Magic Software Continues Financial Turnaround in Q4

Published: March 3, 2008

by Timothy Prickett Morgan

System i application tool maker Magic Software Enterprises is continuing to get itself on a firmer financial footing as its ramps up product and services sales. Sales were up smartly in the fourth quarter, the company swung to a solid profit thanks to its sale of an application subsidiary.

In the fourth quarter ended December 31, Magic Software booked sales of $15.7 million, an increase of 13.8 percent from the year-ago period. In the fourth quarter of last year, Magic Software had an operating loss of $500,000 and managed to pull itself up to breakeven after a major restructuring as the quarter began. This time around, the company had an operating profit of $200,000--not including the discontinued operations from its Advanced Answers on Demand subsidiary, which it sold to Fortissimo Capital for $17 million in the quarter. (AAOD's results have been classified as discontinued operations and are not in the GAAP results.) Magic Software booked a one-time capital gain on the sale of $9.3 million, and with some other positive factors in its financials, that boosted net earnings to $10 million in the quarter, or 32 cents per share.

The company said in its financial statements that software license sales increased in the quarter, and so did OEM sales of its products. The company said that customers were upgrading to the eDeveloper V10 tools and that it was getting some initial success with companies wishing to deploy their applications under a software-as-a-service (SaaS) model using its tools. Magic Software also singled out its SAP Business One channel partners for kudos in the quarter, who use the company's tools to integrate with the application suite.

As part of the AAOD sale to Fortissimo Capital, Magic Software has inked a deal with the private equity group for a three-year licensing agreement that allows the AAOD unit to resell Magic Software's complete software catalog. The AAOD unit posted sales of $3.5 million in the quarter, which are not included in the company's GAAP results. AAOD provides application software for the senior healthcare industry, and is located in Fort Lauderdale, Florida. So looking ahead, AAOD should contribute to Magic Software's financials.

For the full 2007 year, Magic Software had sales of $58.4 million, up 11 percent. (Again, this figure does not include sales from the AAOD subsidiary.) The company had an operating profit of $1.3 million, which was a lot better than the $6.7 million operating loss it booked in 2006. Thanks in large part to the sale of AAOD, Magic Software had a net income for 2007 of $12.6 million (40 cents per share), compared to a net loss of $5 million (16 cents per share) last year.

"We are pleased to report a strong fourth quarter in line with our plan for returning the company to consistent growth and profitability," explained Eitan Naor, the president and chief executive officer that Magic Software brought in last year as part of its restructuring. "Working systematically, we have reorganized the company in line with our strategic objectives, strengthened and focused our product lines, and enhanced our marketing channels. We are pleased that our revenues from license sales continue to ramp up, a reflection of an increased upgrade rate among our existing customers as well as the growth of our partner activities. Our divestiture of AAOD is an important step that allows us to focus on core businesses while contributing significant capital. In parallel, the effects of our efficiency program have begun to take hold, enabling us to improve our profitability."

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