Sapiens International Corporation NV (SPNS) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation first quarter 2015 results conference call.

All participants are present 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 May 6th, 2015.

It is now my pleasure to introduce your host Mrs. Yaffa Cohen-Ifrah, Sapiens Vice President of Corporate Marketing and Communications. Mrs. Cohen, you may now begin.

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 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 provision in the press release issued today also apply 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 the call today, we will refer to non-GAAP financial measures which we believe provides a clear view into the operational state of the business. 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 the call will be available after the call on our Investor Relations section of the Company's Website or via the Web link which appears in the earning release that we published today.

I would like to turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?

Thank you, Yaffa, and good morning, everyone. Thank you for joining the call. We'll provide today a business update and discuss our 2015 first quarter financial results.

This was a strong quarter for Sapiens and a solid start to 2015. We continue our revenue growth, delivering revenue of $41 million, 12% growth year over year. The diversity of our revenue across geographic and product lines demonstrates the demand of our product to (inaudible) customers, both new and existing, and the industry demand for innovative business solutions.

During the quarter, we announced plans to acquire IBEXI Solutions, an India-based provider of insurance business and technology solutions. The acquisition of IBEXI followed a longstanding relationship between our two companies. IBEXI has been selling the Sapiens IDIT software suite for seven years in Asia-Pacific and providing support for IDIT existing customer base.

With a strong local management and sales presence in Asia-Pacific and with a team of 180 insurance and technology professionals, IBEXI is serving 18 insurance companies in both in property and casualty and life, pension and annuity markets, including leading insurance companies in India.

IBEXI offers IT business consulting services to insurance companies on both coinsurance and supporting systems. In addition to its own insurance product business intelligence, BI, and insurance portal, IBEXI also provides implementation services for insurance business solutions.

IBEXI's insurance product will extend Sapiens' portfolio of solution offerings, providing Sapiens clients with immediate benefits.

IBEXI's end-to-end services approach -- include product-led services from initial system analysis and design all the way to data integration implementation and up to testing, training, and deployment.

We expect this robust set of business skills will enable significantly extension of our services to clients, both in Asia-Pacific and in other geographic locations. IBEXI will enhance the Sapiens team with extended and highly experienced team across all Sapiens solution globally.

With a larger and more geographically spread professional services team, Sapiens will be well positioned to provide services and support to our global customers with better cost-effective offshore resource for all of our solutions.

We continue to actively seek and evaluate additional acquisition targets that extend our geographical presence (inaudible) our customer base or provide us with products that are complementary to our (inaudible) portfolio of insurance and financial services solutions.

The continued execution of our M&A plans remain important aspects of our growth strategy. We have built this portfolio and solid balance sheet that provide us the flexibility and afford us the opportunity to be selective in transactions we may undertake.

We see a lot of competition on target companies for acquisition, probably because more players like ourselves but also private equity firm appreciate the potential of the insurance market.

Having said that, we will only acquire companies that fit our M&A plan and will be reasonable in terms of valuations. Beyond acquisition, the majority of our growth continues to be organic, driven by increased sales on our new and existing business.

Certainly, the investment we have made in our product and sales organization to reinforce the fundamentals of our business are paying off. During the quarter, we record a number of new wins that proves our strong competitive position.

In property and casualty business, our customer Hiscox has been recognized for its achievement (inaudible) the deployment of Sapiens IDIT. Hiscox was selected by Celent to receive the Model Insurance Award for the transformation (inaudible) of its retail insurance business.

Key to this effort was successful implementation of Sapiens IDIT P&C software suite selected as a single platform to consolidate Hiscox legacy systems and support new businesses, including Hiscox new Direct Home Insurance products.

In addition, our Australian customer Achmea was also recognized by Celent and won Model Insurance Award for its innovation user (inaudible) technology to protect and services farm customers. This is a strong recognition of our ability to deliver true business value to our customers through the deployment of our solutions.

Announcements such as these demonstrate the power of P&C solution. And these reference accounts are also driving strong demand of our industry-leading offerings. Our P&C pipeline continues to expand. And we are encouraged by the strong demand we are seeing within the P&C segment.

In the retirement services, during the first quarter, we announced the successful go-live of one of the industry leaders of the eligibility component of Sapiens retirement platform. This important milestone brings Sapiens retirement into production, is the evidence of our product readiness for the market, support by our expertise and commitment to strategic market segments. We are on the right track to become a leading technology provider to the US retirement services industry.

In life, pension, and annuity business, our Closed Books solution, a unique offering specifically designed for cost- and process-efficient legacy portfolio administration, was successfully implemented and is now in the production at Wesleyan Assurance Society.

Subsequent to our success with Wesleyan, we officially launched Closed Books to the broader European life and pension insurance market. Sapiens Closed Books match well the increased interest in legacy portfolio management trend we are seeing across the industry.

Sapiens Closed Books is a unique solution for life and pension insurance and is ideal for addressing the administration of legacy portfolio challenges shared by most insurance. We increased our investment in our sales team to support this demand and are also collaborating with SI in order to meet this demand.

Let me turn to our ALIS 6.5 product, which is our core policy administration suite for life and annuity markets. Following to quarter end, we announced that Tennessee Farmers Life Insurance Company selected ALIS for an IT modernization project designed to support its full portfolio of life and annuity products.

For the first time, an ALIS customer will deploy our solution in the Cloud to a partnership we've established with NTT Data, which I will elaborate later in the call.

Our commitment to the life and annuity market is solid as we continue to enhance ALIS to offer greater benefit to our customers. Out of our ongoing support for products includes comprehensive testing to ensure functionality and operability.

This past month, we conducted the benchmarking exercise whereby we simulated a large-scale working environment for ALIS 6.5 that was based on mixed insurance product portfolio typical of a tier one life and annuities company.

The benchmarking served to test our product and, not surprisingly, achieved impressive results. By building a virtual lab in a Cloud environment, we successfully simulated an environment in 1,600 parallel online user and 10 million policies, whereby we produced rapid best processing time and subsequent average screen [response] time. The outcome demonstrate the scale of readiness of our product regardless of the number of users or policy count.

This next generation software suite is the proven ability to frequently support even the largest insurers with the high volume of users and policies.

In DECISION, the product usage, the number of customer, and the number of users is extending. And they can see clear benefit from our DECISION solution.

In addition to our (inaudible) sales team for DECISION, we are expanding our sales effort and announced this week a pending agreement between Sapiens DECISION and Persistent, a global leader in software product development and technology services.

The collaboration between Persistent and Sapiens DECISION will provide clients with significant competitive advantage via process automation and business [rules] management. Persistent and Sapiens previously worked together to achieve seamless integration between Appian, a leading provider of [model] business process management solution, and Sapiens DECISION.

As you know, over the past few years, we have invested significantly in our technology. Ongoing investment is (inaudible) in order to maintain technology leadership. Moving forward, we plan to continue with our investment in order to keep our products fresh and aligned with the market demand, also, at a lower level as a percentage of revenue that's in the recent past.

At the same time, we continue with our investment in our sales and marketing to extend our market reach, further (inaudible) the Sapiens brand, and increase awareness.

Most recently, we presented our range of offerings at 2015 Life and Insurance Conference in Washington DC, one of the industry's largest gathering of industry professionals. We also participate in Future Protection Conference in the UK, expanding the brand recognition of Sapiens and our proven solutions.

During 2015, we plan to continue broadcasting our message and Sapiens brand through conference attendance and leveraging successful deployment. This strategy has been proven effective for lead generation, customer networking [and scale], and critical channel for keeping our finger on both industry trend and expectations.

In addition to our target sales and marketing initiatives, we are also looking to expand our sales channel by collaborating with partners and other third parties, who can enhance our capabilities, extend our geographic coverage, and further accelerate our growth.

We are actively seeking partnership with firms whose capabilities complement our own that can provide us with additional capabilities, such as Cloud, and provide entry in a new geographical location where we do not currently have a presence or enrich our portfolio for the benefit of our customers.

An example of this, our recently announced alliance with NTT Data in North America, through our partnership with NTT Data, our ALIS solution can be delivered using the Cloud model. Tennessee Farm is the first benefactor of this particular partnership. Cloud deployment will open new markets for Sapiens ALIS, offering the solution for customers who wish to enter to this innovating approach to call system deployment.

Another example is the pending agreement we discussed before between Sapiens DECISION and Persistent. You can expect to see more of these types of alliances in the near future.

I would now like to turn the call over Roni Giladi to discuss the financials. Roni?

Thank you, Roni, and good morning, everyone. We started 2015 with first quarter revenue of $41 million and a strong non-GAAP operating margin.

As a reminder, we are presenting our results on a non-GAAP basis, which we believe presents a clearer view of the operational state of the business.

Revenue in the first quarter was $41 million, up 12% from the first quarter of 2014. In our previous call, we discussed the negative impact of foreign currency exchange rate versus the USA dollar on our revenues. In the first quarter, foreign currency further eroded. If we eliminate the negative impact of currency movement in the first quarter compared to the fourth quarter of 2014, our revenue would be higher by approximately $1.4 million.

Our revenue for the quarter by type breakdown is follows. License revenue totaled $3.3 million, or 7.9% of total revenue during the quarter, compared to $2.4 million in Q4 2014 and $3.9 million in the first quarter last year.

Service revenue, which include maintenance revenue, totaled $37.8 million during the quarter, compared to $39.3 million in Q4 2014 and $32.7 million in first quarter of last year.

Let's look at the geographic breakdown of our revenue. In North America, revenue for the first quarter totaled $13.7 million, or 33.4% of total revenue, compared to $10.8 million in the first quarter of last year, reflecting an increase of 27.1%.

In Europe, which include the Israeli sales, revenue totaled $23.2 million, or 56.5% of total revenue, [$3 million] to the first quarter of 2014. As you know, most of the negative impact of currency exchange rates was in this region.

Revenue in APAC totaled $4.2 million this quarter, or 10.1% of total revenue in the first quarter, compared to $2.8 million last year, an increase of 50%.

Let's turn now to profitability. Our gross profit for the first quarter of 2015 was $17.7 million compared to $17.5 million in Q4 of 2014 and $14.6 million in the first quarter of last year. Gross margin in Q1 was 43%, up from 41.8% in Q4 2014 and 40% of the first quarter of last year.

In the last several months of 2014, we started to implement an efficiency program that mainly affected our cost of revenue. The efficiency plans primarily included release and replacement of contractors with employees and initiation offshore recruitment of employees with a lower cost, mainly in Bulgaria.

In addition, the additional erosion of new Israeli shekels versus the dollar reduced our cost of revenue as a majority of our delivery employees are based in Israel.

Our investment in R&D in the first quarter of 2015 totaled $3.9 million compared to $4.3 million in the same quarter of last year. Our selling, general, and administration expenses totaled $8 million this quarter compared to $6.7 million in the first quarter of last year. This increase in SG&A was the result of our continuous increase in sales and marketing effort over the last several quarters to support future growth.

Our operating income for the first quarter of 2015 increased by 58.5% to $5.8 million from $3.7 million in the first quarter of last year. Operating margin this quarter was 14.1% of total revenue compared to 10% in the same quarter of last year. The improvement in operating margin was a result of 3.1% improvement in gross margin and reduction of 2.1% in R&D, which was offset partially by an increase of 1.1% investment in SG&A.

Our adjusted EBITDA this quarter totaled $6.2 million, an increase of 53.7% compared to $4 million in the first quarter of last year. Our adjusted EBITDA reflects 15.1% of total revenue.

Financial expenses this quarter totaled $330,000 compared to financial income of $46,000 in Q1 of 2014. The interest expenses are mainly attribute to the impact of devaluation of monetary [access] and [heading] expenses resulting from currency erosion. Net income for the first quarter of 2015 was $4.7 million, or $0.10 per diluted share, a 40.1% increase compared to $3.4 million, or $0.07 per diluted share, in the first quarter of last year.

Let's turn to our balance sheet. As of March 31st, 2015, we had a cash, cash equivalents, and secured investments of approximately $87 million. From a cash flow perspective, we generated $11.9 million from operating activities in the first quarter of 2015, a significant improvement from the $6 million in the first quarter of last year. The increase in cash flow was mainly due to the improvements in our net income, reaching for the payment milestone, and the renewal of annual maintenance agreements.

Following the recommendation of management, our Board of Directors approved the cash dividend of $0.50 per share. The dividend, which is approximately $7.2 million in the aggregate, is to be distributed June 1st to our shareholders upon shareholder approval.

Our continued growth and improved profitability have led to generation of positive cash flow and a healthy balance sheet, with a strong cash position and zero debt. As a result, we have the flexibility to distribute this cash dividend to our shareholders and continue to pursue and execute our merger and acquisition strategy.

(inaudible) during the quarter, we acquired IBEXI. We will start consolidating IBEXI figures in our financial statements commencing Q2 of 2015. We expect that IBEXI revenues and profit will be immaterial for (inaudible) this year.

Turning to our guidance, for the full year of 2015, we are reiterating our guidance for revenue in the range of $174 million to $178 million and operating margin guidance in the range of 12% to 13% of total revenue.

As we discussed earlier, we see significant fluctuation in all our currencies versus the USA dollar. And the currency movement affects both our revenue and cost.

As the year progress, we will monitor and evaluate our guidance and update accordingly, if necessary.

At this point, I would like to turn the call back to Roni Al-Dor for closing comments. Roni?

Thank you, Roni. Our first quarter financial results and operating highlights reflect a solid business position for future success. Sapiens today has a diverse yet complementary suite of solutions and extend sales organization with target marketing strategies, a broad range of customers, and healthy balance sheet. We are well positioned to achieve our operational and financial targets for 2015, while at the same time reinforce our fundamentals for growth and success beyond that.

I would like now to turn the call over the operator for Q&A. Operator, please poll the questions.

(Operator Instructions). Mayank Tandon, Needham.

Thank you. Roni and Roni, I wanted to first start with just the revenue contribution from these big deals that you won over the past several quarters. Could you just talk about how they're contributing today and how you expect them to ramp over time? And could that potentially have a positive impact in terms of revenue growth in 2016 if not in 2015 on a constant currency basis?

Hi, Mayank. This is Roni G. We recently announced several deals in last quarter. We also announced one on the life and pension and one on the P&C. And today, we mentioned over the past several conference calls, when we started the deal, this is usually for a period of 18 months to up to 24 months. This is the typical range of implementation of our projects. And we see ramp up of revenue over time.

The starting point are revenue, but not significant one. But, as we progress in the year to the middle of the time, the revenue ought to be higher. So, we'll see the revenue ramp during Q2 slightly and also from Q3 and onwards additional incremental revenue as any deal will come.

Okay. And then on the income statement, just looking at the contribution of license and maintenance and services, given the strong license revenue in the first quarter relative to the fourth quarter, first, can you just give us some color in terms of what drove that? And then how should we be thinking about the trends for the rest of the quarters in 2015?

So, obviously, some of this is reflecting by deals that we signed earlier and we completed some percentage of completion of revenue during this quarter. And this drove the high license amount. We currently see a higher pipeline, a stronger pipeline, that we saw in the previous quarter. And this is obviously -- will have effect on the license amount and potentially will increase it over the next quarter.

It will not happen in one quarter, but over time, the same as revenue that we discussed earlier. So, potentially, we should see, with the addition of new deals, increase in license.

Okay. And then on the maintenance and services side, the revenue dropped off relative to the fourth quarter sequentially. What should we make of that? And then given the maintenance renewal cycle, would you expect the maintenance business to start growing sequentially from 2Q onward?

I will try to answer this from what we said in the previous call. As you will remember, we maintained that we should grow this year in the range of, say, 17%. But, because of currency erosion versus the dollar, the reporting revenue will be only 12%. This (inaudible) time and basically as we thought.

What happened this quarter compared to Q4 of 2014, there was additional erosion in euro and in shekels. And as we mentioned earlier, the additional erosion impact our revenue, mainly on the services side, by $1.4 million.

So, if we add this, we had the [deposit] even higher and stronger growth in revenue. As we continue to have a conversion of the pipeline into closing contract, we should also see the revenue and services going up.

Okay.

(inaudible).

Got it. I have two quick questions, and then I'll jump off. First, on the FX, I know you said on a sequential basis there was a $1.4 million hit. But, relative to when you gave guidance in late February, what is the FX impact? I'm just trying to get a sense of what the impact is on guidance versus when you gave it, again, in late February.

We did this calculation in March. And the impact was about 600K.

Okay. So, not major. And then the final question is in terms of margin. Given the outperformance in 1Q, you're still keeping margins intact with your guidance. Maybe just provide us some color in terms of what (inaudible) is in terms of investments and the drivers for the rest of the year.

Yes, of course. So, right now, we are only starting the year. We're only the first quarter of 2015. We see the impact of currency exchange rates on our results in terms of revenue and also, by the way, on profit. We feel confident with the guidance that we gave, about 12% to 13%. And as we mentioned in the call, as the year progress and we see -- we build more our revenue and profitability, probably consider (inaudible) but not at this early point.

Okay. I understand. Good job, guys. Thank you.

Thank you very much.

Bhavan Suri, William Blair.

Hey, guys. This is (inaudible) for Bhavan. I was just wondering if you guys can give a quick update on the retirement services pipeline. I know you had one customer go longer in the quarter. Was just kind of wondering how the discussions with other potential customers are progressing.

Hi, Bhavan. Roni Al-Dor. We are continue with all of our investment. We hope to enter to [early phase or more scoping] with one of the clients soon. But, [think it's delay]. But, we are continuing to put a lot of investment in the retirement services. So, we are still optimistic.

Okay. And then on the P&C side of the business, can you kind of talk about maybe potential plans down the road of entering the US market and maybe if you had any competitive wins against Guidewire during the quarter?

We see a positive momentum for Sapiens now in the P&C. It was quiet period. So, we didn't announce a lot of the customers [who have a ramp here]. So, right now, we see positive momentum. Almost every day, we are competing with Guidewire. But, we already announced a deal. And we hope to see a few more deals in this year.

So, we don't see any more new competitor. But, Guidewire is the market leader today. And -- but, we -- in terms of the product, we position ourselves very strong. We are very focusing on the -- what we call specialty line. So, this is -- we also have the [health] solution. So, they don't have it. So, we try also to find out the niche that we have advantage and also to find our type of customer that's happy to see us doing the full system integration and not just to sell the product. And this is how we try to differentiate ourselves between us and them.

Okay. Thank you for taking my questions.

Thank you, Bhavan.

Tavy Rosner, Barclays.

Hi. Yes, thank you for taking my question. Just going back to the revenue mix, if I remember correctly, I think you're at 8% of total going to license. I was wondering if you could remind me your strategy with regard to system integrator. Do you -- you talked about it, but to integrate the DECISION product. [What's the deal] with regard to the other product lines?

Hi. This is Roni G. We currently work in focusing on the DECISION part working with system integrator. We announced the recent press release about this I think yesterday. And I can tell you that we are working with other firms to be able to extend our sales effort and sell DECISION as a technology platform to many players with the system integrator. We are doing this also in Europe and in the States.

Regarding the other product lines, we recently announced a deal in the States for the life that we're working also with NTT Data on a deal. So, this is one thing that can work with us and potentially not to [have this] with the DECISION, we are doing this with P&C but in much smaller volumes. So, the focus is mainly on the DECISION side rather than the P&C or life.

Yes, understood. And on the -- on Closed Books, you mentioned you're expanding the -- for into the European market. Can you give us some color (inaudible) the addressable market there?

Yes, Roni Al-Dor speaking. No, we have I think one of the best products in the market today for Closed Books. We just announced the second client are in production right now. And there is -- what we see in the market now in Europe, a lot of consolidation. They are looking how to take the insurance company that use the cost of all of these old policy.

And what we are coming to the market is with a product that's relatively -- it's cost them less to do all the data migration to our product. And that's -- they can (inaudible) consolidation. All of these deals is five-, six-, seven-, eight-year deals or more than this.

In this case, we are working in some cases with system integrator if their customer are looking for [VPO] solution. But, in another case, we can also work (inaudible) with the customer. So, right now, we see a lot of interest in our products. We are -- very soon, we enter to at least (inaudible). So, big clients want to see and to build the [NOI] together with us and the system integrator. And I hope quarter three, four, we can hope to see some results.

All right. Thank you.

Richard Baldry, Roth Capital.

Thanks. (inaudible) territory, and maybe because it's off a smaller base. But, could you talk about whether there's any regional factors, maybe the state of the industry there, or otherwise that might be driving that faster growth and how sustainable you see accelerated growth in that region?

(multiple speakers)

(inaudible). So, Asia-Pacific is -- we divide Asia-Pacific by few region. One is the Japan. And this is -- we are more trailing our image solution. This is -- we see a lot of growth in this area. And the other thing is mainly Australia and Southeast Asia. This is -- we are doing right now with IBEXI.

So, each of the three territories, different situation. The -- all I can show to (inaudible) two of them, they are the second growth engine for us. So, we primarily invest in the States, in Central Europe, and West Europe. But, we still have clients in those territories. And we see a potential there. But, that's not priority one for us.

Okay. Then if you look to the [other income line in the] income expenses for ForEx and hedges, how do you see that line trending as the year goes? It's another way of asking how you feel about currencies and how they're embedded into your current guidance.

Hi, Rich, this is Roni. So, we in the Company have a policy to protect our profitability across all currencies for the rest of the year. Obviously, we are doing much more hedging as the quarter is close to us. We are standing right now, and the ratio is decreasing towards the end of the year.

And the fluctuation obviously is depend of what is the currency impact in our operational results. As we see, for example, the currency will impact positively our operating. We'll have expenses and the other way around.

This quarter, we saw the expenses. This is -- came in mainly from monetary [access] that we have erosion against the dollar and some hedging expenses that we protected our profitability. So, we would have from the operating profit, but we basically had some expenses for this.

(inaudible) the dividend that you've announced. Can you talk about (inaudible) on that? It looks like your balance sheet obviously could sustain that on an annual basis and your profitability. Will the determination be made whether to do that year to year be based on factors like acquisition, productivity, or other things we should be kind of keeping an eye on? Thanks.

So, if we look at the balance sheet that we have today, we mentioned we have today $87 million in the bank. We are generating cash quarter over quarter. We foresee this also in the future. So, we feel very strong about this.

The dividend, we don't (inaudible) today any policy in the Company about distribution of dividend. As a matter of fact, this is the second time that we did this. We did this two years ago. And this is a way of rewarding our shareholders. But, in the same time, simultaneously, we'll not have any ideal opportunity that we have in the M&A strategy. So, we'll continue to do M&A and execute for this together with the dividend.

Thanks.

(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 the replay of this call is scheduled to begin in two hours. In the US, please call 1-888-782-4291. In Israel, please call 039255904, and internationally, please call 972 39255904.

Mr. Al-Dor, would you like to make a concluding statement?

Yes, thank you very much for joining the call today. And we will see you again next quarter. Thanks a lot.

Thank you. This concludes the Sapiens International Corporation first quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.