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Formula Systems Reports Third Quarter and Nine Months 2023 Financial Results:

Revenues for the Third Quarter Increased by 4.3% (or 10.8% on a constant currency basis) Year Over Year to a third-quarter record-breaking $654.8 Million with Net Income for the Third Quarter reaching $15.6 million.

OR YEHUDA, Israel, Nov. 22, 2023 (GLOBE NEWSWIRE) — Formula Systems (1985) Ltd. (Nasdaq and TASE: FORTY) (“Formula” or the “Company”), a global information technology group engaged, through its subsidiaries and affiliates, in providing software consulting services and computer-based business solutions and developing proprietary software products, today announced its results for the third quarter and nine-month period ended September 30, 2023.

Financial Highlights for the Third Quarter Ended September 30, 2023

  • Consolidated revenues for the third quarter ended September 30, 2023, increased by approximately 4.3% to a third-quarter record-breaking $654.8 million, compared to $627.7 million in the same period last year. On a constant currency basis (calculated based on average currency exchange rates for the three months ended September 30, 2022), consolidated revenues for the third quarter of 2023 would have increased by approximately 10.8% to $695.2 million.
  • Consolidated operating income for the third quarter ended September 30, 2023 amounted to a third-quarter record-breaking $58.2 million compared to $57.5 million in the same period last year. On a constant currency basis (calculated based on average currency exchange rates for the three months ended September 30, 2022), the consolidated operating income for the third quarter of 2023 would have increased by approximately 6.0% to $61.0 million, compared to the same period last year.
  • Consolidated net income attributable to Formula’s shareholders for the third quarter ended September 30, 2023 amounted to $15.6 million, or $1.0 per fully diluted share, compared to $16.9 million, or $1.09 per fully diluted share, in the same period last year.

    Net income in the period was negatively impacted by (i) an increase in interest expenses resulting from the increase in variable interest rates, with financial expenses net increasing by approximately 38.8% year over year to $6.4 million, compared to $4.6 million in the same period last year, and (ii) an increase in costs related to share-based compensation, which amounted to $4.6 million for the third quarter of 2023, compared to $3.2 million in the same period last year.

Financial Highlights for the Nine Month-Period Ended September 30, 2023

  • Consolidated revenues for the first nine months ended September 30, 2023, increased by 3.4% to a nine-month record-breaking $1.98 billion, compared to $1.92 billion in the first nine months of the previous year. On a constant currency basis (calculated based on average currency exchange rates for the first nine months ended September 30, 2022), consolidated revenues for the first nine months of 2023 would have increased by approximately 10.3% to $2.11 billion.
  • Consolidated operating income for the first nine months ended September 30, 2023, amounted to $179.0 million, compared to $216.5 million in the first nine months of the previous year. Operating income for the first nine months of 2022 included a capital gain realized from the disposition of a Matrix IT subsidiary in the amount of $44.2 million. Excluding such impact, consolidated operating income for the first nine months ended September 30, 2023, increased by 3.9% compared to the first nine months of the previous year. On a constant currency basis (calculated based on average currency exchange rates for the first nine months ended September 30, 2022), the consolidated operating income for the first nine months of 2023 would have increased by approximately 9.5% to $188.7 million, compared to the same period last year (excluding the above-mentioned capital gain of $44.2 million recorded in 2022).
  • Consolidated net income attributable to Formula’s shareholders for the first nine months ended September 30, 2023, amounted to $48.3 million, or $3.1 per fully diluted share, compared to $66.1 million, or $4.24 per fully diluted share, in the first nine months of the previous year. Net income for the first nine months of 2022 was positively impacted by approximately $17.1 million of income (net of taxes) realized from the disposition of a subsidiary of Matrix IT. Excluding such impact, consolidated net income attributable to Formula’s shareholders for the first nine months ended September 30, 2023 decreased by 1.4% year over year compared to the first nine months of the previous year.

    Net income in the nine-month period ended September 30, 2023 was negatively impacted by (i) an increase in interest expenses resulting from the increase in variable interest rates, with financial expenses net increasing by approximately 46.8% to $19.1 million, compared to $13.0 million in the same period last year, and (ii) an increase in costs related to share-based compensation, which amounted to $13.5 million for the first nine months ended September 30, 2023 compared to $9.7 million in the same period last year.

  • As of September 30, 2023, Formula held 48.2%, 43.6%, 46.3%, 100%, 50%, 90.1%, 80%, 100% and 100% of the outstanding ordinary shares of Matrix IT Ltd., Sapiens International Corporation N.V., Magic Software Enterprises Ltd., Michpal Micro Computers (1983) Ltd., TSG IT Advanced Systems Ltd., Insync Staffing Solutions, Inc., Ofek Aerial Photography Ltd., ZAP Group Ltd., and Shamrad Electronic (1997) Ltd., respectively.
  • Consolidated cash and cash equivalents, short-term bank deposits and short-term investments totaled approximately $469.1 million as of September 30, 2023, compared to $569.1 million as of December 31, 2022.
  • Total equity as of September 30, 2023, was $1.23 billion (representing 46.2% of the total consolidated statements of financial position), compared to $1.18 billion (representing 42.1% of the total consolidated statements of financial position) as of December 31, 2022.

Debentures Covenants

As of September 30, 2023, Formula was in compliance with all of its financial covenants under the debenture series issued by it, based on the following achievements:

Covenant 1

  • Target equity attributable to Formula’s shareholders (excluding non-controlling interests): above $215 million.
  • Actual equity attributable to Formula’s shareholders as of September 30, 2023, was $583.3 million.

Covenant 2

  • Target ratio of net financial indebtedness to net capitalization (in each case, as defined under the indenture for Formula’s Series A and C Secured Debentures): below 65%.
  • Actual ratio of net financial indebtedness to net capitalization, as of September 30, 2023, was 8.1%.

Covenant 3

  • Target ratio of net financial indebtedness to EBITDA (based on the accumulated calculation for the four most recent quarters): below 5.
  • Actual ratio of net financial indebtedness to EBITDA as of September 30, 2023, was 0.3.

Comments of Management

Commenting on the results, Guy Bernstein, CEO of Formula Systems, said: “Formula Systems group continues to demonstrate strong and consistent performance, making big strides across multiple fronts, as reflected by our 2023 third quarter and nine months period all-time high revenues and operational profits. Our broad investment portfolio allows us to carefully mitigate the current risks in the IT market, which are mainly a product of the challenging macro-economic environment. With respect to current events taking place in Israel, since October 7, 2023 approximately 1,100 out of our 22,000 employees were drafted to active military service in Israel’s Iron Swards war against the terrorist organization Hamas. The absence of such employees may result in lower profitability in the fourth quarter in certain areas of our operations (despite partial compensation to be paid by the State of Israel). Our global operations which rely on our dedicated global employee base continues to be unaffected by the war, while our Israeli teams continue to work generally in a usual hybrid manner. We estimate that the impact of the current events on our operations across our investment portfolio will not be severe and we remain committed to executing our growth strategy.”

“Matrix concluded the third quarter of 2023 with double-digit growth and third quarter record-breaking results recorded across all its key operational financial indices: revenues, gross profit, operating income and EBITDA. Matrix revenues for the third quarter grew by 18% year over year reaching an all-time third quarter high of NIS 1.33 billion (approximately $356.1 million). Operating income grew by 16.4%, reaching NIS 93.3 million (approximately $24.9 million). We are pleased with Matrix’s continued recognition as a market leader in Israel in the implementation of fastest-growing technologies, such as cloud, cyber, digital, data, DevOps and AI, which enable the company to create significant value for its customers in managing, streamlining, accelerating and making their businesses thrive. There is a strong demand in Israel for software services in digital, cloud, cyber, data, and core operating systems—areas in which Matrix is a market leader, and which are at the center of the IT market demand. North America, which accounted for 9% of Matrix’s nine months revenues and approximately 18% of its operating income in such period, also showed significant growth, with an increase of approximately 23% in operating income, along with continued improvement in operating margin approximately 100 basis points year over year. We believe that Matrix has significant growth potential in the North American market, especially in the field of AI-based solutions for anti-money laundering and prevention of financial crimes, as well as across all of its other areas of expertise in the North American market.”

“Sapiens had a strong third quarter, with 9.8% revenue growth and 18.4% operating margin (on a Non-GAAP basis), driven by significant growth in North American and European markets. Since the beginning of the year, Sapiens has signed new deals for P&C, Life, and Reinsurance and is optimistic as to the quality of its new business pipeline. Sapiens reiterated its full-year 2023 non-GAAP revenues guidance of $511 – $516 million, and also increased its guidance for the full year 2023 non-GAAP operating margin to 18.2% – 18.3%, compared to previous guidance of 18.0% – 18.2%. In addition, Sapiens announced that it expects 2024 revenues to reach the current market consensus estimate of $550 million. These targets demonstrate Sapiens’ commitment to delivering outstanding results and driving sustained growth.”

“Magic Software’s operational results for the third quarter of 2023 reflected a slowdown as revenues for the third quarter decreased by 10.1% to $129.5 million, compared to $144.0 million in the same period of the previous year. On a constant currency basis (calculated based on average currency exchange rates for the three months ended September 30, 2022), Magic Software’s revenues for the third quarter of 2023 would have decreased by 6.0% to $135.3 million, due to certain headwind faced by some of its customers in certain sectors. We remain positive that the vast majority of Magic Software’s customers will continue to value its unique proposition. While we acknowledge that in the short-term, conditions are not ideal, we are nevertheless optimistic that in 2024, assuming the major part of the current war is behind us and Magic Software’s customers return to full operations, they will resume to engage us to an increasing degree as a preferred partner for innovative digital transformation initiatives. Magic Software has a well-established track record of growth, profitability and high cash generation and the Magic team worldwide is committed to executing its strategy to return and deliver future sustainable growth and continued improvement to their shareholders’ value.”

“Michpal continues to monetize on its business model with its revenues for the first nine months of 2023 growing by 14.7% year over year on a constant currency basis compared to the same period last year, to NIS 106 million (approximately $29 million). Michpal ended 2022 with significant enhancements to its product offering and is well-positioned to continue its positive momentum from the first quarter throughout the remainder of the year.”

“TSG concluded the first nine months of 2023 with double-digit growth and record-breaking results recorded across its revenues and operating income. TSG revenues for the first nine months of 2023 grew by approximately 18% year over year reaching an all-time first-nine months high of NIS 223.6 million (approximately $61 million). TSG continues to materialize both on its traditional activities in the defense sector and on its activities in the Israeli municipal sector developing advanced solutions for its customers based on long-term engagement cycles.”

“Lastly, Zap Group continues to develop and invest in diverse advanced fields and innovative technologies, preserving its position as the leading digital marketing and advertising group in Israel. With a deep understanding of the Israeli market and consumer needs, Zap Group successfully manages diverse and significant content and consumer sites and provides strategic services and advertising solutions to its customers. During recent weeks following advanced development Zap Group soft launched its state-of-the-art Marketplace platform based on SAP and Mirakl’s platforms. The Zap Group Marketplace platform offers a reliable and comfortable online buying experience by utilizing a simple ‘compare and purchase’ interface, allowing customers to select and purchase from a variety of products arranged in dozens of popular categories, all using a single shopping cart, with a simple and user-friendly operating system. During the first weeks of the trial period hundreds of sellers, which include tens of thousands of products, have joined the Zap Group’s new unique and advanced platform. Unfortunately, the challenging macroeconomic climate of high interest rates, persistent inflation and reduced spending, influencing both SMBs and consumers, alongside recent events in Israel, have had and are expected to continue to have, an adverse impact on Zap’s top line results. As a result, we initiated a reorganization plan intended to streamline and simplify the organization, improve efficiency, and reduce costs. The restructuring program is expected to be substantially complete by the end of 2023.”

Stand-Alone Financial Measures

This press release presents, further below, certain stand-alone financial measures to reflect Formula’s stand-alone financial position in reference to its assets and liabilities as the parent company of the group. These financial measures are prepared consistent with the accounting principles applied in the consolidated financial statements of the group. Such measures include investments in subsidiaries and a jointly controlled entity measured at cost adjusted by Formula’s share in the investees’ accumulated undistributed earnings and other comprehensive income or loss.

Formula believes that these financial measures provide useful information to management and investors regarding Formula’s stand-alone financial position. Formula’s management uses these measures to compare the Company’s performance to that of prior periods for trend analyses. These measures are also used in financial reports prepared for management and in quarterly financial reports presented to the Company’s board of directors. The Company believes that the use of these stand-alone financial measures provides an additional tool for investors to use in evaluating Formula’s financial position.

Management of the Company does not consider these stand-alone measures in isolation or as an alternative to financial measures determined in accordance with GAAP. Formula urges investors to review the consolidated financial statements which it includes in press releases announcing quarterly financial results, including this press release, and not to rely on any single financial measure to evaluate the Company’s business or financial position.

About Formula

Formula Systems, whose ordinary shares are traded on the Tel-Aviv Stock Exchange and ADSs are traded on the Nasdaq Global Select Market, is a global information technology holding company engaged, through its subsidiaries and affiliates, in providing software consulting services and computer-based business solutions and developing proprietary software products.

For more information, visit www.formulasystems.com.

Press Contact:

Formula Systems (1985) Ltd.
+972-3-5389487
ir@formula.co.il

Forward Looking Statements

Certain matters discussed in this press release that are incorporated herein and therein by reference are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our beliefs, assumptions and expectations, as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: adverse macro-economic trends, including inflation, rising interest rates and supply chain delays, which trends may last for a significant period and materially adversely affect our results of operations; the degree of our success in our plans to leverage our global footprint to grow our sales; the degree of our success in integrating the companies that we have acquired through the implementation of our M&A growth strategy; the lengthy development cycles for our solutions, which may frustrate our ability to realize revenues and/or profits from our potential new solutions; our lengthy and complex sales cycles, which do not always result in the realization of revenues; the degree of our success in retaining our existing customers or competing effectively for greater market share; difficulties in successfully planning and managing changes in the size of our operations; the frequency of the long-term, large, complex projects that we perform that involve complex estimates of project costs and profit margins, which sometimes change mid-stream; the challenges and potential liability that heightened privacy laws and regulations pose to our business; occasional disputes with clients, which may adversely impact our results of operations and our reputation; various intellectual property issues related to our business; potential unanticipated product vulnerabilities or cybersecurity breaches of our or our customers’ systems; risks related to the insurance industry in which our clients operate; risks associated with our global sales and operations, such as changes in regulatory requirements, adverse consequences of international conflicts such as Russia’s invasion of the Ukraine, or fluctuations in currency exchange rates; and risks related to our principal location in Israel.

While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please read the risks discussed under the heading “Item 3.D Risk Factors” in our most recent Annual Report on Form 20-F for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission on May 15, 2023, in order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, or to conform those statements to actual results or to changes in our expectations.

 
 
FORMULA SYSTEMS (1985) LTD.         
CONSOLIDATED CONDENSED STATEMENTS OF PROFIT OR LOSS      
U.S. dollars in thousands (except per share data)         
           
  Three months ended Nine months ended  
  September 30, September 30,  
  2023 2022 2023 2022  
  Unaudited Unaudited  
Revenues  654,839  627,682 (*)1,980,612  1,915,290 (*) 
Cost of revenues 495,222  473,444 (*)1,498,126  1,455,706 (*) 
Gross profit  159,617  154,238 (*)482,486  459,584 (*) 
Research and development costs, net 19,702  18,064  58,220  53,262   
Selling, marketing and general and administrative expenses 81,669  78,645 (*)245,242  234,067 (*) 
Capital gain from realization of a Matrix IT’s subsidiary       44,208   
Operating income  58,246  57,529  179,024  216,463   
           
Financial expenses, net (6,423) (4,629) (19,119) (13,028)  
Income before taxes on income  51,823  52,900  159,905  203,435   
Taxes on income 12,486  11,405  35,356  44,328   
Income after taxes 39,337  41,495  124,549  159,107   
Share of profit of companies accounted for at equity, net 392  (38) 601  575   
Net income  39,729  41,457  125,150  159,682   
Net income attributable to non-controlling interests 24,133  24,580  76,849  93,628   
Net income attributable to Formula Systems shareholders  15,596  16,877  48,301  66,054   
           
Earnings per share (basic) 1.02  1.11  3.15  4.32   
Earnings per share (diluted) 1.00  1.09  3.10  4.24   
           
Number of shares used in computing earnings per share (basic) 15,301,767  15,296,267  15,301,017  15,294,725   
Number of shares used in computing earnings per share (diluted) 15,543,518  15,531,828  15,496,380  15,507,992   
           
           
(*) Immaterial adjustments to comparative data.          
           

 

FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
 
   September 30, December 31, 
   2023 2022 
   (Unaudited)   
 ASSETS    
CURRENT ASSETS:    
 Cash and cash equivalents 392,295 544,342 
 Short-term deposits 76,815 23,976 
 Short-term investments  738 
 Trade receivables, net 692,798 702,727 
 Prepaid expenses and other accounts receivable 72,906 64,535 
 Inventories 37,156 35,181 
Total current assets1,271,970 1,371,499 
       
NON-CURRENT ASSETS:    
 Long-term investments and receivables 51,275 38,985 
 Deferred taxes 44,036 42,027 
 Investments in companies accounted for at equity 18,894 20,746 
 Property, plants and equipment, net 50,715 54,971 
 Right-of-use assets 109,617 116,840 
 Intangible assets, net and goodwill 1,110,458 1,148,887 
Total non-current assets1,384,995 1,422,456 
       
Total assets2,656,965 2,793,955 
       
LIABILITIES AND EQUITY    
CURRENT LIABILITIES:    
 Credit from banks and others 161,637 157,882 
 Debentures 73,231 68,293 
 Current maturities of lease liabilities 41,298 45,497 
 Trade payables 211,502 222,482 
 Deferred revenues 124,345 131,639 
 Employees and payroll accrual 185,060 201,225 
 Other accounts payable 52,834 86,340 
 Liabilities in respect of business combinations 12,377 27,129 
 Put options of non-controlling interests 42,182 60,500 
Total current liabilities904,466 1,000,987 
       
LONG-TERM LIABILITIES:    
 Loans from banks and others 103,167 115,874 
 Debentures 239,541 305,632 
 Lease liabilities 75,583 78,966 
 Other long-term liabilities 13,718 14,101 
 Deferred taxes 57,744 59,465 
 Deferred revenues 4,429 8,859 
 Liabilities in respect of business combinations 5,496 12,345 
 Put options of non-controlling interests 16,702 11,688 
 Employees benefit liabilities, net 9,572 9,116 
Total long-term liabilities525,952 616,046 
       
EQUITY     
 Equity attributable to Formula Systems shareholders 583,299 551,875 
 Non-controlling interests 643,248 625,047 
Total equity1,226,547 1,176,922 
       
Total liabilities and equity2,656,965 2,793,955 
       

 

FORMULA SYSTEMS (1985) LTD.
STAND-ALONE STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands    
 
   September 30, December 31, 
   2023 2022 
   (Unaudited) 
 ASSETS    
CURRENT ASSETS:    
 Cash and cash equivalents 55,075 39,363 
 Other accounts receivable and prepaid expenses 7,711 7,326 
Total current assets62,786 46,689 
       
NON-CURRENT ASSETS:    
 Investment in subsidiaries and a jointly controlled entity (*)     
     Matrix IT Ltd. 148,235 149,701 
     Sapiens International Corporation N.V. 232,331 228,860 
     Magic Software Enterprises Ltd. 119,037 125,058 
     Other 140,854 154,408 
 Total investment in subsidiaries and a jointly controlled entity 640,457 658,027 
       
 Long term receivables and other investments 21,455 12,870 
 Property, plants and equipment, net 10 8 
Total non-current assets661,922 670,905 
       
Total assets724,708 717,594 
       
LIABILITIES AND EQUITY    
CURRENT LIABILITIES:    
 Debentures 31,192 32,999 
 Trade payables 47 125 
 Other accounts payable 1,981 5,596 
 Put options of non-controlling interests 825 848 
 Liability in respect of a business combination 308 426 
Total current liabilities34,353 39,994 
       
LONG-TERM LIABILITIES:    
 Debentures 106,806 125,484 
 Put options of non-controlling interests   
 Liability in respect of a business combination 250 241 
Total long-term liabilities107,056 125,725 
       
EQUITY 583,299 551,875 
       
TOTAL LIABILITIES AND EQUITY724,708 717,594 
       
       
 (*) The investments’ carrying amounts are measured consistent with the accounting principles applied in the consolidated financial statements of the group and representing the investments’ cost adjusted by Formula’s share in the investees’ accumulated undistributed earnings and other comprehensive income or loss.  
          

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