FORTY Formula Systems 1985 Ltd

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, 2021.

Financial Highlights for the First Quarter Ended March 31, 2021

• Consolidated revenues for the first quarter ended March 31, 2021 increased by 22.8% to a record breaking $572.6 million compared to $466.3 million in the same period last year.
• Consolidated operating income for the first quarter ended March 31, 2021 increased by 22.3% to a record breaking $47.5 million, with growth recorded across Formula’s entire investment portfolio, compared to $38.8 million in the same period last year.
• Consolidated net income attributable to Formula’s shareholders for the first quarter ended March 31, 2021 increased by 12.7% to $12.4 million, or $0.80 per fully diluted share, compared to $11.0 million, or $0.71 per fully diluted share, in the same period last year.
• As of March 31, 2021, Formula held 48.9%, 43.9%, 45.5%, 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., Insync Staffing Solutions, Inc., and Ofek Aerial Photography Ltd., respectively.
• Consolidated cash and cash equivalents, bank deposits and investments in marketable securities totaled approximately $459.6 million as of March 31, 2021, compared to $533.2 million as of December 31, 2020.
• Total equity as of March 31, 2021 was $ 1,103.7 million (representing 45.2% of the total consolidated balance sheet), compared to $1,108.5 million (representing 44.0% of the total consolidated balance sheet) as of December 31, 2020.

 Debentures Covenants

As of March 31, 2021, Formula was in compliance with all of its financial covenants under the debenture series 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 $499.9 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 is equal to 3.4%.

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 0.14.

Comments of Management

Commenting on the results, Guy Bernstein, CEO of Formula Systems, said: “We are very pleased to kick off 2021 on a strong note across our entire investment portfolio reaching all-time highs across all of our key indices (revenues, gross profit, operating income, EBITDA and net income). Our strong results evidence our continued focus on the execution of our growth strategy. We plan to continue our efforts across our entire portfolio to adhere to our core values of innovation, professionalism, agility and transparency which allow us to continue our growth and protect our leading position.”

“Matrix reported its best first quarter in history with record-breaking results recorded across all its financial indices. Matrix reported a record-breaking backlog of approximately NIS 4.5 billion, reflecting an increase of 12.5% compared to the same period last year. Despite a slow-down recorded across Matrix’s U.S. Governance, Risk and Compliance segment, we preferred to retain our quality personnel to be well positioned when the U.S financial sector recovers from the COVID-19 period in the short term. We are pleased with Matrix’s continued recognition as a market leader in the implementation of fastest-growing technologies, such as cloud, cyber, digital, data, AI and MA which enables the company to create significant value for its customers in managing, streamlining, accelerating and making their businesses thrive. As Israel’s leading technology partner Matrix is well positioned to meet the increasing demand for digital services, cloud services, infrastructure, computing, and data analytics.”

“Sapiens opened 2021 on a strong note, with record first quarter Non-GAAP revenues of $110 million, 22% higher than in the same period last year and strong Non-GAAP operating margin of 17.2%, improving by 110 basis points, compared to the same period last year. The results demonstrate how well Sapiens is executing its proven “Land and Expand” strategy, which enables it to grow in the highly regulated and regionally diverse global insurance markets and validate its operating leverage. Sapiens updated its operating profit margin guidance, due to its plan initiated this quarter to manage its growth and investment in delivery capabilities in the North American P&C CoreSuite business and following the recent spike in COVID-19 in India, which will increase Sapiens’ labor costs in the short term. As a result of these two factors, operating margin in 2021 is expected to be in the range of 17.0% to 17.4% compared to the previous expected range of 17.7% to 18.0%. In addition, Sapiens increased its 2021 revenue guidance to a range of $459 to $464 million from its prior range of $457 to $463 million.”

“Magic Software’s solid execution in the first quarter delivered 26% revenue growth, with non-GAAP operating margin increasing to 14.0% from 12.9% in the same period last year. Magic’s revenue growth in the first quarter validates its strategy of building a broad business portfolio, which provides the foundation for its continued solid performance and growth. With a strategic focus, increasing global market demand for digital transformations and the steps Magic has taken over the past year to streamline its business activity, Magic Software is well positioned for continued strong financial performance. Magic increased its 2021 revenue guidance to a range of $425 to $435 million from its prior range of $420 to $430 million.”

“Michpal Group continues to realize synergies and monetize on its business model with its revenues, growing by 29% year over year to ILS 25 million, with 57% accounted to organic growth. Michpal Group is well positioned to continue helping its customers to adjust to the ever-changing governmental labor guidelines.”

“TSG (held equally by Formula and Israel Aerospace Industries) also started the year on a high note, with solid revenues and a 60% increase in operating income. We are proud that during the current operation in Gaza, the IDF is widely using the advanced systems provided by TSG and local authorities in the conflict zone which are using TSG's Command and Control system to successfully manage complex situations arising in their regions.”

“Lastly, we are very pleased to welcome Zap Group, a leading group of consumer sites in Israel and a well-reputable brand in the Israeli market, offering a wide range of solutions in the field of advertising, website promotion and targeted mailing. The solutions offered by Zap Group enable small and medium-size businesses to manage their commercial relationship with their consumers in a more efficient and accurate manner by using its digital marketing tools and customer targeting solutions based on big data, media and digital platforms, thereby generating significant value. The acquisition of ZAP Group, which was concluded in April 2021 serves as another milestone in Formula's strategy to offer digital based solutions to small and medium-size businesses. We will endeavor to create synergies between the business activities of Zap Group and other activities within the Formula Group, initially in the Israeli market and thereafter worldwide. The consideration for the acquisition of 100% of the outstanding share capital of ZAP Group was approximately NIS 240 million in cash (subject to certain adjustments) with a contingent amount of up to NIS 60 million in cash (up to a total purchase price of approximately NIS 300 million), subject to Zap Group meeting certain EBITDA targets during the first two years following the acquisition.”

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.+972-3-5389487ir@formula.co.il

Forward Looking StatementsCertain 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: the COVID-19 (coronavirus) pandemic, which may last longer than expected 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, wide-spread viruses and epidemics like the recent novel coronavirus outbreak, 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 “Risk Factors” in our most recent Annual Report on Form 20-F, 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, to conform these statements to actual results or to changes in our expectations.

FORMULA SYSTEMS (1985) LTD.CONSOLIDATED CONDENSED STATEMENTS OF PROFIT OR LOSSU.S. dollars in thousands (except per share data)
		Three months ended
		March 31,
		2021			2020
		Unaudited
Revenues		572,643			466,270
Cost of revenues		447,085			363,131
Gross profit		125,558			103,139
Research and development costs, net		16,004			12,963
Selling, marketing and general and administrative expenses		62,100			51,373
Operating income		47,454			38,803
Financial expenses, net		5,103			4,644
Income before taxes on income		42,351			34,159
Taxes on income		9,349			7,723
Income after taxes		33,002			26,436
Share of profit of companies accounted for at equity, net		230			129
Net income		33,232			26,565
Net income attributable to non-controlling interests		20,813			15,544
Net income attributable to Formula Systems' shareholders		12,419			11,021
Earnings per share (basic)		0.81			0.72
Earnings per share (diluted)		0.80			0.71
Number of shares used in computing earnings per share (basic)		15,289,267			15,284,684
Number of shares used in computing earnings per share (diluted)		15,337,859			15,291,806

FORMULA SYSTEMS (1985) LTD.CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONU.S. dollars in thousands
		March 31,			December 31,
		2021			2020
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		428,154			501,650
Short-term deposits		30,289			30,289
Marketable securities		1,185			1,238
Trade receivables		555,558			519,885
Other accounts receivable and prepaid expenses		84,013			83,820
Inventories		19,851			23,988
Total current assets		1,119,050			1,160,870
LONG-TERM ASSETS:
Deferred taxes		39,405			39,750
Other long-term accounts receivable and prepaid expenses		27,036			22,872
Total  long-term assets		66,441			62,622
INVESTMENTS IN COMPANIES ACCOUNTED
FOR AT EQUITY METHOD		28,508			28,311
PROPERTY, PLANTS AND EQUIPMENT, NET		56,855			59,176
RIGHT-OF-USE ASSETS		106,813			114,414
NET INTANGIBLE ASSETS AND GOODWILL		1,063,845			1,094,687
TOTAL  ASSETS		2,441,512			2,520,080
CURRENT LIABILITIES:
Loans and credit from banks and others		120,160			120,444
Debentures		41,663			41,454
Current maturities of lease liabilities		32,496			32,065
Trade payables		138,730			153,322
Deferred revenues		146,165			128,898
Other accounts payable		241,838			259,223
Liabilities in respect of business combinations		6,840			8,654
Put options of non-controlling interests		31,564			35,843
Total current liabilities		759,456			779,903
LONG-TERM LIABILITIES:
Loans and credit from banks and others		157,359			180,316
Debentures		179,568			203,070
Lease liabilities		84,508			91,188
Other long-term liabilities		12,723			12,191
Deferred taxes		64,427			68,367
Deferred revenues		20,434			16,626
Liabilities in respect of business combinations		15,433			16,582
Put options of non-controlling interests		29,694			28,175
Employees benefit liabilities		14,187			15,119
Total long-term liabilities		578,333			631,634
EQUITY
Equity attributable to Formula Systems' shareholders		499,917			503,201
Non-controlling interests		603,806			605,342
Total equity		1,103,723			1,108,543
TOTAL LIABILITIES AND EQUITY		2,441,512			2,520,080

FORMULA SYSTEMS (1985) LTD.STAND-ALONE STATEMENTS OF FINANCIAL POSITIONU.S. dollars in thousands
		March 31,			December 31,
		2021			2020
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		43,058			47,852
Other accounts receivable and prepaid expenses		11,273			4,977
Total current assets		54,331			52,829
INVESTMENTS IN SUBSIDIARIES AND A JOINTLY
CONTROLLED ENTITY (*)
Matrix IT Ltd.		140,615			142,194
Sapiens International Corporation N.V.		227,116			227,771
Magic Software Enterprises Ltd.		115,384			118,105
Other		86,477			90,359
Total Investments in subsidiaries and a jointly controlled entity		569,592			578,429
OTHER LONG TERM RECEIVABLES		1,646			1,707
PROPERTY, PLANTS AND EQUIPMENT, NET		10			2
TOTAL  ASSETS		625,579			632,967
CURRENT LIABILITIES:
Debentures		21,043			21,652
Trade payables		38			349
Other accounts payable		2,910			2,329
Total current liabilities		23,991			24,330
LONG-TERM LIABILITIES:
Debentures		100,662			104,394
Put options of non-controlling interests		1,009			1,042
Total long-term liabilities		101,671			105,436
EQUITY		499,917			503,201
TOTAL LIABILITIES AND EQUITY		625,579			632,967

(*)

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.