Sapiens International Corporation NV
NASDAQ:SPNS
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Sapiens International Corporation NV
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Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2020 Results Conference Call.
At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded, May 14, 2020.
With us on the line are Mr. Roni Al-Dor, President and CEO; and Mr. Roni Giladi, CFO.
Before I turn the call over to Mr. Roni Al-Dor, I would like to remind participants 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 views or expectations or otherwise.
During the course of the call today, 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 earning release that we published today. As a reminder, the 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.
I will turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?
Thank you, operator and thanks to everyone who is joining us today to review our first quarter financial results. I hope everyone is healthy and safe.
I will start with a review of the quarter, followed by an update on our businesses. Roni Giladi will follow with a detailed overview of financial results and share our outlook for the remainder of 2020.
Our first quarter performance reflects our continued focus on supporting our existing customers and closing new business. We reported 17.9% revenue growth in the quarter and increased operating margin by 80 basis points to 16.1% with both P&C and Life & Pension contributing to our year-over-year growth.
We maintained our momentum through the end of the quarter, signing several new logos even in late March after the COVID-19 outbreak started. Overall COVID-19 had only slight impact in the first quarter as we prioritize performance while adjusting our approach to operations. We worked closely with our large customer base, supporting them in the transition to remote work format and addressing the challenges they face in the transition. The vast majority of Sapiens' employees had a tool to work remotely with the required infrastructure and guidelines in place.
As a result, our transition to work-from-home format was relatively smooth. I'm incredibly proud of my team's hard work in this unique and challenging environment, and I would like to mention the fast adjustment that our customer did to shift to work remotely, and continued their customer services and transformation project.
Today, most of our deliverables to our existing customer continue as planned, and we see minimal impact in our revenue stream for existing customers. Having said that, we anticipate delay in the implementation of new customers on boarding later in the year.
We see three possible outcomes of new customers, number one, continuous plan entering the agreement with us, as this is a strategic step for them. Number two, entering blueprint as a starting point of the implementation. Or number three, placing the agreement on hold until there is less uncertainty from the COVID-19.
Again the overall impact of delay of new business is not material. As I mentioned despite the COVID-19 outbreak, we had several new wins and go lives during the quarter. And we have expanded our ecosystem of partnerships. Illinois Mutual Life Insurance chose Sapiens for its live digital transformation project. The American Insurer plans to deliver our Life & Pension offering to optimize sales, drive new business and provide superior customer experience.
Preferred Physician Medical Risk Retention Group went live with Sapiens P&C offering on the cloud. This client selected our CoreSuite as part of their technology and digital transformation strategy to support their growth strategy and NextGen customers. SA Taxi from South Africa went live with Sapiens Suite to offer its client new short term business insurance product.
Growing our business with our existing customer base has always been a priority for Sapiens and we do see more and more cross selling absolute opportunity across our portfolio. In February, one of our Tier 1 clients in South Africa went live with Sapiens P&C Suite. The selection of our P&C Solution followed the successful deployment of our Sapiens Life & Pension Suite.
As I mentioned earlier, we see many more selling opportunity with our existing customers. We are now enjoying the return on our investment in our Life & Pension policy administration business that include expansion into go live and improvement of overall technology stack of our Life & Pension Suite.
As I mentioned in our previous earning calls, our Life & Pension policy admin solution was awarded the excellent award for its advanced technology in January. In parallel, we started to see growing interest in our Life & Pension solutions. Following the COVID- 19, the life insurance market is already reporting a spike in the sales of new life policies, which we expect to accelerate further the monetization of Life & Pension system, which had slowed down in recent years.
This trend is already reflected in our growing pipeline for our Life & Pension policies admin in EMEA. In the P&C, we continue to gain momentum globally in the first quarter. We grow our share with existing customer as they expand their business with us beyond Core, to include digital, the insurance analytic and managed services.
We also had successful growth, the adoption of cloud deployment, which give customer a more flexible deployment model. I'm delighted to announce that we close the 100 customers multiple reinsurance solution. Sapiens Reinsurance Solutions allows insurance to manage their entire range of reinsurance contracts and activities, with rich accounting and reporting functionality.
Sapiens DECISION is seeing continue expansion in insurance. DECISION provides insurance carriers with a platform to develop unique solution with complex business logic. More carriers are now embracing this solution. Either we sell policy admin or we sell standalone offering. Gartner cited DECISION in their Hype Cycle Report as a simple solution for risk and compliance decision management.
On the digital front, our recent acquisition helped us to expand our digital offering and improve our competitive standing. As you may recall in February, we completed the acquisition of the German-based insurtech sum.cumo. We started integrating our operation and sales team, and have already realized the benefit with larger market present in DACH region and expanded digital offerings that we can leverage.
In terms of service model, across all of our product, we see an increased demand for managed services. Our managed services offering brought tremendous value to our customer during the COVID-19. The platform allows carriers to focus on their business while we take care of the operational part of technology. We expect continued growth for this mode of services.
On our ecosystem, we have added several new partners. HazardHub places integrated real-time geographic risk data in our P&C CoreSuite. SPLICE Software help us to provide streamline billing, claims marketing and customer experience communication solution to insurers.
Our investment in R&D provides continue improvement because of our offering which is receiving recognition from leading industry experts. Sapiens worked closely with leading industry analysts such as Gartner, Celent, Novarica and SMA which gives us confidence in our product roadmap and our area of business focus.
We are aligning our priorities to match the insurance industry needs and trends, both for market coverage and product offering perspective. Sapiens is well positioned to benefit from macro trends impacting our customer, which include the migration from legacy system and adoption of digital capabilities. The current business disruption related to COVID-19 highlights the need for legacy insurance company to modernize their platform, so they can improve remote access and offer digital services, as well as maintain compliance and meet regulatory requirements. COVID-19 has proven to be an accelerator of the trend that began in the last few years.
Today, more than ever it has become essential for all carriers to increase digital capacity. Today shoppers expect, quote insurance purchase and service delivery through a variety of digital channels. This market shift will compel carriers, small or big, to complete their digital transformation.
From Sapiens point of view we have optimized our mode of operation to meet the new business reality. First, our partnership approach with our customer has proven to be an advantage, especially these days.
In the last year, we have invested in developing and expanding our customer success executive team, our direct customer relation have been beneficial aspect of our business model, especially in these challenging business environment, as we help customer address their new and unique challenges to COVID-19.
In return this help us to secure our recurring revenue while increasing sales within our customer base. The close relationship we enjoy with customers give us meaningful knowledge of their business' challenge, unique operational involvement in their team. This connection helps us be highly accurate in our response to their needs and deliver additional solution to enable their goals and success. In fact, we are increasing our customer success team to meet the demand from existing customers.
As we adapt to the new normal our own operation has gone through some changes as well. The global basis involvement has rapidly evolved in reaction to COVID-19 and the agile response to Sapiens team to these changes is increasing our digital engagement model. As we look at the marketing in the context of COVID-19, we believe that the B2B sales and marketing will have to be re-planned. As a result, we are adjusting our marketing mix through digital channels. Today as many industry events are canceled or postponed, we are accelerating our digital marketing activities with a new offering like digital educational session to our customer and prospects.
In the move from face-to-face meeting to information rich virtual events we can include more people from our team. By bringing a bigger team into our customer and prospect interaction, we can provide more value improve outcomes. We are increasing the frequency of FaceTime engagement through virtual meeting creating more touch points with the market. We already see the benefit of the action we took despite the COVID-19 economic new prospect and existing prospects have continued discussion and progressing in their engagements with Sapiens.
Our priority remains executing in our growth strategy. For the remainder of 2020 we will continue to grow where we have already landed and leverage our investment. We remain focused on building a unified global platform of innovating digital insurance solutions to advance our competitive position as one-stop shop for insurance software, with enhanced products and services. We seek business growth organically and with M&A, while see further opportunity to increase operating efficiency and improving margin.
While there continue to be near-term uncertainty from COVID-19, we remain focused on execution. We have taken appropriate action to provide the necessary flexibility and operating efficiency within the current circumstance. Strong demand for our digital products, combined with a high recurrent revenue and a solid balance sheet position us for success in this challenging environment. I'm confident that as the global economy recovers Sapiens will emerge a stronger and well positioned for continued growth.
I would like to turn the call over to our CFO, Roni Giladi to provide more detail on our financial results. Please go ahead. Roni.
Thank you. Roni.
I will review the first quarter non-GAAP results, followed by comments on the balance sheet and cash flow, and end with our guidance for the remainder of 2020. Revenue in the first quarter of 2020 increased 17.9% to $90.5 million from $76.8 million in the first quarter of 2019. The organic revenue growth was 10% with the balance coming from the impact of the Calculo and sum.cumo acquisitions. Eliminating the currency impact, our organic growth was 11%. Our revenue in North America totaled $44.6 million, an increase of 16.8% compared to last year.
Revenue in Europe totaled $40.2 million, up 25% increase compared to last year, mainly due to the last two acquisition. Revenue from North America and Europe combined represent 94% of our business. Gross profit this quarter totaled $39.8 million compared to $33.1 million in the first quarter of last year. Our gross margin increased to 44% from 43.1% in the first quarter of last year. Operational expenses, R&D and SG&A including the investment from Calculo and sum.cumo remained consistent in this quarter with the first quarter of 2018, of about 28% of our revenue.
Moving to operational profit, operating profit totaled $14.6 million this quarter compared to $11.8 million in Q1 of 2018, and $14.3 million in prior quarter. Operating margin increased in the first quarter to 16.1%, an 80 basis point improvement from Q1 of 2019.
Eliminating the currency impact, our operating margin would have been 17% based on currency of Q1 of 2019 results. Operating margin reduced slightly from Q4 2019 to Q1 of 2020 from 16.5% to 16.1%, primarily due to lower operating margin of the acquired entities, which we intend to improve during the year.
Net income attributable to Sapiens shareholders for the quarter was $10.4 million compared to $8.4 million in the first quarter of last year, which reflects 24% growth. EPS increased to $0.20 from $0.17 of last year.
Turning to our balance sheet, as of March 31, we had cash and cash equivalents of $80 million. In order to strengthen our balance sheet in response to COVID-19 pandemic we took a loan from commercial bank in the amount of $20 million with installment payment over the next two years. This new loan brings our total debt to $80 million of which $60 million is spread over six years and $20 million over the next two years.
In the first quarter, we achieved $3.8 million in free cash flow, which is below our quarterly average due to significantly higher free cash flow in the fourth quarter of 2019. The combined average free cash flow of the two quarters is in line with our target quarterly free cash flow. In spite of global impact of COVID-19 we are announcing a dividend of $0.14 per share.
Paying the dividend reflects our continued confidence in our business, our ability to generate cash and our commitment to our shareholders. The dividend will be payable on June 10, 2020 to the shareholders of record as of May 27, 2020.
In closing, I would like to turn to our guidance for 2020. The global economy experienced significant disruption from COVID-19 and we have managed the pandemic effect for both our employees and our customers worldwide. That said our business model has shown its strength under this new business environment.
First from an operational perspective, we are a software company which fortunately allow us to reasonably begin to work from home. Today 98% of our Sapiens worldwide employee base is successfully working from home. Gradually and carefully employees are starting to return to our offices.
Second, from a business perspective, the sector we serve, insurance is an essential business that must continue to manage risk. Sapiens deliver a core system solution for insurers. And this has assured customer stickiness. As a result we have very high visibility of our revenue stream from existing customers which is almost 90% of our revenue. These factors give us confidence for the remainder of the year.
That said we faced some headwinds, macroeconomic uncertainty is impacting the timeline to close new business and commence implementation. As a result, we are revising our 2020 revenue guidance to a new range of $368 million to $377 million as compared to prior range of $377 million to $383 million, reflecting 2% reduction in the midpoint of the range.
The operational efficiency measures we took to adjust our cost to low revenue expectation and our ability to do so across all departments differently allow us to maintain 2020 operating margin guidance unchanged in the range of 16% to 16.5%.
I would like now to turn the call back to Roni Al-Dor for closing comments. Roni.
Thank you. Roni. The customer success team is doing an outstanding job providing critical support to our customers globally while our global sales team continue to be focused on signing new businesses in the new market conditions. Our leadership team remain focused on delivering growth and margin expansion as we execute against our long-term objective of improving shareholder value. Sapiens is well poised for success and growth.
I would now like to close our prepared remarks and open the call for questions. Operator?
[Operator Instructions] The first question is from Mayank Tandon of Needham & Company. Please go ahead.
Thank you. Roni and Roni congrats on the quarter, very impressive in the face of this global pandemic. So I wanted to first start with just the shift to cloud, Roni. I think you said that you think this could be a potential catalyst. I'm just wondering, how are you addressing the sales challenges in a virtual environment to be able to take advantage of the opportunities in the market as more carriers start to really embrace the cloud?
Yes. Hi, Mayank, as you mentioned all digital and cloud can be more interesting at this time. As you know, we have more than 400 customers worldwide. So we are going to each of them with our managed service approach, including cloud, and there we are bringing more and more opportunity to this area.
So that definitely from the existing clients and almost most of our new prospects is also looking for cloud. So there we did a lot of investment in the last few years and we are ready.
Okay, so you haven't really had any challenges in terms of closing these deals and converting these opportunities, due to the virtual nature of the sales process, you've been able to navigate through that and still close at a pretty healthy rate. Is that so?
No, in terms of closing deals, as I mentioned in my call that we have - it's not related just for cloud. We have challenges for mainly for getting more pipeline, the deals that we have on the table, it's okay. Sometimes we have delay, but it's not related to the cloud.
Got it, okay. I wanted to just shift gears to the model, maybe Roni if you could comment on the trajectory of revenue growth and margins. Any changes because of the pandemic, or do you think it's going to be following the same seasonal pattern that we've seen historically, on both the top line and the margin front?
Hi, Mayank, this is Roni G. I think in this time our business model showed strength. We are selling core system solution to insurance carrier, and they have very high visibility and stickiness which is very important in this time for a very long period. This is a core system solution and house our customer under business.
So in terms of our revenue every year, we are entering about 90% of the deal are coming from existing customer. This is implementation that started from last year and customer post go-live we see minimal impact due to this pandemic on this level. Yes, there are some upside and even downside in this area. We are focused on customer success team to be able to do core sell to existing customers, because it's easier in these days.
In the sales cycle, as already mentioned, we see longer time to close the deal. Although, beginning of the year, even in March and April, we signed new opportunity. We see some delay in people taking decision in closing the deal. Some of them signing, going to blueprint and then put this in hold. So we see there some delay.
So we are seeing more revenue from existing, slightly less from new customer and this is the reason for the change in the guidance. If we look organically, we are expecting to grow this year about 9%. And on top of that add with additional M&A. So this is the guidance that we share.
In terms of profitability, we are able to adjust our cost structure according to the revenue level. And this is what we did immediately when this started. And as you can see, we split into two area. The first one is a vendor that we are working with them. For example, event, training, fly all of expenses on facility we will be able to monitor and reduce. And in the terms of the employee, we adjust the employees to the revenue level and so if we have some slowdown in revenue, we do some freeze in hiring and therefore, been able to protect our profitability. And this is the reason we've been able to remain our profitability level between 16% to 16.5% unchanged and we started the year even with 16.1%.
So overall I would say the business models today continue, and we look forward to it. Yes, there is some slowdown due to pandemic, but overall stay the same.
Got it. And then just very final question here from my perspective. A lot of the companies that have large delivery hubs in India have had supply side constraints just because of the work from home shift. It doesn't seem like that disrupted your model. Could you just comment on how you address those challenges, if there were challenges that you faced on the lockdown was announced in India in late March. Thank you.
We started the mid-March event to do some testing working from home for the entire company globally. Basically for three days sales of the Company globally went to work from home and we measure if we are capable of this, are we missing laptops, firewall and all of that. And basically, we've been able to do this successfully and work from home. As I mentioned 98% of the employer are working from home.
Regarding India, we had some concern. The reason is not our offices or the employee, it's the infrastructure that exists in India as a country. But as of now, we see that this is working well. We have been able to provide services in terms of delivery and R&D to internal and for our customers. So currently we do not see any impact as of today. We hope to continue also in the future.
The next question is from Bhavan Suri of William Blair. Please go ahead.
Thanks for taking my question. Glad you're all safe and well. I guess I wanted to touch a little bit on, first of all what you're seeing with the existing customer deployments. So obviously as you think about existing customers roll out implementation, in late March, early April. Did you see - was there a pause maybe and that's picked up? Was that people sort of reevaluate pacing of deliverables and that's changed? Just some color on what you've seen that might have happened in the last couple a March, early April and sort of now say four weeks later, sort of what that trend looks like?
Hi, Bhavan. I will take this. 15% of Sapiens' revenue is coming from customer that we signed the last year and right now are being in the middle or early stage or end of the stage of the implementation of the core system solution. In the company, we are monitoring this area. Basically we are monitoring all the key accounts and major revenue level and we put also attention into this.
We thought that there will be three opportunities or three options to them to work either continue as usual or to postpone the implementation to a lockdown period, which means likely revenue this year move into next year, or to put the entire thing in freeze.
As of today, and we are already two months into this, we do not have even one customer that stop implementation. All the customer continues. I must say that there is potentially some discussion on extending the time but not putting the entire project in freeze. We do not have a situation like this. So overall, small impact, not material and again this represent about 15% of our revenue level.
So let me just drill down a little bit. So when you look at the guidance, Roni and you've got the potential for extending the timelines for these projects and you built that in, or how much should we build that into the guidance today? I understand that new logos will be tough, and that makes sense for everybody, especially for complex kind of mission critical systems, but for the existing guys, how much have you sort of thought about building that into guidance, sort of risk analysis of the projects that are going on, yes.
We factor some delay and not material one, but some delay that revenue will recede from 2019 to 2020, but as I mentioned earlier, we are right now, extending or increasing the team of customer success. We see right now opportunity and not only opportunity, we are doing so of increasing the revenue that our customer that are post go live and can consume from us additional services. Roni mentioned digital solution, offshore capability that other companies cannot fulfill. So we are compensating this with existing customer that post go-live with additional services that we can offer, but we factor this in already.
Got it. And then I wanted to turn onto the Life and Annuities the reinsurance business. If I look at that, you sort of thought about that business to be stable to flat, but you now had some wins, given the investment side. I guess, as we think about Life and Annuities, how does that layer into the growth initiatives, is this implied in growth this year? Do you think that adds to some of the growth this year? Or do you think that's more like 2021 and 2022 and that plays out?
I think we saw already shift in the life area in terms of growth. We have already started this. Last year we win some deals. I can say right now that we have also some opportunity, nice opportunity that we are working on. Q1 was growth for life, more on the European, side less on the USA side, but overall the entire life is slightly growing single-digit, but growing.
And then one last one from me, you've talked about sort of this shift to managed services. You've talked about cloud. But historically, you said there's been very little interest in cloud. So I want to understand sort of - not this year, but maybe in the next two to three years, how big do you think the managed services business could be as a percentage of revenue? And obviously, it's a very nice recurring fees. And then what are gross margins in that business like, Roni?
Today we do not have significant amount of managed services/cloud revenue. But I would say that all the deal that we are signing, I would say majority of them are managed services let's say cloud opportunity. So think about this, 500 customers we are signing, let's say 30, 40 new deals every year. This business moving to cloud plus managed services. It can go to let's say 15%, 20%, let's say in several years not, now. In terms of profitability in the initial days it cost us more, but the beauty of this great additional stickiness and higher profitability, let's say, in eve under 2, 3 and going onwards.
The next question is from Bryan Bergin of Cowen. Please go ahead.
I wanted to ask if you can give some comments on client behavior that you're seeing, based on the customer size. I'm curious if you're having different conversations or seeing different priorities at some of the larger insurance organizations versus the traditional base in the lower tiers?
Hi, this is Roni. We don't - the behavior will form that the customer can be different for each one of them. I think the main focus right now from the customer that in production is make sure that we are able to maintain them. We can work remotely and we can add more value, they are looking. For the transformation project that we have, the main challenges in the work from home, mainly in Europe because most of our client in U.S. regular to work from home. There is few customer renewals. This is relatively new for them and also new for our employee from the rest of the world.
But we don't see any big changes on the - where they really want to invest for sure everything around digital and digital enabled and this is something that's interesting to all of our customers.
Okay. And then as we think about the progress here over the next couple of quarters, do you expect to see the June quarter as a low point and a build from there, from a growth standpoint. What do you expect it to be relatively even as you go through the balance of the year?
Hi, this is Roni G. I think if we look at the yearly guidance, we are still focusing off area. As I mentioned earlier, it's about 9%. We are planning to grow quarter-over-quarter at steady state. The new layers of building on top of each time. So we do not have any drop. We are going to continue adding additional layer of revenue quarter-over-quarter.
Okay, that's helpful. And just last one for you, has the current environment changed anything around capital allocation as it relates to M&A obviously have the dividend announcement here, but just curious on the M&A front, anything around commentary on pipeline and the valuations, you may be seeing?
Hi, this is Roni. M&A is part of our strategy. So we didn't stop looking into M&A. Yes, we are looking at not big companies, we're looking to medium to small sized company to mitigate the risk. We understand that also the due diligence process will be remotely. So we are conscious about this and we make sure that we reduce the risk as much as possible.
We are looking to do M&A. We think that the valuation will go down. We think that the private companies still did not digest fully the change in the valuation. It will take months two, three in order to adjust and then be more realistic in terms of valuation. And we will be ready. As we mentioned earlier, we took a loan of $20 million immediately as this pandemic started to be able to execute when we find the right opportunity.
The next question is from Tavy Rosner of Barclays. Please go ahead.
Thanks for taking my questions. Most of them have been answered. I guess if I can have just a final one on the guidance you gave a lot of color. If I put in all together what you've said, correct me if I'm wrong, but it sounds like most of revenues have been recurring and therefore the decrease in guidance reflects to some investment being delayed by some of your clients. However, if I look at the long-term, the current situation has brought awareness to more and more insurance company and the need for them to digitize their solution.
So I guess, looking into 2020 and 2021 together, would you say that the outlook now is better than what it was couple of months ago driven by the increase in potential new contracts on the roads?
Tavy, this is Roni. I think the outlook is more relaxed. I think in the early days, it was very much concerned and right now it's little bit company are releasing the restriction. I would like to give some color, I think Roni, mentioned this when he talked that digital is becoming more and more a demand from our customer. Recently we acquired company in Germany sum.cumo and we see higher demand than we expected when we acquired this company.
So we see revenue there above our expectation, because of the digitalization and they are supporting us in the revenue of course, starting that and potentially outside of that. The growth rate that we are seeing right now is about 9%. Of course if the pandemic will continue for a very long time this will help us it because it will be - will not allow us to close more deals.
When we talk to analyst. They are saying that once this is over a lot of company that they have legacy solution will quicker their decision in order to move to a modern technology because this environment do not allow them easily to work from home.
So the environment, the macro will remain the same, let's say, after we are out of this pandemic, but if it will stay for longer for sure there will be impact on us.
[Operator Instructions] There are no further questions at this time. Before I ask Mr. Al-Dor to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1888-326-9310, in Israel, please call 039255925, and Internationally please call 972-392-55-925.
Mr. Al-Dor would you like to make your concluding statement.
Yes, thank you operator and thank you all the participants who joined us today. Have a good day.
Thank you, this concludes the Sapiens International Corporation first quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.