Sapiens International Corporation NV (SPNS) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's second-quarter 2015 results conference call. All participants are present 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 August 5, 2015.

It is now my pleasure to introduce your host, Ms. Yaffa Cohen-Ifrah, Sapiens' Vice President of Corporate Marketing and Communications. Ms. 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 provisions in the press release issued today also apply to the content of this 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 certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP result have been provided in our press release issued before the market opened this morning. We are presenting our results on a non-GAAP basis, which we believe gives a clear view into the operation state of the business.

A replay of this call will be available after the call on our Investor Relations section of the Company website or via the webcast link which appears in the earnings 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 today. We will provide the business update and discuss our 2015 second quarter financial results.

This was a strong quarter for Sapiens, with a solid financial result driven by diverse based revenue and improved efficiency from an operational business model that we continued to leverage to benefit to our customers.

We are reporting revenue of $43.4 million, another quarter of double-digit growth, and increasing operating profit of 61%. And even more compelling are the drivers behind our performance; revenue growth driven by our geographic and product line diversity comprised of both new and existing customer, and the margin improvement resulting from the investment we have made in the R&D and sales development.

The demand of our products and services remains strong as customers look for solutions that drive down their cost of doing business and deliver improved services to their clients. The investment we have made in product innovation are proving to be instrumental in a number of wins with both new and existing customer.

Given our success in first half of 2015 and our business plan for the second half, we are raising our guidance for the full year. This increase reflects the acquisition of Insseco that we announced last week as well as improving financial performance year to date, which enable us to raise our profitability guidance.

Last week we announced the acquisition of Insseco, a software provider for the insurance market. Insseco has an established presence in the Polish insurance market and provides services to the major customers in Poland, including top tier insurance carriers. With a team of 140 insurance professionals in Poland, Insseco possess a breath of domain expertise in both life and pension and property and casualty space. Through this acquisition, we are entering into a new market and expanding our already solid footprint in Europe.

By expanding our existing workforce with Insseco highly qualified and experienced insurance professional team, we will establish a regional development and delivery center in Poland that will enhance the support to Insseco customer base and support our global operation. In addition, it will create opportunity to introduce our leading software solution into the local Polish insurance market.

Sapiens is paying approximately $9.1 million in the transaction, which is expected to close during the month of August 2015. On a trailing 12-month basis, Insseco generated approximately $11.5 million in revenue and the acquisition is accretive to Sapiens earnings by third quarter. This acquisition is well aligned with our vision and expands our global presence, customer base and delivery capabilities by adding domain expertise to complement our solutions.

Evaluating and pursuing acquisitions such as this remains part of our growth strategy. We continue to look especially of opportunities that will expand our geographic presence, expand our customer base and provide us with access to solution and product that are complementary to our existing offering.

We remain highly selective in opportunities we undertake. Our ongoing financial performance, healthy balance sheet and lack of gaps in our portfolio afford us the opportunity to be extremely selective in the acquisition transition we undertake.

Turning to our core business for just a moment. Aside from Insseco and IBEXI acquisition we announced earlier this year, the majority of our growth continued to be organic, increasing sales with the new and existing customers. During the second quarter, we record a number of wins for further expand our base of revenue and enhance our competitive position.

Most recently we announced that EuroLife, a leading life insurance company based in Cyprus, has selected Sapiens ALIS, our core solutions suite that supports the complete policy life cycle, to replace its legacy environment and support all of its life, investment and health lines of business. Our solution was chosen due to its modern technology, depth of functionality, flexibility and ability to support EuroLife's diverse product portfolio.

By installing and deploying our solution, the company will be able to improve their time to market for new products, reduce IT costs associated with supporting and maintaining their legacy environment and better leverage data to better serve their customers.

We also recently announced that our DECISION platform has been selected by a top tier UK financial institution for deployment as part of enterprise-wide business improvement initiative. Through our DECISION modeling platform, the institution will be able to separate business logic from the process. The solution utilize DECISION as a centralized location for storing and managing all logics.

One other new business before we move on is the selection of IDIT software suite by Quantum, a Mauritius based insurance company. Quantum began in 2014 to serve local commercial, institutional and individual customers with property, casualty and general insurance services. Quantum will be able to launch its insurance business with a modern and agile platform operating in the cloud, giving the company distinct technology advantage and quickly introduce new and innovative products, while reducing their total cost of ownership.

As you know, we have invested heavily in R&D to construct technology solutions that are not only cutting edge from the technology perspective, but rolling corporate business and domain expertise that is relevant and evolutionary for our customers' operation. Each of these new contract wins are largely the results of these investment that prove our ability to meet and exceed our customer requirements and expectations.

During this quarter, four customers have gone live and moved our system to production, which means our solution is being used as their core operational platform where they actually run their business.

As I said in the past, a go-live is a significant event for both Sapiens and the customer. It is a major demonstration of Sapiens' ability to deliver and of the customers' ability to adopt, roll out a new technology for the organization.

Turning for just a minute to our sales and marketing effort. During the second quarter, we continued our effort to strengthen our brand and broadcast our story by participating in IASA, the Insurance Accounting and Systems Association Annual Educational Conference and Business Show in Las Vegas. We also participated in TINtech, an Insurance Network Technology Conference hosted by the Insurance Network in London. During this showcase, insurance industry professionals were able to discover how industry leaders such as Sapiens are applying new technologies to increase efficiency and improve insurance provider's operating model and customer services.

These industry events are the key elements of our sales and marketing program, enabling us to generate new leads, network with existing customers and keep pace with the changes occurring within our industry.

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

Thank you, Roni, and good morning everyone. Our momentum continue in 2015 with Q2 revenue of $43.4 million and a strong non-GAAP operating margin. Revenue in the second quarter was $43.4 million, up 12.4% from the second quarter of 2014. Excluding the negative impact of currency exchange rate, revenue growth was 22.3%.

Our revenue for the quarter by type breakdown as follows; license revenue totaled $2.6 million or 6% of total revenue during the quarter, compared to $4 million or 10.3% of total revenue in the second quarter of last year; services revenue, which include maintenance revenue, grow to $40.8 million or 94% of total revenue during the quarter, up from $34.7 million in the second quarter of last year.

Let me now turn to geographic analysis of our revenue. We achieved revenue growth across all our geographic regions; North America, Europe and APAC. Our growth was significant in North America, an important growth market for Sapiens, where we reported an increase of 20.6% in revenue compared to the second quarter of 2014.

During the second quarter, we started to consolidate the IBEXI revenue. Please note that the impact of IBEXI revenue is not material to our result.

Turning now to profitability, our non-GAAP gross profit for the second quarter of 2015 was $18.6 million, up $2.9 million compared to the second quarter of last year. Gross margin was 42.7%, up from 40.6% for the second quarter of last year. As we discussed in Q1 conference call, at the end of 2014 we started to implement an efficiency program that mainly affected our cost of revenue.

We initiated offshore recruitment of employees with lower cost in Bulgaria and in India. In addition, the erosion of new Israeli shekel versus the dollar reduced our cost of revenue as the majority of our delivery employees are based in Israel. Also, we started to see improvement in gross margin of our life and pension and retirement division. As a result, we see improvement of 2.1% in gross margin compared to last year. You can also see a trend of improvement in gross margin start at 2014.

Our investments in R&D in the second quarter of 2015 totaled $3.9 million compared to $4.5 million in the same quarter of last year. The reduction in R&D expenses is primarily due to exchange rate and shifting of R&D employee to support our delivery effort due to our revenue growth.

Our selling, general and administrative expenses totaled $8.2 million this quarter compared to $7.1 million in the second quarter of last year. The ongoing increase in SG&A expenses that started early last year was the result of our continuing increase in sales and marketing efforts over the last several quarters to support our future growth.

Our non-GAAP operating income for the second quarter of 2015 increased by 61% to $6.4 million from $4 million in the second quarter of last year. Non-GAAP operating margin this quarter was 14.8% of total revenue compared to 10.4% of last year.

The improvement in operating margin was a result of a 2.1% improvement in gross margin, a reduction of 2.6% in R&D investments, which was partially offset by increase of 0.3% investment in SG&A.

Tax expenses this quarter was $1.2 million compared to tax expenses of $400,000 in the second quarter of 2014. Our tax rate for the first half of 2015 was 15.9%, within the range we provided in the beginning of the year of 15% to 17%.

Non-GAAP net income for the second quarter of 2015 was $5.2 million or $0.11 per diluted share, a 45.2% increase compared to $3.6 million or $0.07 per diluted share in the second quarter of last year.

Turning to our balance sheet. As of June 30, 2015, we had cash, cash equivalents and security investments of approximately $90 million compared to $80 million as of December 2014.

From a cash flow perspective, for the first six months ended June 30, 2015, we generate $22.2 million in cash from operating activities, significantly stronger than the $11.9 million in the first half of last year. The increase in cash flow was mainly due to our improvement in operating profit, completion of project implementation milestones and renewal of maintenance agreements and improvement in our VSO.

During the second quarter, we paid dividend in the total amount of $7.2 million to our shareholders. As we announced last week, we acquired Insseco in Poland. We will start consolidating Insseco figures in our financial statement during Q3 of 2015, upon the closing of the agreement. We expect that the Insseco transaction will be accretive to Sapiens earnings starting from mid-Q3 and beyond.

Turning to our guidance, we are raising our 2015 full-year guidance for both revenue and operating margin. We expect revenue in the range of $176 million to $180 million, which represents growth of approximately 20% on a constant currency basis, an increase of our previous guidance of $174 million to $178 million.

We are also increasing our full-year 2015 operating margin guidance. We expect operating margin of 14% to 14.5% of total revenues, an increase over our previous guidance of 12% to 13% of total revenue.

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

Thank you, Roni. The first half of 2015 was marked by strong financial performance, two acquisition and new businesses signing that build upon our foundation for future growth. We have built a business model that generate revenue from a diverse yet complementary suite of solution from different geographics.

We have assembled and invested in innovation products and sales and marketing program to properly support the launch and delivery to the marketplace. Our success in the first half of the year and strong market demand of our products gives us the confidence to raise our full-year guidance for 2015.

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

Alper Tuken, William Blair.

So this is Alper Tuken in for Bhavan. Congrats on the quarter. And I know you guys talked to your continued implementation efforts of lower cost centers in India and Eastern Europe, and I was just wondering if you could just provide some color on how that's progressing and if there's any additional plans in the back half of the year primarily from India that should be beneficial to operating margins?

This is Roni Al-Dor. As you know, we start the Indian from the beginning of the year. It looks promising. It takes time to build up, to train the people -- this is in the India. In second part -- we are just in the starting point, so it's also we expect to get the benefit at the end of the year and mainly for next year.

Okay, thanks. And I know you guys had a pretty nice bottom line beat for the non-GAAP operating income. I was wondering how much of it was due to the currency effects of the shekel versus the dollar and the offshore recruitment efforts and then the improvements in gross margins of life and DECISION. I know you guys mentioned those three, but I was wondering maybe what the percentage contribution from each was?

This is Roni G. Overall, yes, we show improvement in operational margin compared to previous quarters and last year of course. It's coming from multiple areas and as you mentioned, improvements in the life and pension sector, as we mentioned; and invested significantly in previous year to develop the product; the offshore implementation; and the efficiency program that we already started towards the end of 2014.

All in all, the currency effect was slightly below 1% in total margin and the rest is coming from the three elements that I mentioned -- we are not breaking them up. But only currency is about less than 1%.

Okay, thanks. And as I look at the strong growth in services versus license, which I think was down year over year, can you maybe provide some color in terms of what drove that shift and maybe how we should think of license growth over the next two quarters?

This is Roni G. again. Basically, when we mention our revenue mix, license versus services and maintenance, we always mention that we would like to have additional revenue from existing customers, growing them and also enrich our product over time.

What we see and what we like to emphasize is to analyze our revenue on a total consolidated basis and not only by vertical license versus the rest. We will see the trend slightly potentially improving over the next quarter, but this will not be dramatically. Again, what I think is more important to us is total revenue and that we can generate more profit from this revenue and we've been able to show this.

Okay, thanks. And just one more from me and sorry if you already mentioned this, but I know you guys are expecting to close the acquisition of Insseco in early -- or sometime in August and was just wondering if that acquisition was included in your updated full-year revenue guidance?

The answer for that is, yes, we still didn't complete the closing. The closing probably will be in mid or slightly later in Q3 result. We implemented the Insseco -- and obviously we will review our revenue guidance as we progress over the year and integrate the Insseco entity into Sapiens.

Okay, so just to be clear, Insseco -- the revenue contribution has been included in full-year guidance?

The answer is yes.

Okay, thank you. That's it for me. Thanks, guys.

Thank you.

Tavy Rosner, Barclays.

First, I just wanted some more color on Insseco. You gave several reasons why you made the acquisition. You talked about the workforce and the existing software and the customer base in Poland. What's the main driver and the value generation from that? Is it primarily the workforce or you are really going to use their existing software and try to cross-sell into your other customer?

It's Roni Al-Dor. The main thing is the workforce and the second thing is also the local presence and the customer they have. We are less interesting on their product to take it to the other. But definitely we are interesting to work in the Central Europe. As you know from the past, our business is mainly West Central and now it's good for us to enter today East European business. So it's two things. The product is less important for us.

All right, that's helpful. And then I was also wondering if you could have some feedback on the overall insurance software market. I feel that there's more and more players when I look at different press release and contract announcements. Is that something that you feel, and if so, do you feel some pressure on pricing when you pitch for new contracts?

Yes -- the answer is yes. Definitely we see more opportunity, but in the same times we see more competitors and newcomers -- and a lot of private equity is acquiring other company. We just recently saw the Fadata case. And almost every few months we see another investment in this area.

But again, Sapiens, as you know, we are well positioned. We have 150 customers. We are well recognized by the analysts. We have a lot of reference. So we have advantage to all of those newcomers. But in terms of price issue, definitely we see a pressure on this area.

Thanks. And maybe one last from me. I looked at your guidance for operating margin and -- I mean this year there was some help on the customer on the new side. You mentioned the shekel's strength. So if you would just look at the business going forward beyond 2015, is that kind of range sustainable on the operating margin side?

This is Roni. The answer for that is, yes, we'd like to sustain this operational margin and continue in the same time our growth. As I mentioned, this is not only coming from currency. This is coming from efficiency program and offshore initiative that we started this year and we like also to see the improvement also in next years.

Great. Thank you very much.

Richard Baldry, Roth Capital.

Could you talk a little bit -- given the sort of quick benefits you've seen from some of the offshore early into that effort, over the long-term how much of the operations or projects do you think can fit into an offshore model so we can get a gauge of how much that could swing the top -- or the bottom line? Thanks.

We believe in the next year, not in this year -- next year we want to see around 20% of the services can come from the offshore. And also we at Sapiens we cannot get all the benefit from the profit side, because also we have pressure from the customer that wants to see the benefit as well. So we will plan to give some inshore/offshore model to the customer and when they are using offshore, they can get also the benefit. We at Sapiens if we can do R&D expenses, so then we can get the benefit.

Okay. And when the acquisitions are to layer into the model, do you have an early indication of how that will swing some of the P&L lines? Like are their gross margins similar or somewhat different than yours and maybe the below-the-line costs as well? Thanks.

This is Roni. I think in the current guidance that we mentioned, we basically provided what we like to emphasize, is top line and profitability of the Company. This is taking into effect the differences between the IBEXI and the Insseco. Each of them have different criteria, but overall are implemented in guidance towards the end of the year.

Okay. Congrats on the quarter.

Thank you.

Thank you very much.

Nicole Gilliat, Ion Management.

I've two questions for you. One, you issued a small dividend in the first half of this year, but you now have $90 million in cash on the balance sheet. What are your thoughts on the efficiency of your balance sheet? I'm assuming that you can do an acquisition in addition to further shareholder return. What's the potential for further capital allocation?

Sapiens do not have any dividend policy. The last time that we issued dividend was two years ago. This was after the big merger with FIS and IDIT. And the recent one was about a few months after the good result of 2014. So we do not provide policy and we do not have. As time will come, we will consider this.

The cash in the balance sheet of $90 million is to basically support our growth in the Company. Obviously, we are generating cash, but we would like to continue to do acquisition.

As we mentioned, we have a strategy on M&A either customer base, geographic penetration or complementary product. We in the last five years completed the six M&A and we like to continue doing so. The next M&A that we like to see is bigger size in revenue. Obviously, that can have significant impact on the Company financials.

I look forward to it. My second question is around the ALIS. How are the efforts progressing to move margins in that division closer to the corporate average?

The margin of ALIS is improving. Again, it will take time. As you know, we have there the retirement services business and the life and annuity. In the retirement, we are still in a heavy investment situation. We hope to see more improvement in 2016. And in ALIS, it's slightly better.

All right, thank you.

(Operator Instructions) Nicole Gilliat, Ion Management.

No, I had no follow-up question. I didn't press any button.

Okay. 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 1-888-295-2634. In Israel, please call 03-925-5918. And internationally, please call 9723-925-5918.

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

Yes. Thank you for all of you for joining our call. We will talk to you again in the next quarter. Thank you very much.

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