Formula Systems Reports First Quarter 2020 Financial Results

Operating income for the first quarter increased 22% year-over-year to a record breaking $38.8 million. Net income attributable to Formula’s Shareholders for the first quarter increased 10% year-over-year to a record breaking $11.0 million.

OR YEHUDA, Israel, May 28, 2020 (GLOBE NEWSWIRE) -- Formula Systems (1985) Ltd. (NASDAQ: FORTY), 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, today announced its results for the first quarter ended March 31, 2020.

Financial Highlights for the First Quarter Ended March 31, 2020

• Consolidated revenues for the first quarter increased by 19.1% to a record breaking $466.3 million, with growth recorded across Formula’s entire investment portfolio. Revenues for the first quarter ended March 31, 2019 amounted to $391.4 million.
• Consolidated operating income for the first quarter increased by 22.5% to a record breaking $38.8 million, with growth recorded across Formula’s entire investment portfolio. Consolidated operating income for the first quarter ended March 31, 2019 amounted to $31.7 million.
• Consolidated net income attributable to Formula’s shareholders for the first quarter increased by 9.8% to a record breaking $11.0 million, or $0.71 per fully diluted share, compared to $10.0 million, or $0.58 per fully diluted share, for the first quarter ended March 31, 2019.
• As of March 31, 2020 Formula held 49.02%, 47.84%, 45.52%, 100%, 50% 90.09%, and 80% 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. and Insync Staffing Solutions, Inc. and Ofek Aerial Photography Ltd., respectively.
• Consolidated cash and cash equivalents, bank deposits and investments in marketable securities totaled approximately $448.8 million as of March 31, 2020, compared to $405.5 million as of December 31, 2019.
• Total equity as of March 31, 2020 was $889.8 million (representing 41.7% of the total consolidated balance sheet), compared to $896.3 million (representing 42.9% of the total consolidated balance sheet) as of December 31, 2019

Debentures Covenants

As of March 31, 2020, Formula was in compliance with all of its financial covenants under the debentures issued by Formula, 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 is equal to $418.1 million.

Covenant 2

• Target ratio of net financial indebtedness to net capitalization (in each case, as defined under the indenture for the Formula’s Series A and C Secured Debentures): below 65%.
• Actual ratio of net financial indebtedness to net capitalization is equal to 10.8%.

Covenant 3

• Target ratio of net financial indebtedness to EBITDA (based on the accumulated calculation for the four recent quarters): below 5.
• Actual ratio of net financial indebtedness to EBITDA (based on the accumulated calculation for the four recent quarters) is equal to 0.47.

Comments of Management

Commenting on the results, Guy Bernstein, CEO of Formula Systems, said, “We are very pleased to begin 2020 with a strong quarter across our entire portfolio, especially in light of the COVID-19 global pandemic, which broke out in March 2020 and drastically affected the global economy and markets. In order to address the new market challenges, we have focused across our entire portfolio on taking all necessary steps in order to keep our employees safe and productive and control expenses to assure strong cash flow, while supporting our existing customers and closing new deals.”

“Matrix delivered record-breaking first quarter results across all its key indicators (revenues, gross profit, operating income, net income and EBITDA), overcoming the most challenging period of the last decade and maintaining its outstanding ranking by Midroog (Aa3) and STKI (IT and Technology market leader). While as of this point Matrix did not encounter any material negative impact on its global and Israeli activities, it is constantly performing risk assessments and is taking precautionary steps in order to successfully overcome the global crises.”

“Sapiens’ results for the first quarter of 2020 demonstrate its pursuit of key objectives in this challenging environment, such as focusing on its proven strategy, supporting existing customers, closing new deals, controlling expenses while maintaining productivity. Such steps, together with a strong demand for its digital products, high recurring revenue and solid balance sheet, position it for success despite the global COVID-19 crisis. Sapiens reported a 17.9% revenue growth and increased operating margins (on a non-GAAP basis) to 16.1%, with both its P&C and L&A contributing to growth in the quarter. While its business remains strong, due to macro events there could be delays in closing new deals, which could slightly impact Sapiens’ revenue. Therefore, Sapiens slightly revised its annual revenue guidance for 2020 to the range of $368 million to $377 million, as compared to its prior range of $377 million to $383 million, thereby reducing the mid-point of their revenue guidance by 2.0%”

“Magic’s first-quarter strong performance reflects its continued focus on supporting its existing customers and closing new deals in addition to taking all necessary steps facing this challenging period. In addition, as part of Magic's continued efforts to improve its financial position and as a testimony of its confidence in its existing operations, during the first quarter Magic increased its equity interest in Roshtov Software Industries Ltd., by 20.05%, from 60% to 80.05%, and in Comblack IT Ltd., by 10.2%, from 70% to 80.2%. Similarly to Sapiens, Magic also slightly revised its annual revenue guidance for 2020 to the range of $350 million to $360 million, as compared to its prior range of $360 million to $370 million, thereby reducing the mid-point of the revenue guidance by 2.7%.

During the first quarter, Michpal promoted the execution of its long-term strategy to become a leading provider in Israel of integrated solutions in the field of payroll including pay-stubs, pension services management, education funds management, and software solutions for managing employee attendance. Last year Michpal improved its competitive position through both organic products and solution development, and acquisitions with a focus on growth.  Now that the acquired companies are fully integrated, Michpal is realizing synergies, and maximizing its acquired talent.

Michpal is well positioned to help its customers to adjust to the ever-changing governmental instructions for employers, while complying with laws and regulation, especially in light of COVID-19.”

“During the first quarter, Formula completed the acquisition of 80% of the share capital of Ofek Ariel Photography Ltd., Israel’s market leader in the fields of aerial and satellite mapping, geographic data collection and processing, and provider of services in numerous geographic applications. Among Ofek’s customers are many government authorities and foreign government, which will enable Formula group to expand its customer base and its software and service offerings to the fields of satellite mapping, geographic data collection and processing. We have complete confidence in the management team of Ofek lead by Chairman, Udi Friedlander and CEO, David Peretz, who will continue to lead the company in its journey to success”.

“I am confident that the steps taken across all our portfolio companies will ensure that all companies will emerge stronger and well positioned for continued growth when the global economy recovers, allowing us to continue returning value to our shareholders.”.”

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.
[phone]
[e-mail]

Except for any historical information contained herein, matters discussed in this press release might include forward-looking statements that involve a number of risks and uncertainties. Regarding any financial statements, actual results might 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 locally and abroad, release and sales of new products by strategic resellers and customers, and other risk factors detailed in Formula’s most recent annual report and other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. In addition, there is uncertainty about the spread of the COVID19 virus and the impact it will have on the Company’s operations, the demand for Company’s products, global supply chains and economic activity in general. These and other risks and uncertainties are detailed in the Company’s Securities and Exchange Commission filings.  

FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF PROFIT OR LOSS
U.S. dollars in thousands (except per share data)
	Three months ended
	March 31,
	2020		2019
	Unaudited
Revenues	466,270		391,354
Cost of revenues	363,131		303,494
Gross profit	103,139		87,860
Research and development costs, net	12,963		10,584
Selling, marketing and general and administrative expenses	51,373		45,596
Operating income	38,803		31,680
Financial expenses, net	4,644		3,596
Income before taxes on income	34,159		28,084
Taxes on income	7,723		6,261
Income after taxes	26,436		21,823
Share of profit (loss) of companies accounted for at equity, net	129		726
Net income	26,565		22,549
Net income attributable to non-controlling interests	15,544		12,513
Net income attributable to Formula Systems' shareholders	11,021		10,036
Earnings per share (basic)	0.72		0.68
Earnings per share (diluted)	0.71		0.58
Number of shares used in computing earnings per share (basic)	15,284,684		14,855,794
Number of shares used in computing earnings per share (diluted)	15,291,806		15,587,689

FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
		March 31,		December 31,
		2020		2019
		(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents	438,410		369,042
	Short-term deposits	7,026		29,886
	Marketable securities	3,387		6,600
	Trade receivables	479,473		485,824
	Other accounts receivable and prepaid expenses	68,847		67,273
	Inventories	7,623		7,156
Total current assets		1,004,766		965,781
LONG-TERM ASSETS:
	Deferred taxes	37,350		35,445
	Other long-term accounts receivable and prepaid expenses	22,131		21,493
Total long-term assets		59,481		56,938
INVESTMENTS IN COMPANIES ACCOUNTED
FOR AT EQUITY METHOD		27,315		26,350
PROPERTY, PLANTS AND EQUIPMENT, NET		47,952		43,059
OPERATING LEASE RIGHT-OF-USE ASSETS		99,783		104,130
NET INTANGIBLE ASSETS AND GOODWILL		894,177		892,349	(*)
TOTAL ASSETS		2,133,474		2,088,607
CURRENT LIABILITIES:
	Loans and credit from banks and others	173,889		125,299
	Debentures	30,210		31,362
	Current maturities of operating lease liabilities	30,538		35,673
	Trade payables	125,071		125,163
	Deferred revenues	103,700		93,512
	Other accounts payable	195,917		205,106
	Dividend payable	-		7,081
	Liabilities in respect of business combinations	12,158		8,431
	Put options of non-controlling interests	25,318		39,668
Total current liabilities		696,801		671,295
LONG-TERM LIABILITIES:
	Loans and credit from banks and others	190,900		162,058
	Debentures	161,975		175,411
	Long term operating lease liabilities	75,898		73,686
	Other long-term liabilities	8,744		8,313
	Deferred taxes	51,393		50,877	(*)
	Deferred revenues	10,840		6,491
	Liabilities in respect of business combinations	14,451		17,321	(*)
	Put options of non-controlling interests	19,789		15,182
	Employees benefit liabilities	12,898		11,639
Total long-term liabilities		546,888		520,978
EQUITY
	Equity attributable to Formula Systems' shareholders	418,094		421,640
	Non-controlling interests	471,691		474,694
Total equity		889,785		896,334
TOTAL LIABILITIES AND EQUITY		2,133,474		2,088,607
	*) Immaterial adjustment to comparative data

FORMULA SYSTEMS (1985) LTD.
STAND-ALONE STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
		March 31,		December 31,
		2020		2019
		(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents	54,282		82,725
	Other accounts receivable and prepaid expenses	7,225		6,803
Total current assets		61,507		89,528
INVESTMENTS IN SUBSIDIARIES AND A JOINTLY
CONTROLLED ENTITY (*)
	Matrix IT Ltd.	124,494		125,809
	Sapiens International Corporation N.V.	176,851		176,832
	Magic Software Enterprises Ltd.	112,823		114,019
	Other	80,931		72,322
Total Investments in subsidiaries and a jointly controlled entity		495,099		488,982
OTHER LONG TERM RECEIVABLES		1,539		1,539
PROPERTY, PLANTS AND EQUIPMENT, NET		2		2
TOTAL ASSETS		558,147		580,051
CURRENT LIABILITIES:
	Loans from banks and others	-		13,130
	Debentures	19,819		20,296
	Trade payables	36		69
	Other accounts payable	1,370		1,274
	Dividends payable	-		7,081
Total current liabilities		21,225		41,850
LONG-TERM LIABILITIES:
	Debentures	112,990		116,561
	Put options of non-controlling interests	5,838		-
Total long-term liabilities		118,828		116,561
EQUITY		418,094		421,640
TOTAL LIABILITIES AND EQUITY		558,147		580,051
	(*) 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.