Sapiens International Corporation N.V.
Q4 2017 Earnings Call Transcript

Published: 8 Mar 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation’s Fourth Quarter and Full Year 2017 Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded March 8, 2018. It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens’ CMO and Head of Corporate Communications. Ms. Cohen, please begin.

[Yaffa Cohen-Ifrah:]

Thank you, and good day, everyone. Our quarterly earning release was issued before the market opened this morning, and it has been posted on the company’s website at www.sapiens.com. Representing the company 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 looking-forward statements, and the safe harbor provision in the press release issued today also apply to the content of the call. Sapiens expressly disclaim any obligation 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 have 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 website or via the website link, which appear 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, and good morning, everyone. Many of you joined our conference call three weeks ago, during which we discussed our acquisition of Adaptik and disclosed preliminary 2017 results and 2018 guidance. Thank you for joining us today to discuss our fourth quarter and full year 2017 financial results. In 2017, we made considerable progress in executing in our long-term strategy to become a leading global provider of insurance software solution and services. We have allocated significant capital to acquisition and R&D to support two elements we believe are essential in execution to this vision. The issues of capital has allowed us to boost our competitive advantage through internal development of product and solution and to move rapidly into key markets where we can acquire new solution, client, personnel and resource and branching focus geographically and market segments. We seek three over-reaching trends in the insurance market that we look at capitalize on

[Roni Giladi:]

Thank you, Roni, and good morning, everyone. Before I jump into our results for the fourth quarter, as a reminder, we are presenting our results on a non-GAAP basis, which we believe gives a clear view into the operational state of the business. Revenue in the fourth quarter totaled $72.4 million, up 26.9% from the fourth quarter of 2016, mainly due to incremental revenue from StoneRiver in our organic growth. If you analyze our organic growth on a constant exchange rate this quarter, excluding the onetime impact of the lost revenue due to the halt of the project and excluding the deemphasize of non-core revenues in Japan, our organic growth this quarter would have been approximately 10%. Moving to our geographic breakdown. Our revenue in North America totaled $31.6 million and represent 43.6% of our total revenue as compared to 37% in the same period last year, reflecting the StoneRiver acquisition. EMEA and South Africa revenue of – was 51%. As anticipated, APAC revenues declined following the reduction in revenue in Japan. Moving to gross profit. Gross profit this quarter totaled $29.5 million compared to $23.9 million in Q4 of last year. Our gross margin this quarter was 40.7%, down from 41.8% in the fourth quarter of last year. Operational costs. Our investment in R&D and SG&A increased during the fourth quarter compared to last year. R&D expenses in the fourth quarter of 2017 total $9.7 million compared to $6.2 million in the fourth quarter of 2016 and $9.8 million in the prior quarter. The increase in R&D expenses this quarter compared to the same period in the prior year was the result of the full quarter contribution of StoneRiver. SG&A expenses totaled $10.8 million compared to $10.2 million in last year. SG&A expenses slightly increased despite the contribution of – from StoneRiver, and it was mainly due to the progress we made on reduction SG&A for the combined entity. Our operating income this quarter totaled $9.1 million or 12.5% operating margin compared to $7.5 million or 13.1% in the fourth quarter of 2016. If you assume a constant exchange rate during the period, our operating margin would have been approximately 180 basis points higher, reflecting 14.2% operating margin compared to 12.5% reported margin, mainly due to the strengthening of the Israeli shekel as compared to last year. Our adjusted EBITDA this quarter total $10.1 million, reflecting 13.9% of total revenue from the quarter. Financial expenses this quarter totaled $1 million. The financial expenses this quarter included expenses related due to increased expenses on debenture and an exchange rate expenses resulting from fluctuation of exchange rates over net assets. Tax expenses this quarter were $2 million, representing an effective tax rate of about 24.9% compared to 20.5% last year. The increase in our tax rate is due to the increase in our business in the U.S.A. Net income for the quarter was $6.1 million or $0.12 per diluted share compared to $6 million or $0.12 per diluted share in the fourth quarter of last year. I would like to note that in the fourth quarter, we completed the deemphasize of our non-core activities in Japan and added additional restructuring expenses related to officers and staff. The impact on the GAAP operating profit was $4.2 million. The total restructuring cost in 2017 was $8.1 million. Turning now to the full year results for the 12 months ended December 31, 2017. 2017 revenue was $272 million, up 25.8% compared to $216.2 million in the prior year, in line with our full year guidance. Our operating profit in the full year was $23.1 million compared to $29.6 million in 2016, a decrease of 22%. Our operating margin in 2017 was 8.5% compared to 13.7% in 2016. I would like to remind you that the operating profit margin was materially different between the first half and the second half of the year. In the first half, the operating margin total 3.9% and was impacted by the halt of development project and the integration of StoneRiver. In the second half of the year, the operating margin was 12.4%. Net income for the year was $15.5 million or $0.31 per diluted share compared to $24.2 million or 49% per diluted share in 2016. Turning to our balance sheet. As of December 31, we had a cash and cash equivalent of $71.5 million with commitment to pay $20 million from our last acquisition of Adaptik and a total debt of $80 million. Our first debenture principal payment is due January 1, 2019. I would like to turn now to our guidance for 2018, which we presented to you in February 12. In 2018, we expect revenue of $200 million to $285 million. We expect non-GAAP operating margin of 12% to 13%. Our outlook for 2018 is primarily the impact by four events

[Roni Al-Dor:]

Thank you, Roni. In summary, our 2018 priorities will be to continue to grow organically, drive cross-selling to our customer base and achieve non-GAAP operating margin between 12% to 13%. At the end of 2017, Sapiens significantly enhanced our product offerings by developing and acquiring new solution for core, data and digital to be more competitive. We doubled our customer base and add talent in key areas. We built up a strong P&C platform for North America and streamlined our overall business to build platform to support our long-term strategy. In 2018, we will be focused on maximizing these strong assets to benefit our existing customer and attract the new ones. With that said, I would like to close our prepared remarks and open the call for question. Operator?

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Please go ahead.

[Tavy Rosner:]

Thanks for taking my question. I was wondering if we could talk a little bit about the life segment. You mentioned in your prepared remarks that you’re expecting stability in this segment in 2018. To me – I recall you guys being a bit more optimistic about life in the past. So can you maybe run us through what has changed, especially in the underlying markets, which makes you less confident about this growth in 2018?

[Roni Al-Dor:]

Yes. As you know, in the life business in general, we see less deals than the P&C. This is a general statement. And because they are – were a few things that happened to us versus the retirement services in the life, we decide to take more a conservative approach. And we still believe that we – just to remind you that we have three segment in the life

[Tavy Rosner:]

Do you think anything has changed for ALIS on the underlying market? I mean, that insurance company, either is it just sales cycle that are lengthening? Or do you think that they are taking a different approach to using external providers, such as yourself?

[Roni Al-Dor:]

The main thing is that the market – that there is a lot of consolidation in the life. We just finished a few days with analyst from the – from our business, and those are also – they share with us, there is the – take as an example, income protection in UK. At the past, it was a lot of insurance that – deliberate now. It’s become more commodities, and there is a lot of consideration. That means that our potential customer is less because of the consolidation. So we don’t – and the other thing is around the Closed Book and runoff business, there is a lot of company are taking for offshore, and sometimes, they have two alternative

[Tavy Rosner:]

Thank you.

[Operator:]

The next question is from Bhavan Suri of William Blair. Please go ahead.

[Bhavan Suri:]

Hey guys. Can you hear me okay?

[Roni Al-Dor:]

Yes. Hi, Bhavan.

[Bhavan Suri:]

Hey, Roni, hey, Roni, hey, Yaffa. I guess I want to touch on a couple of things quickly. First, can you just talk about the pipeline with Adaptik? It seems like there’s some good opportunities lined up for 2018, but just some sense of size or sort of your confidence and what stage you’re at, close rates, the profits. I just want to get a little more color on that.

[Roni Al-Dor:]

Okay. I will talk in general about Adaptik, and then Roni can try to add the numbers. As I mentioned, we acquired Stingray, we acquired StoneRiver, we acquired Adaptik. What we – in Stingray is the lower tier. We grow 2017. We have a very good pipeline, so we’re very optimistic that we can grow a high double digit in the Stingray. Now in StoneRiver, StoneRiver, beside the workers’ comp, reinsurance, finance and compliance that was the – that we didn’t do any change, we made a decision – StoneRiver start to develop their Stream system many years ago. It’s a new technology platform and a very, very, very good on claims, and they also start to develop the billings, but very early stage on the policy. So the main idea is to take the – one of the best policy system in the market today for Adaptik and billing and to combine it with the claim. I just, by the way, came back from U.S. from client conference Adaptik and Stream together. Adaptik, we – you can see in the near future what the analyst believe. They put us in a very – in a magic quadrant, very, very good in terms of what they believe the product. So we are – we feel that, now together with Stream and Adaptik, we can instead of now wait. If you remember, there is 50 and 80 vendors in U.S. and we can be – after this acquisition, we can be one of the top five. So we are very optimistic. The client base is very happy. The product is mature and strong. Now with the all help of us, because they are relatively small company and they started, by the way, with Tier 1 and 2, it’s very difficult for them to – just because the size. So I think together with us, with the claim, with the digital, with the services, so we see a lot of potential growth. But right now, we are feeling integration mode, and we are just going to the market right now. The pipeline is good, so we are – yes, we are optimistic.

[Roni Giladi:]

Just to add a small sentence on that. When we completed the due diligence on Adaptik, obviously, we saw a company at the level of $12 million, and we also analyze and review the potential prospect. We feel confident that they will close with Adaptik-Sapiens in the near term and, therefore, potentially will have an impact on the revenue on terms of growth. In terms of overall size, the Adaptik and Stream claim is altogether, let’s say, between $15 million to $20 million. So this is the area that can grow in the high level. But right now it’s still not a big number. It’s about $15 million to $20 million.

[Bhavan Suri:]

Got it, got it. That’s really helpful. I think just one other question for you guys generally, and then I might have a quick follow-up there. But have you guys thought about quantifying the cross-sell opportunity between StoneRiver and Adaptik? If you were to think about sort of – both set of customers, the products they have, the products we could cross-sell, how would that look? Or how should we think about the size and opportunity of what you guys might do there?

[Roni Al-Dor:]

We definitely see we are – already start to – just we feel form from StoneRiver came to the client conference, and again, we are talking about overall StoneRiver has two on this client. I cannot promise that all of them can start to buy but definitely – and by the way, not just Adaptik, also Stingray. StoneRiver, part of their business is legacy, and this is what we are looking for. We are looking to go to all of them and to come with attractive update – upgrade or new version or we can do something good for them. And one, we can keep them, and one, we can see up-sell opportunity. I cannot say give you all numbers, but definitely, this is one of the area that we are looking.

[Bhavan Suri:]

Yes, yes. I think at some point, it’s worth thinking about that from actual size perspective, potentially. One last one from me. And I know you gave a little color on a large project. You said a little bit about that. But sort of as you think about discussions and how they’re progressing, you think about the cadence and the pace of service in that project, so instead of a big one it’s going to be sort of smaller chunks a few weeks later, how are your guys feeling about that, a little more color? And has there been any progress there? Thank you.

[Roni Al-Dor:]

Right now, we are – again, we decide to take conservative approach. We have agreement with this large organization but we are – have a lot of stream, a lot of initiative, but we still wants to see how its progress. So we are very optimistic. But in terms of the size – and also, we are taking more conservative approach in terms of 2018.

[Bhavan Suri:]

Okay, thanks guys. I appreciate it. Thank you for taking my questions.

[Operator:]

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

[Avishai Kantor:]

Good afternoon, guys. Thank you for taking my questions. My first question. So it’s a year passed. The acquisition of StoneRiver was a big strategic move. StoneRiver, it’s predominantly P&C, but if I believe – if I am correct, I think it’s about 20% life. Can you talk – and you touched about it in the previous question. Can you talk a little bit which areas surprised you on the positive side, past – now that the one year anniversary? Which areas specifically remain challenges for 2018? If you can break it down by P&C, of life. I know life is relatively small within StoneRiver, but if you can still break it down by those two segments.

[Roni Al-Dor:]

I – we definitely not see any surprise in StoneRiver. We are very happy with this acquisition. We – if you can – just to remind, we have the life piece, we have finance and compliance, we have the reinsurance, we have the workers’ comp and we have the Stream, so all of those. As Roni mentioned, we improved the operational margin. We are [indiscernible] on the account management to look after up-sell and cross-sell, and this, we look in the future. The only area that we decide to put more engine is on the three parts. And this is relatively small, but that’s one of our – can be one of our growth – main growth engine. Again, as I mentioned before, if you can know Sapiens from 2011, we acquired IDIT, and now it’s definitely one of the market leader in Europe in every opportunity. We are in the short list compared to Guidewire. This is what we – our expectation now. We see Adaptik and Stream together to be in the same area in the very near future. And again, just to remind the people that don’t know Sapiens for many years, this is we try to do for many, many years. We decide not to bring the IDIT to the U.S. like what we did in ALIS. We decide to do few acquisition. Now we complete all of them. We start to integrate, and now we concluded with Adaptik. I think – and again, based on what we overall believe, there is a lot of disruption in the P&C area. So I think we have positioned us one of the very big player on the P&C market.

[Avishai Kantor:]

Okay. And so do you feel like that you can disclose – if any of those areas you’ve added that you expected in terms of winning new deals? For example, the life segment in – within StoneRiver did a little bit better than you expected.

[Roni Giladi:]

On the life, which I – as Roni mentioned earlier, we are selling their component solution, not the core system solution. And we had several opportunity that we won during this year. They are not big in size, but they are a few hundred thousand each, at least. This was a – in terms of revenue – in revenue size, more than what we expected. So on the life, on the complementary solution, winning new deals with the StoneRiver. And also it refer to the previous question about the cross-selling opportunity for us to do this. On the overall profitability, Roni mentioned that we have set aside same tools. At the end of 2017, we reached our target to improve the profitability. We are optimistic about this. We reached this goal. There are small areas that we need to be improved. But overall, they are on the level of Sapiens, and so we are also happy with the overall profitability of StoneRiver. As a reminder, we started the year with 8%, and right now, they are in Sapiens level.

[Avishai Kantor:]

And my last question on the Adaptik acquisition. So it seems like you acquired some tenured IT management capability and C-level executives that are coming from that acquisition. Do you have any plans to leverage them across the organization?

[Roni Al-Dor:]

Yes, definitely yes. The first thing that we decide to do, we move all the StoneRiver Stream to Adaptik, and we – so the 80% of the management of the new organization, Adaptik and Stream, managed by John, he was the CEO of Adaptik, and all of his management. What we add from Sapiens is the Head of Client and Professional Services, Hagit. She worked for Sapiens, managing the Professional Services. She take over the clients and all the other thing from operation, financial, legal, HR. All of those, they are getting from clients – so from Sapiens. So we definitely want to relieve the CEO from doing the financial part and go to the market and take the advantage to bring more business and serve the existing clients.

[Avishai Kantor:]

Thank you so much for taking questions, and the color and strategy.

[Operator:]

[Operator Instructions] There are no further questions at this time. Before I ask Mr. 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 two hours. In the U.S., please call 1 888 782 4291. 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, operator, and thank you for all participants for joining us today. Have a good day.

[Operator:]

Thank you. This concludes the Sapiens International Corporation’s fourth quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.