Magic Software Boosts Sales and Profits in Q2

Published: August 18, 2008

by Timothy Prickett Morgan

Application tool and integration software provider Magic Software Enterprises continued to make progress on riding up the wave of legacy application modernization out there in the world, and reported record sales and profits in its second quarter ended June 30.

Magic Software is based in Or Yehuda, Israel, but does a lot of its business in North America and Europe--particularly in OS/400, i5/OS, and i shops. So its own rise and fall is something of a barometer, loosely speaking, of what is going on out there in AS/400 land. Being a public company, as Magic Software is, allows us to see how and what it is doing, and this is one of the few publicly traded tool vendors in the i ecosystem that we can look at quarter to quarter, year on year. To get a real sense of the i market, of course, would require a more complete sense of the financials of other tool and application vendors, many of whom are privately held and very secretive of their results.

For the three months ended in June, Magic Software posted sales just a smidgen over $16 million, an increase of 12.5 percent over the second quarter of 2007. By keeping costs in check--in fact, by cutting them by 1.5 percent--while boosting sales, the company was able to expand gross profits by 25.5 percent in Q2. And because it has done a lot of development for its iBOLT and eDeveloper tools already, software development costs dropped by 19.6 percent in Q2. The upshot is that Magic Software brought $1.67 million to the bottom line in the quarter, more than twice what it did a year ago. And those profits from a year ago were boosted by $536,000 in income derived from the sale of a business that it sold off.

For the first six months, Magic Software's sales are up 10.7 percent to $31.1 million and net income is down 5.7 percent to $1.72 million. However, in the year ago six-month period, Magic Software's net income was bolstered by nearly $1.1 million from that discontinued business unit, which was called Advanced Answers On Demand, or AAOD. That unit has nothing to do with software development or application integration, even though the code behind the service was created using eDeveloper to run on Windows servers. At the end of 2007, Magic Software sold the AAOD unit to Fortissimo Capital for $17 million. AAOD is, however, a reseller of eDeveloper, and the sale of this business gave Magic Software a net $9 million to throw into the bank, which gave it a cash hoard of $30 million as 2008 got underway. Now, after Q2, Magic Software has $34 million in the bank, and could do strategic acquisitions in its application development or integration areas, if it is so inclined.

Anyway, back to Q2. "The second quarter had record financial results and significant strategic momentum for our company," explained Guy Bernstein, acting chairman at Magic Software. "Our performance is the outcome of the changes that we have put into place during the past several months. Furthermore, for the first time in many years, we are launching a technology that has a significant competitive edge. I believe that we have the potential to regain our status as a dominant player in the application platform and integration markets."

Wall Street is starting to come around to the idea that Magic Software is on the rebound. The company's stock has been trending down since early 2007 after a pretty impressive run up in 2006 thanks to a partnership with IBM that the Street seemed to overreact to, in my opinion. Anyway, Magic Software's shares are heading back up and were at $2 a pop as we went to press last week, giving the company a market capitalization of $63.3 million.

That may not be close to the near-term high of just under $3 a share where Magic Software's shares were trading in late 2006 and early 2007, and it is pretty far from the $4 a pop the company's share sold for in mid-2004. It is interesting to remember that during the dot-com boom, Magic Software shares sold for above $30 a pop. As is the case for all IT companies excepting perhaps Google--whose day is coming as sure as the earth is round--those days of crazy stock prices are gone for Magic Software, and even now, the company has a price-to-earnings ratio of 88, which is pretty high. IBM has a P/E ratio of 15.6 and Microsoft is at 14.9. Even Google has a P/E ratio of only 32.9.

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