Sapiens International Corporation NV

NASDAQ:SPNS

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2019 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, May 6, 2019.

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

[Yaffa Cohen-Ifrah, CMO & Head, Corporate Communications]

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 Sapiens 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 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 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 website link, which is available in the earnings release that we published today.

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

[Roni Al-Dor, President, CEO & Director]

Thank you, Yaffa. Sapiens continue to execute on our strategy to increase on our top line growth and improve our profitability. I'm pleased to see that our momentum for 2018 continued in the first quarter of 2019. In the quarter, we focus on achieving our key objective for this year: winning new customers; cross-selling to existing customers; building customer success team to support our growth; leveraging offshore capabilities and managing overall cost to improve operating profit. As a result of this focused approach, our revenue growth in the quarter accelerated due to our North America segment, which was 23% due to very strong gains in our P&C businesses as well as growth in our European P&C businesses.

In the quarter, we announced that Arizona-based KW Specialty selected Sapiens' cloud solution. Our Core Suite for Property & Casualty, ReinsurancePro will support KW Specialty's wholesaler distribution model, enabling them to support policy billing claims and reinsurance as they launch a new insurance carrier. We were also pleased to announce that Gjensidige Group selected our P&C and reinsurance solution over the cloud for its P&C and digital transformation project. This is a leading Nordic insurance group, and we are very pleased that they have selected our solution. The first phase of the agreement will support Gjensidige operations in Denmark as an option for expanding into other region and various Sapiens solution.

After the end of the quarter, we announced 2 more wins. The first was Folksam Group, one of the Sweden's largest insurance company, who selected Sapiens IDITSuite for Property & Casualty as its new digital core solution. The second was King Wai Insurance from Thailand that selected Sapiens IDITSuite for Property & Casualty to become the top digital insurance in Thailand. And lastly, a great example of cross-selling success in the quarter, Tier 1 South African bank chose Sapiens to expand their Property & Casualty solution offering. This was existing Sapiens' life and annuity client that select our IDITSuite for Property & Casualty to support the increased need and the requirement for their customer.

We have three important go-lives in the quarter. Georgia Farm Bureau with Sapiens P&C Claims solution to streamline their process and increase their speed to market for their North America insurance and agents. Catholic Order of Foresters launched Sapiens Electronic Insurance Application software to modernize their application process. Lastly, Oregon Mutual Insurance went live with our policy administration system on the cloud for its Property & Casualty homeowners line.

Our best-in-class digital P&C platform is winning new businesses and taking market share with its ability to offer and improve customer experience and highly configurable solution. Just after the end of the quarter, we announced the new version of Sapiens IDITSuite Property & Casualty, which feature automatically claims payment, next best action, providing instant claim payment to save time for agents and insurance and automatically identifying customer next best action, streamline process and increase customer satisfaction.

We are constantly improving our offering by leveraging our onshore and offshore R&D team and by expensing the global base of insurtech technology and companies available to us through our ecosystem partnerships. Today, have a comprehensive digital solution and digital hub that facilitates an open communication, API-based platform, enable carrier-fluid interactions within insurtech companies, ecosystem technology providers and business partners. We are well positioned to grow with state-of-the-art platform.

As we discussed in our Q4 conference call, we execute a complete rebranding in the first quarter of 2019. Our new brand identity highlights Sapiens as the unified global provider of insurance software solution. We have integrated 11 acquisitions and their various product into our offering and have now unified all these assets into a lustic brand, with new product names that clearly describe the main function of each product across our suite of insurance platforms.

In the quarter, we delivered an end margin performance with gross margin, operating margin and net income all improving compared to last year. To support our growth in U.S. and to build the pipeline for next year, we appointed a new head of U.S. sales and add 2 new executive to support our U.S. life and annuity sales activities. We are leveraging our offered capability to lower our overall spend, which help offset this planned addition to our sales and customer success team in the quarter. As a result, our operating margin expanded, and this led to an increase in net income.

I would like to thank the dedication of the Sapiens team in delivering these outstanding results.

I would like now to turn the call over to our CFO, Roni Giladi, to provide more details on our financial results. Please go ahead, Roni.

[Roni Giladi, CFO & VP]

Thank you, Roni. I will begin my commentary with a review of the first quarter non-GAAP results, followed by comments on the balance sheet and end with our 2019 outlook. Revenue in the first quarter of 2019 totaled $76.8 million, up 8% from the first quarter of 2018, reflecting the improvement in growth rate compared to last year. Our revenue in North America totaled $38.1 million, an increase of 22.9% compared to last year and an increase of 9.1% compared to prior quarter. Revenue in Europe totaled $32.2 million, a decrease of 6.6% compared to last year and an increase of 4.3% compared to prior quarter. Revenue in North America and Europe represent close to 92% of our total revenues.

Moving to gross profit. Gross profit totaled $33.1 million compared to $30 million in Q1 of last year. Our gross margin this quarter increased to 43.1% from 42.6% in the first quarter of last year and 42.7% in Q4 2018. The improvement by 50 basis points compared to last year is due to revenue growth and economy of scale and better cost structure following the increase in our offshore operations. Operational costs. In the first quarter, we continued our R&D investments and incurred investment of $10.2 million as compared to $10.3 million in the same period last year, a $9.7 million in the prior quarter. Although the total amount of R&D investment is generally flat compared to last year, our R&D headcount continued to increase as we manage cost effectively with onshore and offshore operations.

SG&A expenses totaled $11.2 million compared to $11.1 million last year and $10.8 million in the prior quarter. We continue to grow our sales, presales and customer success team to support our future growth. As a result of all of the above, our operating profit this quarter improved by 32.6% compared to last year and totaled $11.8 million or 15.3% operating margin compared to $8.9 million or 12.5% in the first quarter of 2018. This is the first time that our operating margin exceeded 15%. Our operating margin this quarter improved due to improvements in gross margin and R&D investment ratio.

Our adjusted EBITDA this quarter improved by 25.9% and totaled $12.5 million compared to $9.9 million in last year, reflecting 16.3% of total revenue. Net income attributable to Sapiens shareholders for the quarter was $8.4 million or $0.17 per diluted share compared to $6.3 million or $0.13 per diluted share in the first quarter of last year. While our revenue grew 8%, our net income this quarter increased by 33% compared to last year. Tax expenses increased to $2.3 million as compared to $1.7 million last year and with effective tax rate of 21.4%.

Turning to our balance sheet. As of March 2019, we had cash and cash equivalents of $63.4 million as compared to $64.6 million at December 2018. Our cash position remained at the same level, while we paid the first annual principal payment of our Series B debenture in the amount of $9.9 million in Q1 of 2019. Net cash provided by operating activity this quarter totaled $10.6 million compared to $9.2 million in 2018. This quarter, for the first time, we implemented; new accounting standard, ASC 842, which requires to present future commitment under lease agreements against assets for the right to use these assets. While there is impact on the balance sheet, there is no impact on the P&L.

I would like to turn now to our guidance for 2019. Looking out to the remainder of 2019, we anticipate the primary driver of growth to the continued expansion of our P&C segment in North America and Europe regions, along with stable outlook for our life and annuity segment. We remain confident in our ability to achieve our full year 2019 guidance. As a result, we are reiterating 2019 full year non-GAAP revenue in the range of $318 million to $323 million. We expect to see incremental revenue growth and growth rate throughout the year. In 2019, we anticipate incremental margin improvement quarter after quarter as we manage our cost structure, allowing us to deliver economies of scale with our current infrastructure. We are reiterating our non-GAAP operating margin in the range of 15.2% to 15.6%. However, we now expect to be on the higher end of this range.

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

[Roni Al-Dor, President, CEO & Director]

Thank you, Roni. After a year of transition in 2018 for Sapiens, I'm pleased to see the company back on track with growth and margin expansion in the first quarter of 2019. Our 2019 priorities are: continue to expand our P&C businesses in North America, EMEA and APAC; return our life and annuity businesses to growth; and deliver further margin expansion. I'm pleased with our execution in another quarter of solid operating results in which we execute well against our long-term strategic priorities of long-term growth, profitability and improving shareholder value.

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

[Operator]

[Operator Instructions]. The first question is from Mayank Tandon of Needham & Company.

[Mayank Tandon, Needham & Company]

Congrats on the results. For Roni Al-Dor first. Roni, could you talk about these -- the wins that you announced? Are these displacements of competing vendors? Or are you replacing legacy systems? And then, maybe just talk about like what is determining these client wins. Is it functionality? Is it price? Is it a combination of both? That will be helpful.

[Roni Al-Dor, President, CEO & Director]

Mayank, I think in the question you asked me, you answered also all the answers. So yes, we definitely signed a few deals in the quarter, and I think most of them on the P&C business, mainly in Europe. And when we say Europe, it's rest of the world and also in United States. In all the cases, we are competing with close to 90% with Guidewire. But also with the others. I think the main reason is definitely not the price. It's in terms of our functionality, our business model, that is one hand to shake, it's on the reference that they are getting from their clients, the confidence. And so it's a mix of all of this and then long term. We don't have any functionality issue right now. We improved our digital offerings, so we are good also on that area. And most of those companies, it's to replace their legacy system. And again, we are in a competitive situation. But we -- as you see, we signed deals.

[Mayank Tandon, Needham & Company]

Great. That's helpful. And then, I guess, the question for maybe for Roni Giladi would be a follow-up to that, would be you've had these deal wins. You had a strong first quarter to start the year, but you held your guidance on revenue intact. But just curious in terms of your thought process around potential drivers to that range. Are you being conservative? Or do you think like you'll deal with a time to ramp up, that's why you're holding guidance intact despite the strong deal activity in the quarter?

[Roni Giladi, CFO & VP]

Mayank, thank you. Beginning of the year, we started our revenue guidance at the range 8%, 10% organic, and we are maintaining this level. Basically, this is a slightly according or slightly higher than what we anticipated in the quarter. We will see the growth rate and, obviously, dollar value going up quarter-over-quarter as we continue during the year. As more deals will come, they are mainly on the bookings side. And the revenue and impact of that is not significant. Obviously, the deals that come early in the year are more significant ones. So we'll see increasing revenue and increasing revenue growth rate, but we are leaving a conservative revenue for the year.

[Mayank Tandon, Needham & Company]

Okay. And then one final question for me on margins. Obviously, really impressive performance on the margins side. It's good to see margins back to that mid-teens level. Just looking ahead, though, like what is the optimum margin level for the company and still growing at, let's call it, a low double-digit pace? And then maybe if you could talk about the levers that you still have to drive further margin expansion, if you can assume that going beyond 2019.

[Roni Giladi, CFO & VP]

Of course. So before we enter 2019, our midterm operational margin was between 15% to 17%. This year is the first time that we entered the range. We are right now at the level of 15.3%. And as we mentioned, we will see also here improvement on the operational margin as we continue quarter-over-quarter. The leverage that we have today are basically coming from twofold. The first one is the scalability. As the company is growing, some of the costs is fixed base, and therefore, there is operational leverage on that. And also operation that also improved. Today, we are almost 1,000 employees in India. This gives us a significant, powerful momentum to improve the profitability. We mentioned that the R&D, for example, stayed the same level, but we'd like to mention that we almost recruited 100 employees in India to this segment, to the R&D. So no, the growth is not significant in the dollar value. In terms of effort, it's significantly higher. This allow us to improve operational margin. Looking ahead, we're right now shooting for a level of 17% operational margin in the midterm.

[Operator]

The next question is from Bryan Bergin of Cowen.

[Bryan Bergin, Cowen and Company]

I wanted to get a sense of the overall macro -- North America has clearly picked up nicely. I'm just curious if it's all a function of the market share gains you're referencing or also to a pick-up in underlying demand. And then I'm just curious if you're seeing any noble changes in spending behavior from clients that may have seen recent M&A or leadership changes.

[Roni Al-Dor, President, CEO & Director]

We continue to see a growth in North America. We -- definitely, it's a competitive situation. But we are also -- based on all the acquisition, we are -- the range of the products that we are winning to the market is become big and big and big. We're also focusing on the lower tier and the mid-tier. So in general, it looks right now positive. We don't see any negative change at this moment.

[Bryan Bergin, Cowen and Company]

Okay. And then on the life and annuity business, you mentioned that it was your priority here to return to growth. Can you just talk about some of your top strategic priorities in that part of the business for you to get there?

[Roni Al-Dor, President, CEO & Director]

Yes. Right now, it's a steady state. Just to remind, we have 3 product offering. We have the what we call component is mainly North America, illustration underwriting. We have our cost suite for life is mainly right now in Europe, but we plan to put back investments for North America. We just hired 2 new salespeople in order to put more effort in that area. And where the consolidation matter, you see the area that is what we call the path close book. We plan to see more and more demand mainly in Europe. So the overall right now is steady state. But we believe, based on the booking that we plan to sign this year, we will see more growth in next year.

[Operator]

Our next question is from Tavy Rosner of Barclays.

[Chris Reimer, Barclays Bank]

This is Chris Reimer, on for Tavy. I was wondering -- most of my questions have been answered already. I just wanted to ask about North America and the increase there in revenue growth. What was basically driving that? Was it consolidation mostly?

[Roni Giladi, CFO & VP]

The North America growth is coming from the -- our product on the P&C market Adaptik integrated with Stream. We see high demand to this. We've been able to process several deals that impact the revenue. The pipeline also is looking good. So this is mainly P&C of North America.

[Chris Reimer, Barclays Bank]

Okay. And could you give any color on how many contracts are cloud-based? And what kind of acceleration you're seeing with cloud-based product?

[Roni Giladi, CFO & VP]

Yes. Out of the several deals that we announced recently, I would say 40% are coming on the cloud base. We see high increase in cloud-based RFI or RFP coming to us. More -- on the U.S.A., I would say more than 50% of the RFP are coming on cloud-base. And in Europe, slightly lower, I would say 30%, 35%. We obviously have been able to answer this on the demand level in terms of ability to execute and deal with all this.

[Operator]

[Operator Instructions]. We have a follow-up question from Bryan Bergin.

[Bryan Bergin, Cowen and Company]

Thanks for taking my follow-up here. I just wanted to ask on the M&A pipeline. Can you just give us a sense. You've obviously lapsed Adaptik by a year now, plus it's -- and that's integrated. Any comments on your key priorities in the M&A channel? And then how are you finding value on the channel?

[Roni Giladi, CFO & VP]

This is Roni again. Our last M&A was the Adaptik one that we did early in 2018 where we said that we are going to integrate this with Stream. We are right now a year behind, and we are feeling that the integration is fully completed. After this acquisition, we strategically met some slowdown on this vertical in the M&A side and focused on the operational side in terms of revenue growth and operational margin. In the last quarter, we mentioned that we opened our eyes on the scouting pay in terms of looking for customer base, geographic expansion, all complementary solution. We are looking right now on deal on the small size to medium size. I would like to comment that the pipeline is increasing. We are looking into it. This is our third vertical growth on top of new customers and existing ones. The valuation quite so is higher than what we saw in the past. The entire reinsurance market is in higher valuation. We are looking to do some potentially during this year.

[Operator]

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 1-888-295-2634. In Israel, please call 03-925-5918. And internationally, please call 972-3-925-5918. Mr. Al-Dor, would you like to make a concluding statement?

[Roni Al-Dor, President, CEO & Director]

Yes. Thank you to operator, and thank you for your participation for joining us today call. Have a good day.

[Operator]

Thank you. This concludes the Sapiens International Corporation First Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.