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Magic Software Enterprises Ltd (MGIC) Q4 2018 Earnings Conference Call Transcript

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Magic Software Enterprises Ltd  (NASDAQ: MGIC)
Q4 2018 Earnings Conference Call
March 04, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Magic Software Enterprises Ltd 2018 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. With us online today are Magic's CEO, Mr. Guy Bernstein; Magic's CFO, Mr. Asaf Berenstein; Magic's VP of Technology and Innovation, Mr. Yuval Lavi and Magic's VP, M&A and General Counsel, Mr. Amit Birk.

I would now like to turn the conference over to Mr. Amit Birk of Magic Software. Please go ahead.

Amit Birk -- Vice President M&A and General Counsel

Thank you, and good day, everyone. Our 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.

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, a change in its views or expectations or otherwise.

Also during the course of today's call, we refer to 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.

The replay of this call will be available after the call on our Investor Relations section of the Company's website. I will now turn to the conference over to Mr. Guy Bernstein, CEO of Magic Software. Please go ahead.

Guy Bernstein -- Chief Executive Officer

Good morning, everyone, and thank you for joining us today as we report our fourth quarter and full year 2018 financial results. I'm very pleased with the results of our fourth quarter and the year as a whole as we continue to experience consistent year-over-year growth and an increased level of profit.

We are pleased that we exceeded our full year revenue guidance, delivering nine year consecutive all-time high annual revenue of $284 million, which reflected 10% year-over-year growth consistent with the increase in our non-GAAP operating income of 12% to $39.5 million for the year. We had a very productive fourth quarter with revenue reaching $72.3 million, reflecting 9% year-over-year growth and operating profit increasing 15% to $10 million. Asaf will provide more details on our financial results in his prepared remarks.

The strength of our performance in the quarter and throughout the year was broad-based with all of our major regions and markets producing solid organic growth as evidenced by the trust given to us by more than 250 new logos, who joined during the year.

We continue to strengthen our competitive advantages with the development of products and solutions, while gaining new customers and expanding our business with existing customers, allowing us to build on our strong foundation and achieve ongoing growth.

So overall, I'm very pleased with our strong finish to 2018, and closing out the year with another quarter of improved growth achieved by maintaining our focus and executing on our key objectives.

Now I'd like to turn the call over to Asaf, our Chief Financial Officer, to discuss the financial result in more details. Asaf?

Asaf Berenstin -- Chief Financial Officer

Thank you Guy. Good morning, everyone. I will begin my commentary with the review of the fourth quarter and full year results, after which, I will provide some commentary on the balance sheet and end with our 2019 annual guidance that we introduced in our press release earlier today.

Our fourth quarter revenues totaled $72.3 million compared to $66.2 million for the fourth quarter last year, reflecting 9% year-over-year growth mainly driven by organic expansion.

Looking at the geographical breakdown of the year, revenue in North America and the totaled $137.1 million, representing 48% of our total revenues, increased by 11.3% compared to last year. Revenue in Israel, totaled $103.9 million, representing 37% of our total revenues, increased 12.8% compared to last year. Revenues in Europe totaled $28.3 million for the year, representing 10% of our total revenues, increased 6.7% compared to last year. Revenues from the rest of the world, declined from $16.5 million to $16.2 compared to last year, mainly due to a termination of a project initiated in Africa last year for deploying the proprietary billing system.

Turning now to profitability. Our non-GAAP gross profit for the fourth quarter of 2018 was $23.4 million, up approximately 4% compared to $22.6 million in fourth quarter of last year.

Our non-GAAP gross margin decreased to 32.4% compared to 34.1% in the fourth quarter of last year. On an annual basis, our non-GAAP gross profit for 2018 amounted to $94.4 million, up approximately 6% compared to $89 million in 2017. Non-GAAP gross margin decreased to 33.2% compared to 34.5% in 2017 as a whole.

The continued decrease in the gross margin compared to the respective period -- respectively, results mainly from the shift in our revenue mix from software toward professional services. The breakdown of our revenue mix for the fourth quarter of 2018 and for the year was approximately 28% related to our software solutions and 72% related to our professional services compared to 30% related to our software solutions and 70% related to our professional services in 2017 as a whole.

Looking at the entire year, our revenues related to our software services solutions amounted to $80.1 million, reflecting approximately 40% year-over-year growth. And our revenues related to professional services amounted to $204.3 million, reflecting approximately 13% year-over-year growth.

Moving to operational costs. R&D expenses on non-GAAP basis in the fourth quarter of 2018 totaled $2.3 million compared to $2.6 million in the same quarter of last year. R&D expenses for the year totaled $9.4 million compared to $10.7 million in 2017. The decrease in R&D expenses is due to a shift of development projects to our offshore sites in India and St. Petersburg and to a cost deduction program we implemented in one of our vertical application software solution unit.

Our non-GAAP operating income for the fourth quarter increased 15% to $10 million compared to $8.7 million in the same period last year. This reflects an operating margin of 13.9% for this quarter compared to 13.1% in the fourth quarter of 2017 and compared to 13.8% in the third quarter of 2018.

Our annual non-GAAP operating income increased 12% to $39.5 million compared to $35.1 million in 2017. This reflects an operating margin of 13.9% compared to 13.6% in 2017 as a whole.

Our non-GAAP tax expenses this quarter totaled $2.1 million compared to a tax expense of $1.9 million in the fourth quarter of 2017.

Looking at the year, our non-GAAP tax expenses totaled to $7.5 million, representing an effective tax rate of approximately 19% compared to a tax expense of $7.1 million in 2017 reflecting an effective tax rate of 21%. The main reason for the decrease in our tax rate is due to US corporate tax reform, which reduces our blended taxes. We expect our 2019 tax rate to be slightly higher in the range of 20% to 22%.

Our non-GAAP net income for the fourth quarter increased 21% to $5.8 million or $0.12 per fully diluted share compared to $4.8 million or $0.11 per fully diluted share in the same period last year. The increase in our net income is consistent with the increase in our revenues and operating profit.

Our EPS for the quarter was negatively impacted by an amount of $0.01 per fully diluted share, resulting from the issuance of 4.3 million shares at a price of $8.2 per share in private placements for net proceed of approximately $35.5 million to certain Israeli institutional investors and to Formula Systems, our controlling shareholder during the third quarter of 2018.

Turning now to the balance sheet. As of December 31, 2018, we had cash and cash equivalents, short and long-term bank deposit and marketable securities of $115.6 million compared to approximately $90.9 million at the end of 2017. Our strong cash position and improved profitability enabled us to maintain our dividend policy and to declare a cash dividend in an amount of $0.15 per share, and in the aggregate amount of approximately $7.3 million for the second half of 2018, reflecting 75% of our annual net income attributable to the Magic shareholders.

Together with the dividend distributed from the first half of 2018, we distributed an annual total of $0.305 per share related to our 2018 earnings and in the aggregate amount of approximately $14.9 million, which reflects a current dividend yield of approximately 3.3%.

Our total financial debt as of December 31, 2018 amounted to $28 million compared to $37.6 million by the end of 2017. During the year, we paid an amount of $7.1 million. The remaining of our debt will be paid over the next five years.

Total trade receivable as of December 31st was $90.3 million compared to $82.1 million in 2017, reflecting no change in our DSO, which approximately is 90 days. The increase in trade receivables is in line with the 10% growth reported in our revenues year-over-year.

From a cash flow perspective, we generated $3.8 million from operating activities in the fourth quarter compared to $2.4 million in the same period last year and $24.1 million for the year compared to $25.5 million in 2017.

Lastly, turning to our 2019 guidance, we expect 2019 full year revenue to be in the range of $313 million to $319 million on a constant currency basis, reflecting an annual growth rate of 10% to 12%, maintaining our double-digit growth recorded over the last(ph)years.

With that, I will turn the call back to Guy for closing comments.

Guy Bernstein -- Chief Executive Officer

Thank you, Asaf. In summary, we are pleased once again to report record-breaking results based on organic growth, reflecting the solid demand for our software solutions and professional services, which serve to help our customers on their digital transformation journey. We continue working toward building closer client relationships, investing in those relationships and building a strong foundation for growth. And we expect our strong financial position coupled with the investments we made over the past few years, to promote and grow our market and continue our momentum into 2019.

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

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions).

Your first question is from Tavy Rosner of Barclays. Please go ahead.

Chris Reimer -- Barclays -- Analyst

Hi. This is Chris Reimer on for Tavy, thank you for taking my questions. My first one regarding guidance for the year 2019. In light of 2018, which came in at the low end of guidance, which was between 10% and 14%, I'm just wondering if there was anything from this year that was maybe pushed out into 2019?

Asaf Berenstin -- Chief Financial Officer

I can't say that. I think that we -- for example, if I take one of our largest customers, CVS, which is undergoing the merger transaction with Aetna, so that is I think one of the reasons why we didn't manage to -- let's say, meet the high end of our guidance. We finished some of the project there, and we believe that we should expect renewal beginning of 2019 and even to get more business out of them. And -- other than that, I don't think that we have any significant businesses that was shifted from 2018 to 2019.

Chris Reimer -- Barclays -- Analyst

Great. Thank you. And then just regarding M&A, you mentioned on the previous earnings call that hopefully, a deal might be closed at the beginning of 2019. Could you give any comment as to how that might be progressing or what the outlook might be for the near future?

Guy Bernstein -- Chief Executive Officer

So if I remember, we mentioned at the time that we raised the money to support the deal. This deal was -- we thought it was canceled. Now it's back on the table. Hopefully, we'll have some news in the coming month or 2.

What --- if I remember, we mentioned at the time that we raised some money in order -- basically to support a deal. This deal was -- we thought it was canceled. Now it's back on the table. Hopefully, we'll have some news in the coming month or two.

Chris Reimer -- Barclays -- Analyst

Okay. Thank you very much.

Operator

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

Ted Starck-King -- William Blair -- Analyst

Hi. This is Ted Starck-King on for Maggie Nolan. Thanks for taking our question. So during the quarter, you announced that you had achieved gold status with Microsoft, which means you're eligible for Azure development planning services, sponsored credit and other benefits. Could you discuss the opportunity, the benefits that, that opens up for your business? Have you seen any traction as a result? If not, when do you anticipate to see some additional traction there? Thanks.

Guy Bernstein -- Chief Executive Officer

Yeah. We see some movement in the Microsoft ecosystem and partners. Again, the partnership, the gold partnership with Microsoft is happy opportunity for us. But we mainly work on the partnership relationship with the Microsoft partner -- and with the one alliance program that they have. And this is opening up a lot of opportunities for us worldwide, especially in the US and Europe. And we are pushing more and more processes and work in deployment toward the Azure Cloud to step up in the level of partnership and to be focused by Microsoft as a partner.

And yeah, I cannot say at the moment, no -- the transition that is made to the specific deal. But we do see a lot of action coming on from the market and from the Microsoft partner as I said.

Ted Starck-King -- William Blair -- Analyst

Very good. So next question just on guidance, how much do you anticipate from foreign currency on the top line?

Guy Bernstein -- Chief Executive Officer

Again, how much?

Asaf Berenstin -- Chief Financial Officer

I don't think that it is material in the -- let's say, in the current level of the fluctuations, let's say in currencies, we are currently at the level of $3.6 per share for let's say nominated shekel businesses, this is pretty much the same average that we experienced in 2018 on average. So, on that aspect we don't, we don't expect any negative or positive impact on the top line, or on the bottom line for that one.

Ted Starck-King -- William Blair -- Analyst

Understood. So the last question from me. On the previous call, you mentioned success with a low-code application software platforms. Could you provide an update on your traction with low-code platforms? How much of your current software revenue is from low-code? How much do you anticipate, and how do you anticipate that will impact the competitive environment?

Asaf Berenstin -- Chief Financial Officer

So basically, I would say that we have roughly $80 million of business in terms of turnover coming from our software activity. Out of that, around 90% -- 85% to 90% are related to our low-code activity. I think that the market today is in a very accepted mode back to the low-code model of development for application. The reason is that the pace that enterprises are required to develop new enterprise application is rapidly growing and their generic coding or job hiring professional services to produce more applications, is something that just doesn't keep pace for enterprise demand for new application. You can see a testament for that also in the Forrester and the Gartner market analysis, which anticipate this market, this low-code market to grow from a current level of $4 billion in terms of market size to over $20 billion or $22 billion in the next five years, reflecting over 30% CAGR growth on average. So I think that we are today with the technology and perhaps with a potential new acquisition that we may do in the future is something that we are always looking for -- looking to do. We'll manage to get the top of this positive reaction in the market.

Ted Starck-King -- William Blair -- Analyst

Understood. Thank you.

Operator

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

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

Thanks. Hi guys. Thanks for taking my call. Asaf, Guy, can you just talk to the debt level. I know you took on a bunch about years ago. I thought that -- I thought the thinking was -- the strategic thinking was to use it for acquisitions. And Granted you've got -- hopefully you'll one wants to talk about the next couple of months. But I'm just kind of wondering what the overall plan is at this point.? I think I heard Asaf talk about repaying this debt over the next five years. So could you just kind of give me sort of the top-down view of how you're thinking about that?

Asaf Berenstin -- Chief Financial Officer

Basically, when we originally took this debt two years ago, it was to finance -- specifically to finance a transaction that we did for the acquisition of Roshtov . And we also -- let's say, I also wanted to take the advantage and kind of create ongoing relations with Israeli (inaudible) institutions, to open the channel, so when if we'll need to raise the additional debt, we have some kind of a mechanism, or credit history with the financial institutions. So we took that certain amount of loan, which was for payment on an equally annual installment years. What you see now in our balance sheet is basically the remaining of that loan. And we continue to -- let's say, to keep track on that.

Our EBITDA-to-debt ratio is below, is around 0.6, 0.5 of our profit. So, I think that the company has lost really leverage. I think we are (inaudible) once the M&A may keep backing again, you know, we will be able to facilitate on that bridge.

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

Okay. All right. So the idea though is that, as you said on the call to pay it off completely within that seven-year term over the next five years?

Asaf Berenstin -- Chief Financial Officer

Yeah.

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

Okay, all right. And then, I mean I guess..

Asaf Berenstin -- Chief Financial Officer

You need to take into account that Magic has -- as let's say, a business model is to grow 50% from organic activity, 50% from M&A. We are distributing 75% of our net income, which is roughly 50% of our operating cash flow. So that would mean that for future acquisitions, we will probably, again, once we take off some of our excess cash that we saw on our balance sheet, we will need to turn to additional debt to finance those acquisitions.

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

Right. I -- sure, if I understand. I also -- obviously, you're able to issue shares, if you need to, as you did in the third quarter. I'm wondering if you guys could talk a little bit to the 200-plus logos that you've added. I mean, I've been watching you guys for a bunch of years now, and typically, you've offered press releases time here and time there highlighting some of the new deals that you've done. But I'd say over the past, I don't know, maybe just for the full year of '18, there's been very little news flow regarding some of the new institutions you may have -- or the new deals that you may have won or the new institutions that you've worked with. And you mentioned CVS, I appreciate that. I'm just wondering, if there's any more detail you can speak to for a customer level on the $80 million in software versus the $204 million in services. Can you give us some of your largest customers and the growth that you've seen or the growth that you're not seeing, vis-a-vis the one in Africa that seems to have disappeared?

Guy Bernstein -- Chief Executive Officer

So the reason for us not putting more press releases regarding this just because in most cases, the size of the deal are rather small compared to the overall revenue. So it's all in all, the Company is doing across $300 million. And we report -- we don't see any point in reporting deals of -- I don't know one, usually the deals are -- I would say probably between $100,000 and $200,000 and we have a lot of that. So in the past, we published some of them. The market did not respond to that, because at the end, the Company is built out of many, many rather small deals. And this is the reason why we don't publish them.

All in all, CVS is, by far, the largest customer I mentioned. We have a few more customers not that -- these are not business not significant to the business. But again, we are growing with all of them, but I don't see any point you're going to -- most of them are banks, insurance companies -- the usual topics in the business.

But all you know, as the company is doing good, we continue with the growth. We continue with improving the profits. So we feel quite good about the overall.

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

Okay. I understand, Guy. Just I guess, it's just surprising to see from the outside that you haven't tried to be, I hate to say it, but at least trying to let people know in a promotional way, that you're making progress between each quarterly report?

Guy Bernstein -- Chief Executive Officer

Kevin, it's a big -- some of the frustration, I must say when you say that, this Company is delivering like for the past I think nine years. We deliver, you know, better results every year. True, there is -- because we are built out of many, many small deals, there is a bit of the problem to provide indicators that we give more light to investors about the progress of the company. But all-in-all, when you look at all the history, the record of this Company, I'm really proud that we don't miss on this one. So, sure it's a bit frustrating that I cannot give more indications that people will better understand the way forward.

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

Maybe Guy, it will be helpful if you could give us an indication of deal size overall, and maybe how your relationship with Microsoft or SAP and HANA have influenced that. It seems though -- I mean, given over the years that I've been following you, that it's been for most of those years, mostly small deals, mostly customers recurring, coming back and wanting more services and help from you guys. I'm just wondering if some of the work that you've done in pushing to the cloud has altered the deal size at all? Have your relationships with these partners helped you to increase the size of deals?

Guy Bernstein -- Chief Executive Officer

So all in all, the answer is yes. We do get more business, whether it's from -- getting lead from Microsoft or getting more leads from SAP, definitely. I think by ourselves, we are doing a lot of way better business than what we are getting from the partners. Unfortunately, it would be probably easier to get more leads from partners than to go and hunt them by ourselves. But all in all, the business is growing all the time, we see more deals. As I mentioned, the deals are rather -- based on the size of the company today,(ph)they're not big, so we can take companies like CVS, where we started with -- I don't know close to GBP2 million a year a few years ago. And now we are at like more than GBP40 million which is a great advantage. I do expect to get more business from them as soon as they get over with the all this(ph)merger with Aetna. So we do expect to get more business over there. And we did the same with other customers that we have. So we are doing all the time, we invest a lot in customers relationships. We do see development of the business. Whether if I'll publish that we closed a deal for whatever 250,000 or even 500,000 with specific customers, I don't think it would give an indication to investors. And this is part of the problem to convey the message.

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

Yeah. I know we've talked about this a number of times, Guy. It's equally frustrating for me because as I look across my coverage universe, I don't think I have other companies that have executed as cleanly as you have, despite the -- remember the big wrinkle in '14 and '15 with the Israeli shekel US dollar fluctuations. You guys have done a great job, you really have.

The -- the all states difference with AT&T and managed through that. You've managed through lots of things. And obviously, technology, -- the changes in technology across the board continue to accelerate, which is another difficult problem to manage. I don't know, maybe you can think about it and get back to us more regularly on your interactions with partners and maybe how fast you're seeing leads, maybe you need to devote less time in your partners and maybe more time in your own internal development, since that seems to be doing better.

Guy Bernstein -- Chief Executive Officer

We do that all the time now. In the end, we are very numbers-oriented, which means that we go after the numbers whether we can get them from -- through our partners or directly. The important part for us is to deliver the numbers that we promised.

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

All right. So give us a view -- give us view of the M&A pipeline. I know you've got one that you think is close. How else does the market look? Is it still pretty much as you've always seen it, where firms are asking for multiples that you're not comfortable paying. Do you think maybe it's time to change that perspective and consider looking -- paying maybe a little bit more, given that to Asaf's point, you're trying to grow your business 50-50 inorganic, organic?

Guy Bernstein -- Chief Executive Officer

So I must say that with the transaction I mentioned, I think we are paying a lot more than what we are used to, it's is a technology Company, and therefore assuming we will close, if you will probably see more than one what we pay regularly. We have at least one more transaction on the table that I think we will close, which is regular prices that we pay on the one hand. On the other hand, I think we get some good management in place. All in all, we have -- but can you give us a moment, we have quite a few potential acquisitions. I must say that, for example in 2018, we checked probably 12 companies, and we closed what, -- none. So it's very frustrating because at the end, when bankers present you with a company, it looks very good, and then when you check it, it's becoming less and less good. I think the best opportunities that we are getting, we are getting them through the business and not through bankers. And they are the safest one. Meaning we know what we are buying. We either compete with a guy or we cooperate with a guy. And therefore these are the best transactions that we're getting. But we are checking all of them.

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

Okay. Can you speak a little bit to that? I mean, granted the service side of the business has been driving your growth really for the past couple of years now. And even though, it seems at least from the outside that you're trying to stay on the edge of the technology curve. Can you talk a little bit about technology development, internal resource use, and how you might be able to carve a better niche for your technology business versus your service business?

Guy Bernstein -- Chief Executive Officer

So I'll answer about -- even when we talk about the service business, we always try to go into all kind of niches rather than the generic stuff. Because then the stickiness is much stronger with the customer, and we don't -- we are not driving to a price competition. So this -- even in the services aside, this is -- these are the kind of services we are targeting.

On the technology side, we're trying to improve all the time, we're bringing more technology to our installed base, and of course, to new logos in order to penetrate. This is the best way to penetrate. We tend to check even companies on the technology side. Unfortunately, knowing in most cases, either they are too young or too expensive. And we don't see the value in that. Even if you find something that is expensive, but we will see that value, of course, we will go for it.

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

Okay. Well do you think, Guy, do you think you'll mention a press release when you get these deals done?

Guy Bernstein -- Chief Executive Officer

Yeah.

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

Okay. Then would -- do you think Mr. Lavi, wouldn't mind mind commenting on how he's spending his money developing tech?

Guy Bernstein -- Chief Executive Officer

Again, how?

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

Just on development, what's your -- where is your focus in development? Is it still mostly on cloud?

Yuval Lavi -- Vice President Technology & Innovation

Yeah, it's on the cloud concept, and again, doesn't have to be on cloud on-premise, but the concept of -- again, we're enjoying as Asaf mentioned the backwind of the low-code. We see it now in the -- in Japan where we have a big footprint the minute that we introduced a new version related to the low-code and the angular development. Suddenly, every door is being open to us and everybody is looking to meet us.

So, yeah, we are definitely on the focus of low-code, which again, five years ago, 10 years ago, it's considered to be a negative word. Suddenly for us-good for us, it's becoming a very positive word in the market. And we're focusing definitely on the web development and mobile development either on-premise deployment or cloud deployment.

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

Okay, alright. Well, thanks for entertaining all my questions gentleman. Congratulations on the good year. I look forward to speaking to you again soon.

Guy Bernstein -- Chief Executive Officer

Thank you.

Operator

Then next question is from Ethan Etzioni of Etzioni Portfolio Management. Please go ahead.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Yes, thank you for taking my questions. I wanted to ask -- now that an increasing portion of the -- of the revenues are coming from software or technology. First I wanted to ask, in the second half, I see that there is a decline in the gross margin. So, that's a little bit surprising because I would expect the technology to be higher margin. Can you please explain that?

Yuval Lavi -- Vice President Technology & Innovation

Yes, as we discussed on the call, basically the growth that we experienced from the service side of the business, which was around 13% versus the growth that we think-- that we saw on the software side of the business, which was around 4% to 5% causes the -- from the mix of our activity to a decline of a margin -- the gross margin. In addition, during the last year, CVS, which again, as we said, accounts for 13% of our revenues, introduced rebate model where as we grow in the size of business that we generate from them, then we apply a rebate over our revenues, which now reaches the level of around 10%.

If you look a couple of years back, we were like -- two to three years back, we were at the level of 5%, went up. Last year, we were at the level of 9%. So, the fact that we are growing with the revenues also pushes us to significantly expand our business with the customer otherwise it takes off from our margins there.

So, gross profit in absolute numbers are always growing, but margins are declining mainly from the mix.

As Guy also mentioned, we are trying to focus more and more in niche professional service project, the landscape or the spectrum of our gross profit that we generate from different types of project, high end and low end range from 15% on the low-end side of the gross profit to 27% to 30% on average on the high-end gross profit . From the Israeli market that gross profit for a system integrator range between I don't know -- 16% and 18%. So, we'd really try, despite the fact that 40% of our business is coming from Israel. We still manage to find niche capabilities that we can provide to our customers that still provide us with a higher margin than somebody gets from the Israeli market, for example.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Just to make sure I have the numbers right, what's the comparison to the $80 million this year? What was that in '17?

Yuval Lavi -- Vice President Technology & Innovation

The split in 2017 was 30% out of the 254 million that we sold for software and 70% for professional services. This year, we are 28% on software and 72% on professional services. So the professional service side of the business is growing higher than the software side. Both of them are growing, but professional services is going higher.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

So, looking forward at the profitability, so gross margin seems to be a little under pressure. On the other hand, I see you keep operating cost at base of overall some factors (inaudible)

Yuval Lavi -- Vice President Technology & Innovation

I think that is for the Company and the costs , let's say, fulfillment of the business, I think that between something in the range of 31.5% to 32.5%, that would be our current level of gross margin. On the higher end, the -- let's say, on this range.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

GAAP or non-GAAP?

Yuval Lavi -- Vice President Technology & Innovation

Non-GAAP

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

And what was that in GAAP terms?

Yuval Lavi -- Vice President Technology & Innovation

It would be around I think 2% less than that.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

So 29.5% to 30.5%?

Guy Bernstein -- Chief Executive Officer

Yeah. Something on that.

Yuval Lavi -- Vice President Technology & Innovation

Right. And assuming you -- and you expect operating cost to stay around the same in the -- going forward?

Yes. On a same level yeah, percentage wise, yeah.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Right. So, overall operating margin looks -- in '19 should be pretty similar to 2018.

Yuval Lavi -- Vice President Technology & Innovation

Exactly. I think that you can see that over the last kind of four, five years you can see that the company pretty much maintaining its operating level at around 14% to 15%. We took a notch down from the 15%, but currently we are -- for the last few years, maintaining our 14% operating margin level.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Again, and that's non-GAAP, right? And so

Yuval Lavi -- Vice President Technology & Innovation

Non-GAAP. The way that we see the business on a non-GAAP basis, the motivation that we do on intangible assets related to the acquisitions that we doing or a motivation of software development that we do, we will exclude that.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Alright, I understand. Okay. And one last question please about the capital raising. I mean, you are generating free cash flow and my question is do you expect to need to come to the market again with those share issuance or do you think --

Guy Bernstein -- Chief Executive Officer

Not at the moment. We see a lot of cash and maybe after we deploy all the way to work. So, at the moment nothing.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Okay. Thank you.

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

Yeah. So, thank you all for joining us for another good year, and I have to bring you some more good news in the near future. Thank you.

Operator

Thank you. This concludes the Magic Software Enterprises Ltd fourth quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.

Duration: 44 minutes

Call participants:

Amit Birk -- Vice President M&A and General Counsel

Guy Bernstein -- Chief Executive Officer

Asaf Berenstin -- Chief Financial Officer

Chris Reimer -- Barclays -- Analyst

Ted Starck-King -- William Blair -- Analyst

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

Yuval Lavi -- Vice President Technology & Innovation

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

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