Hilan in the first quarter: margins improved, but the cash is already earmarked for acquisitions and shares
Hilan's first quarter gave a partial answer to the earnings-quality question: margins improved across most activity layers. At the same time, operating cash flow was still negative for the quarter, while the planned Log-On acquisition and buyback program can change the 2026 cash picture.
Hilan opened 2026 with a quarter that strengthens the operating-quality read more than the cash read. Revenue rose 5.3%, operating profit rose 9.4%, all four segments improved or maintained operating profit versus the comparable quarter, and payroll, HR and enterprise systems remained the group's high-quality anchor with a 32.7% operating margin. That partly answers the question left by the previous annual analysis: the profit does not look like a short accounting effect, but like an activity base that can still lift margins even while the weaker dollar pressures part of revenue. Still, the quarter does not close the 2026 test. Operating cash flow was still negative, net cash surplus fell from NIS 327.0 million at the end of 2025 to NIS 187.1 million, and after the balance-sheet date the company flagged a NIS 192.0 million Log-On acquisition alongside a buyback plan of up to NIS 150 million. The next few quarters are therefore less a demand test and more a capital-allocation test: whether acquisitions, investment and cash returns to shareholders are funded by operating cash flow that moves back toward profit, or by erosion of the cash layer built at the end of 2025.
The Quality Engine Is Payroll, Not The Largest Revenue Bucket
The company is an IT services platform with four layers: payroll and HR services, business solutions, computing infrastructure, and software product marketing. That structure can mislead, because the largest revenue segment is not the one holding up earnings quality. Business solutions generated NIS 483.1 million of quarterly revenue, about 58.6% of consolidated revenue, but only NIS 31.2 million of operating profit, with a 6.5% margin.
Payroll and HR services look very different. That segment generated NIS 156.4 million of revenue, less than one fifth of group revenue, but NIS 51.2 million of operating profit. On segment operating profit before unallocated expenses, it accounts for roughly 52% of the group's segment profit. That is why the story still starts with the durability of the payroll engine, and only then with the growth pace of cloud, AI and software solutions.
The two smaller segments are the more interesting signal for the next quarters. Computing infrastructure revenue fell 9.4% because of the weaker dollar, but operating profit did not erode and edged up to NIS 10.0 million as the margin improved from 11.9% to 13.3%. Software product marketing revenue rose only 3.3%, but operating profit rose 21.6% and the margin improved from 4.5% to 5.3%. It is still a small profit layer, but after the pressure seen in 2025, the Q1 improvement suggests that the move toward cloud and managed solutions is not necessarily continuing to cost the company margin.
Profit Improved, Cash Has Not Yet Aligned
Quarterly profitability looks better than cash generation. Net profit was NIS 70.6 million, compared with NIS 66.4 million in the comparable quarter, but operating cash flow was negative NIS 31.0 million. This is still not an operating-loss issue. It is a timing and working-capital issue: customers increased by NIS 49.7 million, suppliers and service providers decreased by NIS 75.3 million, and other payables decreased by NIS 34.7 million. Customer advances and deferred revenue increased by NIS 35.9 million, so the picture is less weak than in the comparable quarter, when operating activity consumed NIS 57.4 million.
That distinction matters because the first quarter confirms one part of the story and leaves another open. At the profit level, the company shows operating leverage: revenue rose by NIS 41.4 million and operating profit rose by NIS 8.4 million. At the cash level, it still needs to show that the profit returns to the bank account rather than remaining tied up in customers, suppliers and payment timing. The all-in cash picture for the quarter is weaker than the operating performance: cash fell by NIS 123.0 million, investing cash flow was negative NIS 61.6 million mainly because of Summit and the Y.L.M activity acquisition, and financing cash flow was negative NIS 29.8 million because of leases and debt repayments.
This is not the same weakness as in 2025. Then, the question was whether the profit-cash gap signaled a deeper issue in business quality. In the current quarter, cash flow still does not provide a full answer, but it also does not worsen the thesis: operating cash burn was smaller, customer advances provided support, and operating profitability improved. The next proof point is simpler: in Q2 and Q3, operating activity needs to return to positive cash generation that covers dividends, leases and the investment layer.
Acquisitions And Buybacks Change The Balance-Sheet Test
At the end of 2025 the company looked like it had a particularly comfortable cash layer. By the end of the first quarter the picture had already changed: net cash surplus fell to NIS 187.1 million, mainly due to acquisitions, loan repayments and activity purchases. This is still a strong balance sheet, and the group meets its financial covenants. The consolidated company has no net financial debt but a net cash surplus, and Ness has comfortable covenant headroom. The new part of the story is not covenant compliance, but how quickly management is willing to use the balance sheet.
| Move | Amount | Status | Economic Meaning |
|---|---|---|---|
| Acquisition of 55% of Summit | Acquisition cost of NIS 55.0 million | Completed on February 26, 2026 | Adds a clearer AI product asset, but still at amounts immaterial to the group |
| Dividend to shareholders | NIS 45.9 million | Declared in March and paid on April 14, 2026 | Continues the cash-return profile, but follows a negative operating-cash-flow quarter |
| Acquisition of Log-On Software | NIS 164.5 million plus NIS 27.5 million to be injected for a seller dividend | Subject to Competition Authority approval and third-party consent | Can expand Ness, but would require a material cash use if completed |
| Buyback plan | Up to NIS 150 million | Approved after the balance-sheet date, with no purchases made by report publication | Signals confidence, but raises the bar for 2026 free cash flow |
The combination of a conditional acquisition, dividend and buyback plan creates a new test. There is no need to assume that the whole plan will be executed or that the Log-On deal will close immediately, but the approved scale is already larger than the net cash surplus at quarter-end. The company's balance sheet is therefore shifting from a defensive layer to an operating tool: it funds activity expansion, bolt-on acquisitions and shareholder cash returns. That is a reasonable move for a stable company, but it requires cash flow to start working faster.
Summit should be read the same way. It adds an AI capability in transcription, captions, translation and meeting summaries, with options that can increase Ness's holding to 100%. But the company states that the initial consideration and potential option consideration are immaterial to the company or Ness. The acquisition therefore strengthens the product shelf and cross-selling story, rather than changing 2026 earnings by itself. Log-On, if completed, will be the heavier test of integration, price and cash.
What Will Decide The Next Read
The first quarter points to a company whose activity is functioning better than the concern created by 2025 cash flow, but it does not yet prove that the improvement is enough to fund the full capital plan. The payroll engine remains highly profitable, business solutions are growing with a thinner margin, infrastructure and software show margin improvement despite dollar pressure, and the AI layer now has a more product-like asset through Summit. At the same time, cash declined, operating activity was still negative for the quarter, and planned acquisitions raise the possible use of funds.
The positive read will strengthen if the next quarters show three things together: positive operating cash flow, further margin improvement in software product marketing without relying only on quarterly timing, and progress in Log-On or Summit that adds profit quality rather than only revenue. It would weaken if the profit-cash gap widens again, if the buyback is used fully without supporting cash flow, or if an acquisition expands revenue while pressuring cash and margin. For now, the evidence leans toward cautious operating improvement: the business is working, but 2026 is a capital-allocation proof year, not only a revenue-growth year.
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