Executive Summary / Key Takeaways

• Magic Software Enterprises Ltd. (MGIC) is demonstrating robust growth, particularly in its Israeli operations, fueled by strong demand for cloud, DevOps, and AI services, alongside a notable recovery in its North American market.
• The company's proprietary low-code/no-code platforms and deep expertise in Generative AI (GenAI) represent a significant technological differentiator, enabling a 70% project success rate for GenAI adoption, far exceeding the industry average.
• Magic Software has revised its full-year 2025 revenue guidance upwards to $600 million to $610 million, reflecting anticipated annual growth of 8.6% to 10.4%, driven by a healthy pipeline and operational momentum.
• A proposed merger with Matrix I.T. is set to create a global IT powerhouse with over $2 billion in annual revenues, promising enhanced scale, cross-selling opportunities, and a stronger competitive position.
• Investors should monitor the successful integration of the Matrix merger, continued traction in the U.S. market, and the ongoing expansion of its high-margin software solutions segment.

The Architect of Digital Transformation: Magic Software's Strategic Foundation

Magic Software Enterprises Ltd. (MGIC), established in 1983, has evolved into a global provider of IT consulting services and end-to-end integration and application development platforms. The company's business model is bifurcated into Software Solutions and IT Professional Services, each playing a critical role in its overarching strategy to enable digital transformation for clients worldwide. Magic Software's foundational strength lies in its proprietary low-code/no-code platforms, such as Magic xpa for application development and Magic xpi for business process integration, which allow for rapid and efficient deployment of business applications across various environments.

The company's strategic responses to market dynamics have been pivotal in shaping its current position. In the second half of 2023, Magic Software experienced a slowdown in its North American operations, primarily among Fortune 500 clients, due to rising interest rates leading to project freezes and cuts. Despite this headwind, its Israeli operations consistently delivered strong double-digit organic growth throughout 2024, driven by robust demand for cloud, DevOps, AI, and defense sector services. This resilience underscored the inherent scalability and defensibility of Magic Software's business model, with cloud services revenue alone increasing by 45% year-over-year in 2024.

Technological Edge: Powering Innovation with AI and Low-Code

Magic Software's core differentiated technology centers on its low-code/no-code application development and business process integration platforms. These platforms, including Magic xpa and Magic xpi, offer tangible benefits by significantly accelerating the development and deployment of business applications. This approach allows organizations to build, deploy, and maintain complex systems with greater agility and reduced reliance on extensive coding, translating into faster time-to-market and lower development costs for clients.

The company is at the forefront of leveraging Generative AI (GenAI), actively redefining how organizations harness this transformative technology. Magic Software manages over 270 GenAI projects across more than 20 industries, supported by an expert team that has expanded from over 30 to over 50 specialists by the second quarter of 2025. This focus on GenAI adoption, from proof-of-concept to large-scale deployment, has yielded a remarkable 70% success rate for its customers, nearly six times higher than the industry average of 12%. Strategic alliances with global leaders like AWS, Azure, and Google Cloud further empower organizations in finance, healthcare, government, defense, and manufacturing to accelerate innovation and enhance productivity in the AI era. The company's CTO notes that GenAI development methods are poised to revolutionize the software development industry, and Magic is adapting its low-code tools for next-generation prompt-based tooling to capitalize on this shift.

Competitive Landscape and Strategic Positioning

Magic Software operates in a competitive IT services and software solutions market, contending with both large global players and specialized niche providers. Its direct competitors include industry giants like Accenture , Infosys , Cognizant (CTSH), and Wipro (WIT). While these larger firms benefit from immense scale, broader global reach, and diversified service portfolios, Magic Software carves out its niche through specialized proprietary technology and deep vertical expertise.

Magic Software's low-code/no-code platforms offer a qualitative edge in ease of implementation and efficiency for custom integrations, potentially providing superior performance in specific application development and integration tasks compared to the more generalized offerings of larger competitors. For instance, its vertical solutions like Clicks for medical records or HR Pulse for HR management provide tailored efficiency that can foster stronger customer loyalty in specific industries. This focused approach allows Magic Software to compete effectively by offering cost-effective, high-performance solutions in targeted segments, often leading to better operational efficiency for niche projects.

However, Magic Software's smaller scale compared to its global rivals presents certain vulnerabilities. Larger competitors like Accenture (ACN) and Infosys (INFY) often demonstrate stronger revenue growth and profitability margins due to their extensive operations and ability to capture larger, more complex enterprise projects. Magic Software's reliance on specific markets, particularly the U.S., has historically exposed it to macroeconomic fluctuations, as seen in the slowdown during the second half of 2023. The proposed merger with Matrix I.T. is a strategic move to address these scale disadvantages, aiming to create a more diversified and resilient global IT service provider. This combination is expected to enhance Magic Software's competitive positioning by leveraging a stronger brand, a larger customer base, and a broader suite of solutions, allowing it to better compete on a global scale.

Financial Performance and Operational Momentum

Magic Software has demonstrated solid financial execution, particularly in its Israeli operations. In the second quarter of 2025, total revenue reached a quarterly all-time record of $151.6 million, an increase of approximately 11.3% from the second quarter of 2024. Israel delivered an impressive 18.8% year-over-year growth, with over 90% being organic, driven by strong demand for cloud, DevOps, and AI services, as well as the defense sector. North American operations also showed strong performance, with revenue increasing approximately 6.5% year-over-year and 6% sequentially. For the first half of 2025, U.S. results reflected approximately 9% year-over-year revenue growth, signaling an improving market.

Profitability metrics reflect the company's revenue mix. The non-GAAP gross margin for the second quarter of 2025 was 28.7% of revenue, amounting to $43.6 million. This compares to 29.4% in the corresponding quarter of 2024. The software solutions segment, which constitutes approximately 17% of total revenue, boasts a high gross margin of approximately 65%. In contrast, professional services, making up approximately 83% of revenue, carries a gross margin of about 21%. The timing of renewals for term-based software agreements, heavily concentrated in the fourth quarter of 2025, is expected to improve gross margins in the latter half of the year, with management anticipating an annual gross margin of around 29%. Non-GAAP operating income for Q2 2025 increased by 1.9% to $18.6 million, and non-GAAP net income attributable to shareholders rose by 8.7% to $12.7 million, or $0.26 per fully diluted share.

The company's liquidity remains sound, with total financial debt decreasing from an average of $72 million in Q2 2024 to $63 million in Q2 2025. As of June 30, 2025, total financial debt stood at approximately $70 million.

Cash flow from operating activities for the first half of 2025 amounted to $21.2 million, a decline from $41.4 million in the corresponding period of 2024. This decrease primarily reflects increased investment in working capital to support the company's record-setting revenue growth, with management expecting cash conversion to normalize in the coming quarters. Magic Software also maintains a consistent dividend policy, declaring a semiannual cash dividend of $0.296 per share for the first half of 2025, representing approximately 75% of its distributable profit.

Outlook and Transformative Future

Magic Software has revised its full-year 2025 revenue guidance upwards, a testament to its sustained operational momentum and favorable market outlook. The company now anticipates revenue in the range of $600 million to $610 million, an increase from the previous estimate of $593 million to $603 million. This updated guidance reflects an anticipated annual revenue growth rate of approximately 8.6% to 10.4% compared to the prior fiscal year. Management's confidence is rooted in healthy demand across its markets and a strong, growing pipeline, particularly driven by cloud and AI services.

A significant inflection point in Magic Software's corporate journey is the contemplated merger with Matrix I.T. , announced in March 2025. This proposed transaction is expected to be transformative, combining the strengths of two well-established technology leaders to create a more diversified and resilient global IT service provider. The combined entity is projected to generate over $2 billion in annual revenues and employ more than 15,000 professionals. The merger is anticipated to unlock substantial value through increased scale, operational synergies, and expanded service portfolios, leveraging Matrix's dominant market position in Israel with Magic Software's international presence, especially in the U.S. The transaction is expected to be presented for shareholder endorsement in the fourth quarter of 2025.

Risks and Considerations

While Magic Software's outlook is positive, investors should consider several risks. The full recovery of the U.S. market, while showing promising signs, is not yet complete. Economic uncertainties could still impact IT spending by blue-chip customers, potentially affecting revenue growth in North America. Additionally, calendar-driven operational factors, such as the timing of holidays, can temporarily reduce billable days and impact quarterly revenues, as observed in Q2 2025 due to Passover. The successful integration of the proposed merger with Matrix I.T. is also a critical factor. While expected to be transformative, any complexities or delays in the execution phase could introduce uncertainty.

Conclusion

Magic Software Enterprises Ltd. stands at a pivotal juncture, poised for continued growth driven by its technological leadership in low-code/no-code platforms and its aggressive expansion into Generative AI. The company's strong performance in Israel, coupled with an emerging recovery in North America, underpins its upwardly revised 2025 revenue guidance. The proposed merger with Matrix I.T. (MTRX) represents a bold strategic move designed to amplify its scale, broaden its offerings, and solidify its competitive standing as a global IT powerhouse.

Magic Software's ability to consistently deliver high-value services and innovative software solutions, particularly in the rapidly expanding AI and cloud domains, positions it favorably for long-term value creation. The "land and expand" nature of its GenAI projects and its superior project success rate highlight a compelling competitive advantage. As the company progresses with the Matrix merger and continues to capitalize on its technological differentiators, it presents a compelling investment thesis for discerning investors seeking exposure to a dynamic and strategically evolving player in the IT services sector.