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 third quarter and nine-month period ended September 30, 2021.

Financial Highlights for the Third Quarter Ended September 30, 2021

	●	Consolidated revenues for the third quarter ended September 30, 2021 increased by 20.3% to $586.3 million, with growth recorded across Formula’s entire investment portfolio, compared to $487.3 million in the same period last year.
	●	Consolidated operating income for the third quarter ended September 30, 2021 increased by 11.2% to $50.5 million, with growth recorded across Formula’s entire investment portfolio, compared to $45.4 million in the same period last year.
	●	Consolidated net income attributable to Formula’s shareholders for the third quarter ended September 30, 2021 increased by 5.2% to $13.3 million, or $0.85 per fully diluted share, compared to $12.6 million, or $0.82 per fully diluted share, in the same period last year.

Financial Highlights for the First Nine-Month Period Ended September 30, 2021

	●	Consolidated revenues for the first nine-months of 2021 increased by 25.6% to $1.75 billion, with growth recorded across Formula’s entire investment portfolio. Revenues for the first nine-months of 2020 amounted to $1.39 billion.
	●	Consolidated operating income for the first nine-months of 2021 increased by 18.9% to $148.4 million, with growth recorded across Formula’s entire investment portfolio. Consolidated operating income for the first nine-months of 2020 amounted to $124.9 million.
	●	Consolidated net income attributable to Formula’s shareholders for the first nine months of 2021 was $39.0 million, or $2.51 per fully diluted share, compared to $34.9 million, or $2.25 per fully diluted share, in the same period last year, reflecting an increase of 11.9% year over year.
	●	As of September 30, 2021, Formula held 48.9%, 43.8%, 45.5%, 100%, 50%, 90.1%, 80% 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. and ZAP Group Ltd., respectively.
	●	Consolidated cash and cash equivalents, short-term bank deposits and investments in marketable securities totaled approximately $495.1 million as of September 30, 2021, compared to $533.2 million as of December 31, 2020.
	●	Total equity as of September 30, 2021 was $1.14 million (representing 43.4% of the total consolidated balance sheet), compared to $1.11 billion (representing 44.0% of the total consolidated balance sheet) as of December 31, 2020.

Debentures Covenants

As of September 30, 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 $519.7 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 10.5%.

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 0.43.

Comments of Management

Commenting on the results, Guy Bernstein, CEO of Formula Systems, said: “We are very pleased to continue our strong momentum recorded across our entire investment portfolio reaching all-time third quarter highs across all of our key indices (revenues, gross profit, operating income, EBITDA and net income). Our strong third quarter financial results recorded across all our key financial indices despite the negative impact of the holidays of the Jewish month of Tishrei (which this year entirely coincided with the third quarter as opposed to being spread over the third and fourth quarters in the previous year - thus reducing our time and material available billable hours in our operations in Israel by approximately 7%) reflect the strengths of our investment portfolio business models. We 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 third quarter in history with record-breaking results recorded across all its key financial indices with 97% of the growth deriving from organic growth. 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, 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 where Matrix significantly increased its strength during the COVID-19 period, and which are at the center of the IT market demand.”

“Sapiens reported all time high revenues of approximately $118 million, 21% higher than in the same period last year, and a strong Non-GAAP operating margin of 17.7% compared to 17.2% in the second quarter of 2021. 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. This unique value proposition enables insurers to benefit from Sapiens’ pre-integrated, cloud-first, low-code “insurance-in-a-box” approach across the majority of its products, empowering them to choose between deploying Sapiens end-to-end solution, or any combination of its components, to meet their evolving needs. Sapiens reiterated its full year 2021 revenue guidance, of $461 to $466 million and increased its operating margin guidance to a range of 17.4% to 17.5% from its prior range of 17.2% to 17.5%.”

“Magic Software reported another record quarter which further adds to its strong 2021 momentum. During the first nine months of 2021, Magic Software reported double digit growth and all-time highs across all of its key indices (revenues, gross profit, operating income, EBITDA and net income), which demonstrates the important role that Magic Software plays in its customers’ lifecycles and transformative journeys, as well as the success of its strategy to build a broad business portfolio that creates value for its customers in managing, streamlining, accelerating and maximizing their businesses. Magic increased its 2021 revenue guidance for the full year of 2021 for the third time this year to a range of $470 to $475 million from its prior range of $450 to $460 million.”

“Michpal Group continues to realize synergies and monetize on its business model with its revenues for the first nine months of 2021 growing by 27% compared to the same period last year to ILS 74 million (approximately $22.9 million) with 73% accounted to organic growth.”

“Lastly, 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, was consolidated since April 5, 2021. During these past months we’ve been focusing together with Zap’s management on the integration of Zap Group and on building a long-term strategy plan to accelerate its growth including the formation of potential business partnerships in order to expand Zap Group’s products and services offerings as well as reaching new customers. We will remain focused on the successful integration of Zap Group and continue to carefully explore additional M&As opportunities.”

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 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: 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 LOSS  U.S. dollars in thousands (except per share data)

		Three months ended								Nine months ended
		September 30,								September 30,
		2021				2020				2021				2020
		Unaudited								Unaudited
Revenues			586,257				487,344				1,746,775				1,390,678
Cost of revenues			444,617				370,952				1,338,636				1,068,221
Gross profit			141,640				116,392				408,139				322,457
Research and development costs, net			16,796				13,337				49,121				38,384
Selling, marketing and general and administrative expenses			74,390				57,691				210,576				159,199
Operating income			50,454				45,364				148,442				124,874
Financial expenses, net			5,580				5,891				16,623				16,162
Income before taxes on income			44,874				39,473				131,819				108,712
Taxes on income			9,821				8,088				30,014				24,514
Income after taxes			35,053				31,385				101,805				84,198
Share of profit (loss) of companies accounted for at equity, net			(308	)			(12	)			353				335
Net income			34,745				31,373				102,158				84,533
Net income attributable to non-controlling interests			21,452				18,743				63,111				49,650
Net income attributable to Formula Systems’ shareholders			13,293				12,630				39,047				34,883
Earnings per share (basic)			0.87				0.83				2.55				2.28
Earnings per share (diluted)			0.85				0.82				2.51				2.25
Number of shares used in computing earnings per share (basic)			15,289,267				15,286,350				15,289,267				15,285,517
Number of shares used in computing earnings per share (diluted)			15,396,849				15,293,113				15,366,211				15,292,498

FORMULA SYSTEMS (1985) LTD.  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION  U.S. dollars in thousands

		September 30,				December 31,
		2021				2020
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			453,283				501,650
Short-term deposits			40,614				30,289
Marketable securities			1,168				1,238
Trade receivables			610,813				519,885
Other accounts receivable and prepaid expenses			75,522				83,820
Inventories			21,136				23,988
Total current assets			1,202,536				1,160,870
LONG-TERM ASSETS:
Deferred taxes			42,119				39,750
Other long-term accounts receivable and prepaid expenses			26,732				22,872
Total  long-term assets			68,851				62,622
INVESTMENTS IN COMPANIES ACCOUNTED FOR AT EQUITY METHOD			28,575				28,311
PROPERTY, PLANTS AND EQUIPMENT, NET			56,675				59,176
RIGHT-OF-USE ASSETS			99,109				114,414
NET INTANGIBLE ASSETS AND GOODWILL			1,164,937				1,094,687
TOTAL  ASSETS			2,620,683				2,520,080
CURRENT LIABILITIES:
Loans and credit from banks and others			204,005				120,444
Debentures			48,785				41,454
Current maturities of lease liabilities			31,903				32,065
Trade payables			151,506				153,322
Deferred revenues			128,211				128,898
Other accounts payable			255,412				259,223
Liabilities in respect of business combinations			6,348				8,654
Put options of non-controlling interests			35,395				35,843
Total current liabilities			861,565				779,903
LONG-TERM LIABILITIES:
Loans and credit from banks and others			158,940				180,316
Debentures			216,769				203,070
Lease liabilities			77,657				91,188
Other long-term liabilities			12,602				12,191
Deferred taxes			73,615				68,367
Deferred revenues			19,136				16,626
Liabilities in respect of business combinations			23,778				16,582
Put options of non-controlling interests			25,974				28,175
Employees benefit liabilities			13,694				15,119
Total long-term liabilities			622,165				631,634
EQUITY
Equity attributable to Formula Systems’ shareholders			519,700				503,201
Non-controlling interests			617,253				605,342
Total equity			1,136,953				1,108,543
TOTAL LIABILITIES AND EQUITY			2,620,683				2,520,080

FORMULA SYSTEMS (1985) LTD.  STAND-ALONE STATEMENTS OF FINANCIAL POSITION  U.S. dollars in thousands  

		September 30,				December 31,
		2021				2020
		(Unaudited)				(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			28,602				47,852
Other accounts receivable and prepaid expenses			6,552				4,977
Total current assets			35,154				52,829
INVESTMENTS IN SUBSIDIARIES AND A JOINTLY
CONTROLLED ENTITY (*)
Matrix IT Ltd.			146,699				142,194
Sapiens International Corporation N.V.			225,981				227,771
Magic Software Enterprises Ltd.			117,450				118,105
Other			167,836				90,359
Total Investments in subsidiaries and a jointly controlled entity			657,966				578,429
OTHER LONG TERM RECEIVABLES			2,207				1,707
PROPERTY, PLANTS AND EQUIPMENT, NET			9				2
TOTAL  ASSETS			695,336				632,967
CURRENT LIABILITIES:
Debentures			28,158				21,652
Trade payables			148				349
Other accounts payable			3,982				2,329
Total current liabilities			32,288				24,330
LONG-TERM LIABILITIES:
Debentures			137,814				104,394
Put options of non-controlling interests			1,116				1,042
Liability in respect of a business combination			4,418				-
Total long-term liabilities			143,348				105,436
EQUITY			519,700				503,201
TOTAL LIABILITIES AND EQUITY			695,336				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.