Formula Systems operating income rises 41% as AI, cyber and defense technology demand expands

Formula Systems (1985) Ltd. reported record second-quarter revenue of $782.4 million, up 29.8% year over year, as growth across its technology holdings drove operating income 41.3% higher to $71.6 million. Net income attributable to Formula shareholders increased 54.6% to $23.3 million, or $1.47 per diluted share, while first-half revenue reached a record $1.52 billion. The performance is particularly notable because Sapiens International Corporation, previously one of Formula’s major holdings, was sold to Advent in December 2025 and is now classified as a discontinued operation in historical comparisons. Formula also declared a $1.63-per-share dividend worth approximately $25 million, using part of the substantial liquidity generated by the Sapiens transaction.

The quarter shows that Formula’s remaining portfolio is generating meaningful growth rather than relying on the business that was sold. Matrix IT delivered record revenue and operating profit, Michpal Technologies posted more than 30% revenue growth and TSG expanded more than 20% as demand increased for defense technology, command-and-control systems and unmanned aerial vehicle capabilities.

Formula’s Nasdaq-listed shares remain extremely thinly traded, making short-term earnings reactions less informative than for larger technology companies. Recent market data showed FORTY around $115.25, roughly 24% below its level at the beginning of 2026 despite a gain of almost 5% over the preceding week, reinforcing the importance of looking beyond individual low-volume sessions when assessing investor sentiment.

Matrix remains Formula Systems’ largest operating engine as cloud, cyber and AI demand grows

Matrix delivered second-quarter revenue of approximately NIS2.1 billion, or $718.3 million, representing 6.3% year-over-year growth in shekel terms and another record second quarter for the business. Operating income increased 10.6% to NIS202.2 million, equivalent to about $68.5 million.

The difference between Matrix’s 6.3% local-currency growth and Formula’s 29.8% consolidated dollar revenue increase highlights the impact of currency translation as well as growth elsewhere in the portfolio. Formula reports in U.S. dollars while many of its businesses generate substantial revenue in Israeli shekels, creating foreign-exchange effects when consolidated results are translated.

Matrix continues to concentrate on technology areas where enterprise spending remains comparatively resilient, including cloud infrastructure, cybersecurity, digital transformation, data, DevOps and artificial intelligence. Management said the company’s diversification across industries and its U.S. operations have helped maintain growth despite a complicated macroeconomic and geopolitical environment.

The broad service portfolio reduces dependence on any single technology cycle. AI spending may be attracting the greatest attention, but cybersecurity, cloud modernization and data-management projects can provide additional demand even if corporate enthusiasm around individual technology themes moderates.

That positioning also gives Formula a different exposure to AI than semiconductor or infrastructure companies. Matrix primarily benefits from businesses implementing AI and modernizing technology systems rather than from selling the underlying chips or computing capacity, linking revenue more directly to enterprise adoption.

Michpal and TSG are becoming faster-growing contributors beyond the core Matrix business

Michpal Technologies produced one of the strongest growth rates in Formula’s portfolio. Q2 revenue increased approximately 31.2% to NIS63.6 million, or $21.6 million, while adjusted EBITDA climbed about 36% to NIS25.2 million. Adjusted net income attributable to shareholders nearly doubled to NIS16.1 million.

The payroll, human-resources and financial-software provider is also using acquisitions to expand its addressable market. Michpal completed its acquisition of Zviran Group in April and ended the period with approximately NIS266.4 million of cash, giving it additional capacity for acquisitions and technology investment.

Management is specifically prioritizing AI, cloud technologies and intelligent automation within Michpal’s product development. These investments can strengthen recurring software revenue if they increase customer retention and allow the business to sell additional capabilities into its existing payroll and HR relationships.

TSG provides Formula with a substantially different growth engine through defense technology. Q2 revenue increased approximately 22% to a record NIS127.6 million, while operating income rose 22.7% to NIS12 million.

Demand is being driven by command-and-control technology, unmanned aerial vehicles and other defense systems in Israel and international markets. TSG is simultaneously expanding through acquisitions, having purchased Mabat 3D in March and Production Floor in May to add spatial mapping, manufacturing and integration capabilities.

TSG has also accumulated considerable financial firepower. Equity and debt financings completed since late 2025 helped lift cash to approximately NIS497.7 million, giving management capacity to pursue further acquisitions in engineering and manufacturing.

First-half earnings remain strong even after removing a one-time TSG capital gain

Formula’s first-half results were even stronger than the quarterly figures. Revenue increased 24.4% to $1.52 billion and operating income rose 53.3% to $153.7 million.

Part of that operating-income growth came from a $16.6 million capital gain related to a TSG private placement and employee stock compensation that reduced Formula’s ownership in TSG from 37.33% to 32.87%. Excluding the gain, first-half operating income still increased 36.7% to approximately $137 million.

The same adjustment is important when assessing shareholder earnings. First-half net income from continuing operations attributable to Formula shareholders increased 186.4% to $58.9 million, but excluding the TSG gain it would have reached $42.3 million, still more than double the comparable continuing-operations figure.

Reported first-half net income attributable to Formula shareholders increased 71.4% compared with the prior-year figure that included discontinued Sapiens operations. Excluding the TSG capital gain, shareholder net income would have risen 23%, providing a more conservative measure of underlying earnings progression.

The adjustments do not undermine the operating story, but they demonstrate why the underlying subsidiaries deserve more attention than the headline percentage increases. Matrix, Michpal and TSG all reported organic or operating growth independent of the one-time capital gain.

$864 million cash position supports dividend payments and additional portfolio investment

Formula ended June with approximately $864.5 million of consolidated cash, cash equivalents and short-term bank deposits, down from roughly $1.28 billion at the end of December. Total consolidated equity stood at $1.66 billion, representing 47.2% of the balance sheet.

The elevated cash position largely reflects the proceeds received when Advent acquired Sapiens in December 2025. Formula’s board has now approved a $1.63-per-share cash dividend totaling approximately $25 million, payable October 6 to shareholders of record on September 22.

The distribution represents only a relatively small portion of available liquidity, allowing Formula to return capital while preserving considerable financial flexibility. The balance sheet can support acquisitions across its operating subsidiaries as management continues pursuing portfolio expansion.

Formula also remains comfortably inside its debt covenants. Equity attributable to Formula shareholders stood at approximately $1.21 billion against a required minimum of $325 million, while covenant calculations showed net financial indebtedness ratios comfortably below required thresholds.

That financial position is particularly useful because multiple subsidiaries are pursuing acquisitions simultaneously. Michpal is expanding payroll and HR software, while TSG is building a more vertically integrated defense-technology platform and evaluating additional engineering and manufacturing opportunities.

The strategic risk is therefore less about immediate liquidity and more about capital allocation. Formula must ensure that acquisitions made across a decentralized portfolio deliver acceptable returns and do not dilute the strong margins or growth currently visible in the underlying businesses.

Sapiens exit changes how investors should evaluate Formula Systems’ next growth phase

The sale of Sapiens creates an important break with Formula’s historical financial profile. Prior-year results have been restated to classify Sapiens as a discontinued operation, meaning continuing-operations comparisons provide the clearest view of how the remaining portfolio is performing.

That remaining portfolio is more diversified than Formula’s headline identity as an IT holding company might imply. Matrix provides broad enterprise technology exposure, Michpal focuses on payroll and financial software, while TSG adds defense and autonomous-systems growth alongside several smaller technology and infrastructure holdings.

The diversification can protect Formula from weakness in any single technology segment, but the structure also creates complexity for investors. Consolidated growth reflects subsidiary performance, acquisitions, currency movements and changes in ownership stakes, meaning headline revenue and earnings can require additional interpretation.

Formula’s Q2 performance nevertheless provides evidence that the post-Sapiens portfolio remains capable of delivering strong growth. Revenue reached an all-time second-quarter record, operating income grew faster than sales and several smaller holdings expanded significantly faster than Matrix.

The stock’s roughly 24% year-to-date decline contrasts with that operating momentum, although FORTY’s exceptionally low trading volume makes valuation signals less reliable than they would be for a more liquid Nasdaq stock.

The second half will therefore test whether Formula can sustain double-digit growth without relying on one-time gains while using its Sapiens-generated liquidity productively. Continued expansion at Matrix, acceleration in Michpal and execution of TSG’s defense strategy would strengthen the argument that Formula has successfully rebuilt its growth profile around a broader group of technology assets.

Key takeaways from Formula Systems’ record Q2 revenue and 41% operating profit growth

• Q2 revenue jumped 29.8% to a record $782.4 million, showing Formula’s remaining portfolio can deliver strong growth even after the December 2025 sale of Sapiens.
• Operating income increased 41.3% to $71.6 million, substantially outpacing revenue growth and demonstrating stronger profitability across the consolidated technology portfolio.
• Net income attributable to Formula shareholders rose 54.6% to $23.3 million, while diluted earnings increased to $1.47 per share from $0.95.
• Matrix remained the largest operating engine, generating about $718 million of quarterly revenue as cloud, cyber, data, digital and AI projects supported enterprise demand.
• Michpal revenue increased 31.2% and adjusted net income nearly doubled, making the payroll and HR software business an increasingly meaningful growth contributor.
• TSG revenue rose 22% as demand for command-and-control and UAV technologies expanded, giving Formula additional exposure to growing international defense spending.
• First-half operating income increased 53.3%, but excluding a $16.6 million TSG-related capital gain, underlying growth was still a strong 36.7%.
• Formula held approximately $864.5 million of consolidated cash and deposits at June 30, providing substantial capacity for dividends, acquisitions and subsidiary investment.
• The board declared a $1.63-per-share dividend totaling about $25 million, beginning to return part of the liquidity generated through the Sapiens sale.
• FORTY remains roughly 24% lower year to date despite record operating results, leaving sustained post-Sapiens growth and disciplined capital allocation as the main rerating catalysts.