Sapiens International Corporation NV (SPNS) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation third quarter 2015 results conference call. All participants are at 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 November 4, 2015. It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens' Chief Marketing Officer and Head of Corporate 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 provisions 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 today's call, we will refer to certain 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's website or via the webcast link which appears in the earnings release that we published today.

I will 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 third quarter financial results. This was another strong quarter for Sapiens. Our solid financial results were driven by diverse base of revenue and improvement efficiency.

We are reporting non-GAAP revenue of $46.1 million, which is another quarter of double-digit growth and increase in operational profit of 58.1% or $2.6 million. We see the growth results for all of our growth engine in all territories and from both existing and new customers.

The demand for our products and services remained strong. This results in a number of important win which boosted our competitive position in the market. Over the past few years we are significantly investing in our technology and today we enjoy the fruits of those investments. Our products are advanced, innovative and industry leading and adds substantial contribution to us to win new business and deepen our footprint with existing clients.

And now in order to accommodate future growth we are focused in enhancing the scalability of our organization in terms of human resource, market presence, and portfolios offerings.

From human resources point of view we have increased and enriched our customer facing sales team to include resource from marketing, product support, business consulting and professional services. We are globally recruiting and training employees to enhance our existing regional delivery and development centers in Israel and UK.

In addition, following the acquisition of IBEXI and Insseco we have established two new regional centers in India and Poland to support our global operation. Since the acquisition both companies have grown substantially. Over the past few months, since the IBEXI acquisition we have recruited over 100 new employees in India growing the number of employees there by more than 50%. As part of our strategy our goal is to keep being close to our customers.

We have [trenched] our market presence by substantial growth in human resource. Located close to our customer [premises]. This investment in human resource will ensure an onsite local experience and we are still hiring key employees for those sites. With this long-term investment, Sapiens is positioned to manage a larger number of opportunities and increase our win rate.

To further accelerate our growth, we seek out for merger and acquisition that align with our growth strategy. Specifically, we are looking for opportunity to leapfrog our market penetration through acquisition of legacy customer base of services new market segments that we do not cater today.

In addition, we are looking for complementary solutions that can expand our solution portfolio and can be offered to our existing and potential customers. That said we will remain highly selective in the opportunities we are undertaking. Our ongoing financial performance, healthy balance sheet and strong product portfolio allow us to be extremely careful in the acquisition transaction we undertake.

Now back to our core businesses. Beside from the Insseco and IBEXI acquisitions we announced earlier this year the majority of our growth continues to be organic with increasing sales from new and existing customers.

During the third quarter we record a number of wins to further expand our base of revenue and enhance our competitive position. For example EuroLife, a leading life insurance company based in Cyprus, selected Sapiens ALIS, our core solutions suite for life and pension to replace the legacy [involvement] and support all their lines of businesses. Sapiens ALIS will allow EuroLife to deliver new products reducing time to market and provide an efficient and flexibility operating environment.

Another new deal in the third quarter, FNB; a South African financial institution provide personal and business banking services to millions of customers, selected Sapiens ALIS to launch their new life and insurance company. This is an important expansion of our footprint in South Africa, a region where we have been doing business for over the past two decades.

Last quarter we announced that our DECISION platform had been selected by top tier UK financial institution for deployment as part of enterprise wide business improvement initiative.

Now during the third quarter Sapiens' DECISION was mentioned in the Four Gartner Hype Cycle as one of the recognized vendors for decision management. This is an important milestone of recognition of DECISION, which was further in Hype Cycle for BI and analytics, BPM application architecture and consumer good reports.

In addition, one of our Sapiens IDIT customer, RAC Insurance was recognized as the best insurance for technology by Asian Insurance Technology Award recognized the value they created by leveraging our software suite.

In another initiative, Sapiens partnered with SAP to enhance our solution with an advanced business intelligence and analytics. Our BI offering empowers customers with user friendly and powerful BI and analytics for faster, more informed decision-making. The BI data model, skill set and knowledge based of the team from IBEXI, a recent Sapiens Company acquisition, are instrumental in the development and delivery of Sapiens BI and analytic module.

Meanwhile we continue with our investment in our sales and marketing to expand our market reach further strengthen the Sapiens brand and increased awareness.

Just two weeks ago we hosted our 2015 Insurance Client Conference in Paris for our European and Asia Pacific customers. We had more than 120 participants from over 16 countries representing our insurance customer, prospects and analysts. Events like these, this enable us to closely engage with existing customer and keep pace with the changing and challenges they are facing in the industry to help us align our strategy.

This was a great opportunity for all of us to meet, share expectations and plan into the future. This conference provides Sapiens with an opportunity to listen to the customer, feedback and inputs, so that we to improve and provide high value to our clients.

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 a third quarter non-GAAP revenue of $46.1 million and a strong non-GAAP operation margin. As a reminder, we are presenting our results on a non-GAAP basis, which we believe give a clear view into operational state of the business. There is a detailed reconciliation to a non-GAAP result in the financial table of the earning press release.

Non-GAAP revenue in the third quarter was $46.1 million, up 14.2% from the third quarter of 2014. Let me remind you that excluding the negative impact of the currency exchange rate revenue growth was above 20%. Our revenue for the quarter by type breakdown as follows.

License revenue totaled $3.6 million or 7.8% of total revenue during the quarter, compared to $2.9 million or 7.1% of total revenue in the third quarter of last year. Services revenue, which include maintenance revenue, grew to $42.5 million or 92.2% of total revenue during the quarter, up from $37.5 million in the third quarter of last year.

Let me now turn to geographic breakdown of our revenues. In North America, revenue for the third quarter totaled $16.6 million or 35.9% of total revenue compared to $13.4 million in the third quarter last year, reflecting an increase of 23.6%.

In Europe which include our Israeli revenues, the revenue totaled $24.1 million or 52.2% of total revenue compared to $22.2 million in the third quarter of last year reflecting an increase of 8.3%.

Revenue in APAC totaled $5.5 million this quarter or 11.9% of total revenue, which reflect increase of 15.5%. We once again achieved revenue growth across all our segments of our businesses, across all geographic regions and from both new and existing customers.

Turning to profitability, our non-GAAP gross profit for the third quarter of 2015 was $20.7 million, up $4.3 million compared to the third quarter of last year. Our gross margin improved to 44.9%, up from 40.6% in the third quarter of last year. The improvement in gross margin is a result of few factors as follows.

First, an improvement in the gross margin of our life and pension and retirement division. Second, the erosion of new Israeli shekel versus dollar which reduced our cost of revenue as the majority of our delivery employee are based in Israel.

Third, the initial positive impact of our offshore operation with a lower cost; and fourth, higher licenses revenue.

Our investment in R&D in the third quarter of 2015 totaled $4 million compared to $4.3 million in the same quarter of last year. The reduction in R&D expenses is primarily due to the exchange rate. Our non-GAAP selling, general and administration expenses totaled $9.7 million this quarter compared to $7.7 million in the third quarter of last year. The increase in non-GAAP SG&A was the result of our continuous increase in sales and marketing efforts over the last several quarters to accelerate our future growth. The consolidation of our SG&A expenses from recent acquisitions and expenses associated with provision made to reflect the potential litigation.

Our non-GAAP operating income for the third quarter of 2015 increased by 58.1% to $7 million from $4.4 million in the third quarter of last year. Non-GAAP operating margin this quarter was 15.1% of total revenue compared to 10.9% of last year. We clearly see the trend of operating margin improvement throughout the year.

Our adjusted EBITDA this quarter totaled $7.5 million, an increase of 56.2% compared to $4.8 million in the third quarter of last year and reflect 16.2% of total revenue.

Non-GAAP tax expenses this quarter was $1.2 million compared to tax expenses of $0.3 million in the third quarter of 2013 representing a tax rate of 17.2%. These tax rates reflect the current tax level rate of the Company.

Non-GAAP net income for the third quarter of 2015 was $5.8 million or $0.12 per diluted share, a 42.4% increase compared to $4.1 million or $0.08 per diluted share in the third quarter of last year.

As you know, we acquired Insseco during the third quarter. Since the acquisition of the Insseco is from the indirect controlling shareholder of Sapiens, the GAAP treatment for the consolidation purposes is pooling of interest with effective date of December 2014.

For non-GAAP purposes we have treated Insseco acquisition in a similar way to all other acquisition we completed in the past to reflect the economic impact on our results. Therefore in the GAAP year-to-date report, we are consolidating Insseco results from the beginning of the year. Please note that Q1 and Q2 GAAP reported results of operation has been changed to include Insseco result due to this accounting treatment.

In our non-GAAP report the Insseco results are consolidated only from mid Q3 when we completed the acquisition. Supplement information is provided in our PR to reflect specifically the adjustment of GAAP versus non-GAAP related to Insseco acquisition.

Turning to our balance sheet. As of September 2015, we had cash and cash equivalents and security investment of approximately $85 million compared to $80 million in December 2014. I would like to remind you that this amount is post the payment of dividend to our shareholders and the payment for the acquisition of IBEXI and Insseco.

From a cash flow perspective, in the nine months ended September 2015, we generated $28.6 million in cash from operating activities, significantly stronger than the $16.2 million in the first nine months of 2014. As most of the listener on the call are aware, we filed the shelf registration last month to allow us flexible capital structure to pursue a capital raise.

Turning to our guidance, we are reiterating our 2015 full-year revenue guidance. We expect revenue in the range of $176 million to $180 million. We are increasing our full year 2015 operating margin guidance. We expect operating margin of 14.5% to 15% 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. This far 2015 has been marked by stronger financial performance, two acquisitions and new wins that build our foundation for future growth. We have built a business model that generates revenue from a diverse, yet complementary suite of solution across geographics.

We have invested in our innovating product and in the sales and marketing program to properly support and deliver them to the marketplace.

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

Thank you. (Operator Instructions). Bhavan Suri, William Blair.

Congratulations, nice job there on the quarter. Just a few questions to start off with. First just on the overall demand environment, you've given us some color on pipeline and [more] demand and it seems like (inaudible) rates have improved, but any color on how IDIT is doing and (technical difficulty) Europe and North America from a pipeline perspective would be helpful?

We are -- as you ask about the P&C, let's start with this. As you know right now we are doing a good business in Europe and two-three years ago we started to move IDIT to the UK, we see a lot of progress there. So we expected a lot of growth and a lot of demand from this area.

According to the U.S., we are also invest and try to penetrate, we try to leverage our other businesses we have in U.S., the P&C and the Life and to try to find some kind of cross-sell, up-sell opportunity. So right now we have a pipeline here in U.S. as well as in Europe. In general I can say, P&C has slowed down a little bit last year and right now we see a big progress in the pipeline and the deals that are coming.

And Roni, you had, that was helpful. You had a lot of new sales and marketing resources; Yaffa, you've built at your team. As you look on that and you look at productivity, do you think you need to have the same investment next year or do you think that the ramp in productivity with the sales people and the impact of marketing activities should be able to drive incremental wins without having to invest as much in sales and marketing?

We plan to continue on the sales and marketing to keep the same level investment on percentage wise. I think we will see the fruits. Just to share with you as I mentioned before, we did that conference for our customers, but we are also doing a lot of activities worldwide and also to [penetrate] the U.S., you also need some kind of branding of IDIT here in U.S.

Got it. And then as you look at retirement services, it seems like a very interesting area, but certainly an area that's growing in from a [secular] perspective. How has traction been with the new retirement services product and how should we think about how fast those should grow, say, over the next two to three years?

If you're looking at retirement services is one area that we believe that we have a lot of future. We are still working on the product and we are still looking hopefully to go to production early next year, and I think based on this result we will see a growth.

I think right now the customer are waiting to see the results after all of these investments and they will get the confidence and we can see more traction.

We are just hired and we announced, we are hiring executive guy from one of our customers and he is doing a lot of activities. Just for example, next week we have a big event, we are in the Board meeting of --

SPARK.

SPARK, again around this retirement services.

Got it. And one last one from me before I jump back in queue. But when you look at the SAP relationship, obviously the BI piece around (inaudible) is very interesting. How do you think that matures, how do you think -- does SAP start to cost (inaudible) BI product, do they start pushing some of your insurance products, how do you think that plays out and maybe give us some more color there, how that relationship is structured?

What we are -- just to remind you, when we acquired IBEXI, beside their business in Southeast Asia and offshore, they invest a lot to build a good data model for the BI, so what we -- we see a lot of demand from our customers, so what we decide is to go to SAP and to just buy them the tools instead of to develop it and so we combine our assets that we are getting from IBEXI combined with the BI tools, which is some agreement with them and we are going to the market. So again SAP will just use the tools and the data model we own it.

I see, okay. One quick question from me. On the margin expansion which was nice, how much of that came from the Polish acquisition, and how much of that if you can break it out a little bit was just part of the business and the shift to offshore?

Hi, Bhavan, this is Roni Giladi. So in terms of the gross -- in terms of gross margin, I think few factors basically came. We mentioned the life and pension, this is ongoing and [continuous] improvement, this is one part.

The second part is the shekel versus the dollar, and we see about 1% is coming from this area. The off-shore, we just started this year, we see some initial fruits, I think we will be able to see much more in the future. So, it's a small amount, less than 1% of the offshore. We need to invest in (inaudible) and only then they can be productive. So only initial [stake] into this.

In terms of profitability from the acquisition, this is on the gross margin. Similar to what we have slightly higher, but not significant impact because we only started to consolidating towards mid quarter and that's it.

Great, that's very helpful. Thanks guys, and nice job again.

Thank you very much, Bhavan.

Tavy Rosner, Barclays.

Just a broad question to start. You mentioned that your products are now innovative. With regards to your positioning, when you speak to clients, do you feel that the discussion has changed and you can talk more about your technology, not so much about pricing? And in general when you see that clients don't buy your product, what's the main reason for the pushback?

If you are talking about the P&C part, we are losing mainly from a Guidewire, mainly because the executive relationship that [Susan Gage] still has and we don't have in the same level.

We don't have any information when we are doing [gridlocks] analysis, we don't see any type of information based on our product, technology and so on. So it's mainly because the type of relationship with the customer at the executive level.

The other thing is if we are competing with local small scale and then it's about the price. But again we are thinking in the last I think 10 months something like that. In all of the situation we are at least in the shortlist and we feel very comfortable.

Thank you, that's helpful, and the follow-on, and decision, you mentioned investments in business intelligence in general, what kind of revenue contribution do you think that could add to the business in the coming years?

That's very small part. It's just add on for its type of services or add-on, it just complements our solution in probability to get deals. This is not something that can be a major part in terms of revenue.

Okay, that's great. And just last one if I may, you guys talked about the shelf prospect, just you filed, would be the main use of cash since you guys already has about $80 million of net cash in the bank?

Hi, Tavy, this is Roni G. In general the flexible capital structure will allow us to execute our strategy potentially in the future to go for bigger M&A. Currently what we can say, we'll report once we have new information to the market.

Mayank Tandon, Needham.

This is Elizabeth Chwalk for Mayank. I have a follow-up question on the previous one about competition. Are you guys breaking out your win rate for each business and can you talk about how your win rate has been trending for each business?

We don't have a number that we are sharing, but in P&C, it's again relatively very high and it's around close to 50. In the Life in Europe right now, we see I think maybe little bit higher than this; in the States, maybe, a little bit lower. And DECISION, the win rate is very high, just depends how long it will take to the customer to make their decision. So, overall we are in a good shape.

Okay, thank you. And can you also breakout what the revenue growth for the quarter was on an organic basis and also I think you mentioned earlier what it was ex FX?

This is Roni G. So if we little bit elaborate about it, if we take out the currency impact on the quarter and compare to a comparable quarter, as we mentioned, we'll grow about 20%. This is including the acquisition of the IBEXI and Insseco. If we eliminate both of this acquisitions, but also have the currency impact, (technical difficulty) about 15%, 15% without an acquisition, but taking out the impact of the (technical difficulty). As you can see from the reports, we reported 40% which include (inaudible).

(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 1888-295-2634, in Israel please call 039-255-904 and internationally please call 972-3925-5904. Mr. Al-Dor, would you like to make your concluding statement?

Yes, definitely. Thank you everyone for joining our call and see you next quarter.

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