Sapiens International Corporation NV (SPNS) 2021 Q4 法說會逐字稿

Welcome to Sapiens International Corporation's 2021 Fourth Quarter and Fiscal Year Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded February 23, 2022.

It is now my pleasure to introduce your host, Tally Kaplan Porat, Director of Corporate Marketing. Thank you, Tally. You may now begin.

Thank you, and good day, everyone. Sapiens' fourth quarter and full year 2021 earnings release was issued before the market opened this morning and has been posted on the company's website at www.sapiens.com. Representing Sapiens on the call today are Roni Al-Dor, President and CEO; and Roni Giladi, our CFO.

Before we start, I'd like to remind everyone that this conference call may contain projections or other forward-looking statements. The safe harbor provisions in the press release issued today also apply to the content of the call. Sapiens 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. On our call today, we will refer to the 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 Sapiens' website or via the website link, which is available in the earnings release we published today.

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

Thank you, Tally. I would like to welcome everyone to our call today to review Sapiens' fourth quarter and full year 2021 financial results. I will begin with highlights from our financial performance and give an overview of our progress in 2021, followed by Roni Giladi, who will review the financial results and our outlook for 2022. Before I begin, I would like to congratulate my global team on the outstanding job they did in 2021, often under challenging global market condition. The team's efforts result in another year of record revenue and delivery excellence for the benefit of our customers.

Starting with brief comment on the financial results. Sapiens finished the year on a strong note, with fourth quarter revenue growing 16.4% to $119.9 million and operating profit of 18% on par with last year results. We maintained profitability despite the increase in employee costs and higher than normal attrition in the second half of 2021, which our industry and many sectors continue to face. For the full year, revenue increased by 20.6% to $463.6 million, and we delivered an operating margin of 17.6%. These record results are a direct outcome of our talented team, who together with the quality and diversity of our product lines validate our strategy. Sapiens' global customer-centric approach deliver consistent long-term growth, profitability and cash generation.

Our strategic priorities are the platform for our success, continuous product innovation and expansion of our offering, our Land-and-Expand approach, both geographically and with existing clients, and providing exceptional value to our customer across their life cycles. All of these strategic elements provide us with numerous growth levels. We continue to execute on our one-hand-to-shake business model. Our approach combines cloud-based digital insurance platform with high-quality program delivery, professional services and cloud managed services. This model brings value to our customer as we are committed to a successful delivery.

At the same time, this model brings value to us, allowing us to benefit from a robust sticky revenue model with a significant percentage of recurrent revenue. We have delivered 17% compound annual revenue growth over the past 10 years and more than doubled our annual operating profit from 8.5% in 2017 to 17.6% in 2021. Part of our long-term success is the result of evaluating strategic additions or change to our business model to fuel future growth. Currently, we are exploring ways to leverage our platform with new distribution relationships that can maximize customer acquisition in key markets. As a result, we are initiating partnerships with a few leading global system integrators for specific segments of our businesses. We are in the early stage of this conversation and we are encouraged by the level of interest. Looking ahead to 2022, we will continue to execute and grow while navigating the challenges that global businesses face in the current environment.

Shifting to our regional performance in 2021, starting with Europe. Europe was a leading growth region for Sapiens in 2021, and it's projected to continue this robust growth in 2022. Revenue increased 38.5%, making 2021 of the best year for Sapiens in the region. We signed multiple new logos across various segments and we saw a substantial increase in our average deal size in the region. Important trends we experienced are in the increase in our engagement with the Tier 1 and 2 and the growing interest in Life and P&C transactions. In addition, we are seeing traction from global carriers seeking a single solution that can be deployed across multiple territories. These trends that emphasize Sapiens' differentiators in the market. We gained industry analysts' recognition and won several key product awards. The continuous recognition of our European offering by Celent and Gartner bring further competitive advantage to Sapiens.

In fact, we were the only one vendor recognized as a leader in 2 Gartner Magic Quadrant in Europe for both Life and P&C. We experienced substantial growth in the Life & Annuity and P&C, thanks for the differentiation of our technology, functionality and product excellence, together with our delivery capabilities. Sapiens is successfully building long-term relationships with customers across tiers, including Tier 1 companies in European countries, where we have an established presence. We continue to add excellent references in the region, supporting our future growth.

Our business in Europe also accelerates, thanks to the recent acquisitions in the Iberia, which includes Spain and Portugal, DACH, which include Germany, Austria and Switzerland, and the Nordics, which include Denmark, Sweden, Norway and Finland. These acquisitions are example of our successful Land-and-Expand strategy. Our market expansion brings influential customer reference and benefits of our local presence, promoting robust growth and pipeline build. In 2021, we completed the Tia integration across products, employees and customers. We are enjoying tremendous benefits from the acquisition, which enhance our already strong market presence in the Nordics. Tia's customers showing increasing interest in Sapiens' offering, which we anticipate will contribute to our growth in 2022.

As with prior acquisitions, we have improved the profit margin contribution for this business. In German speaking region, we have growing P&C pipeline and have successfully closed new businesses. In this strategic market, the combination of organic investments supported by local presence via the sum.cumo acquisition has contributed to growth of our businesses and successful customer delivery building our pipeline for growth in 2022. Our positive momentum in Life & Annuities in Europe is a mature and advanced pipeline representing significant engagement with Tier 1 and Tier 2 customers. Sales process with higher tiers can be lengthy, and we expect they will mature to full deals in 2022. Also, the APAC and South Africa regions continue to show growth. In these 2 markets, we enjoy growing traction and market recognition, which we expect to continue well in 2022.

In APAC, Sapiens was selected by BKI, a Thailand's leading non-life insurance for one of the largest digital co-transformation in APAC. BKI deploy multiple solutions from Sapiens that lowered their operating costs, improve underwriting and claims decisions and accelerate their product innovation for BKI. In South Africa, Sapiens' cloud-native digital solution were selected by Absa, one of South Africa's largest financial institution, in their transformation from legacy system to launching its full digital insurance products.

Now let me move to update on North America. In the North America region, we have built a strong foundation for growth across people, products and practices. Under the leadership of Jamie Yoder, we have built a team that is scaling up the organization and accelerating our delivery. The pipeline is growing, and we are optimistic that we can deliver improved growth in the second half of 2022. Overall, our P&C businesses in North America is continuously improving with stronger delivery capabilities and higher caliber professionals who have joined the team. We expect to see new wins and growing revenue in our P&C businesses in North America later 2022. The U.S. workers' comp market is starting to recover after being impacted by the employment market slowdown.

Our team is reengaged and we're anticipating regaining traction in the second half of 2022. I'm pleased to say that our Life & Annuity business is gaining momentum again in North America. Our product and platform investments are producing results across both our core solution and component. Guardian Insurance is an excellent example where Sapiens' Life components were implemented with analytic solution to provide cutting-edge underwriting capabilities. Our pipeline for CoreSuite for Life & Annuity is also growing. And in Q4, 2021, we were selected to perform a blueprint process with the North American carriers, which is the last stage before full deal closure. We are confident that our Life & Annuity businesses can deliver revenue growth in 2022 and build a solid pipeline towards 2023.

Other part of our North America business like Reinsurance and DECISION continued to grow steadily, building a solid pipeline for 2022. We announced an important win with DECISION at GUARD, Berkshire Hathaway Companies, a solid validation of our platform value to carriers and one that enhance our brand in the market. In third quarter of 2021, Physicians Insurance select Sapiens to transform its reinsurance process and move to the cloud.

Physicians deployed ReinsurancePro to replace their legacy process and automate their reinsurance for efficient processing and management. I'm encouraged to see the team achieving wins on this level. On the product front globally, let's look in how product innovation is lending new businesses. I started before that one of Sapiens' top capital allocation priorities is R&D. Again, in 2021, we saw a commitment to innovation and our ongoing platform improve yield return. Our cloud and digital offering, along with our DECISION platform, where growth levers for Sapiens in 2021, reflecting our investment over the past few years.

We have consistently enhanced our cloud proposition. Today, our solutions are increasingly cloud-native offering our customers greater scalability and performance. As a result, 90% of new deals are now delivered on the cloud, which increased recurrent and reoccurring revenue. We went live with Hiscox Europe on the cloud to deliver on their vision to build special pan-European insurer. The Hiscox Europe go-live in Germany is the first multi-phase strategy with 5 additional European countries to follow. Hiscox Europe needed solution to replace legacy platforms and tools that would allow them to adapt to market evolution quickly. This customer is an excellent example of our ability to deliver our multi-platform product line on the cloud in a global solution for a large multi-national company.

In October of 2021, KW Specialty chose and expand Sapiens' relationship moving reinsurance management delivery on the cloud. KWS is benefiting from 24/7 accessibility and agility of the cloud and benefit of access to managed services. This was a significant upgrade from their legacy spreadsheet-driven process and expand KWS competitive edge. A primary goal for our product innovation is to assure an excellent customer experience for our clients. Therefore, a key focus is our ongoing development and improvement to advanced functionality of our digital offering. Our DigitalSuite include a wide range of advanced digital solution. Companies can rapidly deploy our digital solution as a pre-integrated model together with our core solution or agnostically as a standalone module across their existing core systems.

For example, COPIC Insurance selected Sapiens DigitalSuite to allow agents and staff to manage its pipeline, sale policies and provide high-quality customer services in real-time. COPIC values Sapiens' ability to improve the customer experience on multiple fronts, while increasing employee efficiency and processes. Another business lead innovation in our digital platform is our low-code no-code approach that allow customers to move into the new markets rapidly with a fully configurable process automation. Customers can benefit from our advanced analytics and machine learning capabilities to create predictive analytics and real-time analysis feature that can enable data-driven business processes. As I mentioned earlier, we announced that Guardian Group selected Sapiens to smartly automate their underwriting process. They chose Sapiens INTELLIGENCE to accelerate their life and health underwriting and leverage our best practice, various data sources and AI.

The Atidot Predictive Analytics, a long-term insurance partner of Sapiens was also part of this solution. Sapiens' extensive Insurtech ecosystem enhance the value proposition we provide to Guardian customer, promoting innovation and disruptive technology through open API architecture that delivers seamless customer integration. Our Sapiens DECISION is used by Tier 1 financial institution to modernize traditional business tools management and enable quick response to market regulatory change. In the past few years, we have won several DECISION contracts with Tier 1 carriers and have substantial growth, the penetration into the insurance market.

As part of our increased focus on innovation, technology and cloud services, we recently announced a new Chief Technology and Information Officer, Ilan Buganim. Ilan brings vast technology experience from his numerous leadership position in both solution provider and client side. At Sapiens, Ilan will lead our cloud journey and digital offering, as well as develop a coherent view across our product offering.

Looking ahead to 2022, the global trends of accelerating digital transformation and changing customer expectation means that insurance must continue to modernize their system to remain competitive. Sapiens is well positioned to grow in its primary market. We will leverage our strongest (inaudible) record in Europe to continue the momentum in 2022 with a growing pipeline and in a few large deal with higher-tier customer moving to closing. In North America, we have done the groundwork to return our P&C businesses to growth in the second half of 2022 and into 2023. We are pleased with the improvement in Life & Annuity that should deliver growth in 2022 and with the ongoing success of Reinsurance and DECISION in North America.

Ongoing product innovation continues to earn industry analysts' awards and gain traction from the market. In most of our recent deals, we have provided customer with multiple software solution from Sapiens and the majority of our new wins are delivered on the cloud. And last, the expanding partner ecosystem collaboration helps our customers stay competitive in a rapidly changing market. We cannot ignore the challenge that 2022 brings. Together with our positive momentum with Tier 1 and 2 customers, the process of closing these deals, which are bigger in scope and size can be longer. That being said, we are confident that we can close these deals.

In digital transformation, insurance talent is critical in order to be able to successfully deliver the project. Sapiens is experiencing the same employment challenges that the global market is facing with the big resignation in one hand and rise of employment costs on the other hand. We are building mitigation plans to address these challenges, leveraging our global presence, our nearshore and offshore location, and growing partners' network we are building. Growth, profitability and high cash generation are hallmarks of Sapiens. Our solid footing in the global insurance market and ongoing recognition of our value proposition position us for continued success. We remain committed to execute our strategy to deliver growth and improve shareholder value.

Now I would like to turn the call to Roni Giladi, our CFO. Roni?

Thank you, Roni. I will begin my commentary with a review of the fourth quarter and the full year of 2021 non-GAAP results, followed by comments on the balance sheet and cash flow, I will wrap up with our guidance for 2022. Revenue in the fourth quarter of 2021 increased to a record of $119.9 million, up 16.4% from the fourth quarter of 2020. Overall, organic growth this quarter was 11.6%, and the rest was Tia 2 months revenue contribution in the quarter. Currency in this quarter versus last year was a headwind in the amount of $1 million to our revenue.

Our revenue in North America was $48.9 million compared to $47.3 million a year ago. We grew 3.3% organically after a year of stabilization in North America. At the same time, we remain stable at the level of Q3 of 2021. Revenue in Europe reached $62.4 million, up 26.8% compared to a year ago quarter. This growth continued the strong momentum we have in Europe. Rest of World, which represents APAC and South Africa grew from $6.4 million to $8.6 million.

Moving to gross profit. Gross profit in Q4 of 2021 was $53.9 million, up from $47 million in Q4 of last year, an increase of 14.6%. Our gross margin this quarter was 45%, slightly below 45.7% in the comparable quarter. This result is despite the global increase of labor costs. In addition, if we eliminate currency headwinds, our gross margin would have been 1% higher and at 46%. Moving to operating profit. Operating profit this quarter was $21.6 million, up 15.7% from $18.7 million in Q4 of 2020.

Operating margin was 18% this quarter, mostly unchanged from 18.1% in the fourth quarter of 2020. Again, we reached operating margin despite facing challenge from global increase of labor costs and currency headwinds. Net income attributed to Sapiens' shareholders for the quarter was $17.7 million, up 22.3% from $14.5 million in Q4 of 2020. EPS for the quarter was $0.32 per diluted share compared to $0.27 per diluted share in the fourth quarter of last year, reflecting EPS growth at 18.5% on a higher share count.

Turning now to our full year results for the 12 months ended December 31, 2021. 2021 revenue increased to $463.6 million, reflecting strong growth of 20.6% and in line with our guidance at the midpoint. This revenue level was achieved despite the challenge of higher than normal employee attrition rates, generating a revenue challenge. Growth this year came mainly from strong momentum in Europe and Rest of World. Europe is representing 51.7% of our total revenue, while North America, 40.8% and Rest of World, 7.5%. Our P&C and Life & Annuities are significantly the largest product lines and represents 92.5% of our business. Revenue from our P&C product line grew by 21.9% and Life & Annuity by 22.1%, while DECISION and Technology product line grew together by 5.7%.

Our revenue diversity is also represented by the spread of revenue among our customers. Our top 10 customers represent 21.3% of Sapiens' revenue and the largest customer represent 4.6%. Organic revenue growth in 2021 was 10.8%, while M&A contribution was 9.8%, which totaled 20.6% of overall growth. In the full year of 2021, we had currency tailwinds, which supported our revenue growth by 2%. M&A contributed was $37 million, which include revenue from sum.cumo, Delphi and Tia. In 2021, we did not close any new M&A transaction as the valuation of deals under consideration were relatively higher compared to previous transactions we completed.

Operating margin reached 17.6% compared to 17.7% in the previous year. Operating margin this year was affected by cost increase in onboarding and training of new employees, as well as increasing IT global salaries. In addition, we see low profitability in CoreSuite North America due to additional investment in product and delivery in order to return back to growth. Currency tailwinds was minimal at 0.1%. Solid revenue growth and diligent management of our operating expenses resulted in operating profit in 2021 of $81.4 million, a 19.9% (sic) [19.8%] increase from $67.9 million in the previous year. EBITDA increased by 19.5% to $86.8 million in 2021. Our adjusted EBITDA margin for 2021 reached 18.7%. EPS per diluted share reached $1.18, up 18% from $1.00 per diluted share in 2020.

Turning to our balance sheet. As of December 31, 2021, we had cash and cash equivalents and short-term deposits totaling $210 million and total debt of $100 million, which will mature in the next 5 yearly equal installments. Touching upon adjusted free cash flow. During 2021, we generated free cash flow of $68.8 million, which represents 105% of our non-GAAP net profit. The solid and strong performance reflects our proven ability to convert net profit into cash generation and emphasize Sapiens' strength and ability to generate free cash flow. During 2021, Sapiens' free cash flow grew by 38% compared to 2020.

I would like to turn now to our guidance for 2022. In guiding our 2022 revenue, we are taking the following into consideration: one, foreign exchange rate may also be unfavorable headwind in 2022, which could impact growth. Today, 60% of our business is in Europe and Rest of World. Recurrent currency compared to average of 2021 create headwinds to our revenue of about 1.8% of growth.

The Great Resignation phenomena is reflected in the IT sector and our business, and is seen by increased attrition rates and recruitment difficulties. On a positive note, despite the higher attrition rates, we have been able to recruit new employees to support our growth. Following those reasons, in 2022, we expect revenue in the range of $495 million to $500 million, which translates to year-over-year growth of approximately 7.3% at the midpoint.

If we eliminate currency impact, which today are headwinds to our numbers, our revenue at the midpoint would have been $8 million higher with organic growth of 9.1%. While guiding the full year revenue, we anticipate Q1 '22 to be lower than Q4 '21 and at the level of $116 million to $118 million. The main reason is go live of several customers by end of 2021. And a few prospective customers with significant deal signs have advanced to a blueprint phase, we expect this will contribute to our growth in H2 '22 and a major impact into '23. On the profitability side, we are guiding our profit margin to be the level of 17% to 17.3%. When analyzing our yearly profit margin, we have been affected by currency headwinds at a level of 1% of operating margin. Without currency headwinds, our margin would expanded approximately by 60 basis points and reaching midpoint level of 18.2% of operating margin.

We anticipate that our annual effective tax rate will be in the range of 17.5% to 18.5%, representing approximately a 1% improvement versus 2021. On the M&A side, we continuously evaluate M&A opportunities. We see valuation change in the public market, which we assume will also lead into a change in the private company valuation. We continue to explore opportunities that we find a good fit to our strategy to deploy our current cash position.

I will now turn the call back to Roni Al-Dor. Roni?

Thank you, Roni. Sapiens is well positioned for future growth, performance improvement and expansion. We are exciting to see the growth opportunity and the increasing demand in the traction for our products and services in Europe and APAC. We are steadily improving our North America business towards growth later in the year, and we are working through the market challenges that we and our peers are experiencing. Our plans for 2022 were built based on cautious approach that takes into consideration these global challenges.

Sapiens' excellent track record in delivering growth and managing costs to protect and improve profitability will continue to lead us in 2022. We have a solid customer base, a world-class global team and industry-leading and diversified product offering and an outstanding balance sheet that provide the resource to grow our businesses. I'm confident that we will achieve our objective and enjoy ongoing success. Looking ahead into 2023. First, 2022 will be affected by high investment in North America in order to improve our growth in North America, which will affect 2023 Sapiens' total overall growth. Second, several global large deal will start in 2022 and will have significant impact in 2023 revenues. Overall, we expect improvement to our growth rate in 2023.

I would like now to close our prepared remarks and open the call for questions, please.

(Operator Instructions) The first question is from Mayank Tandon of Needham and Company.

It's actually Kyle Peterson on for Mayank. Just wanted to touch a little bit on the puts and takes for the margin outlook. It seems like at least on a reported basis, there's kind of 30 bps to 60 bps of year-over-year pressure in the guide. It sounds like at least a decent chunk of that is FX related. But just wondered what -- if you can walk us through some of the changes, the impact of the investments in North America, as well as kind of wage pressure and how we should think about some of the puts and takes on margin, especially as the year unfolds?

This is Roni Giladi. With regard to guidance, you asked about the margin expansion or margin decline this year and the guidance. We closed the year at 17.6%, and we are focusing to have margin between 17% to 17.3%. Several elements have affected this margin. The first one, which is the currency headwind. We estimate recurrent currency to have an impact of about 1% on our margin. If we add this, we are already above what we closed in 2021.

The second thing is the phenomena about the Great Resignation. We have experienced in other software companies, higher attrition rates and onboarding, which cost us more money in order to turn the employee. This also have effect on costs. In addition, salary or labor cost was increased dramatically or significantly versus last year. So all to all, these 3 reasons impacting our margin. But at the same time, we've been able to increase our offshore, offshore at Sapiens grow and offset some of the impact that I mentioned earlier. So if I need to summarize, we are expecting to be without currency impact at the level of 18.2%, but with the currency headwind, we are between 17% to 17.3%.

Okay. That's really helpful color. Maybe just a follow-up on some of the trends you guys are seeing in the ROW regions, just it sounds like APAC and South Africa, those regions seem to be growing really, really strong. Just wondered what do you think is the biggest driver behind some of the growth in those regions? And how should we think about kind of that business in '22 and the growth outlook as well?

This is Roni Al-Dor. As I mentioned in my discussion, we are seeing growth in the other -- what we call Rest of the World, including Europe, Asia Pacific and South Africa. I think there's several reasons for that. One is our product offering, the recognition that we got from Gartner and Celent, the reference, the -- our business model as an SI, all-in-all, together, including the digital offering, the managed service, the cloud services and so on. And also in terms of the competitor landscape is also helping us. We still have a huge advantage against the competition at this moment. So this is the reason that we have continued to see the growth. And in Europe, we really become a market leader in so many products. So this is why we feel comfortable on the growth.

One comment from my side, when we're analyzing the growth in APAC and South Africa, there is some part of M&A impact into this. Although the growth is still high, above 20%, some of additional revenue came from the acquisition of Tia and Delphi at this region. So all-all, we are doubling -- growing double-digits very nicely, but there is also (inaudible) M&A.

The next question is from Jackson Ader of JPMorgan.

On North America, I'm just curious for either looking into '22 or '23, what do you guys think needs to happen? Is it execution like literally just getting pen on paper? Is the product not there yet in P&C? Is it a go-to-market initiative that really needs the headcount? What are the reasons why the second half of '22, the bookings should be better and then heading into '23 growth should be better on the revenue side?

Hello, Jackson, this is Alex Zukerman. Looking at our operation in the North America market, we can look at several aspects of this business. Looking at our Life operation, we do already see an increase in revenue, an increase in pipeline and a strong traction in the market. And when we look at our Life component, we see not only an increase in the partner already this year, we expect a growth in the revenue. And in 2023, we hope to see even larger growth based on the success of 2022.

When you look at our CoreSuite Life, Life & Annuity, our policy administration system for the North America market, we have penetrated during 2021 to the market, started to do more activities. We secured 2 blueprints, which for us, a blueprint is the last stage in the process before the concrete deal and the start of the implementation. So we secured 2 during 2021, and we will see the revenue and the business grow in 2022. And based on that also, we expect a substantial growth in 2023. So that's on the Life business. Similarly in DECISION and Reinsurance, we see a steady growth year-on-year in both those businesses, very steady market leaders, and we foresee the continuation of this trend.

Looking at our P&C business, as we also talked before, during 2020, we had a significant growth in terms of new business and new projects, which eventually in 2021, we had a lot of delivery challenges to be able actually to comply with all those new customers. And the business of delivery went into some difficulty, and this is what we did during 2021. There's a lot of effort in structuring and taking this business back to proper delivery. This also includes bringing new people like Jamie Yoder, that also brought additional management members to enhance our capabilities around delivery and strengthen the operation, and we do foresee some growth already in the later part of 2022.

Jackson, if I may add also regarding North America and the margin, if I look at all the business of Sapiens, all of them are profitable. We and the management have decided to invest more on P&C costs with North America on the product and delivery. So this is the one area that is not profitable, obviously, affect the margin, but we -- intention to improve growth later end of this year and 2023. So also a combination with margin about the situation in P&C North America.

Okay. All right. Great. And then a follow-up on the cloud. So Roni, you mentioned some -- the majority, I think of your new business was signed in the cloud. I'm just curious when the decision is made around a cloud deployment, does the architecture or the technology infrastructure mattering more than your kind of one-hand-to-shape bundling of products and services that you -- has been the Sapiens calling card maybe in an on-premise world?

We don't see a direct linkage between the 2 trends. So a cloud deployment is required by our customers due to the technology and the benefits they get from a cloud deployment. While the system integration part, we have chosen for that typically because customers believe in the efficiency of this model and in the one-hand-to-shape. However, there is kind of a potential linkage there because once these customers provide us with the trust of the full delivery, it's also easier for them to give us the full trust in -- into, not only installing it in the cloud, but also providing full cloud managed services around that. And there is a kind of a trust from those customers also connected to the fact they give us the trust on the implementation.

The next question is from Bhavan Suri of William Blair.

I guess let's just start at a high level, maybe for both Roni's. When you look at the next 12-month guide, you sort of said we're going to be conservative. We're going to be back-half weighted. We've seen projects sort of go live in Q4 '21, and so the services business that obviously ramps down once they're in production, but you have some big deals. I guess help us think through how conservative you're being with the big deals? If you've got 10, are you thinking 5 will close? If you've got 20, do you think 10 will close? How should we think about that? Even if you got the blueprint, some of those don't play out. Sometimes today's labor market, it's hard to find people, so they get delayed. Help us think through how conservative you are?

Bhavan, we are not talking about several big deals. We are talking about handful of big deals that can have impact on the revenue. And obviously, they are larger than -- not mega, but larger than the typical. We are in good (inaudible) with these customers. So obviously, doing due diligence both side, scoping, timing and also pricing on that. Traditionally, this take longer. We thought it will come earlier this year, but it take additional few months and therefore, the delay in the year, and therefore, the growth that we emphasize. We feel comfortable about the deal. We feel we'll sign them close to the end of first half of this year and have impact on the second half of 2022.

Yes. I guess just to be very clear, so you're assuming the deals that you have blueprints for, they will all close in the first half or do you think you've given yourself a little room in case they get pushed out?

We plan the revenue, by the way, not for all the deals, but most of them, again, handful, not a lot, that will come second half of the year in terms of revenue. So we'll close by end of H1, the revenue will be in [Q2]. Q3 (inaudible)

Got it. So then let's talk about labor, right? So that's a problem because we know people are hopping. There's a lot of wage inflation everywhere. Life in Israel has become very expensive than in many other places. Help us think through what you're doing specifically to offset some of the attrition challenges, because you need people to deliver, you need people to implement, you need people to do all the work. What are you doing to sort of address attrition, manage attrition? Can you buy another business in India like you have in the past to do that? Help us think through what you're doing to address the attrition issue?

I will...

No, no, go ahead.

Okay. So overall, the attrition was in 2021, and obviously, we've seen a higher than normal attrition rate. But I can say that the total number net employees in 2021 grew by almost 500 employees. This allow us to continue to grow. I call the Sapiens, like we have [3] firms inside the company of recruitment. We are recruiting, we have dashboard on a monthly basis on attrition and recruitment from all positions. We are focusing on position that around -- a team around them that can deliver people. And for those ones, we are basically making sure that the salary that they have, the one that we have in the company today match the market.

Obviously, there is increase in salary, sometimes even very high. But these guys surround them are about 20, 30, 50 employees sometimes in order to lead the project. We are focusing on promoting employee inside, this gives the motivation higher salary, and by doing that, we are also managing the attrition in promotion. So several things that we are doing. Overall, we are monitoring this very closely all the division. Each one of them have a target on a monthly basis in order to make sure that they can generate the revenue.

Got it. One last one for me, maybe for Alex and for Yoder, if he's on. But P&C North America, you said you're going to invest in the product and R&D and things like that in delivery. But I guess my question to you is, do you think it's product or do you think it's go-to-market? Like it's been a couple of years now, P&C North America has kind of not done well. You brought in April of last year, I think to sort of help drive some improvement. I think Alex said you're seeing some early signs. But do you think it's a product issue or do you think it is more R&D in the product which you mentioned or do you think it's a go-to-market awareness, brand perception, which is a slightly different investment or is it both? I'd love to talk through those 2 things.

Very well. I'll try to answer you, Bhavan. I think actually, we'll touch based on the 3 main factors that we see as a combination. In terms of, first of all, our brand recognition around P&C in North America, so this product is basically came to Sapiens through acquisitions of StoneRiver and then Adaptik and then creating this new product, and it takes time to push it stronger to the market and to have brand recognition and market recognition around the product being relatively new in the market as the combined suite. So this is one factor.

And we are taking some steps this year in specifically for North America marketing to improve our operations around it. The other point, as we mentioned before, it's around the organization. We felt the organization had the difficulty to cope with the level of the business that we had to deliver and maintain during 2022. Hence, the joining of Jamie and then joining of additional executive team, specifically around the P&C business to help drive customer engagement, scoping, doing better the scoping and the delivery part.

And the third point is definitely we invest and put substantial investment in the product level in order to ensure, first, it's that we are constantly upgrading the technology capabilities, but not less important, big part of our investment in the product is to assist in the delivery of the upcoming projects and all the delivery challenges. So around operability and around our ability to grow in terms of new resources, the recruitment and to make the onboarding faster and more template in order also to go to market faster and to help with the delivery challenges.

The next question is from Tavy Rosner of Barclays.

This is Chris Reimer on for Tavy. Actually, everything has been asked mostly that I was interested in. But on a technical issue, you've reported financial income as opposed to financial expense over the last 2 quarters, is that something you expect to continue or was that just a temporary impact?

This is Roni Giladi. With some currency hedging that we did, which obviously created income to us. I assume that we need to plan going forward about $3 million expenses of our debenture.

Expense?

Yes. Go ahead.

On a yearly basis?

Go ahead.

Sorry, you said $300 million on a yearly basis expense?

Again, this quarter, we had income because of the hedging, going forward into 2022, we should plan on a yearly basis, expense of $3 million.

$3 million. Sorry. Yes. Got it. And just touching on the operating margins, again, given what you mentioned already before, will we be still seeing the higher levels of R&D throughout this year?

As Roni and Alex mentioned earlier, we are focusing and improving our product. We've seen the report slightly increase in R&D percentage, we would like to continue. Roni mentioned, the joining of Ilan Buganim to the company in order to move most of the growth engine of the company to the cloud. So we'll see a slightly increase in R&D, correct.

The next question is from Omri Lapidot of Leumi Partners.

You're describing a lot of improvements, strong team in the U.S., strong momentum in Europe, yet 2022 guidance presents slowdowns of growth. Can you shed some light regarding this trend? How confident are you about regaining double-digit yearly growth in the future? What is the growth potential you see for the U.S. in 2023? Any light could help.

Omri, this is Roni. When we analyze 2021, we see clearly one area which is flat, North America and 2 areas that are growing very nicely, Europe and APAC or Rest of World. If we are looking also into 2022, we see -- we'll see some improvement, let's say, low single digits in North America and continuation of Europe and Rest of World. We will see -- and we are investing this year in order to see improvement into 2023 more in North America in order to take the entire growth rate up for the overall company.

If I analyze 2022 growth rate, we reported about 7.3% organic growth. but this include the currency impact. If we eliminate this, we are at 9.1% at the range or the level that we mentioned between 8% to 11%, this is what we are shooting. So if we are looking something more than that, potentially in 2023.

So you feel you can go back to double-digit growth in 2023, and it mainly depends on the improvement you're doing in the U.S.?

Correct. U.S. is 40% of the business. And in order to increase the growth on the overall basis, we need to do step there that Roni and Alex mentioned earlier. The answer is yes, correct.

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Al-Dor to go ahead with his closing statement -- there is an additional question from Surinder Thind of Jefferies.

This is Benjamin Huang on for Surinder. I was just wondering like in regards to sort of wage inflation and pricing, how has the conversation been with both existing and new clients? And are you able to pass some of the pricing over to the clients by any chance?

This is Roni. So far, we did slightly been able to do this, not in a significant level. If this will continue, I'm sure the trend will also be to push this to the customer or some degree, but as of today, very slightly.

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 2 hours. In the U.S., please call 1-877-456-0009. In Israel, please call 03-925-5900. And internationally, please call 9-723-925-5900. Mr. Al-Dor, would you like to make your concluding statement?

Yes. Thank you for taking the time to join us today and your interest in Sapiens. Thanks again, and have a good day.

Thank you. This concludes the Sapiens International Corporation fourth quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.