Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Magic Software Enterprises Ltd (NASDAQ:MGIC)
Q3 2020 Earnings Call
Nov 16, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to Magic Software Enterprises 2020 Third Quarter Financial Results Conference Call. [Operator Instructions] Magic's quarterly earnings release was issued before the market opened this morning and it has been posted on the company's website at www.magicsoftware.com.

Representing Magic Software today, are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Bernstein; and Magic's VP of Technology & Innovation, Mr. Yuval Lavi.

Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements. The safe harbor provision provided in the press release issued today also applies to the content of this call. Magic expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information or change in its views or expectations or otherwise.

Also during the course of today's call, management will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in the press release issued before the market opened this morning. A replay of this call will be available after the call on Magic Software Investor Relations section of the website.

I would now like to turn over the call to Mr. Asaf Bernstein, CFO of Magic Software. Please go ahead.

Asaf Berenstin -- Chief Financial Officer

Thank you, operator and thank you everyone for joining us today as we report our third quarter 2020 financial results. Magic continues to deliver strong execution across all upfront as we advance our business globally, signing new business and increasing our revenue from existing customers.

During the third quarter revenue grew by 11% driven by our solid strategic performance to expand in Israel and in North America and leverage our existing customer relationships to up-sell additional services. This quarter we increased our revenue in Israel by 23% year-over-year, North America by 8% and Europe by 7%. These results were driven by the expansion of work for our existing customers and the addition of new ones during the quarter and demonstrates our ability to deliver our Software Solutions and Services to our existing customers and closed new deals alongside our continued solid execution of our priorities of top line growth, despite continued global impact of the COVID-19 on business decision making.

Overall COVID-19 continues to leave only a small impact over our business results. As we prioritized our performance, we continue to work closely with our large customer base, supporting them in their daily challenges that they face. As markets are trying to normalize after the initial impact of COVID-19, we see that the current business disruption related to the pandemic pushes organization to embrace profound digital transformation to migrate from legacy system to more than flexible on-premise or cloud-based solutions as well as the need for meeting customers' expectations for digital and more personalized experience while improving the operational efficiency. This alone is driving future opportunities for Magic Software as our business is benefiting from this global trends that are driving our growth, unlike during the first wave of COVID-19 with the second wave now hitting the main markets in which we operate, we experienced much less uncertainty from our customers and rarely comes across customers taking sudden decision to stop or reduce project activity as we witnessed a solid demand for new project and expansion of existing project in much more normal fashion.

From Magic's point of view, our direct customer relations as well as trusted advisor approach has been a beneficial aspect of our business model, especially in these challenging business environments and we help our customers address the new and unique challenges. In return, this helps us secure repeating revenues while increasing sales within our existing customer base delivering additional services to enable our customers' growth and success. While there continues to be near term uncertainty from COVID-19, we remain focused on execution. And for the remainder of 2020, I'm pleased to say that deliverables to our existing customers remain on track.

We will continue to grow where we have already landed and leverage our investments. We continue to see the growth in sales to our existing customers which proves the viability of our position as a one-stop-shop for the SMB market with enhanced products and services. Solid demand for our offerings with higher repeating revenue and a solid balance sheet positions us for success in this challenging environment. We continue to seek business growth organically and through M&A, while we seek further opportunities to increase operating efficiencies and improved margins. We are confident that as a global economy -- as the global economy recovers Magic Software will emerge stronger and well positioned for the continued growth.

Turning now to our third quarter business performance. I will now review our non-GAAP results followed by comments on the balance sheet, cash flow and end with our outlook for the remaining of 2020. Revenue in the third quarter of 2020 increased by 11% to $94.9 million compared to $85.8 million in the third quarter of 2019. Looking at the geographical breakdown of our revenues, during the third quarter, North America accounted for 46% of total revenues. Israel 42%, Europe 8% and APAC and the rest of the world accounted for 4% of our third quarter revenue. Most of our growth in absolute numbers during the third quarter was traditionally from North America and Israel, which continues to be our strongest territories. North America accounted for 30% of our growth in the third quarter and Israel accounted for 65%. For the nine-months period, North America accounted for 41% of our growth in the third -- and Israel accounted for 55%.

Turning now to profitability. Our non-GAAP gross profit for the third quarter of 2020 was $30.7 million, up approximately 6% compared to $28.9 million in the third quarter of last year. Our non-GAAP gross margin for the third quarter of 2020 decreased from 33.7% in the third quarter of 2019 to 32.4% in the third quarter of 2020. The decrease in our gross margin is solely attributable to the change of our revenue mix related to our software solutions versus our professional services. The breakdown of our revenue mix for the nine-month period of 2020 was approximately 24% related to our software solutions and 76% related to our professional services, compared to 26% related to all software and 74% related to our professional services in 2019 as a whole, and 25% related to our software solution and 75% related to our professional services during the third quarter of 2019. The breakdown of our gross profit mix for the nine-month period of 2020 was approximately 50% related to our software solution and 50% related to our professional services, the same as in 2019 as a whole.

Moving to operational cost. R&D expenses on a non-GAAP basis in the third quarter of 2020 totaled $3.1 million same as in the respective quarter and compared to $2.8 million in the previous quarter. SG&A expenses on a non-GAAP basis in the third quarter of 2020 totaled $13.4 million compared to $14.1 million in the same quarter of last year and -- $11.4 million in the previous quarter. The increase in our SG&A expenses versus the second quarter of 2020 is attributable to cost-cutting measurements taken with respect to the COVID-19 business disruption during the second quarter and as we moved back to more normalized business environment we reduced savings to support our growth. Our non-GAAP operating income for the third quarter of 2020 increased 21% to $14.2 million compared to $11.8 million in the same period last year. This reflects an operating margin of 14.9% for the third quarter of 2020 compared to 13.7% in the third quarter of 2019 and 14.1% in the second quarter of 2020.

Our non-GAAP tax expenses this quarter totaled $3 million compared to tax expense of $1.4 million in the third quarter of 2019. Our effective tax rate for the nine month period of 2020 was 18% compared to 19% recorded in 2019 as a whole. We expect our effective tax rate in 2020 to be in the range of 19% to 21%. Our non-GAAP net income for the third quarter increased 17% to $9.5 million or $0.19 per fully diluted share compared to $8.1 million or $0.17 per fully diluted share in the same period last year.

Turning now to the balance sheet. As of September 30, 2020, cash and cash equivalents, short and long-term bank deposits and marketable securities amounted to approximately $86 million compared to $92 million in the previous quarter. Our total financial debt as of September 30, 2020 amounted to $28.8 million compared to $25.3 million in the previous quarter. From a cash flow perspective, we generated $13.3 million from operating activities in the third quarter which was offset mostly by $8.6 million or $0.175 per share related to dividend distribution to shareholders with respect to the first half of 2020, $2.3 million related to dividend distribution to non-controlling interests and $10.8 million related to M&A activities. We continue to have high conversion from net profit to cash flow from operating activities. Third quarter represents 90% conversion and the accumulated last nine months represent 103% conversion rate from net profit to adjusted operating cash flow.

In closing, I would like to turn now to our guidance for 2020. The global economy experienced significant disruption from COVID-19 and we have managed to -- and we have managed the pandemic effect for both our employees and our customers worldwide. That said, our business model has shown its resilience in a challenging environment. From an operational perspective, we are a software company which fortunately allows us to reasonably work in hand or from client side. As a result, we have a very high visibility of our revenue stream from existing customers. These factors give us confidence for the reminder of the year and we are raising our 2020 full year revenue guidance, which we expect to be in the range of $358 million to $365 million on a constant currency basis, reflecting an annual growth rate of 9.9% to 11.5% year-over-year as compared to our prior range of $350 million to $360 million overall increasing the midpoint of our guidance by 1.8%.

With that I will now turn the call over to operator for questions.

Questions and Answers:

Operator

Thank you, ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

Tavy Rosner -- Barclays -- Analyst

Hi, good afternoon. Thanks for taking my questions. I just wanted to touch on guidance. So your updated guidance kind of imply flat Q4 in terms of revenue or roughly 4% year-over-year in Q4. So I'm just wondering if you guys are being conservative or if you are expecting some kind of slowdown in Q4 compared to Q3?

Asaf Berenstin -- Chief Financial Officer

We always -- we are always conservative, but you need to remember that October, for example, there is the New Year's holiday season in Israel, which todaty account for over 40% of our revenue stream and also in November with the American with North America holiday season and Christmas also have some impact on the revenue. We always -- we hope that we will meet the higher end of our guidance, but I guess that we remain conservative, by the way as we were in the second quarter where I think that everybody knew that we will update our guidance.

Tavy Rosner -- Barclays -- Analyst

That's helpful. And then I just want you to talk about your customers' a little bit. So where do you see most of the demand coming from in terms of vertical and conversely, where do you call kind of pushing back in terms of budget during the corona time, like what's driving most of the business at the moment?

Asaf Berenstin -- Chief Financial Officer

I think that Magic is today very oriented to the healthcare sector, to the financial sector, to the defense sector. We are also oriented a little bit to the sector, which a little bit is in parallel to our results this year, we expected it to be much better than we saw a recovery, a slight recovery during the third quarter. So in defense we see a solid demand, I think that all of these sectors, the financial sector, the defense and the hotel sector are the ones that were the minimum hit from the COVID-19. You need to remember that the financial district [Phonetic] works and invest a lot of money in order to update the legacy system. We have tens of common people working on Israeli banks and Israeli insurance companies and credit card companies to update their legacy system, same with start-up. Every start-up in Israel that today we see it, and we feel that every start-up in Israel that start to generate revenues and start to grow its business, in everything that goes around the Big Data and cloud services in our domain and the approaches and with that we manage also to grow business. Same with the healthcare, CVS, the two Israeli biggest and now largest healthcare providers, also in the midst of investment due to the COVID-19 and handling the winter, which also contributed to our business. So all of that are drivers for the increase in our activity and I'm sure that they will also continue in 2021.

Tavy Rosner -- Barclays -- Analyst

Thank you Asaf. That's helpful. And maybe a last one, if I may, on the M&A. So you reiterated your commitment to future acquisitions. Have you guys seen anything relevant lately in the pipeline and perhaps valuations are too high or there is a lot of competition for kind of trophy assets. Any color you could add?

Guy Bernstein -- Chief Executive Officer

I will answer that Asaf. Yes, we do have a lot of transaction in the pipe. Most of them or other very small companies as we don't work through bankers, most of the businesses we acquire are coming by our businesses. The branches around the world and therefore they are way more conservative in the way we do it, because we are talking about companies that we know, companies that we compete, but the disadvantages is that most of them are rather small, so this is how we do it. Still, we are looking for the one which is like a game changer. Apparently prices are -- will be high, but we are still looking.

Tavy Rosner -- Barclays -- Analyst

All right, that's helpful. Thanks, Guy and Asaf.

Operator

The next question is from Maggie Nolan of William Blair. Please go ahead.

Maggie Nolan -- William Blair -- Analyst

Hi. Congrats on the strong quarter. I'm sensing some kind of preliminary optimism on 2021. Can you maybe give us some preliminary thoughts just based on the conversations you've had with clients around what they are seeing in terms of their budgets for 2021 and how that may translate into your outlook for both software and services?

Guy Bernstein -- Chief Executive Officer

Nolan.

Asaf Berenstin -- Chief Financial Officer

Okay. Go ahead Guy, sorry.

Guy Bernstein -- Chief Executive Officer

Yes, so I would probably say that in the sectors we work in, like the healthcare is definitely, they all have like a lot of plans for 2021. About the financial sector, they always have plans and they always invest. So we're trying to expand as much as we can within the existing customers. And of course, to gain some more new logos. So all in all, currently they all are pretty positive about 2021, yet to be seen. We are not sure where this all pandemic is going to.

Operator

Ms. Nolan.

Maggie Nolan -- William Blair -- Analyst

Thank you. I do have a follow-up. So for this quarter, the September quarter, can you give us a little more detail on the new client additions and kind of the breakout of the growth coming from new clients versus your existing client base? Thank you.

Guy Bernstein -- Chief Executive Officer

I think it would be proudly rather tough to give you like a list of clients, because as you know, Magic is working. Most of the deals are rather small deals in the range of like a few tens to a few hundred thousand dollars and therefore there is no significant client that is making a strong impact in the quarter. So it's probably between a few tens of clients. We definitely see the expansion in the healthcare and in the financial sector.

Maggie Nolan -- William Blair -- Analyst

Okay, thank you for taking my question.

Guy Bernstein -- Chief Executive Officer

Thank you.

Operator

The next question from Kevin Dede of H.C. Wainwright. Please go ahead.

Kevin Dede -- H.C. Wainwright -- Analyst

Good morning, gents, sorry afternoon over there. So Asaf you touched on telecom and a resurgence there. I suspect that you were alluding to Sprint, T-Mobile. Can you give us little more color how is that going? Are they sort of full throttle yet? Do you expect them to go may be full throttle in the next stage of their integration next year and do you think Magic will be more involved?

Asaf Berenstin -- Chief Financial Officer

We hope to be more involved. I can tell you that starting from the second half or mostly in the third quarter of 2019, T-Mobile, basically stopped everything, because of this merger with the Sprint. We do see improvement, but it's far, far from where we were in previous year. I think -- in previous years. I think that the 5G once it will start driving in more investments in the telecom industry, we will also benefit and ride [Phonetic] on that. But currently, it's a very small -- it became a smaller business for us. We manage, also adjust our cost relatively to that, if you look at on our opex, on our sales and G&A expenses versus last year the entire deduction of around $800,000 comes from the telecom sector that shrinked significantly from where we were in prior years. So to your question, we don't see any -- we see a slight improvement, but most where we were in prior years.

Kevin Dede -- H.C. Wainwright -- Analyst

I'm glad you mentioned the SG&A Asaf. It was up almost $2 million from the June quarter. Is that just because of sales mix and increase in sales or?

Asaf Berenstin -- Chief Financial Officer

It was -- not, 25% of the -- roughly 30% of that is from the up -- going back to normalized activity. All other refers to some legal stuff, insurance, D&O that prices went up from last year where our premium was around $50,000, today its close to $300,000. So we got some hit on the insurance and legal, some customers that -- clients that we've got are not making payments on time. So we made some -- we had to do some buyback provision of around $0.6 million and bonuses, when the business does well, still people are getting paid for. So this is also part of the increase. So I would say 50% comes from going back to normalized busniess and improvement of our financial results and 50% legal, insurance and bad debt.

Kevin Dede -- H.C. Wainwright -- Analyst

All right. So do you think this sort of a new run rate or so does it settle back down somewhere closer to first half levels?

Asaf Berenstin -- Chief Financial Officer

In terms of what, in terms of the opex expenses?

Kevin Dede -- H.C. Wainwright -- Analyst

G&A. Yes, SG&A, yes. Just for the December quarter.

Asaf Berenstin -- Chief Financial Officer

Yes, I think that it would even reduce for the Q4. Again I don't -- we said that we are conservative. I don't -- we don't give any guidance on that, but I think that this is pretty much the level yes to your question.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay, all right. Can you give us the same sort of color on CVS too. I mean, I know both you and Guy mentioned healthcare, and I'm wondering if that's sort of the bucket that you've talked with CVS deal into?

Asaf Berenstin -- Chief Financial Officer

We see, yes, the healthcare we also, we have very strong operation in Israel on the healthcare sector. But yes, CVS today accounts for around 10% of our top line. We view -- again on the profit side, it is not that profitable, because there is rebate from CVS and stuff like that, but still we managed to bring enough solution [Phonetic] numbers, increased level of business, so it pays out also to us and to the client.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay. So is that sort of more normalized now too? Is that a fair way to look at it?

Asaf Berenstin -- Chief Financial Officer

We hope that it will continue to grow.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay. I think that's a better way to phrase it. Is -- I think the operator mentioned that Yuval is on, is he on the call?

Asaf Berenstin -- Chief Financial Officer

Yes.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay. Could you give us a little more insight on the next generation of xpa and the integration of PowWow? How's that going? Have you run beta, have any of your customers looked at it? What sort of insight can you give us and how you think it emerges in sort of the competitive world?

Yuval Lavi -- Vice President, Technology & Innovation

We are in the midst of kind of the R&D effort. We are -- prepared the two platform on each side of what needs to be connection and now we are kind of building the, what I call the developer journey in the joint platform. And yes, definitely going to be a competitive offering to other products in the market. This is where we also see a big opportunity to jump on new customers consuming this platform. Also in the Japanese market we are, as opposed to our usual behavior where we first come to the global market is only after that coming to Japanese market. Since we have a big demand on the Web Client development and [Indecipherable] our technology, we are going to look at bringing it to Japan earlier with some prospect or customer that are talking thoughts about implementing it to million concurrent user platform where usually it never used to be our playground, but now we see that our partner is kind of pulling us there. And we are answering the challenge definitely.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay. Yuval. Thanks for the color. Can you give us -- can you speak a little bit more to timelines and I don't know if you have early customer feedback or if you're [Indecipherable] yet. Can you just sort of give us your perspective on timelines? And when we might expect to see it in the market full-blown?

Yuval Lavi -- Vice President, Technology & Innovation

Full-blown it will be somewhere second Q next year. Okay? The idea is to start having the kind of design partners that are working with us or early adopter better sites mid of Q1 around February and then start in taking up to customer mid of Q2 with doing the full-blown marketing and global availability beginning of half-two.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay, fair enough. Yes. That sounds like you -- I think the way you portrayed it on the August call, so it seems like you're sticking to your timelines. Now you mentioned going into Japan early. Are you going to release it globally across your entire network or are you still thinking in terms of geographic release?

Yuval Lavi -- Vice President, Technology & Innovation

We are going to global -- all over the globe. What I said is that again traditionally the Japanese market prefer us to go with 0.0 version to the global market and not take it into Japan. And Japan is taking it both 0.1 and 0.2 version etc, because there are -- when we say it's perfect for them it's still not perfect. But yes, it's -- Japanese is -- but again we have such a huge demand there from the communities that we are going to kind of put the next effort with the Japanese branch in order to shorten the gap between the global availability or the rest of the world and Japan, only to be between weeks to a month and not more than that.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay. On the development side, I mean, if I understand correctly, you've got developers in Israel and then somewhere in Central Europe, too. So imagine it's a combined team effort. Are you having any trouble finding the resources that you need to stay on track?

Yuval Lavi -- Vice President, Technology & Innovation

Not really, because, again, I think we can say that we had and we overcome it by actually emerging the existing team to the new team. So we are working with partly in the technical people in the US and with firewall, the team in the Ukraine, that we have in computer world, but also a big team in India that we are shifting form our existing R&D of xpa and pulling them to follow technology which again they're going to be merged as one technology. So we managed to overcome the challenge of bringing new talents in this time of the COVID-19, with actually shifting a little bit focus so far in other products internally.

Kevin Dede -- H.C. Wainwright -- Analyst

Okay. Thanks Yuval. Asaf, can you give us maybe -- I mean it seems like Israel is really bouncing back and I think the big question in my mind is how many of your consultants are actually going on-site versus working remotely? Did that change at all in the September quarter? I know when we talked about it in August, it seemed to me that most of your guys were still remote. But I know, I mean, I know this pandemic is really intensified. And I'm just wondering if it's sort of changed your operating perspective at all?

Asaf Berenstin -- Chief Financial Officer

Of course it did change us our operating imperative, let's say, most of our people are working from home. We are now doing the call from home, except for the defense sector, when we have -- when we must to secure there is enough people either on-site or in our offices, all other -- most of all other people are working from home. First -- most and foremost, because we don't want to have a situation where when one gets infected or tested positive and everybody else need to go home or infected themselves. So this is something that surely as changed and I don't think that it is for the short time is not going to change back. Israel, you need to remember is still on the second phase of going back to normal. So we went into a shutdown and we are now gradually only getting out of the shutdown and people also saw us saying back that the government is also saying that they want to do another curfew. So everything, 7 o'clock PM. So we changed and we'll change if we look to smaller offices where we could by the way. And you also see it on the -- on our margins.

It is more, by the way, the problem with that is that we trying to call it because we have very good people and you want to continue having them, relate to the business and once they are working from home, they're are losing some of their DNA with the business. So to keep them identified with the Magic way and it's something that for us is now more challenging. It's something that we didn't handle until today because everybody were together and there was like it could moderate feeling.

Kevin Dede -- H.C. Wainwright -- Analyst

Yes, no, understood. I think all businesses were facing that company culture issue. I know we are, I mean, I haven't been in our New York office since March. I guess my question was really whether or not things have changed from the second quarter and I guess they haven't, right? You're still maintaining the same sort of operating conditions with everybody working from home?

Asaf Berenstin -- Chief Financial Officer

Yes. But for a change is that mostly with the client. The client for now more willing, you don't use people saying let's stop the project. So let me use the capacity. This is what has changed from the client side.

Guy Bernstein -- Chief Executive Officer

Kevin I think from the second quarter, the clients understood that this is basically the new reality. So if that the second quarter, we faced some pushbacks on new projects. It's not the case anymore.

Kevin Dede -- H.C. Wainwright -- Analyst

Well, yes, obviously, Guy, I think you did a great job. I mean, sales were up 10%, almost 10% sequentially. So clearly you're -- what you said in August stands through, right? Because you said that. You said your clients aren't really holding back. So congratulations on the quarter. Thank you very much for taking my question.

Guy Bernstein -- Chief Executive Officer

Thank you.

Operator

The next question is from Asaf Barel of Oppenheimer. Please go ahead.

Asaf Barel -- Oppenheimer -- Analyst

Hey guys. Congrats again on the strong quarter. Just to start off with maybe a housekeeping question. Can we get an organic growth number for the quarter?

Asaf Berenstin -- Chief Financial Officer

Yes, on the top line we were, Q versus Q we were 40% percent non-organic, 60% organic.

Asaf Barel -- Oppenheimer -- Analyst

Okay. Do you mean that sequentially or year-over-year?

Asaf Berenstin -- Chief Financial Officer

Year-over-year.

Asaf Barel -- Oppenheimer -- Analyst

Okay, great. Okay. And then on product mix. You guys had noted -- what you guys had noted on the breakdown implies a pretty strong results for the software business. Is there any update you can give us on that front. I know it's just kind of something we speak about less on the conference call? Also if there was any impact from the Magic-Hands acquisition that was closed? So, any color would be helpful?

Asaf Berenstin -- Chief Financial Officer

Again the Magic-Hands acquisition is a very small operation. Its a company that does little bit on the EUR2 million a year. The logic behind the acquisition was to bring in around 20 Magicians to and bringing a partner that has some kind of the advent application built using the Magic tool, but take the management in, take the magicians in and upgrade our Dutch activity, our Dutch branch, following the leave of -- the retirement of one of the managers there, the branch manager there. So that was the logic behind it. It's not material in terms of our business. It is material in terms of our prospects from the Dutch market.

Asaf Barel -- Oppenheimer -- Analyst

Okay. So maybe I'll just kind of reiterate the first part of my question, which is more important. It sounds like the software business is growing again. I mean, you tell me if I'm doing the math wrong here, especially when I compare 3Q versus 2Q this year. So, any color on the software business would be helpful.

Asaf Berenstin -- Chief Financial Officer

Yes. The software business is growing and grew versus last year. You don't see it so much of -- you see an improvement on the margins, but not so much because the capacity of professional services is still huge versus the 75% or the revenues still comes from the Professional Services. We did sell something like 20% more than last year in terms of our software. And this is what also have to bring to improve the bottom line.

Asaf Barel -- Oppenheimer -- Analyst

Okay. Any kind of drivers there or is it just kind of a logical next step in terms of people trying to become more and more digital?

Asaf Berenstin -- Chief Financial Officer

I think that people are trying to get more digital. I feel we see it on the project side. We see it on the software side and so it is what it is.

Asaf Barel -- Oppenheimer -- Analyst

Okay. Okay, great. Gross margins were quite strong this quarter. Well above kind of the post-acquisition rates of 4Q'19 and even stronger versus first half of 2020. Any one-time effects here? Can we actually expect this kind of number to continue or do we need to take it back down moving forward?

Asaf Berenstin -- Chief Financial Officer

Let's say that still its conservative. Let's say that we -- normally the fourth quarter is a stronger quarter in terms of Professional Services and also in terms of software. So I hope, so I don't expect any significant changes for this year. For next year, First of all, because of the type of prospect that we have on the M&A side, I would assume that Magic should range between the 31% to -- 31.5% to 32.5% on the gross profit.

Asaf Barel -- Oppenheimer -- Analyst

Okay, great. That's very helpful. That's all from me. Thanks for taking my questions.

Operator

[Operator Instructions] There are no further questions at this time. Mr. Bernstein, would you like to make your concluding statement.

Guy Bernstein -- Chief Executive Officer

Well, thank you everyone for joining our call this quarter and we definitely hope to bring you some more good news next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Asaf Berenstin -- Chief Financial Officer

Guy Bernstein -- Chief Executive Officer

Yuval Lavi -- Vice President, Technology & Innovation

Tavy Rosner -- Barclays -- Analyst

Maggie Nolan -- William Blair -- Analyst

Kevin Dede -- H.C. Wainwright -- Analyst

Asaf Barel -- Oppenheimer -- Analyst

More MGIC analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.