Sapiens International Corporation N.V.
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Welcome to the Sapiens International Corporation Fourth Quarter and Full Year 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded February 26, 2019. It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens’ CMO, Head of Corporate Communications. Mrs. Cohen, you may now begin.

[Yaffa Cohen-Ifrah:]

Thank you and good day everyone. Our quarterly earnings release was issued before the market opened this morning and it has been posted on the company’s website at www.sapiens.com. Representing Sapiens today are Roni Al-Dor, President and CEO and Roni Giladi our CFO. Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements and the Safe Harbor provisions in the press release issued today also apply to the content of the call. Sapiens expressly disclaims any obligations to update or revise any of these forward-looking statements whether because of future events, new information, a change in its views or expectations or otherwise. Also during the course of today’s call, we will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued before the market opened this morning. A replay of this call will be available after the call on our Investor Relations section of the company’s website or via website link, which is available in the earnings release that we published today. I will turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?

[Roni Al-Dor:]

Thank you, Yaffa. Today, I will start this review for fourth quarter, comment in our progress in 2018 and close with our plan for continued excellence in 2019. At the beginning of 2018, we laid out our strategy for turning to growth based on four key objectives

[Roni Giladi:]

Thank you, Roni. I will begin my commentary with a review of the fourth quarter results followed by the full year result. After which, I will provide some commentary on the balance sheet and end with our 2019 annual guidance that we introduced in our press release earlier today. Revenue in the fourth quarter of 2018 totaled $73.4 million, up 1.4% from the fourth quarter of 2017. Our revenue in North America totaled $34.9 million, represents 47.6% of our total revenue, revenue in the region increased by 10.7% compared to last year, but slightly declined compared to previous quarter due to delaying operational milestone that is expected to be reversed in the first half of 2019. Revenue in Europe totaled $30.9 million, an increase of 3.6% compared to last year and represents 42% of our total revenue. South Africa revenue declined compared to last year, mainly due to the change in scope of the project that we mentioned on prior call. The project, as originally planned will not continue. We will have small revenue stream throughout 2019. Moving to gross profit, gross profit this quarter totaled $31.3 million compared to $29.5 million in Q4 of last year. Our gross margin this quarter increased to 42.7% from 40.7% in the fourth quarter of last year. Operational cost R&D and SG&A in the fourth quarter was essentially flat compared to last year. Our operating income this quarter totaled $10.8 million or 14.8%, compared to $9.1 million or 12.5% in the fourth quarter of 2017. Our operating margin this quarter continued to improve compared to last year and compared to previous quarter. Net income for the quarter was $7.8 million or $0.16 per diluted share compared to $6.1 million or $0.12 per diluted share in the fourth quarter of last year. While our revenue grew 1.4%, our net income this quarter increased by 27.4% compared to last year. Our adjusted EBITDA this quarter totaled $11.8 million, reflecting 16.1% of total revenue for the quarter. Turning now to the full year result of the 12 months ended December 31, 2018, when we began the year, we stated that our 2018 priorities were

[Roni Al-Dor:]

Thank you, Roni. As I said earlier, we recently announced the launch of our new brand architecture to reflect our evolution into unified global provider of Innovative Digital Solutions and to position the company as a partner for our client success. With an improved competitive position as a one stop shop for insurance software solution and enhanced product platform. I’m looking forward to another year of advancing our global position. We are building on our foundation for growth and leveraging our investment made over the past few years. Today, we are strongly positioned with a wide range of insurance platform, technology-led services, brand postproduction, and we offer enhancement digital solution by collaborating with insurtech partners. Our winning businesses model of product and services enable us to advance our long-term relationship with our customers. Our 2018 priorities are

[Operator:]

Thank you. [Operator Instructions] The first question is from Mayank Tandon of Needham & Company. Please go ahead.

[Kyle Peterson:]

Hi good morning. This is actually Kyle Peterson on for Mayank today. Thanks for taking the question. Just want to see in terms of the P&C growth outlook for the year, is that will that be kind of split pretty evenly between North America or Europe or kind of how are you guys looking at the geographic growth for the coming year in P&C?

[Roni Giladi:]

Hi this is Roni G. In 2018, we saw double-digit growth from the P&C in Europe and rest of the world. And while we see growth single-digit growth on North America P&C, as we look at 2018, we see both of the area growing double-digit growth. We have some indicators coming from recently from the stake where we signed several deals on the P&C side and we have very good pipeline to continue. So, we’re confident on the double-digit growth on the P&C as a stake. And in Europe, we’re continuing the trend as we had in the past, this will continue going forward. So basically, evenly both of them double digit.

[Kyle Peterson:]

Great, that’s good color. Good to see acceleration in North America. And then just wanted to touch on the life and annuities business, I know you guys mentioned stable with a little bit of positive bias. Just want to see your overall thoughts, just what it might take to be able to return to a little bit of positive organic growth in the life and annuity space?

[Roni Al-Dor:]

Hi this is Roni Al-Dor. We are seeing the life and annuity 3 type of solution. One is our core, what we call today Sapiens’ core suite for life and where is the component, include illustration and underwriting, and then we have the runoff businesses calling today Consolidation Master. The 2 areas that we plan to continue to see a growth between single and double digit is the component in the runoff. In our core suite, we still see a business many from Europe. This is what we made a decision 2018, and this is going forward. So, the overall is growing, but not as high growth like the P&C.

[Kyle Peterson:]

Okay, great thanks. And last one for me and then I’ll hop out. Just want to touch and see if you can give any background on the M&A pipeline. What you guys might be looking for? Whether it’s specific capabilities, geographies, product offerings? Any color would be great.

[Roni Giladi:]

Hi this is Roni G. As we mentioned in 2018, we had a decision to slow down our activities into the M&A, focusing on operational and building the foundation of organic growth. As we close to end of the year in Q4 of 2018, we started discounting processing in the company, looking basically for the angle that you mentioned, either additional complementary solution, customer base and also geographic expansion territories that we do not have present today. We’re in early stage, and we’re looking to do so. And hopefully, we can announce something in 2018, but right now in very, very early stage.

[Kyle Peterson:]

Alright great. Thanks for the color. Good quarter guys.

[Roni Giladi:]

Thank you.

[Operator:]

The next question is from Avishai Kantor of Cowen. Please go ahead.

[Avishai Kantor:]

Hi good morning and good afternoon everyone. My first question, so we are talking about 10% organic growth for the year a, stronger second half versus the first half. And you mentioned that the reason is, I would say delays in some ramp-up within U.S. clients. Are we talking about one specific client or a handful of clients?

[Roni Giladi:]

Hi Avishai, this is Roni G. We are talking about the specific customer, on specific item. I do not see the something that it goes above. Very specific and we convert on the first half of 2018.

[Avishai Kantor:]

Okay thank you for that clarification. And then you’ve been able to throughout 2018 and what seems to be going forward into 2019. You’ve been able to post very nice gradual margin expansion despite as you characterized, continued investments in U.S. sales and management capabilities. Obviously, this is coming from back office and delivery capabilities. How much more levers do you and you were talking about moving some of the functions to India. How much more of lever do you have in the business model to support that margin expansion?

[Roni Giladi:]

Hi again, this is Roni. Our guidance for 2018 basically take into effect additionally, acceleration or lever in the model. We have significant stuff right now, doing delivery, but we would like to accelerate also the R&D part. This will also improve our margin going forward. And also, without their offshore as we scale our business and growth the revenue with some economic of scale that will improve margin. Our midterm range is 15%, 17%. We think we can achieve this in the midterm. 2019 will be the first year that we are entering this range with the range of 15.2% to 15.6%. And as Q4 already with 14.8%, we are enriched with this range.

[Avishai Kantor:]

Great. And then, is the accelerating U.S. pipeline driven by new or existing clients? Is that is, it driven by your strong marketing efforts in the second half and then the re-branding, what’s driving it?

[Roni Giladi:]

I think the first part is coming from the new customer. We see a lot of promising opportunities coming on the P&C platform on the stake. As Roni mentioned, we also established a current customer-centric team that will support to improve or increase the revenue from existing customer. I think we see this increase in revenue potential revenue towards the second half of the year but right now, what we see is more on the new customer coming on.

[Avishai Kantor:]

And my last question for the team, can you talk can you give us a sense on cloud-based wins for your platforms. I mean, do we see an acceleration in the ratio or the mix of cloud-based platform contracts?

[Roni Al-Dor:]

Yes, the answer is yes, we see more and more interesting in cloud solution for all of our products. So, the answer is yes.

[Avishai Kantor:]

Okay. And I assume this is a long-term – this is another long-term lever to your margin expansion?

[Roni Al-Dor:]

Yes.

[Avishai Kantor:]

Great thank you so much and good luck in 2019.

[Roni Al-Dor:]

Thank you.

[Roni Giladi:]

Thank you.

[Operator:]

The next question is from Tavy Rosner of Barclays. Please go ahead.

[Tavy Rosner:]

Hi good afternoon. Congrats on the solid quarter. All of my questions were basically answered. I guess that is follow-up on the M&A one. Before you made that comment that you’re looking into additional M&A next year I mean, given your 10% organic growth am I to assume that you would also take ‘19 as a break. So, I guess looking at your where your balance sheet is. Would you go into taking that if you saw an interesting opportunity on the M&A front?

[Roni Giladi:]

Hi Tavy, this is Roni. So, as we mentioned, we’d like to wake up the still level of growth in the company. And the 10% is only organic and we’d like to accelerate it. And we’re right now focusing on talking M&A, not big M&A, and we think we can the cash position that we have allows us to do this acquisition. In case, we’ll see something which is bigger opportunity, we always opportunity to look at equity or debenture. Today, we have a debenture of about $80 million [indiscernible] 8 years will give us a lot of flexibility. And if we look at our EBITDA for next year, we’ll be close to $50 million and obviously, the ratio of EBITDA to debenture is very low and increased debenture. So, both angle, are open to us, equity or debenture. If we see big M&A, we consider at the time and opportunity, we’ll talk on M&A.

[Tavy Rosner:]

That’s helpful and just a broad one on life and specifically on the core aspect. We’ve spoken about the decline last year over the I’m just curious fundamentally, have you explained that just kind of insurance company postponing the investment decision into layer of time? Or simply you realize that they have [indiscernible] alternatively days and they can just stay with their legacy core and then figure something out later.

[Roni Giladi:]

Hi Tavy, this is Roni. When we enter 2018, we set a specific goal to our life division to focus first of all on existing customer. We basically put all the effort, not searching for new opportunity, but to maintain our existing customer, customers that some of them are going live and some of them are basically in preproduction phase. And obviously, when post production phase come, obviously, there is some decline in revenue. This is the event that happened to us in 2018 basically on the core life business. So right now, we have a level that the customer are possible realize and basically the revenue is stable. During that we continue to look for opportunities and we have some pipeline in the life division mainly on the run of business, mainly on the components of the solution but also very few on the life. We’re right now working on that but right now we’d like to conservative, and we’re mentioning the business is being stable.

[Tavy Rosner:]

Thank you Roni I appreciate it.

[Roni Giladi:]

Thank you.

[Roni Al-Dor:]

Thank you.

[Operator:]

Our next question is from Justin Furby of William Blair. Please go ahead.

[Justin Furby:]

Hi guys. Thanks for the question. Nice quarter. Just to start off in the P&C business, can you remind us what percent or give a sense for the coming in as cloud deals versus people hosting on-premise? And then in terms of the success that you’re starting to see there in North America, what kind of insurers I think are you resonating most of the terms of the sizes whether it’s commercial? Whether it’s personalized just any more color on North America and what you’re seeing there would be helpful. And then I’ve got one quick follow-up.

[Roni Al-Dor:]

Yes, this is Roni Al-Dor. In the P&C North America, we have few types of solution the, workers’ comp is going for the stake and for the Tier 1 clients. And our core solution is mainly for Tier 3, 4 and sometimes Tier 2. All of them are looking for cloud and hosting as a smaller-companies more interesting for them. On the reinsurance, we’re also seeing more Tier 1 clients, Tier 2, Tier 1 type of clients.

[Justin Furby:]

Super helpful. And then if you look at Europe, I’m just checking with P&C. Any notice that Brexit is having some sort of impact in the market in the U.K. specifically? I was just curious what you’re seeing there. And then what areas within Europe specifically, are you seeing the most pipeline growth on the P&C side? Thanks.

[Roni Al-Dor:]

Okay. So, we don’t see any impacts of the Brexit until now. In terms of Tiers, we’re in Europe, we’re many moving towards Tier 2, So Tier 3, 2. And the Nordic is very hot area for Sapiens as well as UK. We also start to see some deals in the Duck area, mainly in Duck. But also, we are working, what you call, rest of the world. We’re working also in the South Africa and Asia Pacific. So those are the areas that we are working right now.

[Justin Furby:]

Okay, great. And then Roni, Roni G, on the acceleration and growth, maybe I missed it, but are you is it sort of single-digit growth in the first half and double digit in the back half? Is it sort of what you’re pointing to? Or any more color there would be helpful. Thanks.

[Roni Giladi:]

Hi Justin. So obviously, the 10% is a blended one. We see the first half slightly below and second half is higher. This is what we meant when we talked about the growth for 2019.

[Justin Furby:]

Okay fabulous. Thanks guys and see you next week. Cheers.

[Roni Giladi:]

Thank you.

[Roni Al-Dor:]

Thank you.

[Operator:]

[Operator Instructions] There are no further questions at this time. Before I ask Al-Dor to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1-888-295-2634, in Israel, please call 03-925-5918, and internationally, please call 9-723-925-5918. Mr. Al-Dor, would you like to make your concluding statement?

[Roni Al-Dor:]

Thank you to operator and thank you to all the participants for joining us on today’s call. Have a good day.

[Operator:]

This concludes the Sapiens International Corporation fourth quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.