.1 million and grew by an impressive 16.5% excluding the negative impact of the weakening of the Israeli shekel against the U.S. dollar to a record $155.0 million. This easily exceeded the consensus estimate for $131.7 million and was driven by better-than-expected organic performance, which was responsible for more than half of this growth. Demand from North America was especially strong with revenue from the region rising 20% to a record $84.9 million. Though MGIC’s operating margin fell due to the currency headwinds and a bigger chunk of its total revenues coming from the lower-margin IT Professional Services segment, this was mostly offset by lower interest expense and tax rate. As a result, adjusted net income still rose 9.9% to $13.9 million or 28 cents per share, which was two cents above what analysts were projecting.
As for 2023, MGIC expects revenues of $585-593 million. While the $589 million midpoint falls $23.1 million short of the $612.1 million consensus view, it’s consistent with the similarly cautious forecasts provided by other IT software firms during this past earnings season, including those that reported a strong finish to 2022 like MGIC. What’s important is that this outlook still implies solid year-over-year growth of about 4% even with currency headwinds projected to cut another $15 million from the top line (without which 2023 revenues would be closer to $604 million and reflect higher growth of 7%) and is expected to be supported by the healthy demand MGIC continues to see in many of its end markets and its solid pipeline of opportunities from customers increasingly viewing the company as a preferred partner for innovative digital information initiatives, software solutions and IT services. Along with my belief that margin performance will also improve, I think earnings can grow at a faster pace that has the company meeting or beating the $1.13 per share that analyst currently expect for 2023.
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What’s more, boosted by the strong free cash flow also generated in the final quarter, MGIC entered 2023 with $87.0 million in cash and short-term bank deposits against just $51.1 million in total debt—for a net cash position of $35.9 million. A portion of this excess cash will be used to fund its recently declared semiannual dividend payment of 30 cents per share. The fact that the latter is up to the discretion of the company, represents its biggest payout to date and implies an annual yield of more than 4%, conveys the high degree of confidence MGIC has in its ability to continue delivering solid free cash flows ahead in our view. Thus, while I’m frustrated by lackluster investor response to this favorable quarterly report, I believe that the attractive combination of increasing profits, persistently strong free cash flow production, cash-rich balance sheet and generous dividends offered by MGIC’s stock is too compelling to keep it down at these depressed levels for long.