Sapiens International's (SPNS) CEO Roni Al-Dor on Q2 2014 Results - Earnings Call Transcript

| About: Sapiens International (SPNS)

Sapiens International Corporation N.V. (NASDAQ:SPNS)

Q2 2014 Earnings Conference Call

August 12, 2014 9:30 AM ET


Yaffa Cohen-Ifrah – SVP, Corporate Marketing and Communications

Roni Al-Dor – President and CEO

Roni Giladi – CFO


Bhavan Suri – William Blair

Richard Baldry – Roth Capital Partners


Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation second quarter 2014 results conference call. (Operator instructions)

It is now my pleasure to introduce your host, Ms. Yaffa Cohen-Ifrah, Sapiens’ Vice-President of Corporate Marketing and Communications. Thank you. Ms. Cohen, you may now begin.

Yaffa Cohen-Ifrah

Thank you, and good day everyone. Our quarterly earnings release was issued before the market open this morning, and it has been posted on the company’s website at Representing the company on the call today are Roni Al-Dor, President and CEO, and Roni Giladi, our CFO.

Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements and the safe-harbor provision in the press release issued today, also apply to the content of the call. Sapiens expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in the company’s view or expectations, or otherwise.

Also during the course of today’s call, we will refer to certain non-GAAP financial measure. A reconciliation schedule showing GAAP versus non-GAAP result have been provided in our press release issued before the market open 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 webcast link which appeared in the earnings release that we published today. With that out of the way, I will turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni.

Roni Al-Dor

Thank you, Yaffa, and good morning everyone. Thank you for joining the call on which we will provide the business update and go over our second quarter and year-to-date 2014 financial results.

We delivered another quarter of solid result for Sapiens. Continuing our revenue growth by delivering [ph] $38.6 million in sales, up to 16.9 compared to $33.1 million for second quarter of last year. Driving these strong revenue growth are the deals we continue to convert from our robust pipeline.

During the second quarter, we signed new businesses to further support our backlog and add new customers to our portfolio. Let me discuss some of these wins now.

In our reinsurance business [ph], we signed a multi-year agreement with West Bend Mutual Insurance, a property and casualty provider to better manage and control this reinsurance business and related processes. The implementation phases of the project is already underway with launch planned for the end of the year.

In our Decision space, we signed an agreement with the leading financial institution in North America. I’m please to say that leading financial institutions globally are either more interested in our business decision management solution that will help them streamline their operations and reduce cost in competitive and changing market.

As we said in the past, winning a new deal is just a beginning of a long-term relationship. And the key milestone in the relationship is successful delivery and the implementation of the solution. We are pleased to share with you that this quarter we have a successful going live with several projects worldwide. In addition, we continue to expand our service offering to our broad customer base.

Sapiens today have over 130 customers worldwide from all of our businesses, insurance and financial services. Our activity [indiscernible] customer are in different phases from design, to implementation, production, to variety of ongoing maintenance activities. We see growth and increasing demand for new functionality and new line of businesses.

To support future growth and further build up our competitive offering, we continue to invest in product development. As previously announced and scheduled, we launched our ALIS Retirement Services Platform, and they are actively marketing it.

This industry leading platform provides a comprehensive record keeping solution for employer, sponsor, the fund contribution, retirement plans. We are particularly excited about these launched as it is the result of partnership of collaboration with some of the industry’s top retirement services.

Following three years of development, these innovative system designs enable business leaders to support top line growth while lowering operational cost and improving overall profitability. In property and casualty, we release our new Sapiens IDIT core version 11.2, which increase the number of out of the box standard Web services and provides a new framework for country level interfaces.

In life, and pension and annuities, we are progressing very well with our ALIS 6.5 new major release. We are actively marketing our solution and proposing it to the market is our leading and latest version.

Our ongoing investment in product development and upgrades, keep our offerings at the leading edge of the industry to meet our customers ever evolving demand for technology and process improvement. These developments and upgrades received good feedback from the market and grows our book of business.

We are continuing our investment in sales and marketing to increase our market penetration and sales. During the quarter, we exhibited and sponsored several key industry events in North America and UK. In North America, we participated at the core global forum [ph]. At the forum we present our leading solution to insurance industry executives.

We also participated and sponsored the 2014 IASA Annual Educational Conference and Business Show in US. Both events turn into an excellent opportunity for us to meet with our customers and prospective clients.

In UK, we exhibited the future of life and long-term saving. The UK’s leading event for life companies, fund managers, platforms and advisors who operate in long-term saving and investment space. This conference was attended by over 150 senior [ph] delegated, includes CEOs and managing directors of major companies and turn into an excellent opportunity for us to meet with senior level prospective clients.

We also sponsored TimTech, the insurance sector of leading technology strategy event with [ph] 400 IT directors and business leaders, covering the UK P&C and LMP [ph] segments. These events was a unique opportunity for us to network with hundreds of industry leaders and place our solution and offering directly in front of technology decision makers across the insurance industry.

Looking ahead, we’ll be hosting in October our USA Life and Annuity customer conference in Boston. And following this event, we’ll be hosting a retired industry event. That retirement services event, we’ll share with prospective clients our vision of the industry, address today business challenges, and review new enabling technology to help them achieve the future state. This event can help us target prospective clients and further build our sales pipeline.

In addition to the product upgrade and expand marketing effort, as we discussed, we restructure our sales organization, aligning our insurance focus sales organization under a single new business group that will help us better target new business in the insurance. We expand our sales organization, and since the beginning of the year with 10 new experience sales people. We completed the recruitment for this year, and today we have 43 experienced people in sales, pre-sales and account managers.

We increasing our sales team is in key growth market specifically in the US and Europe. I would remind listeners that the sales cycle is long, and our expectation is that we will see the benefit of the sales team expansion in 2015.

Another important aspect of our growth strategy is our continual evaluation [indiscernible] to help product capability that will complement our existing portfolio of business. We’ll seeking target that we will expand our geographic presence, across of our [ph] customer base and synergistically enhance our portfolio.

Subsequent to the quarter, we completed the acquisition of Knowledge Partners International, KPI, the owner of the Decision Model patent and boutique [ph] decision management consultancy firm. A pioneer and recognized leader in the decision management consultancy, service and training.

Sapiens strategic investment in KPI reflects our recognition that the discipline of decision management is rapidly gaining adoption across the financial services industry. The benefit of effective decision management including improve strategic agility, operational effectiveness, efficiency and compliance with regulatory and corporate policy are being in birth [ph] and gaining adoption across the financial services industry.

KPI domain knowledge coupled with patent rights to the Decision Model will provide us with a powerful end-to-end enterprise offering to meet the growing demand for effective decision management tools and process. Gathering technology, consultancy and training services under a common corporate umbrella will allow us to define, increase awareness and grow the decision management bucket. Our end-to-end enterprise offering for decision management is unmatched in the industry, and will position us as a decision management innovator.

I would now like to turn the call over to Roni Giladi, to discuss the financial. Roni.

Roni Giladi

Thank you, Roni, and good morning everyone. In our call today, we will be analyzing our result on a non-GAAP basis, which management believe better represents the business. There is a detailed reconciliation to a non-GAAP result in the financial table of the earnings press release.

Revenue in the second quarter was $38.6 million, up 16.9% from the second quarter of 2013, and 5.5% above the previous quarter. Our revenue for the quarter by type, breakdown as follows. License revenue totalled $4 million or 10.3% of sales during the quarter, compared to $3,7 million or 11.4% of sales in the second quarter of last year.

Services revenue which include maintenance grew to $34.7 million or 89.7% of sales during the quarter, up from $29.3 million in the second quarter of last year or 88.6% of sales. Revenue from services and maintenance grew as a percentage of total revenue due to our efforts to offer additional product functionality and services to allow this customer base.

With that said, I would like to turn to profitability analysis. Our non-GAAP gross profit for the second quarter of 2014 was $15.7 million, up to $1 million compared to the second quarter of last year. Gross margin was 40.6%, down from 41.1% for the second quarter of last year. Our gross margin slightly improved from previous quarter from 40% to 40.6% this quarter. And we expect in 2014 to see the same level of gross margin as we saw in 2013. In additional improvement in gross margin during 2015.

Non-GAAP operating expenses excluding COGS for the second quarter of 2014 were $11.7 million compared to $10.2 million for the second quarter of last year, an increase of $1.5 million. While our R&D investment this quarter remained at the same level to last year, operating expenses increase this quarter mainly due to our increase in sales and marketing investment to support future growth of the company.

As Roni mentioned, since the beginning of the year, we have added 10 new sales people to our team to support future growth. We have added these resources in Europe, the UK and the USA in order to sell all of our product across each of these geographies. In addition to the increase stuff [ph], we have refined ourselves process across the product line in geographies to better qualify deals and pursue new opportunities.

Even including those investment [ph], our non-GAAP operating income for the second quarter of 2014 increased by 19.6% to $4 million from $3.3 million in the second quarter of last year. Our operating margin this quarter was 10.3% compared to 10.1% last year and 10% in the previous quarter.

Non-GAAP net income for the second quarter of 2014 was $3.6 million or $0.07 per diluted share compared to $3.2 million or $0.08 per diluted share for the second quarter of last year. The decrease in EPS was due to increase in weighted average number of shares used for the calculation of diluted EPS compared to Q2 of 2013, mainly due to the secondary offering we completed in November 2013 and additional exercise of stock option [indiscernible].

After the end of the quarter, we reported the acquisition of KPI. The total purchase price was $2.4 million in cash and 3% of this is in ownership. The KPI acquisition will not impact our financial results in 2014, but we expect to gain momentum in the market starting 2015, mainly due to our joint sales effort.

Turning to the result for the six months ended June 2014, our year-to-date revenue was $75.3 million, up 16.6% compared to the same period last year. Non-GAAP net income for the six months, totalled $7 million, grew from $6.6 million in the first six months of 2013, an increase of 6%.

Moving to the balance sheet, as of June 2014, we have cash and cash equivalent of approximately $45.4 million, compared to $70.3 million as of December 2013. The decrease in cash is explained by investment in marketable securities in the amount of $34.4 million in Q2 of 2014.

In total, cash and marketable securities increased by $9.4 million in the last six months. The rest of the balance sheet item, did not change materially.

From a cash flow perspective, we generated $11.9 million in cash from operational activities or $9 million including capitalization of software. This is significantly stronger than the $9.1 million or 6.5 after including capitalization in the first six months of 2013.

Our ability to generate free cash flow along with our existing cash balance provide us with the capital we need for investment. And as we continue to search for potential acquisition target to accelerate our growth.

With two quarters now behind that, we are reiterating our full year revenue guidance for 2014 of $154 million to $158 million. This represents a continue organic growth into the second half of 2014 which in total represents growth of approximately 15%, the midpoint of our guidance versus our 2013 full year revenue of $175.4 million.

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

Roni Al-Dor

Thank you, Roni. With the first six months of 2014 behind us, we are firmly on track to deliver solid financial results for the full year. We have a clear path to achieve the organic revenue target we have set.

Our strong customer base and our wide offering together with our sales team expansion, position us to capture the market opportunity. Insurance market continues to look for a way to improve customer delivery and reduce cost, driving increased demand for our product, services and solution.

As a global player and industry leader, we are uniquely position to capitalize on these trend. Our portfolio of offering have been designed and develop to make insurance carry and transition from Legacy system to our more robust state of the art technical solution, seamless and cost-effective. I look forward to providing you with additional updates as we progress to the year and deliver on our financial commitment and expand our market presence.

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

Question-and-Answer Session


Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. (Operator instructions)

The first question from Bhavan Suri from William Blair. Please go ahead.

Bhavan Suri – William Blair

Hey, guys, thanks for taking my questions, and a nice job there. Roni, when you look at the decision, it was nice to have the decision win in North America. But can you provide a little color on any decision expansions you had in the quarter given that you sort of sell a few seats and then look to expand within a customer?

Roni Giladi

Hi, Bhavan, this is Roni G. Thank you. We see the same trend in decision as we saw before. If I’m looking from existing customers, a customer that they already been with us and did the implementation and went live with this. We see constant request additional seat as they see the benefit of it and they increase and the amount of seat. And this is in one area. A number of new customer, we see a lot of traction from big organizations in the USA and also starting to see in the UK.

Looking at this product, what I can say that the sale cycle there is pretty long because it’s a new product, we need to educate the market. But we see, repeatable meeting with them and additional team member from all the organization coming and verifying the product. This is in depth [ph].

I also would like to emphasize that in DECISION, we are trying to keep a sailing term life perpetual [ph]. Although we see a request from big organizations to shift from term to perpetual, we’re still holding with the term.

Bhavan Suri – William Blair

Okay. That’s helpful. And then, on the insurance side of the business, maybe you can give us some color on pipeline. I remember last quarter, when we talked, you sort of said that some of the large deal pipeline had stalled a little bit, people were taking a little more time. Maybe with a launch of ALIS and IDIT 11, just some color on the pipelines for both the property and casualty side and the pensions, life and annuity side.

Roni Al-Dor

Yes. Hi, this is Roni Al-Dor. Well, I can share with you that in both product, life and the PNC [ph], the pipeline is stronger than the past. As you remind to everybody that we have more resales, almost 10 people we had for the sales organization, dedicated sales people. The main issue as we mentioned that’s at stake long time to them also to build the sale cycle.

The pipeline is pretty nice. You know it’s different between – to move from 30% to 50% to 80% to 90% and to close them. So we have pipeline in all the level of and we’re following them. I think because we have good reference, we have good product, it’s just time to close. But we continue to see demand in all area.

I’m talking about ALIS in US, the retirement services, the IDIT and the reinsurance. So we have products in the insurance market and we are working in several territories.

What I can also share with you is that at the past, we put a lot of investment in US/UK. Right now, we see also Europe. Mainly, with Europe is a potential interesting area for us. So we are putting also effort in that area and we’re also building a nice plan there.

Bhavan Suri – William Blair

Great. And when you look at the – just a little clarification on the sales headcount. You’ve got 43 in pre-sales account management and quarter carrying. What’s the total quarter carrying headcount, Roni?

Roni Al-Dor

Can you explain what the quarter turn – what that means?

Bhavan Suri – William Blair

The guys who are responsible for going and pre-sales helps but the main guys who are responsible for going to go and close deals. How many of those do you have total?

Roni Al-Dor

This is around 20. So the dedicated sales guys, they are around 20. And all the guys [indiscernible] pre-sale. And by the way, the other 23 presale is more dedicated pre-sell and SME when the deal has become 60%, 70% then all the delivery organization. Because just to share with all of you that the 43 people are mainly doing a lot – they are doing the sale on the license. All the presale that’s connected to [indiscernible], 23. They are dedicated to help to sell the license.

Because our deal is also services, so all these services is the people who are coming from the delivery organization. And if there is a need for any pilot or if you see something like this, he’s coming from the delivery organization. So the 43 is dedicated, the rest is coming from the other organization.

Bhavan Suri – William Blair

That’s helpful. And then of those 20 to 10 new ones, you said it will take some time to ramp and will be helpful to next year. But when you look at that, are we talking 9 to 12 months or are we looking at longer times to get to full quota?

Roni Al-Dor

It depends – it’s around the times that you mentioned. Sometimes a little bit longer, the [indiscernible] of the deal. The shorter deals is the reinsurance; after that, the PNC; after that, life and annuity. And the longer is the retirement. If the size of the deal is bigger, then the long cycle is the same. It’s bigger as well.

Bhavan Suri – William Blair

That’s helpful. And then one for Roni G, jus quickly. You touched on gross margins next year ticking up and returning to sort of a little bit of expansion. If I look at just the operating, the non-GAAP operating margin line, this year roughly flat with 2013 at 10.4%. If you were to think about next year, are you thinking sort of – this is material expansion or are we thinking something – and I don’t want you to give guidance but some sense of where the expansion is going to come from. Is it largely from the gross margin line or do you see some leverage on R&D and sales and marketing lines, too.

Roni Giladi

Okay. So we’ll see leverage next year in the operational amount in non-GAAP. Right now, as you mentioned, we’re flat at 10% level. And we’d like to increase it by a few percentage points. The expansion will come mainly from improvement in gross margin. In R&D, we are going to stay at the same level of dollars but reducing it percentage wise and shift this towards certain marketing, again, to accelerate growth. So the main impact will come from gross margin to next year.

Bhavan Suri – William Blair

Great. Thanks for taking my taking my questions guys. Nice job.


The next question is coming [indiscernible] at Needham Company. Please go ahead.

Unidentified Analyst

Hi guys. Could you just talk a little bit about the competitive landscape. Have you seen any changes both in the North American market and also in Europe in terms of who you’re seeing in bake-off [ph] opportunities.

Roni Al-Dor

We don’t see any news in the retirement services as well as in ALIS, as well as reinsurance. In the PNC, we see not really a newcomers but people are putting a lot of effort in terms of to build a good PNC offering. We see a company called Subaru [ph] as part of the exchanging. We see them more from the past.

And we see a trend that people continue to invest in PNC. Everybody tried to be guide [ph] [indiscernible]. So we see more investment in those area.

Unidentified Analyst

So otherwise, no change in the key players that you’re competing with head on for new deals?

Roni Al-Dor

No. Nothing that we are seeing right now. As you know, in this saying, the insurance business is not easy to enter. It’s difficult. It’s a long, long time to build a company with the offering that we have.

So it’s not something that we need to be afraid that overnight, we will see a new player. It’s a small priorities. The structure that’s both, for example, [indiscernible] a long time ago is – they are right now decided to put more effort as an example. It also take time a long time but newcomers take time a lot and we don’t need to be surprised for a new one.

Unidentified Analyst

Sure. That makes sense. And then I know previously you’ve talked about working with some of the large system integrators that have expertise in insurance. Could you talk about that channel is developing and what you’re doing to expand it?

Roni Al-Dor

We don’t have a huge change from the past. The area that we have a little bit more is in the retirement services. We added the past also [indiscernible] relationship with Deloitte. But right now, I hope to see the fruit from the investment. So it’s more to leverage that with the system integration that we have.

Also, in the coming October, we plan to do a big launch in Boston. So we plan to do it together with two system integrator; one with Bridgepoint and another with Deloitte. So this type of things. All the rest, we continue to try to find new [indiscernible] decision by the way. And we hope to see results from that.

Unidentified Analyst

And then just one housekeeping question for Roni G. Maybe you already gave this but Roni, what was the breakdown between license maintenance and services this quarter?

Roni Giladi

It’s very similar to the previous quarter. We are talking about 10% of licenses. The rest is services and maintenance included.

Unidentified Analyst

So would it be fair to say then that the license and maintenance is about a quarter of your revenue and the rest is services portions?

Roni Giladi

I would say, give or take, yes. The answer is yes.

Unidentified Analyst

And then in terms of next year and the years going forward. How fast can we expect that shift to move toward license and maintenance. What are some of the longer term targets that you see for that mix evolving to that higher margin scheme of revenue.

Roni Giladi

Overall, what we are trying to do in the company or the strategic move is to expand the revenue that we have from existing customers and obviously to acquire additional new ones. And the revenue that will come from existing customer. The additional product line or services will probably will be more on the service side rather than the license. Obviously, the new ones will generate it to us the license as new customers.

We see increase but not dramatic increase again, because we’d like to leverage our customer base and the revenue stream that we have [indiscernible] them. So we see more direct increase but not significant one. Also, if you add in that, I think the decision part as we took the decision to sell term license, not perpetual, the increase will be moderate. If we shift to perpetual, obviously, we can beat the higher impact.

So overall, very moderate increase. Not significant ones.

Unidentified Analyst

Thank you guys.


The next question is from Richard Baldry of Roth Capital Partners. Please go ahead.

Richard Baldry – Roth Capital Partners

Thanks. Looking at KPI [ph], can you talk about whether that’s in the even minor revenue impact and what type of headcount that brings to the company? And also, maybe [indiscernible] sort of in the sequential growth, the fastest we’ve seen is well over a year. So was there anything unusual or [indiscernible] projects that came in earlier. Or do you feel like it was just a solid quarter across the board that drove that strong performance?

Roni Giladi

Richard, this is Roni G. We’ll appreciate if you can repeat the question? It was hard to hear you. Thank you.

Richard Baldry – Roth Capital Partners

On KPI, can you talk about the headcount in/or any revenue impact?

Roni Giladi

I see. On KPI, you mean the company that we acquired the knowledge partner? The company is small. It’s about 15 employees, not more than that. A total revenue is few million dollars. A significant part of this is also coming from Sapiens, meaning relationship with Sapiens. So when we consolidated them, the impact – we need to eliminate this revenue. So the total net impact will be on a yearly basis, $1 million. And obviously, if we acquire this right now, so the impact until then will be very minimal.

The main idea about this acquisition is to align to CELSOS [ph] to acquire the patent in order to capture the market opportunity. Right now, the team working together in analyzing the opportunity and tackle them in order to acquire new decision customers.

Richard Baldry – Roth Capital Partners

And can you look at the sequential growth now? It was 5.5% in the quarter sequentially. That’s the best you had in well over a year. So was there anything unusual in that in Q2 or do you think that was a good across-the-board performance?

Roni Giladi

I think overall, nothing major came. I think it’s business as usual. We’re trying to acquire an existing annual customer. Nothing major has happened. We repeat the same growth that we said in the beginning of the year. We see this right now in matches, longer visibility, and we are okay with this. We do not see any major change in Q2.

Richard Baldry – Roth Capital Partners

Normally, when asked about [indiscernible] but the interest in other line – you’re only about 56,000 below having an 8% quarter [ph] and in my model, that all came out of the non-operating line. Can you talk about the driving factors in there? Maybe looking also at your – you put some longer term securities as part of your cash, whether that impacts that interest line on a go-forward. Thanks.

Roni Giladi

Did you mean the interest income?

Richard Baldry – Roth Capital Partners


Roni Giladi

Okay. So interest income, we had some devaluation of some of the countries [ph] [indiscernible] that impact the interest rate. This is what’s the reason for the small amount of interest income. We are doing some hedging in the company. Of course, all the subsidiaries in the revenue stream line from different countries and their currencies.

Usually, we do this with the profit – half of the profit. We’re looking nine months ahead. This quarter, we got some heat from devaluation of the countries.

Richard Baldry – Roth Capital Partners



(Operator Instructions) Please stand by as we poll for more questions. 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 the participants, the replay of this call is scheduled to begin in two hours. In the US, please call 1-888-254-7270. In Israel, please call 03-925-5904. And internationally, please call, 9-723-925-5904.

Mr. Al-Dor, would you like to make a concluding statement?

Roni Al-Dor

Yes. Thank you everyone for joining our call. We’ll be happy to talk to you again in our next quarterly call. Thanks.


Thank you. This concludes the Sapiens International Corporation second quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.

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