Magic Software Rises Despite Devaluing U.S. Dollar

August 17, 2015 Timothy Prickett Morgan

Hot on the heels of its announcement of enhancements to an in-memory data grid for its Magic xpa application development environment that will eventually support the IBM i platform, Magic Software turned in pretty good numbers in its most recent quarter despite the compressing effects of current fluctuations that are affecting all global IT suppliers.

In the second quarter ended in June, Magic said that it had increased revenues by 4.6 percent to $42.5 million. Gross profits were down 4.4 percent to $15 million, but the revenue bump was large enough to cover the gap and net income actually rose 10.2 percent to $5.3 million. For the first half of 2015, revenues are up 1.5 percent to $82.8 million; gross profits were down by 5.8 percent to $30.4 million, and this is one reason why net income was flat at $8.4 million. Magic ended the quarter with $84.2 million in cash and equivalents in the bank and has a market capitalization of just under $300 million as The Four Hundred goes to press on Friday.

For the past four years net income has remained fairly flat as revenues have climbed, and Magic has been investing the difference between the two back into the business to expand into new markets. Magic is projecting sales of between $166 million and $173 million for the full 2015 year, which would represent modest growth from the $164.3 million in sales it posted in 2014. However, if you took those projections at currency rates that prevailed in 2014, then the revenue for 2015 would have been projected to fall somewhere between $175 million and $182 million, which is a pretty nice 7 percent to 11 percent growth rate. Magic is growing, but the value of the dollar is growing a bit faster and it stings a bit–as it does for all U.S.-based IT companies or those, like Magic, that trade on a U.S. exchange and do their books in U.S. dollars.

“We are experiencing continued growth for our professional services along with solid demand for our software products, mainly reflecting organic growth,” explained Guy Bernstein, Magic’s chief executive officer, in a statement accompanying the financial results. “In fact, excluding the negative impact from currency fluctuations, we would have produced record-breaking revenues for the second quarter.”

In a conference call with Wall Street analysts, Bernstein explained some of the factors that limit growth for Magic even as it does more and more to make application development–and specifically development for mobile applications–easier. In the past, Bernstein said that customers were trying to figure out what their mobile application strategies were going to be and that was limiting uptake of products like Magic xpa. But things seem to be turning for the better as customers get their mobile acts together.

“Customers are starting to go into real projects,” said Bernstein. “I think the strategy in most cases is not clear yet, but since we provide a cross-platform, then we usually are not a barrier to go into a project with them. So we definitely see some signs of bigger projects. But we are not talking about big money.” Many times, he added, the choice of Magic xpa leads to a Magic xpi sale, which allows legacy systems to be integrated with the new cloudy apps.

About 40 percent of the company’s revenues come from product and support services, and the other 60 percent comes from professional services and other kinds of project work, according to Bernstein.

The wonder is that some private equity firm has not yet acquired Magic to add to its portfolio, considering that it can do cross-platform development in Magic xpa as well as integration with the IBM i platform (and others) with its Magic xpi (formerly iBolt) middleware. But as it turns out, Magic might be the one looking to do some acquisitions. Bernstein said that this was problematic because the valuations of companies have gone up along with the currency changes, which can make it worse depending on how you move the money around to do a deal. But Magic is looking to build out if it can. Back in February, Magic bought a 70 percent stake in an unnamed company specializing in what it called “mainframe and complex large scale environments” for an undisclosed sum. This operation will be part of its AppBuilder team, and brings 60 people to Magic with large systems expertise. It is peculiar that a public company can make such a vague announcement, but there you have it.

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