Sapiens International Corporation N.V.
Q2 2014 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's Fourth Quarter and Full Year 2016 results conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded, February 28, 2017. It is now my pleasure to introduce your host Ms. Yaffa Cohen-Ifrah, Sapiens CMO and Head of Corporate Communications. Thank you, Ms. 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 our company's Web site at www.sapiens.com. Representing the company on the call 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 applies to the content of the call. Sapiens expressly disclaims 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 certain 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 Web site, or via the Web site link which appears in the earning release that we published today. I will turn the call over now to Roni Al-Dor, President and CEO of Sapiens. Roni?
  • Roni Al-Dor:
    Thank you, Yaffa, and good morning everyone. Many of you join our conference call two weeks ago during which we discussed our acquisition of StoneRiver. So thank you for joining the call today as well. Sapiens deliver another solid quarter with double-digit revenue growth and a strong performance across all of our offering, and across all of our territories. Driven by increased demand of our products and services, I am very pleased with our continued geographic expansion, our organic growth, and the opportunity we see to accelerate our business with the current M&A activities. During this call we will provide business update and discuss our fourth quarter financial results and our outlook for 2017. Today, we are reporting quarterly revenue of $57.1 million, up 17.3% over the fourth quarter of 2015. Our full-year revenue total is $216.2 million, up 20.6% compared to $179.3 million in 2015. As in previous quarter, the demand of our products and services remains strong, and we continue to improve our position in the market by expanding our businesses with existing customer and by winning deals with new customers. During the fourth quarter we record a number of new wins to further expand our revenue base and enhance our competitive position. Generali Nederland selected Sapiens for its life portfolios. Generali start of the Generali Group, one of the largest European insurance provider, and we were selected to administer a large portion of its life portfolios. Our implementation, which includes consolidation many of Generali Nederland's life book system on to Sapiens solution in order to release significant operations reserve by lower its IT costs and improving operational efficiency. In P&C, LB Group choose our IDIT P&C Suite as its new policy administration solution. For LB Group, a member-owned insurance company based in Denmark, Sapiens' IDIT Insurance Suite was selected by LB Group, new core insurance system for general lines of businesses. This is a multimillion Euro engagement, and it's cover the launch of 26 products of the next two years, and the implementation of four LB Group brands. Key to our selection was our strategic relationship between Sapiens and LB Group who previously selected Sapiens Reinsurance to manage its reinsurance program, and help the company comply with European regulations. To support our Nordic expansion, a leading area for insurance and technology innovation, and as part of our effort to better service the Nordic customer and expand our footprint in the market, we established a new head office in Copenhagen, and recruited an experienced regional director. We believe that insurance in the region are currently limited by their legacy system, and they are considering how to best prepare for the future. We see a significant opportunity for Sapiens to grow in this market by expanding its relation with existing regional clients, like LB Group, and by attracting new ones. We continue to maintain an intense R&D program to improve our product offerings, and to further enhance our investment in technology platform. This quarter we launched a consumer and agent portal for life and P&C insurers. Sapiens' portal is pre-integrated with the Sapiens ALIS and Sapiens IDIT Software Suite, and will provide our clients a fully digital experience. Later in the quarter, we released an upgrade Sapiens DECISION version 6.2. The enhanced [ph] 6.2 version feature advanced compliance capability and improved user experience, and accelerate policy change capabilities. And it was designed to reduce the cost of implementation and changing the regulations and policy in support of accelerated application development. Our investment in technology over the past few years have led the development of advanced and innovation product helping us to expand our businesses with both new and existing customer. This investment in technology had led to market recognition, and we were recognized by outside professional for our industry-leading offering. In December, Sapiens was named as a top 10 consistent solution provider of 2016 by a panel of expert professional technology leaders assembled by Insurance CIO Outlook. Sapiens was cited for its commitment to constantly improving and advancing to make the true business and technology needs for the insurance and financial services industry. To deliver on this commitment, we will continue to make ongoing R&D investments and improve our core product and maintain leadership position in the market, especially in the areas of capitalization and customer experience. We are also pursuing demand in new areas such as mobile access, self-service, IoT device, and wearable technology with this investment. Today, over 200 customers worldwide are using Sapiens solution. We worked and continue to work closely with these customers to help them maintain their system and maximize efficiency. We support them with the introduction of new capabilities or expanding other businesses. During 2016, more than 16 customers have gone live to move into production, which means our solution is being used as their co-operational system. Go live is a major event for both Sapiens and customer. It is the major demonstration of our ability to deliver, and of our customers' ability to adopt and rollout a new technology across the organization. I would like to wrap up my prepared remarks with some comments on our most recent M&A transaction. Our largest acquisition to date, which we announced earlier this month, as you know, on February 15, we announced the acquisition of StoneRiver. The StoneRiver acquisition significantly expands Sapiens' presence in North America insurance industry by increasing our U.S. customer base with an additional 200 customer, expanding our local insurance expert presence with the team of 500 professional, and improve our insurance practice and professional services capabilities and offering. It will also accelerate our footprint in the U.S. P&C space, a strategic priority for us. StoneRiver solution complements Sapiens' existing offering, and will allow us to accelerate the growth in the U.S. and globally in both P&C and Latin America markets. To conclude my remark I would like to summarize the key highlights. We posted yet another strong quarter highlighted by double-digit revenue growth, and double-digit operation margin. We won new customer and extended our businesses with existing customer across all of our products in all line and territories. We are confident that we will continue our expansion and growth in 2017. I would like now to turn the call over to Sapiens' CFO, Roni Giladi, to discuss our financial result and outlook for 2017.
  • Roni Giladi:
    Thank you, Roni, and good morning everyone. Revenue in the fourth quarter was up 17.3% from the fourth quarter of 2015, with revenue growth across all regions. Our gross margin was 41.8%, down from 44.2% in the fourth quarter of last year. Our investment in R&D and SG&A grew by plan during the fourth quarter. R&D expenses in the fourth quarter of 2016 totaled $6.2 million compared to $4.4 million in the same quarter of last year. SG&A expenses totaled $10.2 million compared to $9.8 million in the fourth quarter of last year. The increase in R&D was the result of our investment in the group capabilities for the Sapiens ALIS, and the investment in the development of Sapiens [technical difficulty]. Our operating totaled $7.5 million, 13.1% of operating margin, compared to $7.4 million or 15.1% operating margin in the fourth quarter of 2015. The reduction in operating margin is mainly due to higher investments in R&D and the impact of the currency exchange rates. On a constant exchange rate, our operating margin will be approximately 15%. Our adjusted EBITDA this quarter totaled $8.3 million reflecting 14.5% of total revenue for the quarter. Tax expenses this quarter were $1.5 million, representing an effective non-GAAP tax rate of about 20.5%. Net income for the quarter was $6 million or $0.12 per diluted share, compared to $6.3 million or $0.13 per diluted share in the fourth quarter of last year. Although our operating profit this quarter was slightly higher than last year our EPS was lower by $0.01 due to financial expenses in Q4 of 2016 compared to financial income in Q4 of 2016 ad the currency impact. Eliminating the currency impact this quarter our EBITDA this quarter will be higher by $0.02 and will total approximately $0.14. Turning to the full year result for the 12 months ended December 2016. 2016 revenue totaled $216.2 up 20.6% compared to $179.3 million in the prior year. Our revenue exceeded our guidance range of $211 million to $215 million, or annual growth of 18% to 20%. This increase was despite the devaluation of guaranty versus the USA Dollar. This happened in the second half of 2016. If we eliminate the currency impact our growth rate this year was 23.1%. and investments this year totaled to $22 million an increase of $5.8 million or an increase of 35.4% compared to last year. SG&A expenses increased by $4.5 million or 12.5% compared to last year. The increase in R&D and SG&A was to support our current and future revenue growth by enhancing our product and increasing our sales. After our investments total non-GAAP operating profit in the full year was $29.6 million compared to $26.5 million in 2015, an increase of 11.6%. Our operating margin was 13.7 compared to 14.8 in 2015. Our operating margin was in the mid-range of our guidance of 13.5% to 14%. Again if we eliminate the currency impact our operating margin this year will be around 15%. Our fully diluted earnings per share totaled $0.49, up 8.9% compared to $0.45 in 2015. Let's move to balance sheet. As of December 31, 2016 we had cash and cash equivalents and security investments of $96.4 million compared to $94 million. This amount is post a partial payment for the acquisition of Maximum Processing and a cash dividend of about $10 million during the year. We currently have no debt, but we do expect to fund portion of the StoneRiver acquisition with new bank debts. Moving to StoneRiver, we are all very excited about this acquisition. Upon closing, StoneRiver will become fully-owned by Sapiens. As I mentioned on our last call, StoneRiver 2016 non-GAAP revenue grew approximately $80 million on a full year basis. The company revenues are a mix of growing stable and declining product sales. We assume that some of StoneRiver revenue was a transaction will not continue with that in 2017. StoneRiver is guarantee profitable, but below Sapiens' profitability range. I would like to turn now to our guidance for 2017. Our annual guidance for 2017 includes StoneRiver results on a pro-rata basis. In addition, this year we took strategic decision to emphasize our non-insurance and financial services revenue. These are not in our focus territories, and with low margins. Revenue; Sapiens guidance for 2017 revenue is between $217 and $280 million, representing annual revenue growth of 25% to 30%. Our revenue guidance reflects the following three parameters. The acquisition of StoneRiver on a pro-rata basis and taking into effect that some of StoneRiver revenue will not continue in 2017; two, a decision to deemphasize certain elements of our non-insurance and financial services business which will result in reduction of revenue in 2017, and third currency devaluation, eliminating the impact of the currency devaluation and the reduction of non-insurance revenue and financial services will result on organic growth excluding StoneRiver at the range of 12% to 17%. Moving to operating margin, we expect full year 2017 operating margin approximately at 13%. Our operating margin guidance is affected by two entities; first, Sapiens on a standalone basis Sapiens' profitability is approximately 14%, and on a constant currency basis software profitability will increase to the level of 16%. Second, StoneRiver profitability for 2017 is at the level of 8%. To summarize, on a consolidated annual basis, we expect our profitability to reach 13%. Please note, that the direct impact only part of 2016 and will have full year effect on 2017. In addition, the Israeli Shekel versus a Dollar in the last few months which negatively impact us as half of Sapiens costs in Israeli Shekel. Second, StoneRiver profitability is lower in Sapiens' profitability, as we mentioned we expect the StoneRiver contribution to our profit will start from Q3 onwards. After the reorganization expenses related to the merger that we expect to have in Q2. I would like to indicate that following the StoneRiver acquisition we expect our tax rate to be in the level of 25%. In addition, as we finance the transaction from our internal sources and some bank debt we will have financial expenses rather than financial income in 2017. As a summary I would like to mention the following. Post acquisition our insurance revenue will account for approximately 90% of our total revenue, an increase from 80% in 2016. We will significantly enhance our North America presence which would represent 50% of Sapiens' total revenue in 2017. This is 34 in 2016. Sapiens' organic growth on a standalone basis and on constant currency basis is between 12% to 17% in 2017. At this point, I would like to turn the call back to Roni Al-Dor for closing comments. Roni?
  • Roni Al-Dor:
    Thank you, Roni. Our first quarter marked by strong financial performance based on our business model that generates revenue from a diverse and complementary suite of solutions across geographies and product sales. I am pleased with our continued geographic expansion, our organic growth and opportunity we see to accelerate our businesses with M&A activity, particularly with the close of StoneRiver. We are confident that we will continue to deliver strong performance in 2017. I would now like to turn the call over to the operator for Q&A. Operator, please poll for questions.
  • Operator:
    Thank you [Operator Instructions] Our first question is from Bhavan Suri of William Blair. Please go ahead.
  • Bhavan Suri:
    Hey, everybody. Thanks for taking my questions and nice job on the quarter. As we look at the acquisition you obviously had, that's a big part of sort of the '17 and '18 strategy, just a little bit more color on what you seek the synergies there could lead to, so operating margins are 8% today, but post synergy, what margin do you think that business could have?
  • Roni Giladi:
    Hi, Bhavan, this is Roni G. And StoneRiver acquisition is a strategic acquisition to Sapiens. We mentioned all the positive impacts on [indiscernible] to the state and significant customer base that we allow us to go into future. We are in the business on the insurance, and obviously, impact takes time. We are in long-term cycle, and obviously we would like to integrate this in a very conservative mode. So, I assume that we will see impact only in the second half of 2018. On a consolidated basis, we mentioned this year [ph] about 13%, but we have a plan into which 15% on the second half of 2018.
  • Bhavan Suri:
    Got it. Roni, if you look at the StoneRiver business model, you said it's sort of very similar to Sapiens, lots of services with customers, you know, obviously with your acquisitions in Poland and India, you moved some of the services offshore, which has helped margin. How much of StoneRiver services piece is offshore? Is that an opportunity for margin expansion within that business?
  • Roni Giladi:
    Yes. StoneRiver, they have [indiscernible] less than Sapiens. We are already in discussion how we can integrate it with Sapiens offshore. Again, obviously, this will take time, but they are slightly below Sapiens. We have today 20%, slightly below, and they have about half of our.
  • Bhavan Suri:
    Got it, got it. Okay, maybe one for Roni Al-Dor here, you've entered the P&C market through a couple of acquisitions now in the U.S, some are lower tiers, but as you think about the next -- not even next year, but the next 12, 24, 36 months, do you think that there is an integration between IDIT and the StoneRiver products to start targeting Tier 1 P&C carriers in the U.S.? Or do you think it's IDIT is not going to come to U.S., it's going to take the StoneRiver products and enhance those to target Tier 1 P&C carriers? How should we think about that technology offering and then the opportunity, I'd say, 24, 36 months?
  • Roni Al-Dor:
    Yes. Hi, Bhavan. So, we made a strategic decision not to penetrate with IDIT to the U.S. market. And the main two reason is, one, we believe this will cost us a lot and will take us many, many years. And we decide to show the time to benefit to the U.S. So -- and that's one. So, in terms of U.S, we would like to invest in our [indiscernible] products for the lowest [indiscernible] area, and this looks very promise right now, and we believe this [indiscernible] that is new product that's built of many, many years experience and already in production, we can see that together with our knowledge and our marketing and sales, we can grow in U.S. market. In terms of synergy, everything around digital and analytics, and if you think on the underlying technology, we definitely see synergies. So, we plan to use the same portal in analytics that we are building, by the way not just for the P&C [indiscernible] suite, fully integrated with StoneRiver products.
  • Bhavan Suri:
    Got it, got it. And then one last one from me, if I might, here for maybe both of you, you know, as I look at the growth rates you have given us on organic basis, obviously currency, excluded, and then I tie that to StoneRiver's $18 million run rate. It feels like there is a small gap there just trying to say how conservative you guys are being or what the revenue decline on some of the lines at StoneRiver that you are divesting or not investing in or just letting sort of churn away looks like, how should we think of the puts and takes between the 12% to 15% organic growth and then you have StoneRiver to that which should be sort of say $80 million [ph] run rate stable. It feels like there is a little bit of gap, help me walk through that, please.
  • Roni Giladi:
    Hi Bhavan, this is Roni Giladi. I would like to explain this. So, I'd like to split the answer into two, StoneRiver and Sapiens. And I would like to start with Sapiens. In the call, we mentioned that Sapiens took a strategic decision to de-emphasize as a known insurance or financial services [indiscernible] that are not called territories for Sapiens, territories for Sapiens for example all the states, Europe and Israel. The level of revenue that we are talking about is very close around the $20 million and the reason that we are doing this again it's not the core business of Sapiens and profitability in this area is low. So, if we take our revenue, 2016, excluding this revenue and let's take it for example 13% or 15%, 13% organic growth plus the devaluation of all currencies and against the rollout that -- around make us loss about $10 million adding StoneRiver on a full asset basis revenue [indiscernible] we indicated $270 million to $280 million. On the StoneRiver part, as we mentioned, although 2016 was $80 million we are only consolidating [indiscernible] and some of the revenue of StoneRiver will not continue with that 2017. The reason for that we have start implication of revenue, some revenue that are related to the same product that obviously will impact 2017 revenue. So, combining this two, Sapiens strategic decision, the guaranty and StoneRiver, this is the revenue level that we achieved.
  • Bhavan Suri:
    Thanks, Roni. It's really helpful. Thanks for taking my questions guys.
  • Roni Giladi:
    Thank you.
  • Operator:
    The next question is from Tavy Rosner of Barclays. Please go ahead.
  • Tavy Rosner:
    Hi, everyone. Thanks for taking my questions. Mostly on the guidance, if I may, when you talk about different assumptions, we talked with what you mentioned by de-emphasizing on certain activities. How does it work are you planning on selling or divesting some of these businesses I'm thinking about how this decision fit into that and then you said that those activities were structurally less profitable. So assuming that longer emphasize on them. What is the impact to operating margins that with those…
  • Roni Giladi:
    Hi Tavy, this is Roni G. So just to clarify Sapiens focus today on the insurance and financial services and when I say financial services, I mean decision. So this is -- will remain our core focus. When I'm saying is that not on the insurance or financial services we also mentioned not in the call territories, which means all the revenue in USA, Israel and Europe will remain the focus of Sapiens. So second revenue, which is outside of what I just categorized, and we analyzed the profitability of 2016 will reach without including the currency effect about 15%. The reason for that we are doing projects with very low margin I guess go revenue but still contribute to the bottom line and together with StoneRiver that will allow us to grow we took this decision together and what we are doing, we are continued activities there. But we took much less effort on getting new projects on these product lines. And this is the reason for the revenue growth. So we are not going to close, we are just going to reduce the effort for revenue.
  • Tavy Rosner:
    Okay, that is helpful and do you have a sense I mean looking in at the revenue guidance when you make the assumptions together plus moving parts there but you get a sense of how much of the revenues from StoneRiver will remain over time is that perhaps something like just of what they were last year, do you have a way to quantify that?
  • Roni Giladi:
    Yes. So I think we mentioned in the previous call two weeks ago, historically StoneRiver revenue were declining. And this year, 2016, sorry, it was $80 million rollout with some product which are growing, some stable some in decline mode. We are in analysis -- we still took a reduction in revenue. We see this. We see the customer that will not continue. We see the duplication of revenue on product so on the maximum side lets say up to 10% this is the maximum, but this year will be stabilization year for us. We are putting a lot of efforts on our sales and marketing, our infrastructure in the state, and we believe we can turn this around into 2018 going forward. We need to understand that the sales target is business is long and is taking time. So, it will truly fruit in 2018.
  • Tavy Rosner:
    Okay, that's helpful. And looking beyond 2017, you know, after you've integrated the StoneRiver. So, you see yourself continuing to grow at the same organic growth rate close to 17% beyond 2017?
  • Roni Giladi:
    I will not say 17%. We all the time say 15, and we are not giving guidance for next, but with the effort of Sapiens would say the same level of Sapiens.
  • Tavy Rosner:
    Okay, that's helpful. Thank you, Roni.
  • Operator:
    The next question is from Avishai Kantor of Cowen. Please go ahead.
  • Avishai Kantor:
    Yes, hi. Thank you so much for taking my question. So my first question is going to back to the guidance. So you're talking about 12% to 17% organic growth in constant currency what needs to happen in order for us to reach the higher range the higher end of that range?
  • Roni Giladi:
    Hi Anishai, this is Roni G. you know in the busness there are lot of ups and down. We are having right now significant opportunity in front of us in terms of pipeline, I'm talking about Sapiens right now; historically not all of them happen. But some of them are very close and with very high productivity. So you can imagine that management is totally focused on this deal in order to close it, but we like to use the range. And I would assume that lets take the mid-range. I think a lot of impact was with guarantees, if I'm taking the pound, the Brexit with up and only second half of 2016 this year will be fully impact on Sapiens also the Euro rate now. So just imagine the very slightly change in currency and we will see additional growth. But we are not billing on that.
  • Avishai Kantor:
    And my next question it seems like you implicated there is some overlapping clients between you guys and StoneRiver, can you give us a sense how many clients overlap?
  • Roni Giladi:
    Not a lot. Very few, but [indiscernible] a very conservative approach I would say up to 10% of revenue duplicate clients and product line and customer that will not continue.
  • Avishai Kantor:
    Thank you so much.
  • 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 US, please call 1-888-3269-310. In Israel, please call 039255904. And internationally, please call 972 39255904. Mr. Al-Dor, would you like to make a concluding statement?
  • Roni Al-Dor:
    Yes. Thank you to all of the participants for joining us today. Have a good day.
  • Operator:
    Thank you. This concludes Sapiens International Corporation fourth quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.