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Magic Software Reports Record Revenues for Q3 2007

OR YEHUDA, Israel, November 8 /PRNewswire-FirstCall/ -- Magic Software Enterprises Ltd. (NASDAQ: MGIC), a leading provider of business integration and development technology, today announced financial results for the third quarter and nine-month period ending September 30, 2007.

OR YEHUDA, Israel, November 8 /PRNewswire-FirstCall/ — Magic Software Enterprises Ltd. (NASDAQ: MGIC), a leading provider of business integration and development technology, today announced financial results for the third quarter and nine-month period ending September 30, 2007.

Results for the Third Quarter

Revenues for the third quarter of 2007 reached a record $17.6 million, an increase of 5% compared with $16.8 in the second quarter of 2007, and 17% compared with $15.1 million in the third quarter of 2006.

On a U.S. GAAP (Generally Accepted Accounting Principles) basis, operating income for the third quarter was $1.1 million, up 10% compared with $1.0 from the second quarter of 2007, and a significant improvement compared to the $3.6 million operating loss recorded in the third quarter of 2006. GAAP net profit for the period was $0.8 million, or $0.02 per share compared to $0.8 million, or $0.03 per share, in the second quarter of 2007, and a net loss of $3.5 million, or $0.11 per share, in the third quarter of 2006.

GAAP results include amortization expense as well as non-cash charges taken for the capitalization of intangible assets and stock-based compensation.

Excluding these expenses, non-GAAP operating income for the third quarter was $1.3 million, up 44% compared with $0.9 million in the second quarter of 2007. Operating loss for the third quarter of 2006 was $3.0 million. Non-GAAP net income for the period was $0.9 million, or $0.03 per share, an increase of 29% compared with $0.7 million, or $0.02 per share, in the second quarter of 2007. Non-GAAP net loss for the third quarter of 2006 was $2.9 million, or $0.09 per share.

Reconciliation between GAAP and Non-GAAP results is summarized in the following table. For a complete reconciliation, please refer to the tables appended to this release.

(In millions of U.S. dollars, except per share data) U.S. GAAP basis Q3 2007 Q2 2007 Q3 2006 Revenues $17.6 $16.8 $15.6 Operating income $ 1.1 $ 1.0 $ (3.6) (loss) Net income (loss) $ 0.8 $ 0.8 $ (3.5) Basic EPS (loss) $0.02 $0.03 $(0.11) Non GAAP Q3 2007 Q2 2007 Q3 2006 Revenues $17.6 $16.8 $15.6 Operating income $ 1.3 $ 0.9 $ (3.0) (loss) Net income (loss) $ 0.9 $ 0.7 $ (2.9) Basic EPS (loss) $ 0.02 $0.02 $(0.09)

Results for the Nine-Month Period

Revenues for the first nine months of 2007 were $50.8 million, a 12% increase compared to $45.5 million in the first nine months of 2006.

On a U.S. GAAP basis, operating income for the nine-month period reached $3.2 million compared to an operating loss of $5.2 million in the first nine months of 2006. Net profit for the period on a GAAP basis was $2.6 million, or $0.08 per share, compared to a net loss of $5.0 million, or $0.16 per share, recorded in the first nine months of 2006.

On a non-GAAP basis, operating income for the first nine months of 2007 was $3.3 million, compared to a non-GAAP operating loss of $4.9 million in the nine month of 2006. Net income on a non-GAAP basis for the nine-month period was $2.8 million, or $0.09 per share, compared to non-GAAP net loss of $4.7 million, or $0.15 per share, for the first nine months of 2006.

Comments of Management

Commenting on the results, Eitan Naor, President and CEO of Magic Software, said, "Having reported record revenues for the third quarter together with four quarters of consecutive growth, we are ready to focus our attention on improving the Company's execution and profitability. We have recently strengthened our management team in line with our plan for building a stronger organization in 2008."

Mr. Naor continued, "During the reporting period, we continued to improve our execution, with the following achievements standing out as highlights:

– We achieved significant cross sales into our customer and partner base.

– In the IBM space, we reinforced our partner base via the addition of a significant competitive partner win in the Netherlands.

– We performed well in our target ecosystem market.

– We expanded our footprint in the JD Edwards community through the addition of new partners and new sales in the US.

– We continued to grow our SAP Business One partner base, and signed a significant deal that builds on our combined presence in the SAP and BMC communities."

Mr. Naor concluded, "We are now working on two parallel tracks: to improve our short-term results and bottom line performance, we are streamlining our operational capabilities; at the same time, we are formulating a detailed strategy for fueling our long-term growth. I look forward to reporting progress on both these fronts in the year ahead."

Non-GAAP Financial Measures

This release includes non-GAAP basic and diluted earnings per share and other non-GAAP financial measures, including cost of service, research and development, selling, general and administrative, operating income, income taxes and net income. These non-GAAP measures exclude the following items:

– Amortization of purchased intangible assets;

– In-process research and development capitalization and;

– Equity-based compensation expense.

Magic's management believes that the presentation of non-GAAP measures provide useful information to investors and management regarding financial and business trends relating to the company's financial condition and results of operations as well as the net amount of cash generated by its business operations after taking into account capital spending required to maintain or expand the business.

For its internal budgeting process and in monitoring the results of the business, Magic's management uses financial statements that do not include amortization of purchased intangible assets, in-process research and development capitalization and equity-based compensation expense. Magic's management also uses the foregoing non-GAAP financial measures, in addition to the corresponding GAAP measures, in reviewing the company's financial results.

These non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. Magic believes that non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with Magic's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Magic's results of operations in conjunction with the corresponding GAAP measures.

Please refer to the Reconciliation of Selected Financial Metrics from GAAP to Non-GAAP tables below.

Conference Call

Magic Software's management will also host a conference call today at 10 am EST, 3 pm GMT, and 5 pm in Israel.

To participate in the conference call, please call the appropriate number listed below at least five to ten minutes prior to the start of the call:

From the US: 1-888-642-5032 From Canada: 1-866-485-2399 From UK: 0-800-917-9141 From Israel: 03-918-0688 All others: +972-3-918-0688 Callers should reference the Magic Software Earnings Conference Call.

For those unable to listen to the conference call, there will be a replay available from the investor relations part of Magic's web-site at: http://www.magicsoftware.com.

About Magic Software Enterprises

Magic Software Enterprises Ltd. (NASDAQ: MGIC) has been a leader in enterprise application development, deployment and integration technology for more than two decades. The company's service-oriented (SOA) platforms are used by companies worldwide to develop, maintain, and deploy both legacy and new business solutions, while integrating these applications across both internal and external, heterogeneous environments. Magic Software's platform-independent methodology lets companies achieve agility by quickly assembling composite applications, allowing programmers to create services and architects and business analysts to orchestrate and reuse these services to enable business processes. Through partnerships with industry leaders such as IBM and SAP and more than 2500 ISVs worldwide, Magic Software technology is used by more than 1.5 million customers around the globe.

Magic Software is a subsidiary of the Formula Systems and Emblaze Group of companies.

For more information on Magic Software Enterprises Ltd. and its products and services, visit http://www.magicsoftware.com.

Except for the historical information contained herein, the matters discussed in this news release include forward-looking statements that may involve a number of risks and uncertainties. Actual results may vary significantly based upon a number of factors including, but not limited to, risks in product and technology development, market acceptance of new products and continuing product conditions, both here and abroad, release and sales of new products by strategic resellers and customers, and other risk factors detailed in the Company's most recent annual report and other filings with the Securities and Exchange Commission.

Magic Software Enterprises Ltd Consolidated Statements of Operations (In thousands of U.S. dollars, except per share data) Three months ended September 30, 2007 2006 (unaudited) (unaudited) Sales $ 17,632 $ 15,117 Cost of revenues 7,936 7,312 Gross profit 9,696 7,805 Software development costs, net 1,140 1,338 Selling, general and administrative expenses 7,458 7,986 Restructuring expenses – 2,125 Total operating expenses 8,598 11,449 Operating income (loss) 1,098 (3,644) Financial income (expenses), net (172) 191 Income (loss) before taxes 926 (3,453) Taxes on income (119) (55) 807 (3,508) Minority interest (7) 26 Equity gain (loss) (31) (49) Net income (loss) 769 (3,531) Basic net earnings (loss) per ordinary share $ 0.02 $ (0.11) Diluted net earnings (loss) per ordinary share $ 0.02 $ (0.11) Weighted average number of 31,486 31,210 ordinary shares used in computing basic net earnings (loss) per ordinary share Weighted average number of 31,831 31,210 ordinary shares used in computing diluted net earnings (loss) per ordinary share Nine months ended September 30, 2007 2006 (unaudited) (unaudited) Sales $ 50,804 $ 45,536 Cost of revenues 23,320 21,179 Gross profit 27,484 24,357 Software development costs, net 3,236 3,114 Selling, general and administrative expenses 21,087 24,313 Restructuring expenses – 2,125 Total operating expenses 24,323 29,552 Operating income (loss) 3,161 (5,195) Financial income (expenses), net (53) 286 Income (loss) before taxes 3,108 (4,909) Taxes on income (462) (241) 2,646 (5,150) Minority interest (5) 94 Equity gain (loss) (51) 20 Net income (loss) 2,590 (5,036) Basic net earnings (loss) per ordinary share $ 0.08 $ (0.16) Diluted net earnings (loss) per ordinary share $ 0.08 $ (0.16) Weighted average number of ordinary shares used in computing basic net earnings (loss) per ordinary share 31,417 31,150 Weighted average number of ordinary shares used in computing diluted net earnings (loss) per ordinary share 31,970 31,150 Magic Software Enterprises Ltd Reconciliation of GAAP to Non-GAAP Results (In thousands of U.S. dollars, except per share data) Three months ended September 30, 2007 2006 (unaudited) (unaudited) GAAP operating income (loss) $ 1,098 $ (3,644) Amortization of intangibles 736 1,193 Capitalization of software (698) (516) development Stock-based compensation 131 – Total adjustments to GAAP 169 677 Non-GAAP operating income (loss) $ 1,267 $ (2,967) GAAP net income (loss) $ 769 $ (3,531) Total adjustments to GAAP as above 169 677 Non-GAAP net income (loss) $ 938 $(2,854) Non-GAAP basic earnings (loss) per share $ 0.03 $ (0.09) Weighted average number of ordinary shares used in computing basic net earnings (loss) per ordinary share 31,486 31,210 Non-GAAP diluted earnings $ 0.03 $ (0.09) (loss) per share Weighted average number of ordinary shares used in computing diluted net earnings (loss) per ordinary share 31,831 31,566 Nine months ended September 30, 2007 2006 (unaudited) (unaudited) GAAP operating income (loss) $ 3,161 $ (5,195) Amortization of intangibles 2,292 2,874 Capitalization of software (2,310) (2,530) development Stock-based compensation 186 – Total adjustments to GAAP 168 344 Non-GAAP operating income (loss) $ 3,329 $ (4,851) GAAP net income (loss) $ 2,590 $ (5,036) Total adjustments to GAAP as above 168 344 Non-GAAP net income (loss) $ 2,758 $ (4,692) Non-GAAP basic earnings (loss) per share $ 0.09 $ (0.15) Weighted average number of ordinary shares used in computing basic net earnings (loss) per ordinary share 31,417 31,150 Non-GAAP diluted earnings (loss) per share $ 0.09 $ (0.15) Weighted average number of ordinary shares used in computing diluted net earnings (loss) per ordinary share 31,970 31,568 Magic Software Enterprises Ltd Consolidated Balance Sheets (In thousands of U.S. dollars) As of As of September 30, December 31, 2007 2006 (unaudited) (unaudited) ASSETS Current Assets Cash and cash equivalents $ 12,232 $ 8,162 Short term bank deposits 87 69 Marketable securities 4,037 4,649 Trade accounts receivable 13,429 12,365 Other receivables and prepaid expenses 3,487 2,472 Inventory 280 328 Total Current Assets 33,552 28,045 Non-Current Assets Severance pay fund 2,215 2,176 Long term deposits 567 576 Investment in affiliated companies 162 213 Fixed assets, net 6,256 6,414 Goodwill 21,647 21,624 Other assets, net 10,966 10,863 Total Non-Current Assets 41,813 41,866 Total Assets $ 75,365 $ 69,911 Liabilities and Shareholders' Equity Current Liabilities Short-term credit from banks $ 4,094 $ 4,514 Trade accounts payable 3,237 3,491 Accrued expenses and other liabilities 13,880 11,399 Total Current Liabilities 21,211 19,404 Non-Current Liabilities Long-term loans 201 233 Accrued severance pay 2,555 2,499 Minority interests 137 131 Total Non-Current Liabilities 2,893 2,863 Shareholders' Equity 51,261 47,644 Total Liabilities and Shareholders' Equity $ 75,365 $ 69,911 Contact: David Zigdon, CFO Magic Software Enterprises Ltd. Tel. +972-(0)3-538-9600 dzigdon@magicsoftware.com

SOURCE Magic Software Enterprises Ltd

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