Formula Systems (1985) Ltd. — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023; filed May 15, 2024. This is an annual report, not a standalone fourth-quarter filing. Consolidated statements are prepared under IFRS in U.S. dollars. Formula is a technology holding company, consolidating Matrix, Sapiens, Magic Software and other subsidiaries; its 50%-owned TSG is accounted for using the equity method.
Key financial results
Amounts below are U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Revenue | $2,620.9 | $2,572.4 | +1.9% |
| Gross profit / margin | $643.7 / 24.6% | $622.5 / 24.2% | Margin improved 0.4 percentage points |
| Operating income / margin | $239.4 / 9.1% | $276.6 / 10.8% | FY2022 included a $44.3 million gain on a subsidiary sale; excluding that gain, FY2022 operating margin was about 9.0% |
| Net income | $165.7 | $199.7 | Down 17.0% |
| Net income attributable to Formula shareholders | $64.0 | $81.4 | Basic EPS was $4.19 vs. $5.31; diluted EPS was $4.12 vs. $5.21 |
| Net cash from operating activities | $295.0 | $239.1 | Increased; cash generation outpaced net income |
| Net cash used in investing activities | $139.2 | $74.3 | Higher acquisition spending and deposits contributed |
| Net cash used in financing activities | $243.2 | $71.0 | Included debt and lease repayments and dividends |
| Cash and cash equivalents at year-end | $451.9 | $544.3 | Down $92.4 million |
Revenue mix shifted modestly toward proprietary software products and related services: $693.4 million, up 5.1%, versus software services revenue of $1,927.5 million, up 0.8%. Revenue from Israel was $1,600.8 million, or about 61.1% of total; international revenue was 38.9%. Europe revenue increased while U.S. revenue declined.
Balance sheet, debt and liquidity
- Current assets were $1,375.9 million and current liabilities $985.7 million at year-end, a current ratio of about 1.40 and net current assets of approximately $390.2 million.
- Cash, short-term deposits and short-term investments totaled approximately $528.2 million, compared with $569.1 million in 2022.
- Bank and other borrowings plus debentures totaled approximately $541.3 million: $146.0 million of current bank and other credit, $90.9 million of long-term loans, and $304.4 million of debentures, including accrued interest. The comparable 2022 total was about $647.7 million. These figures exclude lease liabilities; year-end lease liabilities were $128.7 million.
- Total equity was $1,308.2 million, including $625.8 million attributable to Formula shareholders and $682.4 million of non-controlling interests.
- Goodwill was $936.6 million and intangible assets were $206.9 million. The company reported no goodwill impairment in 2023.
Material changes and management commentary
- Reported operating income and net income declined, although the prior-year operating result benefited from the $44.3 million Infinity Labs disposal gain. Net financial expenses rose to $28.3 million from $19.9 million, chiefly due to higher borrowing and lease interest costs, derivative losses, and the absence of prior-year PPP loan-forgiveness income.
- Sapiens revenue grew 8.4%, primarily organically. Matrix reported growth across most activities, while its training and integration activity weakened amid lower high-tech hiring and wartime restrictions on in-person courses.
- Magic Software revenue fell, in part after a major North American customer suspended significant time-and-materials projects. The filing also cites currency effects and macroeconomic caution as headwinds. Shamrad saw increased demand for security-related systems following the outbreak of the Israel-Hamas war.
- Acquisitions included NCDC by Sapiens, KMT by Magic Software, Zebra by Matrix, and Emalogic by Michpal. Cash expenditures for acquisitions, net of cash acquired, were $37.0 million in 2023.
- Remaining performance obligations were approximately $2.320 billion at year-end, with 66.2% expected to be recognized in 2024. This is not company revenue guidance; time-and-materials professional services contracts were excluded.
- Management said existing cash, expected subsidiary distributions and available credit should cover working capital needs for at least 12 months at current operating levels. The company gave no specific consolidated revenue or earnings guidance. Its outlook is subject to uncertainty; management cited analyst forecasts of a potential 2024 IT-market recovery, not company-specific guidance.
Risks, contingencies and unusual items
- Israel-related disruption: The war and regional hostilities may affect staff availability, customer demand, government spending, suppliers and delivery. The company reported limited negative effects on Israeli operations through the filing date, but the duration and economic consequences remained uncertain. Insurance does not cover war and terrorism losses.
- Foreign exchange and macroeconomic exposure: Shekel depreciation reduced the U.S.-dollar value of Israeli operations; inflation, interest rates and weaker customer spending may pressure growth, profitability and cash flow.
- Customer, project and technology risks: Long sales cycles, project cost or timing overruns, cancellations, customer concentration, competition, cybersecurity incidents, privacy regulation and the shift to cloud services may affect results.
- Debt covenants: Formula and key subsidiaries reported compliance with their financial covenants at December 31, 2023. Debt agreements restrict matters including dividends, additional debt and asset dispositions; a covenant breach or ratings downgrade could trigger consequences, including accelerated repayment.
- Legal matters: A court dismissed in December 2023 a derivative-action certification motion concerning the CEO’s RSU award; the plaintiff appealed, with a Supreme Court hearing scheduled for February 2025. Zap Group faces price-comparison and other claims, including a reduced class-action claim of NIS 63 million and a separate NIS 24.5 million claim; outcomes are uncertain. Certain pre-acquisition Zap claims are covered by seller indemnities. A potential Matrix derivative action concerning executive compensation was also disclosed.
- Controls and acquisitions: Formula reported effective consolidated internal control over financial reporting, and the auditor issued an unqualified opinion. However, Magic Software identified a material weakness in its own controls relating to documentation and review evidence; management was continuing remediation. Formula excluded the acquired KMT business from its 2023 internal-control assessment.
- Other unusual exposure: Tax incentives and Israeli Innovation Authority grants are conditional and can carry repayment, royalty or technology-transfer obligations. Goodwill and intangible assets are substantial and depend on future cash-flow estimates.
Most important facts for investors to verify
- Review audited financial statements and notes for the operating-income comparison, including the $44.3 million 2022 disposal gain, and the increase in net financing costs.
- Confirm debt and liquidity definitions, subsidiary-level maturities, covenant headroom, pledged shares and lease obligations; consolidated cash is not necessarily freely available to Formula’s parent.
- Track whether customer project suspensions, Matrix training weakness, currency movements and Israel-related disruption persist or alter subsidiary performance.
- Assess the progress of Magic Software’s controls remediation and whether any further deficiencies affect consolidated reporting.
- Follow the CEO RSU appeal and the material Zap and Matrix legal matters, including any changes to estimated exposure or seller indemnification coverage.
- Evaluate acquisition integration and the carrying value of goodwill and acquired intangible assets, alongside the expected conversion of remaining performance obligations into revenue.