Sapiens International Corporation NV (SPNS) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Sapiens International Corporation Fourth and Full Year 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 February 28, 2017. 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 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 disclaim 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 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 website link which appears in the earning release that we published today.

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

Thank you, Yaffa, and good morning, everyone. Many of you join our conference call two weeks ago during which we discussed our acquisition of StoneRiver. So thank you for joining the call today as well. Sapiens delivered another solid quarter with double-digit revenue growth and a strong performance across all of our offering and across all of our territories, driven by increased demand of our product and services. I'm very pleased with our continued geographic expansion, our organic growth and the opportunity we see to accelerate our business with the current M&A activities.

During this call, we will provide business update and discuss our fourth quarter financial results and our outlook for 2017. Today, we are reporting quarterly revenue of $57.1 million, up to 17.3% over the fourth quarter of 2015. Our full year revenue totaled is $216.2 million, up to 20.6%, compared to $179.3 million in 2015.

As in previous quarter, the demand of our product and services remain strong as we continue to improve our position in the market by expanding our businesses with existing customer and by winning deals with new customers.

During the fourth quarter, we record a number of new wins to further expand our revenue base and enhance our competitive position. Generali Netherlands select Sapiens for its life portfolios. Generali is part of the Generali Group, one of the largest European insurance provider and we were selected to administrator a large portion of its life portfolios.

Our implementation which include consolidation many of Generali Netherlands life book system on to Sapiens solution in order to [release] significant operation reserve by lowering its IT cost and improving operational efficiency. In P&C, LB Group choose our IDIT P&C suite as its new policy administration solution. For LB Group, a member-owned insurance company based in Denmark, Sapiens IDIT Insurance Suite was selected by LB Group, new core insurance system for general lines of businesses. This is a multi-million Euro engagement and it cover the launch of 26 products over the next two years and the implementation of four LB Group brands. Key to our selection was our strategic relationship between Sapiens and LB Group who previously select Sapiens Reinsurance to manage its reinsurance program and help the Company complies with European regulations.

To support our Nordic expansion, a leading area for insurance and technology innovation and as part of our effort to better service the Nordic customer and expand our footprint in the market, we established a new Head Office in Copenhagen and recruited an experienced regional director. We believe that insurance in the region are currently limited by their legacy system and they are considering how to best prepare for the future. We see significant opportunity for Sapiens to grow in this market by expanding its relation with existing regional client like LB Group and by attracting new ones. We continue to maintain an intense R&D program to improve our product offerings and to further enhance our investment in technology platform. This quarter, we launched a consumer and agent portal for life and P&C insurers. Sapiens portal is pre-integrated with the Sapiens ALIS and Sapiens IDIT software suite and will provide our client a fully digital experience.

Later in the quarter, we released an upgrade Sapiens DECISION version 6.2. The enhanced 6.2 version feature advanced compliance traceability, an improved user experience and accelerated policy change capabilities and it was designed to reduce the cost of implementation and changing regulations and policy in support of accelerated application development. Our investment in technology over the past few years have led the development of advanced and innovation product helping us to expand our businesses with both new and existing customer. This investment in technology have led to market recognition and we were recognized by outside professional for our industry-leading offering. In December, Sapiens was named as a Top 10 core system solution provider of 2016 by a panel of expert professional technology leaders assembled by Insurance CIO Outlook. Sapiens was sighted for its commitment to constantly improving and advancing to meet the [true business] and technology need for the insurance and financial services industry. To deliver on this commitment, we will continue to make ongoing R&D investment and improve our core product and maintain leadership position in the market, especially in the areas of the [capitalization] and customer experience. We are also pursuing demand in new areas, such as mobile access, self-service, IoT device and wearable technology with these investments.

Today, over 200 customers worldwide are using Sapiens solution. We worked 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 expanding for their businesses.

During 2016, more than 16 customers have gone live to move into production, which means our solution is being used as their core operational system. Go live is a major event for both Sapiens and customer. It is a major demonstration of our ability to deliver and offer our customers ability to adapt and roll out a new technology across the organization.

I would like to ramp up my prepared remarks with some comments on our most recent M&A transaction. Our largest acquisition to-date, which we announced earlier this month. As you know on February 15, we announced the acquisition of StoneRiver. The StoneRiver acquisition significantly expand Sapiens presence in North America insurance industry by increasing our US customer base with an additional 200 customers, expanding our local insurance expert presence with the team of 500 professional and improve our insurance practice and professional services capabilities and offering. It will also accelerate our footprint in the US P&C space, a strategic priority for us. StoneRiver solution complement Sapiens existing offering and will allow us to accelerate the growth in the US and globally in both P&C and life and annuity markets.

To conclude my remarks, I would like to summarize the key highlights. We posted yet another strong quarter highlighted by double-digit revenue growth and double-digit operation margin. We won new customers and expand our businesses with existing customer across all of our products in all line and territories. We are confident that we will continue our expansion and growth in 2017.

I would like now to turn the call over Sapiens CFO, Roni Giladi to discuss our financial results and outlook for 2017.

Thank you, Roni, and good morning, everyone. Revenue in the fourth quarter was up 17.3% from the fourth quarter of 2015, with revenue growth across all regions. Our gross margin was 41.8% down from 44.2% in the fourth quarter of last year. Our investment in R&D and SG&A grew by [plan] during the fourth quarter. R&D expenses in the fourth quarter of 2016 totaled $6.2 million compared to $4.4 million in the same quarter of last year.

SG&A expenses totaled $10.2 million compared to $9.8 million in the fourth quarter of last year. The increase in R&D was the result of our investment in the group capabilities for the Sapiens ALIS and the investments in the development of Sapiens Portal in our digital suite. Our operating income totaled $7.5 million, 13.1% of operating margin, compared to $7.4 million or 15.1% operating margin in the fourth quarter of 2015. The reduction in operating margin is mainly due to higher investment in R&D and the impact of the currency exchange rate. On a constant exchange rate, our operating margin will be approximately 15%. Our adjusted EBITDA this quarter totaled $8.3 million, reflecting 14.5% of total revenue for the quarter.

Tax expenses this quarter were $1.5 million representing an effective non-GAAP tax rate of about 20.5%. Net income for the quarter was $6 million or $0.12 per diluted share compared to $6.3 million or $0.13 per diluted share in the fourth quarter of last year. Although operating profit this quarter was slightly higher than last year, our EPS was lower by $0.01 due to financial expenses in Q4 of 2016 compared to financial income in Q4 of 2015 and the currency impact. Eliminating the currency impact this quarter, our EPS this quarter will be higher by $0.02 and will total approximately $0.14.

Turning now to the full-year result for the 12 months ended December 2016. 2016 revenue totaled $216.2 million, up 20.6% compared to $179.3 million in the prior year. Our revenue exceeded our guidance range of $211 million to $215 million, or annual growth of 18% to 20%. This increase was despite the devaluation of most currency versus the USA dollar that happened in the second half of 2016.

If we eliminate the currency impact, our growth rate this year was 23.1%. And the investment this year totaled $22 million, an increase of $5.8 million or increase of 35.4% compared to last year. SG&A expenses increased by $4.5 million or 12.5% compared to last year. The increase in R&D and SG&A was to support our current and future revenue growth by enhancing our product and increasing our sales team.

After our investments, total non-GAAP operating profit in the full year was $29.6 million, compared to $26.5 million in 2015, an increase of 11.6%. Our operating margin was 13.7% compared to 14.8% in 2015. Our operating margin was in the mid-range of our guidance of 13.5% to 14%. Again, if we eliminate the currency impact, our operating margin this year will be around 15%. Our fully diluted earnings per share totaled $0.49, up 8.9% compared to $0.45 in 2015.

Let's move to balance sheet. As of December 31, 2016, we had cash and cash equivalents and security investments of $96.4 million. This amount is both the partial payment for the acquisition of Maximum Processing and the cash dividend of about $10 million during the year. We currently have no debt, but we do expect to fund portion of the StoneRiver acquisition with new bank debt.

Moving to StoneRiver, we are all very excited about this acquisition. Upon closing, StoneRiver will become fully-owned by Sapiens. As I mentioned on our last call, StoneRiver 2016 non-GAAP revenue were approximately $80 million on a full year basis. The company revenue are mix of growing stable and declining product sales. We assume that some of StoneRiver revenue post the transaction will not continue with us in 2017. StoneRiver is currently profitable but below Sapiens profitability range. I would like to turn now to our guidance for 2017. Our annual guidance for 2017 include StoneRiver result on a pro-rata basis. In addition, this year, we took strategic decision to deemphasize our non-insurance and financial services revenue that are not in our focused territories and with low margin revenue. Sapiens guidance for 2017 revenue is between $270 million to $280 million representing annual revenue growth of 25% to 30%.

Our revenue guidance reflect the following three parameters; the acquisition of StoneRiver on a pro-rata basis and taken into effect that some of StoneRiver revenue will not continue in 2017. Two, a decision to deemphasize certain elements of our non-insurance and financial services business, which will result in reduction of revenue in 2017. And third, currency devaluation. Eliminating the impact of the currency devaluation and the reduction of non-insurance revenue and financial services will result on organic growth excluding StoneRiver at the range of 12% to 17%.

Moving to operating margin. We expect full year 2017 operating margin approximately at 13%. Our operating margin guidance is affected by two entities. First, Sapiens, on a standalone basis Sapiens profitability is approximately 14%, and in a constant currency basis Sapiens profitability will increase to the level of 16%. Second, StoneRiver profitability for 2017 is at the level of 8%. To summarize, on a consolidated annual basis, we expect our profitability to reach 13%. Please note that the Brexit impact only part of 2016 and will have a full-year effect in 2017.

In addition, the Israeli shekel strengthened versus the dollar in the last few months which negatively impact us as half of Sapiens cost in Israeli shekel. Second, StoneRiver profitability is lower than Sapiens profitability. As we mentioned, we expect that StoneRiver contribution to our profit will start from Q3 onwards after the reorganization expenses related to the merger that we expect to have in Q2.

I would like to indicate that following the StoneRiver acquisition, we expect our tax rate to be in the level of 25%. In addition, as we finance the transaction from our internal sources and some bank debt, we will have financial expenses rather than financial income in 2017.

As a summary, I would like to mention the following. Post-acquisition, our insurance revenue will account for approximately 90% of our total revenue, an increase from 80% in 2016. We will significantly enhance our North America presence which would represent 50% of Sapiens total revenue in 2017 versus 34% in 2016. Sapiens organic growth on a standalone basis and on constant currency basis is between 12% to 17% in 2017.

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

Thank you, Roni. Our fourth quarter marked by strong financial performance based on our business model that generate revenue from diverse and complementary suite of solution and core geographic and product sets. I'm pleased with our continued geographic expansion, our organic growth and opportunity we see to accelerate our businesses with M&A activity, particularly with the close of StoneRiver. We are confident that we will continue to deliver strong performance in 2017.

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

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) Bhavan Suri, William Blair.

Hi everybody, thanks for taking my questions and nice job on the quarter. As we look at the acquisition here obviously that's a big part of sort of the 2017 and 2018 strategy. Just a little bit more color on what you think the synergies there could lead to? So, operating margin of 8% today, but post synergy, what margin do you think that business could have?

Hi Bhavan, this is Roni G. StoneRiver acquisition is a strategic acquisition to Sapiens. We mentioned all the positive impact on penetration to the state and significant customer base that will allow us to grow in the future. We are in the business on the insurance and obviously impact takes time, we are in long sales cycle and obviously would like to integrate this in a very conservative mode. So I assume that we'll see impact only in the second half of 2018. On a consolidated basis, we mentioned this year about 13%, but we have a plan to reach 15% on the second half of 2018.

Got it. And if you look at StoneRiver's business model, you said it's sort of very similar to Sapiens, lots of services with customers, obviously with your acquisitions in Poland and India, you move some of the services offshore, which has helped margin. How much of StoneRiver's services piece is offshore, is that an opportunity for margin expansion within that business?

Yes, StoneRiver today have some offshore capabilities, less than Sapiens. We are already in discussion how to can integrate this with Sapiens offshore. Again, obviously this will take time, but they are slightly below Sapiens. We are today 20%, slightly below and they are about half of us.

Got it, got it. Okay, maybe one for Roni Al-Dor here. You enter the P&C market through a couple of acquisitions now in the US, some are lower tiers, but as you think about the next, not even the next year, but the next 12, 24, 36 months, do you think that there is an integration between IDIT and the StoneRiver products to start targeting Tier 1 P&C carriers in the US, or do you think its -- IDIT is not going to come to US, you're just going to take the StoneRiver products and enhance those to target Tier 1 P&C carriers. How should we think about that technology offering and then the opportunity over say 24-36 months?

Yes hi, Bhavan. So we made a strategic decision not to penetrate with IDIT to the US market and the main two reason is one, we believe it will cost us a lot and will take us many, many years and we decide to show the time to penetrate to the US. So, and that's one, so in terms of US, we would like to invest in our Stingray product for the lower tier and niche area. And this is -- looks very promise right now and we believe that [stream] that is a new product that built of many, many years experience and already in production. We can see that together with our knowledge in our marketing and sales, we can grow in US market. In terms of synergy, everything around digital and analytics and if you think on the underlying technology, we definitely see synergies. So we plan to use the same portal and analytics that we are building, by the way, not just for the P&C for all of our products suite, fully integrated with StoneRiver product.

And then, one last one from me if I might here for maybe both of you. If I look at the growth rates you've given us on organic basis, obviously currency excluded, and then I tie that to StoneRiver's $80 million run rate. If feels like there is a small gap there, just trying to understand, how conservative you guys are being or what the revenue decline in some of the lines at StoneRiver that you're divesting or not investing in or just letting sort of churn away looks like. How should we think of the puts and takes between the 12% to 16% organic growth, and then, you add StoneRiver to that, which should be sort of say, as you said $80 million run rate stable, it feels like there's little bit of gap, help me walk through that please.

Hi, Bhavan, this is Roni G. I'd like to explain this. So, I'd like to split the answer into to StoneRiver and Sapiens, and I would like to start with Sapiens. In the call, we mentioned that Sapiens took a strategic decision to deemphasize the non-insurance or financial services in territories that are not a core territories for Sapiens. Core territories for Sapiens, for example are the state, Europe and Israel. The level of revenue that we are talking about is very close to around $20 million. The reason that [we are doing] this, again it's not the core business of Sapiens and profitability in that area is low. So, if we take our revenue 2016, excluding this revenue, and let's take for example, 13%, not [15%], 13% organic growth, plus the devaluation of all currencies against the dollar that around make us loss about $10 million, adding StoneRiver on a pro-rata basis, we will get the level revenues we indicate $270 million to $280 million. On the StoneRiver part, as we mention, although 2016 was $80 million, we only consolidate this in pro-rata and some of the revenue of StoneRiver will not continue with us to 2017. The reason for that we have some duplication of revenue, some revenue that are related to the same product that obviously will impact 2017 revenue. So combining the two, Sapiens strategic DECISION, the [currency] and StoneRiver, this is the revenue level that we achieved.

Tavy Rosner, Barclays.

Hi, everyone. Thanks for taking my questions. Mostly on the guidance if I may, You talked a lot about the different assumptions. Could we start with what you mentioned by deemphasizing on certain activities. How does that work? Are you planning on selling or divesting some of these businesses? I'm thinking about how this decision fits into that. And then, you said that those activities were structurally less profitable, so assuming that you no longer emphasize on them. What the impact to operating margin net-net, without those.

Hi Tavy, this is Roni G. So just to clarify, Sapiens focused today on the insurance and financial services and when I'm saying financial services, I mean, DECISION. So this is -- will our core focus. When I'm saying is not on the insurance or financial services, we also mentioned not in the core territories, which mean all the revenue in USA as well in Europe will remain the focus of Sapiens. So taking the revenue which is outside of what I just categorized, we analyse the profitability of 2016, we'll reach without taking -- including the currency effect about 15%. The reason for that we are doing project with very low margin that yes grow our revenue, but do not contribute to the bottom line. Together with StoneRiver that allows us to grow, we took this decision together and what we are doing, we are continuing the activities there but with much less effort on getting new project on this product line. This is the reason for the revenue drop. So we're not going to close, we are just going to reduce the effort of revenue [there].

Okay that's helpful. And do you have a sense, I mean, looking again at the revenue guidance when you make all the assumptions together, lots of moving parts there, but you get a sense of how much of the revenues from StoneRiver will remain over time, is that perhaps something like in the range of half of what they were last year. Do you have a way to quantify that?

Yes. So I think we mentioned in the previous call two weeks ago that historically StoneRiver revenue were declining. This year, 2016, sorry they close at $80 million, with some products which are growing, some stable, some in decline mode. With our analysis, we still took a reduction in revenue. We see this, we see the net customer that will not continue. We see the duplication on revenue and product. So on the maximum side, let's say, up to 10% this is the maximum, but this year will be stabilization year for us. We are putting a lot of effort on our sales and marketing, our infrastructure in the state and we believe, we can turn this around in 2018 going forward. We need to understand that the sales cycle in this business is long and its taking time. So we will see the fruit in 2018.

And looking beyond 2017, after you've integrated StoneRiver, so you see yourself as continuing to grow at the same organic gross rate 12% to 17% beyond 2017?

I will not say 17%, we all the time say 15%. We are not giving probably guidance for next year, but with the effort of Sapiens, I'd say the same level of Sapiens.

Avishai Kantor, Cowen.

Thank you so much for taking my question. So my first question is going back to the guidance. So you're talking about 12% to 17% organic growth in constant currency. What needs to happen in order for us to reach the higher range, the higher end of that range?

Hi, Avishai, this is Roni G. In the business there are lot of ups and down. We are having right now significant opportunity in front of us in terms of pipeline. I'm talking about Sapiens right now. Historically, not all of them happen, but some of them are very close and with very high probability. So you can imagine management is totally focused on these deals in order to close this, but we would like to give the range. And I would assume that let's take the mid-range. I think a lot of impact was with currencies, if I'm taking the pound, the Brexit which happen only in second-half of 2016. This year will be a full-year impact on Sapiens also the euro right now. So just imagine that very slightly change in currency and we'll see additional drop, but we're not building on that.

And my next question, it seems like you implicated there is some overlapping clients between you guys and StoneRiver, can you give us a sense how many clients overlap?.

Not a lot, very few, but I say to be conservative, very conservative approach, I would say up to 10% of revenue duplicate of [clients] and product line and customer that will not continue.

Thank you so much.

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Al-Dor to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the US, please call 1-888-326-9310. In Israel, please call 0-3925-5904 and internationally, please call 972-3925-5904. Mr. Al-Dor, would you like to make your concluding statement.

Thank you, operator, and thank you to all the participants for joining us today. Have a good day.

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