Sapiens International Corporation NV (SPNS) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, May 15, 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 provision in the press release issued today also apply to the contents 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 website or via the webcast link, which appears 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 reported this morning its first quarter results, reporting double-digit revenue growth driven by a mix of organic growth and M&A for our recent acquisition of StoneRiver Inc. However, offsetting these to some extent in the near term, particularly in operational profitability, were primary 2 factors: the halt of software development project with significant customer; and the beginning of integration of StoneRiver. Roni Giladi will go into more detail on both of those and others shortly, but we do face some challenges ahead in the near term.

The halt of software development project with significant long-term customer were certainly a major event. This impact both our revenue and gross margin. That said, we have a plan in place to improve our cost structure and to return to double-digit operational margin in the second half of 2017, and we believe we are on track with that plan at this time.

Turning to the quarter, we are reporting revenue of $56.5 million up to 14.1% over the first quarter of 2016. We believe market demand for our solutions remain intact and we have a solid pipeline of business ahead of us.

On the M&A front, towards the end of the quarter, we closed on our acquisition of StoneRiver. StoneRiver significantly expands Sapiens' presence and the scale in the North American insurance industry, and especially help us further acceleration our growing market footprint in the U.S. P&C and license annuities space. It strengthen our position as the leading innovating and global solutions provider, offering end-to-end solution to the global insurance industry.

Meanwhile, on the deal front, Alexander Forbes, a pan-African financial services group, selected Sapiens for its full portfolio, including Sapiens' ALIS for license annuity, Sapiens' IDIT and Sapiens' Reinsurance for Property & Casualty Insurance, together with the Sapiens' PORTAL, Sapiens INTELLIGENCE and Sapiens DECISION for decision management. This co-system will provide end-to-end integration digital capabilities across all lines of business, and Sapiens will serve as the primary implementation partner. We consider this as a major win, as this is the first time that the customer, which will certainly be a significant customer going forward, have chosen all of our solution, and they chose them all at the start of the relationship.

Also, we have already gained a new customer with our StoneRiver offering the Catholic Order of Foresters, and select StoneRiver's LifeApply and LifeSuite software solution. In addition, Hallmark Financial Services ensures in North America is now in production with StoneRiver Freedom Reinsurance System. These both are great example of the type of customer that Sapiens looks to gain in North America, with StoneRiver and other acquisitions, along with potential growth selling opportunities with our other co-Sapiens offerings.

After the end of the first quarter, we were selected by a leading Nordic insurer for modernization project worth over $30 million. This new significant customer select a wide range of Sapiens solutions to modernize its environment, including the Sapiens' P&C Solution IDIT insurance suite of policy, claims and billing; the Sapiens Reinsurance suite of product; and the Sapiens INTELLIGENCE and Sapiens total component of Sapiens' Digital Suite. Also, the insurance processing environment will be managed via Sapiens hosted services, leveraging the Microsoft Azure cloud environment. This is another great opportunity for us and it demonstrates the strength of our solution, delivery capability and commitment to the Nordic market, which will support out of our new head of office in Copenhagen.

We continue our renovation efforts in the first quarter. Sapiens unveiled its full Life Insurance Transformation Suite, which is now available for life and annuity provider at the 2017 Life Insurance Conference in late April, the leading event for the insurance industry. This new product suite is the result of Sapiens' strategic initiative, including an increasing investment in the company's digital vision and enhancing group, supporting Sapiens' ALIS as well as the recent acquisition of StoneRiver. All offerings can be deployed on premises or via cloud touch model, with the option of fully managed services model from Sapiens.

Also, during the quarter, StoneRiver enhanced its offering with the safe compliance management model for the eFreedom annual statement system that manage state forms for compliance with regulatory and statutory reporting standards. Nearly 80 companies have already select this product. In addition, within Sapiens' co-offerings, Sapiens launched the Decision upgrade Suite version 6.2, designed to reduce the costs of implementation and changing regulation and policies in support of accelerated application development. We continue to be recognized by outsider professional for our industry-leading offering. Earlier this month, StoneRiver was named among this year the "Top 10 Policy Administration Solution Provider" by Insurance CIO Outlook Magazine. This is the second consecutive insurance CIO Outlook Top 10 appearance for StoneRiver, having been named "Top 10 Claims Processing & Management Solutions Provider" in 2016.

To conclude my portion, I would like to summarize the key highlights. We posted yet another quarter highlighted by double-digit revenue growth, driven by a mix of organic growth and our acquisition StoneRiver. We won new customer and expand our business with existing customer. We are confident that we will continue our expansion and growth in 2017.

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

Thank you, Roni, and good morning, everyone. Revenue in the first quarter was up 14.1% from the first quarter of 2016. Our growth in the first quarter was impacted by several factors, both positive and negative.

One, on April 27, we announced the swap on a major software development project with a significant long-term customer has been ended. Due to this event, Sapiens had material impact on Q1 revenues. Also, we do not expect to generate any additional revenues from this customer in 2017. Please note that we are [encouraging] advanced discussions with the customer, and expect to reach an amicable solution shortly. The discussion are positive, and we expect to final settlement to provide, among other things, that the parties will have no future claim against each other.

Second, fluctuation in currency exchange rates also has an impact on our revenues. If exchange rates were constant, our revenue would have been $2 million higher compared to the comparable quarter last year. The difference is mainly due to the devaluation of the British pound. Third, and as we discussed previously on Q4 conference call, Sapiens made a strategic decision to de-emphasize certain elements of our noninsurance business in non-core regions, which resulted in a reduction of revenue in the APAC in the first quarter of 2017. Fourth, following the closing of the StoneRiver acquisition towards the end of this first quarter, we began to consolidate StoneRiver results, which offset the negative factor that we have mentioned above.

If we analyze our organic growth this quarter on a constant-currency basis, excluding the non-core revenue that we decided to deemphasize, our organic growth rate this quarter would have been 5% despite the significant impact of the loss of revenue due to the halt of the software development project. Without the impact of the lost revenue due to the halt of the development project, our organic growth rate would have been in the range of 15%.

Moving onto gross profit. Gross profit this quarter totaled $20.5 million compared to $21.6 million in Q1 of last year and $23.8 million in Q4 2016. Our gross margin this quarter was 36.2%, down from 43.5% in the first quarter of last year and 41.8% in Q4 2016. The decrease in gross profit and margin compared to last year was mainly due to the following. As previously discussed, in Q1 2017, we have planned for several million dollars of revenue associated with the customer [halted] development project. This revenue historically carried higher margin than the company average. Without this expected revenue to offset the cost we had incurred in the full quarter, the impact on the gross profit and margin was material. Additionally, the currency exchange rates impact on our gross margin was significant. On a constant exchange rate, gross margin [would have] higher by approximately 200 basis points compared to Q1 of 2016.

Moving to operational growth. Our investments in R&D and SG&A grew during this quarter. R&D expenses in the first quarter of 2017 totaled $7.3 million, compared to $4.6 million in Q1 of 2016 and $6.2 million in Q4 of 2016. The [increase in R&D expenses] this quarter compared to the first quarter of 2016 was the result of our continued investment in the development of the new group capabilities for Sapiens ALIS, Sapiens TOTAL, our Digital Suite, and included investments in StoneRiver. Please note that Sapiens' standalone R&D investments this quarter were comparable to those in Q4 2016. We are currently making elevated investments in StoneRiver relative to the revenue they currently contribute as compared to Sapiens standalone.

SG&A expenses totaled $11.5 million compared to $9.6 million in the first quarter of last year and $10.2 million in Q4 of 2016. Most of the increase was due to the first-time consolidation of StoneRiver. Our operating income totaled $1.7 million, 3% operating margin compared to $7.3 million or 14.8% operating margin in the first quarter of 2016. The reduction in operating margin is primarily due to the following: one, the decrease in gross profit, as I explained earlier; two, higher R&D and SG&A expenses as percentage of revenue in Sapiens standalone due to the decrease in revenue following the cancellation of the development project; three, a 120 basis point impact from currency exchange rates on operating margin on top of gross profit due to the strengthening of the Israeli shekel during the period. If we assume a constant exchange rate during the period, operating margin would have been approximately 6.2% compared to 3% reported due to 2% currency impact on gross profit and 1.2% on operational expenses. As previously announced in April, we expect operating profit margin for the first half of 2017 will be impacted, following the halt of the development project, and will be in the range of 3% to 4%.

Our adjusted EBITDA this quarter totaled $2.5 million, reflecting 4.5% of total revenue in the quarter. Financial expenses this quarter totaled $208,000 compared to financial income of $80,000 in the first quarter of 2016. The increase in financial expenses is mainly due to interest payment on the new $40 million bank debt used to finance the StoneRiver acquisition. Tax expenses this quarter was $324,000, representing effective tax rate of about 25.4%. Net income for the quarter was $1.2 million or $0.02 per diluted share, compared to $6 million or $0.12 per diluted share in the first quarter of last year.

Turning to our balance sheet. As of March 31, we had a cash and cash equivalent of $35.1 million, following the acquisition of StoneRiver of about $100 million. During the quarter, we raised $40 million in new bank debt to partly finance the acquisition in our working capital. The loan is dollar-based and paid equally every quarter over a period of 5 years. Operating cash flow this quarter was negative and totaled $7.3 million compared to positive cash flow in the amount of $4.5 million in Q1 of 2016. The main reason for the negative cash flow are operational loss of $2.2 million compared to operational income of $4.9 million last year, and increasing accounts receivable of about $10.5 million compared to $6.7 million in Q1 of 2016. The increase in trade receivable is mainly due to a shifting in time and payment milestones, which will be offset in the coming quarters.

I would like to turn now to our guidance for 2017. We'll reiterate our recently revised annual guidance for 2017. We expect revenue between $265 million and $275 million, representing annual revenue growth of 23% to 27%. This growth is despite a major any revenue loss due to the halt of the development project. However, the decrease is expected to be partially offset by the acquisition of StoneRiver and the planned revenue increase from new projects we have announced and expected announcement this year.

Moving to operation margin. Sapiens also expect its full year operating profit margin to be between 9% and 10%. We expect operating profit margin for the first half of 2017 to be between 3% to 4%, increasing to 13.5% up to 14.5% in the second half of the year. To return to double-digit operating margin in the second half of 2017, Sapiens began a restructuring and reorganization program at the end of the first quarter and continuing to the second quarter. We anticipate total restructuring cost in the second quarter of this year to be up to $5 million. This program will help us to reach our 13.5% to 14.5% operational margin goal for the second half of the year.

To improve our cost structure within this program, we are pursuing the following initiatives: cost savings and efficiencies, synergy and integration of back-office operation and delivery between Sapiens and StoneRiver, begin offshore program with Sapiens' capability for the StoneRiver operation and realigning the organization and shift employee away from the canceled software development projects to other growing vertical, and downsizing if necessary.

R&D. Combination in the R&D efforts for both companies, particularly those that can jointly exploit previously development assets and additionally, reducing the R&D investment in Sapiens standalone, following the completion of the development effort for both [our and] group capabilities. As you can see, we are acting upon several initiatives to improve our results going forward. The combination of these initiatives, together with the halt of the development project, are a challenging task, but we are confident in our ability to execute this initiative based on previous experience and following the action we already implemented.

I would like now to turn the call back to Roni Al-Dor for closing comments. Roni?

Thank you, Roni. Overall, we delivered double-digit growth for the quarter. We view the halt of the software development project with the significant customer as an isolated one-time event. We remain very excited about our acquisition of StoneRiver and its contribution to our overall business addressable market opportunity. Our businesses remain strong and customer demand for our products and services remain high. We are confident that we will continue to deliver growth in 2017.

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

(Operator Instructions) The first question is from Justin Furby of William Blair.

This is actually Bhavan for Justin. I have 2 quick questions. One, I wanted to start off with, could you give us a sense for the path forward in the retirement market, just some sense around investment there on the product side as well as go-to-market? And how does that opportunity compare, let's say, relative to life and P&C? And then I have a follow up on the model.

(technical difficulty)

Hey, were you able to hear me?

Can you repeat the question? I'm sorry.

Yes, sure. No worries. So again, Bhavan for Justin. So I wanted to start off with asking about the retirement market and the path forward in that market in terms of investment around product and go-to-market? And just how that opportunity compares to, let's say, life and P&C?

Okay. Roni Al-Dor, Justin. So there's 2 different market. The retirement market is big in terms of the player, but it's relatively small in the U.S. in terms of number of vendors. In terms of, say, competition, there are 2 main one, is DST and (inaudible) where 2 of them has legacy. One of them are more selling the BPO solution. The life system is all over the world in terms of the number of opportunities, by far much bigger than the retirement. But as well as in terms of competition, there's much more competitor than the retirement.

Got it. And then just a follow-up on the model, Roni G, I guess, this one's for you. So I know you've unpacked StoneRiver for the full year. But I was just hoping if you could give us the puts and takes in terms of the organic growth for the full year with StoneRiver, the deemphasis and then the roughly net $5 million that you're losing out from the project. So if you could just unpack that quantitatively, that will be helpful. And then I know that you don't guide the quarterly, but any sense for where that revenue might be coming out from the first half versus second?

Justin, this is Roni. So as we started in the end of the year, we gave guidance of $270 million to $280 million, and we mentioned that about 12% to 15% will be organic growth. About 2 weeks ago, we revised our guidance to $265 million to $275 million, $5 million less. This is coming from 2 verticals. So 2 factors. The first one is what we mentioned about the halt of the solution with a significant customer. Obviously, the impact from this customer was much higher than the $5 million. But due to our organic growth and recently significant deals that we signed, that we mentioned, one in South Africa and the other one is the Nordic, we are confident that we can capture this revenue from the halted project. And on top of that is StoneRiver. Currently, on the StoneRiver piece, we are -- we have the same confidence as we said in the beginning of the year. Obviously, we know them slightly better right now or better than what we knew before, but the overall confidence is okay, even slightly even better. So we do not revise the revenue that we say for them. So most of the revenue is coming from a consolidated StoneRiver end of Q3 and organic growth that offset the halted portfolio.

(Operator Instructions) There are no further questions at this time. Before I ask Ms. Yaffa Cohen-Ifrah to go ahead with a concluding statements, I would just like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1 (877) 456-0009. In Israel, please call (03) 925-5940. And internationally, please call 9 (723) 925-5940. Mrs. Yaffa Cohen-Ifrah, would you like to make a concluding statement?

Yes. Thank you, operator, and thank you, all participants, for joining us on today's call and have a great day.

Thank you. This concludes Sapiens International Corporation First Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.