Sapiens International Corporation NV (SPNS) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded February 17, 2016. It is now my pleasure to introduce your host Ms. Yaffa Cohen-Ifrah, Sapiens' Chief Marketing Officer, and Head of Corporate 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 our 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 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 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 now the call over to Roni Al-Dor, our President and CEO. Roni?

Thank you, Yaffa. And good morning, everyone. Thank you for joining the call today. We are pleased to discuss another strong quarter providing an exciting finish to a record year. During this call, we will provide a business update and discuss our 2015 fourth-quarter financial results and our outlook for 2016.

We are reporting a non-GAAP revenue of $48.7 million, which is another quarter of double-digit growth and increasing operational profit of 48.4%, or $2.4 million. We saw growth and improvement performance across all of our offerings, from all geographic from both new and existing customers.

The demand for our product and services remained strong. This is a result in a number of important wins which have boosted our leading market position. Our investment in technology over the past few years have led to a development of an advance in innovation products, helping us to expand our business with both new and existing customers. We expect this momentum to continue in the near future.

Our acquisition of IBEXI in India and Insecco in Poland are clearly paying off, allowing us to increase our global presence by entering a new territories, acquiring existing customer base, and enhance our offerings. Following the acquisitions, we established new regional delivery and development centers in those markets to support our customers.

This is in line with our strategic goal to be close to our customers and support them by investing in on-site employee with local experience and technical expertise. As result of the acquisition, Sapiens is now positioned to pursue and manage a larger opportunity of increasing size.

Today, Sapiens has a diverse portfolio of market-leading product across P&C, and the life and annuity in our selected territories. In addition, we have a variety of services (inaudible) post-implementation as a global one-stop shop for both product and services with a long-term relationships with our customer. We are well-positioned to leverage our lend-and-expand business model.

We consistently grow our business by adding new logos every year. We also aggressively look for growth opportunity within our existing client base by expanding with new products, technology capabilities, new line of business, and in end services. We also seek to expand in new geographic to grow our market reach and addressable markets.

To further accelerate our goals, we plan to continue to look for additional merging acquisition that are in line with our overall growth strategy. We are looking for opportunities to expand our market penetration through acquisition of companies that will provide us a complementary insurance solution, new market presence, or legacy customer base.

We have a proven history of making bolt-on acquisitions at fair price and successfully integrated the acquired companies into our businesses. We will leverage our experience to pursue additional acquisitions.

That being said, we will remain highly selective regarding the M&A opportunities we pursue. Our ongoing financial performance, healthy balance sheet and strong product portfolio are primary factors in our evaluation and pursuit of potential transaction.

Now back to our core businesses. During the fourth quarter, we recorded a number of new wins to further expand our revenue base and enhance our competitive position. One of the fourth-quarter wins was the Medical Protection Society, or MPS, the world's leading protection organization for doctors, dentists and healthcare professionals. They selected Sapiens IDIT software suite as the new insurance membership system that will enable them to continue to provide world-class services to over 300,000 members worldwide. MPS is our fourth IDIT customer in the UK, a strategic growth market for Sapiens.

Also during the quarter, a top-tier US insurer selected Sapiens DECISION for its retirement and investment services group. This win was an expansion of a long-term existing relationship between the insurance where the adopted DECISION model as its standard in Sapiens.

We believe that the insurance industry is a good fit for Sapiens DECISION's expansion, because of our relationship with the living cares, all of whom run a significant volume of complex business rules. More recently, RiverStone Management Limited, a UK-based company that is part of RiverStone Europe Group selected Sapiens Reinsurance. We believe that the maturity and flexibility of Sapiens Reinsurance product offering were a key to RiverStone's decision.

Sapiens and RiverStone have a ongoing successful relationship in the US, a contribution factor to the selection of Sapiens in UK. As we mentioned in previous calls and earlier this one, our global lend-and-expand strategy involves leveraging customer relationships in geographic presence to cross-sell our solutions. RiverStone is an example of how our existing relationship in the US can help us sign new deals with affiliate in UK operations.

Also after the end of the quarter, we announced a huge contract win, a $30 million business expansion with a leading North America insurance and retirement services company. The latest agreement extend our existing partnership with this customer for the second phase of multi-year, multi-phases technology and core system modernization program.

We continue to maintain an intense R&D program to improve our product offering to further enhance our heavy investment in our technology platform in the recent years. Last month, we announced the expansion of our business DECISION Management solution, Sapiens DECISION Suite, with the introduction of Sapiens DECISION InfoHub software and Sapiens' DECISION STEP services. With the addition of this new software and services company, Sapiens now offers a complete business decision management solution.

This investment in technology have lead to some of the most advanced solutions in the market and we continue to be a recognized by the analyst [firms] such as Celent. In fact, last month we won Celent XCelent Awards in Breadth of Functionality, category for our ALIS policy administration system for life and pension in EMEA region in 2015.

This is our second straight Breadth of Functionality recognition by CELENT in EMEA, which is award every other year. In a report that was just released yesterday by Celent, the EMEA Policy Administration Solution 2015, Sapiens IDIT won two categories: XCelent Technology for Leading Advanced Technologies score and XCelent Functionality for Leading Breadth of Functionality score.

Each vendor was position according to these two categories, with Sapiens the leader in each. At the same times, we continue to invest in sales and marketing, our largest sales organization will help us manage a larger number of opportunity than we were capable of previously and increase our win rate.

Our marketing efforts are focused on regeneration and breadth awareness. In 2015, we have participate in 18 industry events in US and Europe and also the event in UK, Australia and US. We also held our 2015 Insurance Client Conference in Paris for our European and Asia Pacific customer. We consider this investment to be a critical to our long-growth strategy. The investment we have made in R&D, sales and marketing have already help us win new customer and successfully deploy the new system.

To date, over 190 customers are using Sapiens Solution. We work and continue to work closely with these customer to help them maintain their system and maximize efficiency. We support them with the introduction of new capabilities or their expansions of their businesses. During 2015, more than 15 customers have gone live and move into production which mean our solution is being used as the core [portion] of system.

As I've said in the past, a go-live is a major event for both Sapiens and customer. It is a major demonstration of our ability to deliver and of customers' ability to adapt a rollout of new technology across the organization. Sapiens' offering today is the most comprehensive in our Company's history, with a wide range of solutions, strong delivery capability and modern services. This will enable us effectively cross-sell within our existing customer base.

To conclude my portion, I would like to summarize the key highlights. Yet another fourth quarter highlighted by double-digit revenue growth and margin expansion. We are winning new customer and expanding our business with existing customer across all of our products in geographics.

Our acquisition are paying off by enabling us to increase our presence and support customer through a new region of delivery and development centers in this [neo]geographic. We have confidence that we will continue to achieve double-digit growth in 2016.

I would now like to turn the call over Sapiens' CFO, Roni Giladi, to discuss our financial situation and outlook

Thank you, Roni. And good morning everyone. Our momentum continues in 2015 with fourth-quarter non-GAAP revenue of $48.7 million and non-GAAP operating profit of $7.4 million achieving both record high levels.

As a reminder, we are presenting our results on a non-GAAP basis which we believe gives a clearer view into the operational state of the business. There is a detailed reconciliation to non-GAAP result in the financial tables of the earnings press release.

Non-GAAP revenue in the fourth quarter was $48.7 million, up 16.5% from the fourth quarter of 2014. Our revenue for the quarter by type break down as follow: license revenue totaled $2.8 million, or 5.8% of total revenue during the quarter compared to $2.4 million, or 5.8% of total revenue in the fourth quarter of last year. Service revenue, which include maintenance, grew to $45.9 million, or 94.2% of total revenues during the quarter, up from $39.3 million in the fourth quarter of last year.

We usually sell our software license as part of the overall solution offered to our customer that combine the sale of software licenses and services. Our licenses revenue are typically perpetual and generated from new customer, recognizing over the utilization period. Our services revenue are comprised of implementation services related to our solution and post-implementation services in our generated from existing customer over many years.

Since we maintain long-term relationships with our customer and we will generate revenue over a long period, we know how to find the balance in our revenue mix while continuing to improve our profitability.

Let me now turn to geographic breakdown of our revenues. In the fourth quarter, we maintain our geographic mix. Our revenue in North America represent 34.4% of total revenue. Europe, which include our Israeli revenues, represent 54.3% of total revenue. And APAC represent 11.3% of total revenue. Most of our growth in the fourth quarter was in North America and in the UK, which are the strong territories for Sapiens.

Turning now to profitability. Our non-GAAP gross profit for the fourth quarter of 2015 was $21.5 million, up from $17.5 million in the fourth quarter of last year. Our gross margin improved to 44.2%, up from 41.8% in the quarter of last year, improvement of 240 basis points. Our gross margin improvement is a result of few factors. First, continuous improvement in the gross margin of our largest division, life and pension and retirement.

Second, the erosion of new Israeli Shekel versus the dollar which had reduced our cost of revenues as a majority of our delivery employees are based in Israel. And the positive impact of our offshore operation with the lower costs.

Our investment in R&D in the fourth quarter of 2015 totaled $4.4 million compared to $4.3 million in the same quarter of last year. Non-GAAP SG&A expenses totaled $9.8 million this quarter compared to $8.2 million in the fourth quarter of last year.

The increase in non-GAAP SG&A was a result of our ongoing increase in sales and marketing investments over the last quarters to accelerate our future growth and the full-quarter consolidation of our recent acquisition in Poland and India. Our non-GAAP operating income for the fourth quarter of 2015 increased by 48.4% to $7.4 million from $5 million in the fourth quarter of last year, representing 15.1% of total revenue compared to 11.9% of last year.

We have seen trend of improvement in operating margin throughout the year. Our adjusted EBITDA this quarter totaled $7.9 million, reflecting 16.3% of total revenue for the quarter.

Non-GAAP tax expenses this quarter was $1.4 million, representing an effective tax rate of 18.6% compare to tax benefits of $4,000 in the fourth quarter of last year. Non-GAAP net income for the quarter was $6.3 million, or $0.13 per diluted share. A 28% increase compare to $4.9 million, or $0.10 per diluted share in the fourth quarter of last year.

Turning now to the full-year results for the 12 months ended December 2015. We improved our financial performance in all of our parameters. Revenue totaled $179.3 million, up 13.9% compared to $157.5 million in the prior year. Our revenue were in line with our guidance range, reaching the high end of our guidance.

Please note that excluding the impact of foreign currency exchange rates, revenue growth exceeded 20%. In addition, our organic growth, excluding M&A and the impact of currency exchange rates was at the level of our mid-term growth plan of 15%.

Total non-GAAP operating profit in the full year was $26.5 million, compared to $17 million in 2014. Our operating margin was 14.8%, an improvement of 400 basis points compared to 10.8% in 2014. We had a positive impact of currency exchange rates during 2015 on our operating margin of 60 basis points. Again, please note that our operating margin was in line with our guidance range. Our fully diluted earnings per share totaled $0.45, up 36.2% compared to $0.33 in 2014.

Turning to our balance sheet. As of December 2015, we had cash and cash equivalents and security investments of approximately $94 million compared to $80.5 million as of December 2014. I would like to remind you that this amount is post the payment of $7.2 million dividend to our shareholders and the past year's payment of the acquisition of IBEXI and Insecco.

Turning to our 2016 guidance. Revenue, we expect 2016 full-year revenue in the range of $207 million to $211 million, representing a growth in the range of 15.4% to 17.7%. Profitability, we expect full-year 2016 non-GAAP operating margin of 15% to 15.5% of total revenues.

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

Thank you, Roni. Overall, 2015 was marked by strong financial performance through acquisition and new businesses signing that build our foundation for future growth in 2016 and beyond. 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 products 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 to the operator for Q&A. Operator, please poll for questions.

(Operator Instructions)

Chris Reimer, Barclays.

Hi. Thanks for taking my question. Just on operating margins, you've raised sequentially your expectations. Is this a result from the move to offshore operations?

And on that, you mentioned last quarter that you could get up to 20% operations offshore. Could you mention what percentage you think you are around about now?

This is Roni Giladi. Today, we are -- our offshore operations that we started only this year, at the end of the year, is about at 10% of -- slightly below 10% of total headcount of the Company. And again, this is the team that right now joined during the year; we are in training mode and need to learn on product, and eventually we'll be able to produce delivery at low cost.

And the 20% that we mentioned will be over time. It will not be one year, but over time we will be able to achieve this.

Okay. Also, if you could give some color on any regional strengths you saw? Europe was a little up. Was that just because it's the deals that came in this quarter, or is something else involved there?

Our mainly two geographic, as of today, are USA and UK. And I separate UK out of total Europe.

This is a strong presence that we have significant customer facing and deliver everything that we have in these territories. And they are basically having today the highest growth rate. Looking forward, we would like to penetrate additional territories, but this, again, will be over time.

Okay. And of course, about M&A, anything in the pipeline? Anything you can mention?

Sapiens has a strategy, increase this team that is working on the M&A side. This is part of the strategy and, therefore, this is what we did.

We are looking at the companies, again, across geographic, complementary solution and customer base. We have the pipeline at different level of degree. We cannot indicate anything currently.

I must say that the valuation today of the market are quite high, and we are, as a conservative Company, and would like to find something that we believe at the right value. So again, we have a pipeline at different level of degrees.

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

Mayank Tandon, Needham and Company.

Thank you. Hi, guys. Great job once again.

So just at a very high level, I think this question, maybe for Roni Al-Dor. Roni, in terms of -- given all the concerns about the global economic climate, what are you hearing in terms of feedback from your core clients, both in Europe and the US, in terms of their pipeline to spend? Even though I know it's imperative that they upgrade their technology platforms, just given the environment, are you seeing any hesitation on their part or is it business as usual from your standpoint?

Hi -- Roni Al-Dor.

I think for long term, people -- the insurance company are looking to invest, and they need to prepare themselves for the difficulties. People are looking for more efficient. People are looking for a way to do more analytical -- the data that they have. They are looking for direct connection to the client, to their client, and not through a broker.

So there is a lot of need. Again, I cannot say where they are -- customer are not talking about the economy, but they are still continuing to invest, and we don't see any change right now.

Okay. Obviously, your guidance is very good, so that would suggest that you're obviously pretty confident for the next several quarters.

Actually, moving on to the guidance question, I just wanted to get a sense, in terms of the sequential trends you expect, both on the top line and in terms of margin expansion. Will it be fairly linear across the year or will there be maybe a couple of quarters that may be more seasonally stronger versus the others? Just remind us of the seasonality in the Business.

Hi, Mayank. This is Roni Giladi.

We basically anticipate a linear growth quarter over quarter. I must say that we do not have seasonality, but Q4 basically is the highest. The main reason for that is customer would like to go live by the end of the year for the following year and, therefore, because of the revenue recognition, a percent of completion, most of the time this is higher revenue than the previous quarter. So, overall, linear, but expect higher on Q4 of 2016.

Okay, that's helpful.

And then a couple of quick ones here. In terms of -- you gave us the breakdown on the FY15 numbers for both constant-currency organic growth and in terms of the margin impact from currency. What are you building in, in terms of currency impact, and on the organic growth side for FY16?

So we current -- took the current exchange rate that we have based on that, we did the analysis, and based on that we gave the guidance. I must say that we have also some inherent, I would say, protection or hedging because we are diverse in revenue mix. And on the cost side, we are much more heavier on the shekel, so any time the shekels weaken against the dollar, we have additional profit on that side, and so this is on the currency.

What was the other question, Mayank?

Well, also, just related to that was -- what is the organic growth you're reflecting in your guidance for FY16, of that 15.4% to 17.7%? How much of that is organic versus the bought revenue? Just remind us of that, please?

So, basically, I think we mentioned this. We can see for the mid- or short-term, we would like to see something around 15%. This is the organic growth that we are seeing year over year, so we can anticipate this amount going forward.

Okay. And then, one last question on the tax rate. I think, if my model is correct here, you ended up with a tax rate of about 14.6% -- sorry, 15.5% for FY15. What kind of tax rate would you expect to see in FY16 on a non-GAAP basis?

So just the -- on the tax rate that we finished 2015, the non-GAAP tax rate is about 17%, and this is in line of what we anticipated at the beginning of the year, between 16% to 18%. As we are -- continue to increase our profitability and utilizing our carry-forward losses that were from the past, some legal entities, we anticipate the legal -- the tax rate will go up at the range of 19% to 20%.

Got it. Great, thanks, guys

Bhavan Suri, William Blair.

Hey, Roni and Roni. Congratulations.

Thank you.

Just to get back to fundamentals for a second here -- let's start off with IDIT. Obviously, nice traction in Europe. Can you just comment a little bit about how IDIT is doing in the US, and just contrast that to, and given Europe's relatively nascent for that business, what's driving the growth in Europe for the product?

You are asking about the US or you are asking about Europe right now?

I'm asking about the strengths -- you had some European wins in IDIT, right?

Yes, we -- just to remind -- (multiple speakers).

Was it the new functionality or was it new sales hires? What's driving that growth there?

I think I can give you some indication. When we acquired IDIT like four years ago, IDIT more focused on the central Europe and Asia Pac. We leveraged the acquisition that Sapiens and FIS very strong in UK, so we brought them to UK, and we see huge growth in this area based on our resource [there to represent this]. So, that, and we invest specific on that. That's one of the reasons.

The other reason we continue to invest in Europe -- the customers like our model that we are doing, both product and system integration, and we add a few more services all the time. We also started to talk to them about new features like total new UI. We are investing in the analytic, and we are also entering to the portal. All of this together give us advantage in the market.

I shared with all of you that just yesterday morning we just got a new recognition from Celent that we are the number one in the Functionality and Technology, and again, just to remind you that Guidewire and all the rest, we are behind them -- they are behind us, sorry.

(laughter) Great. And then, when you look at the retirement pipeline, obviously the US a year ago was an interesting pipeline. It was starting to get to points of where you could see some deal activity. Maybe some update on how the retirement offering is going, and how that pipeline or customer growth has been over the last year?

We are continuing to invest heavily in the retirement. We also hired a very senior person for this business. We plan to go live soon, and we are also -- and we also invest heavily on the customer that we have right now, and we believe that we will see the fruits of all of this huge investment that we did in the last few years hopefully soon. Nothing in the next few quarters, but I believe at the end of the year or next year.

Great. And then just a couple more from me. One, on the $30 million win, maybe this is for Ronnie Giladi, maybe just explain how that $30 million rolls out over the next, maybe, 12, 24 months? And how do those contracts typically play out in terms of deployment?

Hi, Bhavan. So this is the biggest deal the Company signed, $30 million, that basically compounds from two -- with a segment implementation and development of second phase of the platform. The implementation and development will take about 24 months -- about two years -- and our revenue recognition met all these percentage of completion. So we will see these fruits coming over the next two years -- slightly we got in Q4 of 2015, but most of it, significant part over the next two years over time. I would say on a linear pace.

Got it. And then turning lastly to DECISION, obviously it's nice to see the insurance business, and you guys know my opinion about bringing DECISION to the insurance market. It's nice to see that win. Just a little bit about what the pipeline looks like, given the strength you have in insurance for the DECISION product. And then just to reaffirm, that's still sold on a term license basis, right?

Yes. So, about your comment, we start to listen to the -- to you and (laughter) -- I'm joking. We signed a few contracts in the insurance, and we also put a lot of investment right now in the insurance space. So, again, I hope besides all the investment bank and the banks that we are focusing, we will see some growth also the insurance.

Again, DECISION is mainly term license and, again, we are fully committed for this. And we can see there is a lot of noise around it, but it still takes time to grow.

Given it's term, so it's recurring, Roni, could you share what percentage of revenue DECISION makes up today?

We are not splitting this amount, but I would say about -- around 10% -- this is the total revenue of the Company -- of the division.

Fabulous. Thanks so much, guys. Congratulations. Thanks for taking my questions.

Okay. Thank you, Bhavan.

(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 1-888-782-4291. In Israel, please call 03-925-5901. And internationally, please call 972-3-925-5901.

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

Yes. Thank you, everybody, and we will talk to you again next quarter. Thank you.

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