Sapiens International Corporation NV (SPNS) 2016 Q3 法說會逐字稿

Welcome to Sapiens International Corporation third quarter 2016 results conference call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded November 7, 2016.

It is now my pleasure to introduce your host Mrs. Yaffa Cohen-Ifrah, Sapiens' CMO and Head of Corporate Communications. Thank you. Mrs. Cohen, you may now begin.

Thank you and good day, everyone. Our quarterly earning 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 view or expectations, or otherwise.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued before the market opened this morning.

A replay of this call will be available after the call on our Investor Relations section of the Company's website or via the Webcast link which appear in the earning 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. Sapiens continued to deliver its strong financial results in third quarter. I remain very encouraged by our geographic expansion, our organic growth with both new and existing customer and the potential of ongoing M&A opportunity to enhance our growth and profitability.

During this call, we will provide a business update and discuss our third quarter financial results and our outlook for the remainder of the year. Today, we are reporting revenue of $56.5 million up 22.4% over the third quarter of the last year. We believe this growth and improved performance across all of our offering and in all territories we are operating are driven by strong demand from existing customers and ramping sales from new customers.

As in recent quarters, the demand of our product and services remained strong and we continue to improve our position in the market by winning strategically important deals with new customer. We expect this momentum in sales to continue throughout the remainder of the year. We had a very busy quarter. We expanded our strategic relationship with Medical Protection Society, MPS, with a new multi-million dollar agreement to lead the complex implementation of the MPS' membership system, key component of the company's program to refresh their IT landscape.

MPS has previously selected Sapiens IDIT software suite to run its new membership system and now MPS has decided to extend their business with us by selecting Sapiens to provide professional services to lead the implementation effort. Also Menora Mivtachim Insurance in Israel selected Sapiens IDIT Software suite in a new agreement value at over $10 million. Menora had previously selected Sapiens to manage its life and pension as well as their reinsurance line of businesses.

In addition, during the quarter 21st Century Insurance in the newest division of farmers insurance selected Sapiens Stingray P&C solution as its new policy administration system. In another multi-million Euro agreement, LB Group selected the Sapiens IDIT P&C softer suite as its new policy administration solution. LB Group had previously selected Sapiens reinsurance to manage its reinsurance program and help the company to comply with the European regulations. This new agreement covers the launch of 26 insurance products over the next two years and professional implementation of four LB Group brands. As part of our growth strategy and in order to expand our global footprint we are focusing upon penetrating new growing territories. The Nordic market, a leading center of insurance and technology innovation, is such a target market for Sapiens. So, as part of our strategy, we have increased our investment in that market and launched a new Nordic head office in Copenhagen.

In addition, we have recruited [Hele Hoolmer] as the Sapiens Regional Director. Hele has extensive experience from sales and IT and software companies such as IBM and has worked for more than 30 years with a client in Nordic financial sector. For the past 15 years, she has walked in consulting with core system transformation, in insurance as well as life and pension, latest as a partner in the Lloyd Consulting.

In our life line of business, two weeks ago we announced that Generali Nederland selected the Sapiens Closed Books solution to manage its run-off portfolios. Generali Nederland is part of Generali Group, one of the largest European insurance providers. We are seeing a strong interest in our closed books offering across the European continent.

Meanwhile, we are very active in engaging some new key solution partners during the quarter to help our customer to [embrace] modern solution beyond the core. We partnered with Life.io to enhance our digital suite by integrating with Life.io digital transformation solution for life insurance, enabling carriers to offer a personalized and digital customer experience to policyholders.

Sapiens also partnered with Idomoo to add personalized video capabilities to our insurance portfolio for both life and P&C. This particular partnership will allow our insurance customers to provide unique customer experience to their end users. More strategically, both of these partnerships, Life.io and Idomoo, are part of our commitment to support our customer journey to the digital evolution.

In today's world, the expectation of policyholders are changing rapidly and Sapiens is working to stay ahead of both industry and consumer trends by offering our carrier customer a complete innovation digital suite of solutions.

In the third quarter, we announced the upcoming launch of several new products and capabilities. By the first quarter of 2017, Sapiens ALIS policy administration solution will be expanded to include support of Group Life and will be one of the only system that supports the whole range of hybrid group, worksite and individual life solution on a single platform. We have identified the growing need in modern Group Life solution and we are set to service the many carriers that want to do so with a single system.

We have invested in re-architecting Sapiens ALIS so that the multi-line carriers will be able to leverage a common platform in the near future. We also launched a consumer and agent PORTAL for life and P&C insurance. The Sapiens PORTAL along with Sapiens INTELLIGENCE will enable our customer to provide both consumers and agents a fully-digital self-service experience.

Regarding our DECISION product we are working to expand the existing capability of Sapiens DECISION by introducing a pre-integrated advanced analytic component with the coming year. This will help our customer drive digital insight for their organization across multiple industries. Furthermore, we launched the Sapiens DECISION version 6.1 upgraded. This suite features improved integration capabilities with enterprise applications.

In quarter three, our product continued to be recognized and awarded by the industry analysts. The Sapiens ALIS Policy administration system won a vendor award from the Aite Group. ALIS was recognized for its Outstanding Preparation for Future Data Intake, recognizing ALIS readiness to support the Internet of Thing and wearable, electronic medical record capabilities. Sapiens was recognized as one of the three notable vendors among the 40 evaluated who have worked diligently on the front end of the policy process when it comes to new businesses and underwriting.

Further in the recent Gartner Report, Sapiens ALIS received the highest scores in three separate categories, and was the top three at the other three in evaluation of 15 North America life insurance vendors. We are very proud of this achievement, recognized our devotion to innovation and our commitment to remain at the technology forefront.

We continue to make ongoing R&D investment to improve our core product and to maintain the leadership position in the market. We also see demand in new areas such as mobile access, self-services, Internet of Things and wearable technology that we are targeting with these investments.

We are working closely with our customers in prospect to make sure we address their current and future business needs. In September, we hosted a global client conference in Atlanta, attracting more than 150 participants from 13 countries. During the event, we shared our vision and roadmap and continued the dialog we maintain with our customers.

To conclude my portion, I would like to summarize the key highlights. We posted yet another strong quarter highlighted by double-digit revenue growth and double-digit operating margin. We continued to win new customer and expand our business with existing customer across all of our products in all of our territories and we continue to invest in our product to maintain our leadership position. We remain confident that we will continue to achieve double-digit growth throughout 2016.

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

Thank you, Roni, and good morning everyone. Before I jump into our results for the third quarter, as a reminder we are presenting our results on a non-GAAP basis, which we believe give a clear view into operation states of the business. There is a detailed reconciliation showing a GAAP to non-GAAP results in the financial tables of the earnings press release.

Revenue in the third quarter was up 22.4% from the third quarter of 2015. This quarter, we started to consolidate Maximum Processing results. Our organic growth this quarter without the acquisition of Maximum Processing was above 18%. If we are also eliminating the impact of the devaluation of the British pound as a result of Brexit, our organic growth this quarter was above 20%.

Looking at the geographic breakdown of our revenue, in the third quarter we maintained a diverse geographic mix with a double-digit revenue growth in North America, Europe and APAC. Our revenue in North America represented 34.9% of total revenue. Europe, which we include the Israeli operation, represented 50.8% of our total revenue and APAC represents 14.3% of total revenue. Our gross profit this quarter was $23.6 million compared to $20.7 million in the same quarter of last year. Gross margin this quarter was 41.8%, down from 44.9% in the third quarter of last year. Our gross margin this quarter declined compared to previous quarter, mainly due to the increase in our investment in the recruitment and training of our delivery team to support our current and future revenue growth and due to the impact of the devaluation of the British pound that had impacted approximately 1% on our margin compared to the same quarter of last year.

R&D expenses in the third quarter of 2016 totaled $5.8 million compared to $4 million in the same quarter of last year. As Roni said earlier, in addition to our ongoing investments in our core products, we maintained elevated R&D investment in our complementary digital suite, Sapiens BI, Sapiens PORTAL and new group capabilities to our life product. SG&A expenses totaled $10.4 million this quarter compared to $9.7 million in the third quarter of last year. The increase in SG&A was the result of our ongoing increase in sales and marketing investments to win new business and to support our future growth and the impact of the first time consolidation of Maximum Processing.

Our operating income for the third quarter of 2016 increased by 5.5% to $7.3 million from $7 million in the third quarter of last year, representing 13% of total revenue. Our adjusted EBITDA this quarter totaled $8.1 million, increased by 8.3% from the $7.5 million in the third quarter of last year and reflecting 14.4% of total revenue for the quarter compared to 16.2% of last year. The reduction in operating and EBITDA margin is mainly due to higher investment in delivery and product investment.

Tax expenses this quarter was $1.6 million representing an effective non-GAAP tax rate of about 20.6% as compared to $1.2 million in the third quarter of last year. Net income for the quarter was $6 million or $0.12 per diluted share, up from $5.8 million or $0.12 per diluted share in the third quarter of last year.

Turning to our balance sheet, as of September 30, we had cash and cash equivalent and security investments of approximately $97 million with no debt compared to $94 million as of end of 2015. I would like to remind you that this amount is towards the payment for Maximum Processing.

Turning to our 2016 guidance, we are reiterating our full-year revenue guidance of $211 million to $215 million or annual revenue growth of 18% to 20%. In fact, we currently expect the full-year revenue to come in the high end of the range we provided. This is despite the impact of the continuous devaluation of the British pound in the fourth quarter.

We are maintaining our short-term investments in delivery and R&D, sales and marketing to support our accelerated growth and thus we reiterate our full-year 2016 operating margin in the range of 13.5% to 14%.

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

Thank you, Roni. Our third quarter was marked by continued strong financial performance based on a business model that generates revenue from a diverse, yet complemented suite of solutions across geographies and product sets. We expect to continue to win new customer and expand our businesses with existing clients across all of our product and geographies and we expect to expand our market reach with another strategic acquisition. We remain confident that we are on track to reach our double-digit growth target for 2016.

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

(Operator Instructions) Bhavan Suri, William Blair.

Thanks for taking for my questions. I apologize for the background noise, I'm on a plane, but congrats and a nice job. Roni, just a quick question. First, it seems like the Nordics and that all European region are doing very well. Just a little color on sort of who you're winning against for both ALIS and IDIT, sort of what's driving the significant large deal activity in that region.

Yes, two years ago we decided we want to enter to a new territory and we started to invest in marketing and sales. And yes, we start to see the results, mainly on the P&C business. And I think one of the main advantages that we are coming is our business model. So, besides the product the Sapiens business model that we are providing, the software, end-to-end services and right now talking about software as a service and all the integration with BI and PORTAL and everything so they like the way that we are working. Most of the deal we have -- again Guidewire, [Fadaka] and a few local players like TIA.

Great. That's helpful. And then when you look at why you win is it because of the integration with SaaS and BI or is it because sort of the policy management or billings components?

In all or most of the cases it's full end-to-end. So there is no question around our product. We have advantage, again, mainly on the policy, but they are also happy with all the rest. In terms of the product they like to see that we are coming with end-to-end, include all and they are not working with two players like local SI and vendors.

Got it. And then just to touch a little bit on the pipeline for DECISION, obviously that's been doing well historically, a little bit of how you started to sell it into insurance and then just sort of how that pipeline is trending. Thanks.

Yes, as you know DECISION is a disruptive technology. The main issue there, the challenge that we have, it takes more time because we need to educate, to explain, going through that POC and then it's a term license. So the pipeline in terms of size is big but to close deal it takes time.

Got it. And then just one quick one for Roni G. You obviously had a nice beat. You raised the height of the range. I am just surprised you didn't raise a little more given the strength. Is there something sequentially that we might be missing or is it just sort of your natural sort of just prudent approach?

I think the Company and the way that we are, we like to work in a conservative mode. We took the range of $211 million to $215 million and we said we're going to hit the high end of the range. And this is despite the additional devaluation of the UK pound against the dollar that has hit us by additional about $2 million. So despite this, we feel very comfortable with hitting the higher end. It will be surprising we can beat this also, let's see, for Q4.

Great. Thanks, guys. Thanks again for taking my questions and congrats.

Thank you, Bhavan.

Mayank Tandon, Needham & Company.

Great job guys, once again. Just a few questions. So just a follow-up on Bhavan's question about the pipeline. I'm just trying to get a sense of -- I know you're not giving guidance for 2017 right now, but just based on what you're seeing in the market, your win rate, what's your sense of how 2017 is shaping up, if you could just give us maybe some broader context around how we should look at growth versus say what you will end up in 2016?

This is Roni. We usually provide guidance by about February when we announce Q4 results for 2016 and probably will be duplicated again this year. As we look at the pipeline and the carrying backlog that you'll see, we'd like to expect the organic growth at the rate of 15% as we say year over year. If we can accelerate this organically or through M&A, probably we will do so, but we'll provide this on February of 2017. What we can see right now is the pipeline in the P&C is very strong and the others are also improving.

Great, okay. And then in terms of margins too, just wanted to get your sense. You obviously are going through an investment cycle here, and you've talked about that very openly. But as you go into 2017, can we get back to some level of margin expansion, again without quantifying it, but just maybe more broadly speak to get your thoughts on where you think margins will go over time?

I would like, Mayank, to answer on the mid-term level, not on 2017. As we mentioned last quarter, we reduced the operation margin to about 13.5% to 14%. We reiterate this guidance for this year. As we continue down the year, we'd like to additionally invest in the R&D. We'll see benefit today, as we talked about -- the earlier question was about pipeline, because of the investment, we see bigger pipeline for us. So we'll continue.

So guidance for 2017 probably we'll provide on next year, early next year, but the mid-term goal of 2016-2017 which is in two, three years, this is to stay the same. Let me remind everyone that the business on an ongoing basis without DECISION is today around 15.5%, something like that.

That's helpful. And then a final question for me, on the M&A side, I think you mentioned in your prepared remarks about doing more acquisitions. Could you just give us a sense of should we expect maybe a larger deal or use of the tuck-in deals? And then what are some of the niches that you're looking to acquire into and how are the valuation expectations out there in the market for the potential acquisitions?

You asked a lot of questions. I'd try to give the full answer. We reorganized ourself to do more scouting, meaning to talk to more potential M&A as before. So our pipeline is much better than the past. The evaluation is still an issue. So we are losing business because of evaluation for some reason and we try to understand why the [payee] is paying more than strategic like us, but this is the life. But overall, we have more in the short list right now, people that we are talking, but still it's in the process.

In terms of big versus small, we are open to big and small sometimes, but we are talking for both sides right now. And main reason that we are looking for is customer base and complementary solution. Again Sapiens prefer to stay in the insurance business worldwide and sometimes you want to penetrate to new territory on the same territory to have more presence and more complementary. But definitely, we plan to continue with our common product is what we are bringing, but again we can find a company that can give us some value-add.

Tavy Rosner, Barclays.

Most of my questions were answered already. I was just wondering with the new wins, congratulations on the wins, broadly speaking do you feel that in order to get those wins you have to kind of make an effort on pricing in order to be more competitive or just you didn't win, thanks to price? How do you feel competitive environment at the moment?

Yes, it's all the time, sales or new deals, you have competitive environment. And sometimes it's fixed price. So the price is an issue and sometimes it depends on the situation we have now decreased the price list that we want to have. So the answer is there is a price pressure independent of the case.

That's helpful. And with regards to M&A, you mentioned that you have a pipeline for potentially doing strategic move. Would that be with regards to acquiring someone with complementary product or clients or perhaps even integration? What kind of direction you're looking at?

Exactly what you mentioned. So we are looking for a client base and a complementary solution, but again not something that -- we don't plan to replace any of our product, it's mainly complementary that we prefer to come in the ecosystem that we have.

(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 1-888-269-0005. In Israel, please call 03-925-5929, and internationally, please call 972-3-925-5929. Mr. Al-Dor, would you like to make a concluding statement?

Yes. Thank you for you, the operator, and thank you to all of the participating and for joining us today and have a good day. See you next quarter.

Thank you. This concludes the Sapiens International Corporation third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.