FORMULA SYSTEMS (1985) LTD Annual Report: A Simple Guide

I’ve put together this guide to help you understand how Formula Systems performed this year. My goal is to cut through the corporate jargon and give you the facts you need to decide if this company fits your investment goals.

1. What does this company do?

Think of Formula Systems as a parent company for a collection of tech and software businesses. They operate as a global IT powerhouse, providing software, systems integration, and tech consulting. They don't make one specific product; instead, they own a group of companies that serve sectors like finance, healthcare, and government.

The Big News: The company completed a major strategic shift in 2025 by selling their stake in Sapiens for a significant cash payout. This move transformed their financial position, leaving them with a substantial cash reserve and a clearer focus on their remaining core businesses, such as Matrix IT, Magic Software, and Michpal.

2. Financial performance: The "New" Formula

Because they sold Sapiens, the company adjusted their past results to provide a clear view of the business as it stands today:

• Revenue Growth: The core business is healthy. Revenue reached $2.63 billion, an 18.4% increase from last year, driven by both organic growth and strategic acquisitions.
• Profitability: Operating profit margins shifted from 8.3% to 7.5% this year as the company increased investment in staff and operational capacity.
• The "Cash Pile": The Sapiens sale generated $676 million in proceeds. The company ended 2025 with $1.28 billion in cash and short-term investments, up from $563 million the previous year. This provides significant flexibility for future acquisitions or debt management.

3. The "Hidden Gems" & How They Make Money

Formula owns specialized businesses that act like "toll booths" in the Israeli economy. They generate revenue through:

• The "Must-Haves": The company focuses on essential services like payroll software (notably Michpal, which grew 34% this year) and long-term IT maintenance—services that customers rely on for daily operations.
• Predictable Revenue: As of late 2025, the company has roughly $2.96 billion in future revenue already under contract, providing a strong foundation for the coming years.

4. Competitive Landscape & Risks

• Accounting Adjustments: The company updated the expected lifespan of certain customer relationships, resulting in $18.7 million in additional non-cash costs. While this impacts reported profit, it does not affect the company's actual cash flow.
• Operational Environment: Subsidiaries provide critical cybersecurity and defense software to the Israeli government. While this creates consistent demand, it also means that project timelines can be affected by the military reserve duty requirements of their workforce.
• Financial Safety: Management maintains a conservative approach to capital, keeping cash in stable, highly-rated financial institutions and conducting monthly reviews to ensure liquidity.

5. Future outlook & Leadership

Management is currently focused on "recovery and rebalancing." With their strengthened cash position, the company is actively seeking to acquire software firms that offer steady, recurring income streams.

Leadership: The company is led by CEO Guy Bernstein, who has been at the helm since 2008. The board includes financial experts from the Asseco Group, ensuring a disciplined approach to managing the company's capital and long-term strategy.

Investor Takeaway: Formula Systems has transitioned into a cash-rich holding company with a strong backlog of essential IT services. When considering an investment, weigh their proven ability to grow revenue and maintain a massive cash reserve against the potential for operational delays in the defense sector and the impact of their ongoing acquisition strategy.