Matrix in the first quarter: more profit reaches shareholders, cash still has to prove itself

The first quarter gives the first real answer to the two questions left open after the Magic transaction: whether the combined Matrix group can show genuine operating improvement, and whether the strong cash flow of 2025 was a repeatable base or mostly working-capital timing. Operationally, the answer is fairly positive. Reported revenue rose only 2.4%, but revenue rose 8.9% in constant currency, and operating profit increased 11% to NIS 203.1 million. The quarter was also stronger than Q4 2025: revenue was almost unchanged, but operating profit was materially higher, which means the group did more than expand on paper. At the shareholder layer, the picture is even stronger because the acquisition of the full Magic stake reduced the leakage to minority interests and profit attributable to Matrix shareholders rose 30.5%. Cash is the unresolved part. Operating cash flow was negative NIS 123.1 million, mainly because of working capital, while customers and accrued income rose by NIS 196.7 million. The current read is therefore not that Magic has been absorbed and the story is clean, but that profitability is starting to look better while the real test shifts to cash conversion, customer credit, and the ability to sustain profit without another year-end receivables move.

Company Context

Matrix is an IT services, software, cloud, infrastructure and consulting group. After completing the Magic acquisition in February 2026, it is no longer only a large Israeli IT services house. It is a broader group with more software and intellectual property, larger international exposure, GRC activity for financial institutions outside Israel, and a meaningful cloud and infrastructure arm. The group employs more than 17,000 software, hardware, engineering, integration and training professionals, serving thousands of customers in Israel and abroad.

The new reporting structure splits the group into three segments: IT solutions, software products and services, consulting and systems engineering in Israel; IT solutions, software products and services outside Israel; and cloud, computing infrastructure and systems in Israel and abroad. From this quarter onward, the comparison figures were also reclassified because Magic is treated as a business combination under common control using the As Pooling method. That means the 2025 comparison base is not old standalone Matrix, but a restated base that presents the group as though Magic had already been consolidated.

That makes Q1 a cleaner test than the headline suggests. Reported growth of 2.4% is not a simple Magic contribution, because Magic also appears in the comparison numbers. The more important questions are whether the combined group is improving margins, whether dollar weakness hides a better activity run rate, and whether the new profit actually reaches shareholders rather than being trapped in minorities, working capital or financing.

Profitability Improved More Than Revenue

The headline number looks modest: NIS 2.13 billion of revenue, up only 2.4% year over year. But the shekel strengthened against the dollar, and the average dollar exchange rate fell 13.6% versus the parallel quarter. In constant currency, revenue would have been NIS 2.26 billion and growth would have been 8.9%. The business therefore looks stronger than the shekel report, especially in activities measured or translated through the dollar.

The gap between revenue and profit matters more. Gross profit rose roughly in line with revenue and the gross margin stayed at 18%, so the improvement did not come from the gross line. It came below gross profit: R&D expenses fell to NIS 9.2 million, selling and marketing expenses fell to NIS 87.5 million, and general and administrative expenses fell to NIS 82.9 million. The result was operating profit of NIS 203.1 million and an operating margin of 9.5%, compared with 8.8% in the parallel quarter.

The sequential comparison is also important. Q1 2026 was almost identical to Q4 2025 in revenue, NIS 2.13 billion versus NIS 2.13 billion, but operating profit rose from NIS 175.3 million to NIS 203.1 million. That does not prove on its own that the margin improvement is permanent, but it closes part of the question left after the prior analysis of the Magic transaction: at least in the first quarter, integration and the new group structure did not show up as an expense jump that erased the scale benefit.

The Segments Show Where The Improvement Is Real And Where It Is More Expensive

Israel is still the anchor. The Israeli IT solutions, software products and services, consulting and systems engineering segment generated NIS 1.30 billion of revenue, 59.9% of segment revenue, and NIS 126.6 million of operating profit. Its operating margin rose from 8.3% to 9.7%, and its contribution to segment operating profit rose to 61.1%. Management attributes the improvement mainly to higher activity in Data and AI, cyber, security, core systems and software products, together with deal mix changes and operating efficiency measures.

The international segment looks weak in shekel reporting, with revenue down 1.6% to NIS 344.7 million. In constant currency it grew 13.9%, and operating profit in constant currency rose 25.2%. This is where Magic starts to show the business logic of the transaction: not only more volume, but software, GRC, Data and AI and expert services in the United States with an 11% operating margin. The problem is that the dollar can still erase a large part of that story when reported in shekels.

Cloud and infrastructure are the yellow flag of the quarter. Segment revenue rose 6.9% to NIS 530.0 million, and would have risen 19.8% in constant currency, but operating profit fell 7.6% to NIS 42.7 million. The margin dropped from 9.3% to 8.1%. The company's explanation matters: lower activity in marketing, implementation and support of advanced technology solutions, mainly at Radat and Ortech, which are higher-margin activities. In other words, growth in cloud and infrastructure was not necessarily growth of the same profit quality. It added revenue, but in this quarter it did not add profit at the same pace.

Magic Brings More Profit To Shareholders

The sharpest accounting and economic event in the quarter is not just the consolidation of Magic, but the change in the ownership layer. Consolidated net profit rose 9.2% to NIS 136.8 million, but profit attributable to Matrix shareholders rose 30.5% to NIS 120.7 million, while profit attributable to non-controlling interests fell from NIS 32.8 million to NIS 16.1 million. The reason is straightforward: until the Magic transaction, minority interests in Magic were calculated based on the controlling shareholder's 46.7% holding in Magic, while as part of the transaction Matrix also acquired Magic's minority interests.

This is the point the market may miss if it only watches consolidated net profit. The Magic transaction did not only increase the group. It changed who gets the profit. Still, this is not free value: the transaction also increased share capital and premium, added convertible debt, and left meaningful liabilities for put options granted to non-controlling interests in other subsidiaries. Profit attributable to shareholders is strong, but it has to be tested together with cash conversion and dilution already created or potentially still embedded in the convertible bonds.

Cash Is The Next Proof Point

This is the uncomfortable part of the report. Matrix reported negative operating cash flow of NIS 123.1 million in Q1, compared with positive operating cash flow of NIS 68.5 million in the parallel quarter. The gap mainly reflects working-capital movements, led by a roughly NIS 260 million customer factoring transaction carried out in Q4 2025. That was exactly the issue flagged in the follow-up analysis on cash quality: cash flow that is pulled forward or smoothed through receivables has to be tested again in the following quarter.

The all-in cash picture for the quarter is weaker than profit: negative operating cash flow, negative investing cash flow and negative financing cash flow, despite NIS 297.3 million of proceeds from convertible debt. Part of the proceeds was used to repay around NIS 200 million of Magic bank debt, while the quarter also included net credit repayments, bond repayment, lease principal repayment, acquisition of minority interests and payments related to business combinations. This is an all-in cash flexibility view, after the actual cash uses of the quarter, not an estimate of normalized cash generation.

The balance sheet is still strong. Cash and cash equivalents were NIS 1.01 billion, net cash was NIS 43.5 million, and covenants are very far from pressure: net financial debt to balance sheet was negative 0.7% versus a 45% ceiling, net financial debt to adjusted EBITDA was negative 0.04 versus a ceiling of 5, and equity was NIS 2.13 billion versus a minimum covenant of NIS 400 million for the convertible bond. The upgrade to Aa2 with a stable outlook also supports the liquidity picture.

Still, the cash test has not closed. Customers and accrued income rose by NIS 196.7 million versus year-end 2025 and reached NIS 2.52 billion, compared with quarterly revenue of NIS 2.13 billion. Average customer credit over the last 12 months was NIS 2.43 billion, versus average supplier credit of NIS 1.03 billion. This is a business that generates attractive profit, but still finances a large credit gap. If that gap does not fall over the coming quarters, the profit attributable to shareholders will look better than the cash actually reaching the company.

What Determines The Next Read

Matrix passes the first-quarter test better in profit than in cash. Operating profit is strong, the margin improved, and profit attributable to shareholders received a real lift from the acquisition of the full Magic stake. That supports the view that Magic can change shareholder economics, not only group size. The weak point is that cash has not provided the same proof: working capital consumed NIS 353.7 million in the quarter, and customers plus accrued income rose rather than falling after the factoring move at the end of 2025.

The more constructive interpretation over the next few quarters requires two things together: operating margin staying around the new level, and operating cash flow returning to positive territory without another large receivables move. The cautious interpretation will strengthen if cloud and infrastructure keep growing with lower margin, if the dollar continues to weigh on shekel growth, or if customer credit stays too high. Short interest has already risen to 2.85% of float, above the sector average of 0.66%, so the market does not appear to be giving the company full credit upfront. Q1 says profitability is moving in the right direction, but 2026 is still a cash proof year, not only an accounting consolidation year.