Business context and reporting period
Formula Systems (1985) Ltd. filed an annual Form 20-F for the fiscal year ended December 31, 2019, not a standalone 2019 fourth-quarter report. The consolidated statements are prepared under IFRS in U.S. dollars. Formula is an IT and software holding company; its principal businesses include Matrix, Sapiens, Magic Software, Michpal and InSync. TSG is jointly controlled and accounted for using the equity method.
Consolidated results include subsidiaries Formula controls under IFRS despite its minority ownership stakes in Matrix, Sapiens and Magic Software. Non-controlling interests therefore receive a substantial share of reported group earnings. The filing says Q4 represented 26.3% of full-year 2019 revenue but does not provide a clear standalone Q4 revenue figure in the supplied text.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1,701.1 million | $1,493.0 million | +13.9% |
| Gross profit / margin | $386.0 million / 22.7% | $333.3 million / 22.3% | Margin +0.4 percentage points |
| Operating income / margin | $138.5 million / 8.1% | $109.6 million / 7.3% | +26.3%; margin +0.8 points |
| Net income | $94.4 million | $77.4 million | +22.0% |
| Net income attributable to Formula shareholders | $38.8 million | $32.4 million | +19.9% |
| Basic / diluted EPS | $2.56 / $2.44 | $2.20 / $2.14 | Basic +16.4%; diluted +14.0% |
| Cash from operating activities | $196.1 million | $82.6 million | +$113.5 million |
| Cash and cash equivalents | $368.7 million | $268.5 million | +$100.2 million |
| Current assets / current liabilities | $965.5 million / $671.4 million | $781.1 million / $525.5 million | 2019 current ratio approximately 1.44 |
| Bank and other borrowings plus debentures | Approximately $494.1 million | Approximately $381.4 million | +29.6% |
| Total equity | $896.3 million | $805.4 million | +11.3% |
Revenue comprised software services of $1,286.9 million, up 14.6%, and proprietary software products and related services of $414.2 million, up 11.9%. International customers generated 38% of 2019 revenue; Israel contributed $1,047.3 million and the United States $462.8 million.
Net financial expense increased to $18.7 million from $8.3 million. The filing attributes the rise mainly to currency-related effects, higher Matrix interest expense and the initial application of IFRS 16. Net income includes $55.6 million attributable to non-controlling interests, compared with $45.0 million in 2018.
Material changes versus the prior comparable period
- Growth was broad-based but included acquired businesses. Acquisitions and expanded consolidation contributed to the increase at Matrix, Sapiens, Magic Software and Michpal; reported growth should not be read as wholly organic.
- Operating margin improved as gross margin rose and selling, marketing, general and administrative expense grew more slowly than revenue. However, the filing’s percentage presentation for these expenses is inconsistent: it gives 12% for both years in one table, while the discussion states 10.1% for 2019; the reported dollar amounts imply approximately 11.8%.
- Operating cash flow rose sharply from 2018, when growth in receivables had absorbed cash. In 2019, lower trade receivables and other receivables supported cash generation, alongside non-cash depreciation and amortization.
- Investing cash outflow was $108.2 million, including $52.5 million net cash spent on acquisitions, $22.4 million on property and equipment, and $9.8 million on capitalized software and other costs. Financing cash provided was $6.0 million, down from $41.0 million in 2018.
- Formula issued NIS 300 million of Series C secured debentures in March 2019. It also repaid the remaining Formula Series B convertible debentures at maturity and converted a portion into shares. Formula’s 2015 institutional loan was fully repaid in January 2020.
- IFRS 16 was adopted in 2019, adding $104.1 million of operating lease right-of-use assets at year-end and lease liabilities; 2018 was not restated. The group reported $34.5 million of lease-liability repayments during 2019.
Outlook, commentary, risks and unusual items
Management stated that available cash, expected subsidiary distributions and existing credit facilities should meet working-capital needs for at least the next 12 months at the then-current operating level. The filing does not provide specific 2020 revenue or earnings guidance. It cautions that COVID-19 could cause customer delays or cancellations, lower IT spending, travel and service-delivery constraints, and payment delays; the impact was described as uncertain.
The group continued its acquisition-led growth strategy. 2019 acquisitions included businesses in insurance software, IT staffing, low-code software, engineering, ERP and payroll. The filing reports $889.5 million of intangible assets and goodwill at year-end, including $724.2 million of goodwill, and no impairment losses for 2017–2019. Acquisitions carry integration, retention, contingent-payment and impairment risks.
Debt agreements and debentures impose financial covenants and restrictions, including limits on dividends, additional liens and certain transactions; breach or ratings downgrades could accelerate repayment. At December 31, 2019 the group reported compliance with covenants. Formula’s secured debentures are collateralized by shares in publicly traded subsidiaries. Contractual obligations totaled $934.7 million, including debt, debentures, leases and acquisition liabilities.
Material exposures also include foreign-exchange movements, particularly the NIS against the U.S. dollar; customer concentration and complex project delivery; privacy and cybersecurity; competition and talent costs; Israeli political and security conditions; and government and defense spending or export-license approvals. A Magic Software dispute seeks NIS 34.1 million in damages; the company rejects the claim and says it cannot reliably estimate its chance of success. Other legal provisions were described as immaterial. The auditors issued unqualified opinions on the financial statements and internal control, but management’s control assessment excluded two 2019 acquisitions representing approximately 1.9% of revenue.
Formula declared dividends of approximately $8.0 million and $7.1 million in 2019; the latter was paid in January 2020. Formula’s stand-alone functional currency changed to the NIS effective January 1, 2019, while the group continued reporting in U.S. dollars.
Most important facts for investors to verify
- How much of revenue and operating-income growth came from organic performance versus acquisitions, currency translation and changes in consolidation.
- Whether the increase in operating cash flow is repeatable, including the effects of receivables, payables, deferred revenue and acquisition-related payments.
- Current debt and lease obligations, upcoming maturities, covenant headroom, and the effect of the secured share pledges.
- Acquisition integration progress, contingent consideration, and the carrying-value assumptions behind $889.5 million of goodwill and intangible assets.
- The status and potential financial exposure of the NIS 34.1 million Magic Software lawsuit, tax uncertainties and Innovation Authority royalty obligations.
- The extent of COVID-19’s effects on customer demand, projects, collections and operations, as the filing provides risk discussion but no specific forward financial guidance.
- The filing’s inconsistent SG&A margin disclosure and whether the 2019 figure is approximately 11.8% based on the stated expense and revenue amounts.