Matrix published its second quarter report, and it is the largest of the Israeli companies that reported today.
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The Quarter
| NIS millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 2,119.4 | |
| Gross profit | 387.0 | 18.3% |
| Operating profit | 202.2 | 9.5% |
| Pre-tax profit | 175.7 | 8.3% |
| Net profit | 135.4 | 6.4% |
| Attributable to shareholders | 122.6 | |
| Non-controlling interests | 12.8 | |
| Basic earnings per share | NIS 1.32 | |
| Total assets | 6,262.5 | |
| Equity | 2,050.1 |
What the Numbers Say About the Business
A gross margin of 18.3% sounds low - and it is exactly the profile of IT services.
In a business like this, the cost of revenue is mostly people's salaries. Matrix provides outsourcing, development, infrastructure and implementation services, and every hour sold to a client carries a direct wage cost.
This is an entirely different business from a software company. A software company sells a licence whose marginal cost is near zero, so an 80% gross margin is normal there. In services the gross margin is inherently capped - it is the gap between what is charged to the client and what is paid to the employee.
Which means the figure that matters in such a business is not the gross margin but the ratio between the two.
| Gross margin | 18.3% |
| Operating margin | 9.5% |
| The gap | 8.7 percentage points |
8.7 percentage points is NIS 184.8 million in the quarter - selling, marketing, general and administrative expenses.
At a services company, the test is how much of the gross margin survives to the operating line. Here about 52% of it does.
And that matters especially in a business that grows mainly by hiring: as the company grows, the question is whether central costs grow at the same rate or more slowly.
The Tax and the Split
Pre-tax profit of NIS 175.7 million and net profit of NIS 135.4 - meaning tax of NIS 40.2 million, an effective rate of 22.9%.
That is almost exactly the Israeli corporate rate. An effective rate hugging the statutory one is a sign of accounts without unusual items - what shows up in the bottom line comes from the activity.
And of the net profit, NIS 12.8 million was booked to non-controlling interests, and NIS 122.6 million to Matrix shareholders. The company holds subsidiaries that are not wholly owned, and that line reflects it.
Capital and Return
| Total assets | NIS 6,262.5 million |
| Equity | NIS 2,050.1 million |
| Ratio | 3.1 to one |
| Return on equity, annualised | about 23.9% |
The return is computed on profit attributable to shareholders - NIS 122.6 million times four, over equity of NIS 2,050.1 million.
And about 23.9% is a high level for a services business, which enjoys no software margins and does not rest on meaningful financial leverage.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
Matrix is a good illustration that a low gross margin does not mean a weak business.
18.3% sounds weak only when compared with the wrong industry. Against a software company it is low; against a services company it is normal, and against the 9.5% operating margin it looks different again - because it means more than half the gross margin survives to the operating line.
And what I read at a services company is not the margin but growth relative to it. A people-based business grows by hiring, and hiring costs money before it generates revenue. Such a company can grow fast and see its margin compress, or grow slowly and see it widen - and both are legitimate.
So the number I would place next to revenue is headcount, and it is not in the structured filing. Revenue per employee is the measure that separates growth which creates value from growth which only enlarges turnover.
And what can be said from this report: a 22.9% tax rate and a roughly 23.9% return on equity together describe a business earning from its activity rather than from its structure. That is a good starting point for any further examination.
(An important note: this is my personal opinion only, and nothing here is a recommendation to take any action.)
