20-F: Formula Systems Reports Fiscal Year 2023 Results, Navigating Global Economic Headwinds and Regional Conflicts

Formula Systems reports a 1.9% increase in revenue for fiscal year 2023, reaching $2.62 billion, while navigating macroeconomic challenges and regional conflicts.

Summary

• Formula Systems (1985) Ltd. reported a 1.9% increase in revenue for fiscal year 2023, reaching $2.62 billion.
• Revenue from software services increased by 0.8% to $1.93 billion, while revenue from proprietary software products and related services increased by 5.1% to $693.4 million.
• Operating income decreased to $239.4 million in 2023 from $276.6 million in 2022, primarily due to the absence of a capital gain from the disposition of a Matrix IT subsidiary in 2023.
• The company experienced slower growth in revenues, profitability, and cash flows due to macroeconomic headwinds such as inflation, high interest rates, and currency exchange rate movements.
• The ongoing war between Israel and Hamas and Hezbollah may limit the company's ability to sell its products.
• The company's largest shareholder, Asseco Poland S.A., can significantly influence the outcome of matters that require shareholder approval.
• The company is subject to a range of requirements relating to internal controls over financial reporting.
• The company is subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide.
• The company is continuing to expand its international operations as part of its growth strategy.
• The company is dependent on a limited number of core product families.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While revenue increased, profitability decreased, and several risks and challenges were identified. The company is navigating a complex environment with both opportunities and threats.

Positives

• Revenue from proprietary software products and related services increased by 5.1% to $693.4 million.
• Matrix's operation in the United States experienced a 15.2% increase in operating income.
• Matrix's computer and cloud infrastructure and integration solutions saw a 14.9% increase in operating income.
• Matrix's software product marketing and support experienced a 90.5% increase in operating income.
• Sapiens revenue for 2023 grew by 8.4%.
• InSync's revenues increased by approximately 14.6% from $46 million in 2022 to $52.7 million in 2023.
• Shamrad Electronics revenues increased by approximately 257% from $3.7 million in 2022 to $13.2 million in 2023.

Negatives

• Operating income decreased to $239.4 million in 2023 from $276.6 million in 2022.
• Magic Software's revenues decreased by approximately 6.9% from $489.2 million in 2022 to $455.5 million in 2023.
• Matrix's training and integration business segment experienced a 16.8% decrease in revenue.
• Zap Group's revenues decreased by approximately 20.8% from $39.4 million in 2022 to $31.2 million in 2023.

Risks

• The implementation of the company's M&A growth strategy involves significant risks.
• Failure to successfully develop and deploy new technologies could harm the business.
• Macro-economic headwinds may adversely impact revenues, profitability, and cash flows.
• The company's inability to respond to the evolving technological environment could materially affect results of operations.
• Highly skilled personnel are difficult to retain.
• Failure to manage growth could harm the business.
• The market for software solutions and related services is highly competitive and dynamic.
• Relationships with existing customers could be impaired.
• The company is dependent on a limited number of core product families.
• The company's business sometimes involves long-term, large, complex implementation projects across the globe, which are accompanied by various risks.
• The company may be liable to clients for damages caused by a violation of intellectual property rights.
• Significant disruptions of information technology systems or breaches of data security could adversely affect the business.
• Errors or defects in software solutions could inevitably arise.
• Catastrophes may adversely impact the insurance industry.
• There may be consolidation in the insurance or other markets in which the company operates.
• The company's and its investees' credit facility agreements and debentures are subject to a number of restrictive covenants.
• Third parties may assert that the company has infringed their intellectual property rights.
• Fluctuations in foreign currency exchange rates have been adversely affecting, and could continue to adversely affect, the business.
• The ongoing war and hostilities between Israel and terrorist groups may limit the company's ability to sell its products.
• A reduction of government spending in Israel on IT services may reduce revenues and profitability.
• Tax benefits available to certain of the company's Israeli subsidiaries and its Israeli affiliate require the company to continue to meet various conditions and may be terminated or reduced in the future.
• As the company continues to expand its business in emerging markets, such as India, it faces increasing challenges.
• There is limited trading volume for the company's ADSs and ordinary shares, which reduces liquidity and increases volatility.
• The company has a history of quarterly fluctuations in results of operations.
• The company's securities are traded on more than one market, which may result in price variations.
• The company's largest shareholder, Asseco Poland S.A., can significantly influence the outcome of matters that require shareholder approval.
• If the company is unable to maintain effective internal control over financial reporting, the reliability of its financial statements may be questioned.
• The enactment of legislation implementing changes in taxation of international business activities, the adoption of other corporate tax reform policies, or changes in tax legislation or policies could impact the company's future financial position and results of operations.
• The company may have difficulty protecting its interests as a shareholder of Sapiens, which is a Cayman Islands company.
• The company's U.S. shareholders may suffer adverse tax consequences if the company is classified as a passive foreign investment company or as a controlled foreign corporation.

Future Outlook

The company expects to continue to develop and enhance the products, services, and solutions of its investees and to continue to pursue additional acquisitions of, or investments in, companies that provide IT services and proprietary software solutions.

Industry Context

The document provides insight into the competitive landscape of the IT services and software solutions market, highlighting the presence of multinational IT service providers, offshore IT service providers, accounting firms, consultancies, and solution providers. It also discusses the increasing trend of customers switching to cloud-based solutions and the need for companies to adapt to changing market conditions.

Comparison to Industry Standards

• The document mentions Gartner's forecast for global insurance market IT spending, projecting a 7.0% growth in 2023 and reaching nearly $213 billion.
• The document mentions Gartner's forecast that total insurance IT spending on software in 2024 will be $63.0 billion.
• The document mentions Gartner's forecast that global IT spending in insurance will increase by 8.9% in 2024 to reach $232.3 billion.
• The document mentions Gartner's forecast that from 2022 to 2027, the spending is forecast to grow at a CAGR of 9.0%, driven by the growth in IT services and software at a CAGR of 9.9% and 14.1%, respectively.
• The document mentions Gartner's forecast that total insurance IT spending on software in 2023 will be $52.9 billion.
• The document mentions that Sapiens estimates that its current total addressable market for core insurance software solutions and the accompanied point solutions and the corresponding part of IT services is approximately $60 billion.

Legal Proceedings

• Olir Trade and Industries Ltd. filed a derivative action and a motion to certify a derivative action, with the District Court (Economic Division) of Tel Aviv-Jaffa, Israel, challenging the legality, under the Companies Law, of compensation awarded to the company's chief executive officer and chief financial officer.
• A motion for the approval of a class action was filed against Zap Group with the Israeli district court (central district), claiming that Zap Group had allegedly generated income illegally from paying customers through the ZAPs price comparison website.
• Ronen Har Even, Galit Har Even and TV Center Ltd. submitted a monetary claim and a claim for the grant of a mandamus order against Zap Group, in the District Court at Haifa, alleging that Zap Group constitutes a monopoly in the provision of price comparison services in the online arena in Israel.
• Safra, a subsidiary of Zap Group, was added as defendant to a lawsuit filed by the estate of the deceased Klil Kimchi, who died in an accident in a swimming pool in a private house during a social event organized by Safra and another company.
• Our subsidiary Matrix received a request for disclosure of materials pursuant to Section 198a of the Companies Law, which was submitted to the District Court (Economic Division) of Tel Aviv-Jaffa by an individual who claimed to be a shareholder of Matrix.

Related Party Transactions

• During 2023, Asseco provided back-office services, professional services and fixed assets to Sapiens Poland in an amount totaling approximately $0.2 million.
• During 2023, Sapiens Poland performed services as a sub-contractor on behalf of Asseco for clients of Asseco in a total amount of approximately $3.5 million.
• Sapiens paid Formula approximately $28,288 in respect of their share of the directors fees of Guy Bernstein, their Chairman, for the year ended December 31, 2023.
• Matrix paid Formula approximately $27,000 in respect of their share of the directors fees of Guy Bernstein, their Chairman, for the year ended December 31, 2023.
• During 2023, Magic Software provided back-office services to Formula in amounts totaling approximately $224.

Stakeholder Impact

• Shareholders may experience volatility in the market price of the company's ordinary shares and American Depositary Shares.
• Employees may face challenges related to job security and compensation due to macroeconomic headwinds and industry competition.
• Customers may experience delays or disruptions in service due to potential cyber-attacks or supply chain disruptions.
• Suppliers may be affected by the company's financial performance and ability to meet its obligations.
• Creditors may be at risk if the company breaches restrictive covenants in its credit facility agreements and debentures.

Next Steps

• The company expects to continue to develop and enhance the products, services, and solutions of its investees.
• The company expects to continue to pursue additional acquisitions of, or investments in, companies that provide IT services and proprietary software solutions.

Key Dates

Keywords

financial results, annual report, software services, proprietary software, IT solutions, Formula Systems, Sapiens, Matrix, Magic Software, Michpal, InSync, Zap Group, Shamrad, TSG, Israel