Hilan: How Much of 2025 Software Growth Was Accounting and How Much Was Economic

What This Follow-Up Is Isolating

The main article covered the broader Hilan story. This follow-up isolates the segment where the 2025 headline is least clean: software product distribution. This is the segment where revenue jumped, while full-year operating profit actually slipped. It is also the segment where growth was colored at the same time by four different forces: accounting presentation, acquisition consolidation, a faster move into cloud, and FX pressure.

The short version: 2025 growth was not fake, but it was not clean either. Out of ILS 61.6 million of added segment revenue, about ILS 11 million came from a wider gross-recognition effect. The rest was more economic, driven mainly by fuller consolidation of WideOps and Europe Cloud together with organic growth, but that economic growth sat on a less profitable mix, continued investment in cloud expansion, and a weaker dollar.

That is why the real question here is not whether there was growth, but what kind of growth Hilan bought in this segment. Once the accounting-presentation layer is stripped out, growth is still solid. But it is growth that did not fall through to profit at the same pace, which means the segment now has to be read through quality of growth, not through revenue alone.

How Much of the Growth Was Accounting

Segment revenue rose to ILS 425.5 million in 2025 from ILS 363.9 million in 2024, an increase of ILS 61.6 million or 16.9%. But the company itself flags in the footnotes that the move to gross revenue recognition affected the segment by about ILS 25 million in 2025, versus about ILS 14 million in 2024. That means roughly ILS 11 million of the annual revenue increase came from presentation, not from a matching expansion in the underlying economics.

That is a material point, but it has to be stated carefully. This is not an error and it is not inflation. It is an allowed accounting presentation under the applicable standards. Even so, anyone trying to understand quality of growth cannot treat the full 16.9% as if it all came from the same engine. Roughly 17.9% of the reported revenue increase came from the larger gross-recognition effect, while about 82.1% came from more economic sources.

Once the gross-recognition effect is removed, segment revenue would stand at about ILS 400.5 million in 2025 versus about ILS 349.9 million in 2024. That still produces cleaner growth of about 14.5%. This matters, because it means the segment genuinely grew. But quality now becomes the next question: the company itself attributes that growth to first-time consolidation of WideOps and Europe Cloud from October 2024, to organic growth, and at the same time notes that a weaker dollar worked in the opposite direction.

That chart gives the most direct answer to the headline question. Roughly one fifth of the growth was accounting in presentation terms, not in value terms. The remaining four fifths were more economic, but not necessarily higher-quality.

Why Profit Compressed Even as Revenue Grew

This is where the core story sits. The company states explicitly that the annual decline in operating profit came from a change in revenue mix and continued investment in expanding cloud activity. In other words, even before any deeper interpretation, management is already signaling that the segment is moving away from classic license distribution toward a different structure: more cloud, more advisory, more services, and more build-out.

The business-description section lays that shift out more clearly. Cloud services grew materially in 2025, partly through WideOps and Europe Cloud, partly through the expansion of Microsoft, AWS and GCP solutions, and partly through stronger demand for cloud, cyber and AI solutions. Strategically that makes sense. Economically, it is not neutral in the short term. The company explicitly says the licensing market is shifting from one-time payments to subscription models, and that under those models short-term revenue and profit are lower than under traditional software-product sales, even if lifetime economics can become better if customer relationships stay longer.

That is the heart of the debate. If the segment were still mostly classic software-license distribution with related support, the revenue jump might have dropped through to operating profit much more quickly. But the 2025 segment already looks different. It includes more cloud services, more transformation work, more projects and more subscription-style models. That means part of the economic growth is also a transition into a model that recognizes less near-term profit for each shekel of revenue.

The dollar adds noise, but it does not overturn the conclusion. The company says a weaker dollar hurt revenue, while operating profit was only partly affected thanks to hedging transactions. So without FX the picture would have looked somewhat better. But even after giving FX its share, the simple fact remains: in 2025 the segment increased volume without increasing annual operating profit.

The multi-year view sharpens the point that this is not only a 2025 issue. The segment almost doubled revenue since 2021, while operating profit rose much less. That is not proof that the move into cloud is wrong. It is proof that the market should stop treating every new shekel of segment revenue as if it were economically identical to the older shekel of classic license distribution.

The Fourth Quarter Already Looks Much More Economic

This is where the follow-up becomes genuinely interesting, because the full-year picture hides a change inside the year. In the fourth quarter, segment revenue rose 8.3% to ILS 145.0 million and operating profit rose 13.5% to ILS 32.4 million. Operating margin improved to 22.4% from 21.4%.

That matters for several reasons. First, the move to gross recognition had already been implemented in the fourth quarter of 2024, so the fourth-quarter 2025 comparison is much cleaner than the full-year comparison from an accounting-distortion standpoint. Second, WideOps and Europe Cloud had already been consolidated from October 2024, which makes the fourth-quarter comparison much closer to activity versus activity on an economic basis. Third, the company itself attributes fourth-quarter growth to organic activity, offset by the weaker dollar.

Once the fourth quarter is subtracted from the full-year numbers, the picture becomes even sharper. In the first nine months of 2025, segment revenue was up about 21.9% to ILS 280.5 million, but the implied operating profit for those months fell about 30.0% to only ILS 9.9 million. Implied operating margin dropped to about 3.5% from about 6.1%. In other words, most of the pressure on growth quality sat before the fourth quarter, while year-end already looked cleaner and healthier.

This is the most important balancing point in the read. Anyone looking only at the full year could conclude that cloud activity and the new business model simply diluted the segment. Anyone looking only at the fourth quarter could conclude that the issue is already solved. Both reads are too extreme. The more reasonable interpretation is that 2025 was a transition year inside the segment: the year Hilan absorbed the cloud acquisitions more fully, broadened the solution set, carried investment, and by the last quarter showed the first signs that the new base could already look more profitable.

What Has to Happen Now for This to Count as High-Quality Growth

From here, the question is no longer whether the segment can grow. It has already proved that. The question is whether the segment can turn its newer cloud, subscription and services growth into growth that also falls through to operating profit over a full year, not only in one strong quarter.

There are four concrete checkpoints here:

• If operating margin stays closer to the fourth-quarter level than to the first-nine-month level, it will suggest that the segment is starting to absorb both the investment layer and the mix change.
• If growth continues to come mainly from cloud services and managed solutions, the market will need to see that recurring revenue really does compensate for the short-term profit drag the company itself described.
• If the dollar remains weak, Hilan will need to show that hedging and pricing are enough to prevent further margin erosion.
• And if more cloud expansion or acquisitions follow, it will matter to see that they add not only volume but also profitability after the integration period.

In other words, 2025 already gave a partial answer to the question in the title. The accounting portion is relatively easy to quantify. The economic portion is real, but still not clean enough to deserve the same quality multiple the market would assign to simple, profitable organic growth.

Bottom Line

Hilan's software product distribution segment did not deliver purely accounting growth in 2025, but it did not yet deliver clean economic growth either. Roughly ILS 11 million of the added revenue came from the wider gross-recognition effect. The rest came from more real activity, but activity that depended on fuller cloud consolidation, a shift toward subscription models, and investment that still reduced the annual margin.

The good news is that the fourth quarter already looked better. The less comfortable news is that it is still unclear whether that is a new base or simply a strong year-end inside a transition year. So the right conclusion is not that the growth was unreal. It is that the market should demand a higher quality test from this segment: not only more revenue, but proof that cloud, services and subscriptions can also produce durable profitability without erosion.