Magic Software Boosts Sales, But Profits Under Pressure in Q1

Published: May 27, 2008

by Timothy Prickett Morgan

The impending announcement of its new Rich Internet Application Platform were not to blame for earnings pressure at Magic Software Enterprises in the first quarter ended March 31, but from the numbers, it looks like the effects of currency exchange rates have pushed up sales and administrative costs relative to sales levels. This is what happens when IT companies sell into the United States when the dollar is dropping in value; the reverse happens, of course, when U.S.-based IT companies do a lot of sales overseas but have their administrative costs booked in local dollars.

Anyway, in the first quarter, application development tool maker Magic Software posted sales of $15.1 million, up 9 percent, and managed to hold its cost of sales essentially flat at $6.8 million. Gross profits at the company rose by 17.3 percent to $8.3 million, and the company was actually able to reduce research and development costs by 10.5 percent to $560,000 in the quarter, presumably because the work for the new product, which launched late last week and which we will cover in our Four Hundred Stuff newsletter, was largely done. But SG&A expenses (presumably relating to expenses back at the home office in Israel) rose by 31.6 percent to $7.9 million. And that pushed the Magic Software to an operating loss of $136,000. After booking some other income and paying taxes, the company had $52,000 fall to the bottom line, which is a lot less than the $1 million in black ink the company had in the year-ago quarter.

Still, Magic's new chairman, Guy Bernstein, was obviously pretty pleased that the company it getting a new product out the door, has its iBOLT product up on the Salesforce.com AppExchange, and has more than doubled cash on hand to $29.1 million. "Our first quarter results represent a solid beginning for 2008," said Bernstein in a statement accompanying the financial results. "Our divestment of AAOD in the fourth quarter has strengthened our cash position significantly while allowing us to increase our focus on core activities." Magic Software sold the Advanced Answers On Demand unit at the end of 2007, which is where the extra cash is coming from.

Bernstein is in charge of the company after president and chief executive officer, Eitan Naor, who was hired a little more than a year ago to run Magic Software, was removed from those positions at the end of April. Naor has been appealing to the Tel Aviv Labor Court to be reinstated in his positions. (We covered this altercation two weeks ago in Four Hundred Stuff). The outcome of the last appeal Naor made is not yet clear.

Magic Software is traded on the NASDAQ exchange, which is why we know each quarter what its sales and profits are, and is itself a subsidiary of Formula Systems, which is in turn part of a holding company called Emblaze that is traded on the London Stock Exchange.

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