Sapiens International Corporation N.V. (NASDAQ:SPNS) Q1 2018 Results Earnings Conference Call May 7, 2018 9:30 AM ET
Yaffa Cohen-Ifrah - CMO and Head of Corporate Communications
Roni Al-Dor - President and CEO
Roni Giladi - CFO
Mayank Tandon - Needham & Co.
Tavy Rosner - Barclays
Justin Furby - William Blair
Avishai Kantor - Cowen
Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2018 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 7, 2018.
It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens’ CMO and Head of Corporate Communications. Thank you. Mrs. Cohen, you may now begin.
Thank you, and good day, everyone. Our quarterly earnings release was issued before the market opened this morning, and it has been posted on the Company’s website at www.sapiens.com. Representing the Company 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 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 call today, we will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results have been provided in our press release issued before the market opened this morning.
A replay of this call will be available after the call on our Investor Relations section of the Company’s website or via the website link, which appear in the earnings release that we published today.
I will turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?
Thank you, Yaffa, and good morning, everyone. Thank you for joining us today to discuss our first quarter 2018 financial results. Our first quarter results were driven by our strategy to become a leading global provider of insurance software solution and services. We continue to improve our competitive advantage through our product and solution enhancements, and through the acquisition of new solution and clients focused on growth markets, particularly in Europe and North America.
We are now fully integrated and have aligned our resources to become a market leader in the areas of greatest client demand in the insurance market; digitalization, data analytics, and legacy transformation.
In this quarter, we have made progress on the following key objectives. One, expand our EMEA and Asia Pacific P&C business. In the first quarter, we continued with our P&C European expansion, executing our long-term expand strategy, which is reflecting both geographic expansion in Nordic and Turkey and existing customer product expansion. The market continues to be very active, we have a strong pipeline and we have what it takes to continue the momentum in the region.
Second, enhancing and expanding our U.S. P&C business by replicating our success in European P&C market. In the first quarter, we integrated the Stream and Adaptik product and organization. We launched a new digital U.S. P&C insurance platform combining the three powerful core components, Adaptik Policy and Billing and Stream Claims, and Sapiens’ existing reinsurance, data analytics solution, digital engagement and distribution and cloud operation. This launch improves our competitive position, accelerates our go-to-market timing, and ultimately increases market share in the market.
Third, enhancing our digital offerings. By leveraging our recently established digital division and acquisition of KnowledgePrice which brought additional insurance technology experts, in Q1, we advanced an integrated KnowledgePrice into our digital division with successful delivery, comprehensive platform solution including full core, [ph] BI and analytic and digital product this quarter to a UK customer. The digital unit plays a critical role in supporting our sales and marketing teams that are already responsive to an increase in demand for digital solution worldwide.
As I stated on our last earnings call, our plan for 2018 is built on four pillars, and in the first quarter we made progress on each of them. The first one, continue to deliver double-digit growth in our P&C line in Asia Pacific and EMEA. We remain on track to achieve this goal as evidenced by new customer wins in the region. Second, enhancing our North America P&C business. We already see positive indications and started to build a pipeline in the region. We are on track to meet this goal with the integration of Adaptik and Stream. The third, maintain our life and annuity business. In Q1, we focused on continue to support our customer base, providing the highest level of support. These customers are important to all our future growth in the market. We see growth in our complementary life solution for underwriting and illustration as demonstrated by new customer wins in the region. And the fourth one, cross-selling. Cross-selling to our existing customers, in Q1 we continued with program [ph] and that increased our cross-selling opportunity. I would like to note that while this process has just begun, we’re already seeing our clients’ interest in this expanded offering and capabilities.
On the deal front, this quarter we announced that Equitable Life of Canada selected our LifeSuite underwriting solution. LifeSuite provides a modern platform with process automation and faster quality decision for this insurance underwriting transformation. This is a great win for us and future.
During the quarter, we also announced that Turkish insurance provider HDI Sigorta is a member of German insurance giant, Talanx Group, selected Sapiens P&C Insurance Suite IDIT platform to accommodate and accelerate its growth, including faster time to market for the new product initiative. Sapiens is proud of our established footprint in the region. Sapiens IDIT has once again been selected in Turkey to help providers to complement with the national regulation and stay ahead of their competitors. Sapiens IDIT continues to be extremely popular in the strategically important EMEA region and it’s a flagship product of our businesses.
On the partnership front, this quarter, we announced a new partnership with EasySend. EasySend’s Digital Transaction Management platform will integrate with Sapiens Digital Engagement Suite and will enable insurers to rapidly transform forms and documents into a customer-driven digital experience on a PC, tablet or mobile devices. This partnership reflects the importance of working with the insurtech ecosystem and leveraging innovative technologies into Sapiens’ digital offering.
For the remainder of 2018, we’ll be focused on maximizing our assets, mainly our leading solutions, customer and employee, to benefit our existing customers and attract new ones. We are dedicate to support and serve our global customer base of over 400 insurance carriers work with us as the trusted advisors and partners. We are fully committed to all of our customers for maintenance of their existing projects, to advising them on new products and to service and support their business goals.
I would now like to turn the call over Sapiens’ CFO, Roni Giladi, to discuss our financial results and outlook for 2018.
Thank you, Roni, and good morning, everyone. Strong execution in the first quarter allowed us to come in above our revenue and profit guidance we provided on the last earnings call. Q1 revenue of $71.1 million as compared to guidance range of $67 million to $69 million and operating margin of 12.5% in Q1 came in above our guidance of 10%.
As of January 1, 2018, we required to implement the new accounting standard ASC-606 regarding revenue from contract with customers. Sapiens adopted this accounting standard and expects the full year 2018 impact of the standard change will be positive but not material, mainly in our decision division.
Non-GAAP revenue in the first quarter totaled $71.1 million, up 25.7% from the first quarter of 2017 or $56.5 million. Our revenue growth was impacted mainly by the full quarter consolidation of StoneRiver and Adaptik and KnowledgePrice acquisitions. Revenue in North America totaled $31 million and represents 43.7% of our total revenue. Europe revenue that includes UK, rest of Europe and Israel was 48.5%. As anticipated, APAC revenue declined following the strategic reduction in activity in Japan.
Moving to gross profit. Gross profit this quarter totaled $30.3 million compared to $20.5 million in Q1 of last year and $29.5 million in Q4 of 2017. Our gross margin this quarter was 42.6%, up from 36.2% in the first quarter of last year. Q1 gross profit also improved compared to the fourth quarter of last year, mainly due to the impact of our cost cutting program that was implemented last year and continued this year across all our divisions.
Moving to operational cost, R&D expenses in the first quarter of 2018 totaled $10.3 million compared to $7.3 million in the first quarter of 2017, and $9.7 million in the prior quarter. The increase in R&D expenses compared to the fourth quarter of 2017 is mainly due to the consolidation of our recent acquisition with full quarter of KnowledgePrice and one month of Adaptik.
SG&A expenses totaled $11.1 million compared to $11.5 million last year and $10.8 million in Q4 of 2017. The increase in SG&A expenses compared to the fourth quarter of 2017 is mainly due to the consolidation of our recent acquisition that was offset by our cost savings. Operational income this quarter totaled $8.9 million compared to an operating income of $1.7 million in the first quarter of 2017, $9 million in Q4 of 2017.
Operating margin improved in Q1 to 12.5% compared to 3% in the same quarter of last year and at a same level of Q4 of 2017. Our adjusted EBITDA this quarter totaled $9.9 million, reflecting 14% of our total revenue for the quarter. Financial expenses this quarter totaled $0.8 million. The financial expenses this quarter included interest expenses on our $80 million debenture and will continue throughout the year.
Net income attributable to Sapiens shareholders for the quarter was $6.3 million or $0.13 per diluted share compared to $1.2 million or $0.02 per diluted share in the first quarter of last year. As of March 31, 2018, we had a cash and cash equivalents of $61.7 million and total debt of about $80 million. The GAAP operating cash flow this quarter totaled $8.8 million compared to negative $7.3 million in Q1 of last year. There are no other material changes in the balance sheet.
I would like to turn now to our guidance for 2018. For 2018, we are maintaining our guidance of revenue of $280 million up to $285 million, and non-GAAP operating margin in the range of 12% to 13%.
As we said in our previous call, in 2018, we are focused on improving our profitability, together with building the growth for 2019 and beyond. We are pleased to see the progress we made in the first quarter, mainly in profitability. We see positive indicators in the coming quarter and we are on track to our annual guidance, as shown by Q1 results.
I would like now to turn the call back to Roni Al-Dor for closing comments. Roni?
Thank you, Roni. We are working towards our 2018 priorities, improving our organic growth, improving our non-GAAP operating margin by year-end, and cross selling to our customer base. We have invested, we have built, and we have the foundation for long-term growth, increased profitability and improved shareholder value.
I would now like to close our prepared remarks and open the call for questions. Operator?
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Mayank Tandon of Needham & Co. Please go ahead.
Hi, Roni and Roni, and Yaffa. I wanted to just start off with getting your comments around the insurance market in general. I know, you gave us some color about your focal points for this year. But, if you could just comment on how the market is looking on the P&C and the life side, and then just maybe in terms of deal sizes and what kind of opportunities you are seeing in the market?
Hi, Mayank. It’s Roni Al-Dor. In general, as I mentioned last time, we see a good demand for the P&C business now in Europe and North America, mainly in tier 2, 3, 4, 5. In terms of the size of the deals, at Sapiens, we expanded our offering from core product policy billing, now together with all the services, the digital including engagement, BI, total; people are looking for managed services, those types of services. So, the deal size has become bigger and bigger. And the issue is the big size has become bigger -- the sales cycle is also in the same. But in general, we see more and more demand. Right now, in P&C for many years, we’ve built our good brand for IDIT. And now, as I mentioned in my comments, we feel very comfortable with everything we see with Adaptik and Stream and also with our workers’ comp. So, generally positive demand on the P&C.
In the life side, as I mentioned, we have four components on the life or mainly three. We have the run-off business, we have our core business, and we have the component business mainly in U.S. So, the component is solely grow few clients new every year. We just completed very successful user group in Chicago, last week. So, the business in life underwriting illustration is positive. We see demand. We have two, three competitors but it’s fine. And core system, we are focusing mainly in Europe. We decided to put more of the effort in Europe and in Asia Pacific versus U.S. right now in U.S. we are more working with our client base. And the third one is our run-off business vertical, Closed Book. We see a lot of opportunity and we hope to in the near future to see positive results. So that’s the overall.
That’s helpful color. Then, if I can just ask some questions around the numbers too. I know you don’t give quarterly guidance. But, maybe give us some sense of how the trajectory of revenue and margin should be, especially given the outperformance in 1Q, you aren’t flowing through into your guidance, your holding guidance intact. But maybe just give us some perspective on what your expectations are for the upcoming quarters?
As we said earlier, although we past Q1 result on the revenue and profitability, we maintained the full year guidance, the same revenue and profitability. I’d like to say that we are seeing positive indicators, mainly on the profitability, but we’d like to continue our progress and then make sure the results. So, we will see improvement in the profitability. As we said earlier, quarter-over-quarter, but currently the guidance is the same.
Right. And then, as you look a little bit ahead, I know, there’s going to be a lot of noise in 2018, a lot of moving parts to the model, but on a steady state basis, what is your expectation for Sapiens organic growth rate and margin profile?
Okay. So, I’d like to touch based on both. We will provide the guidance for let’s say mid-term, long-term revenue growth beyond 2018 later in the year or end of this year. As we said, this year we are focusing on profitability, and while we are building, the growth there to come. So, we’d like to give numbers only later this year.
In terms of profitability, we are going to see improvement quarter-over-quarter on our profit margin. We said it the past, we’d like return to it. We’d like to reach at the mid-term level around 15%, 16% operational profit. This is what we are shooting.
Got it. And one final question on the tax rate. What is your expectation for taxes going forward, Roni?
I’d say that the current level of around 22% should reflect the tax rate of Sapiens. This is of course after implementing the reforms in the USA.
Your next question is from Tavy Rosner of Barclays. Please go ahead.
Hi. Thanks for taking my questions, mostly technical ones on the guidance. I mean, you guys came up with 1Q revenue then margins that were above your initial guidance and expectations. And as a result, given the beats on both sides, isn’t due to the fact that you’re reiterating guidance for year-end conservative move or are there other things we should be aware of?
I would say, the first one, we mentioned in the beginning of the year that we’d like to be conservative. We do not see anything that will reduce the current level. We mentioned earlier, we see improvement in profitability as we continue during the year. So, let’s take the conservative approach and we’ll update when we see additional progress.
Okay. That’s helpful. And maybe just a quick one. In your prepared remarks, you mentioned a deal with Canada. I’m sorry, I didn’t get the details. And I don’t recall you guys publishing a press release. I might have missed it. So, can you just give me just the broad detail about what this was?
We issued a press release about Equitable of Canada, and I can send you the press release. It’s an underwriting deal that we signed earlier this quarter.
The next question is from Justin Furby of William Blair. Please go ahead.
Thanks, guys. I guess, maybe just to start on the long-term growth, I know -- I can appreciate you’re going to give that later this year. But, I guess maybe big picture in the U.S. market, there is a lot of moving parts in P&C for you guys this year. It sounds like you’re now fully integrated across the product lines. Do you think, when you look out over the next few years, is there any reason why you’re offerings and the demand can’t support double digit type growth in that U.S. P&C market? Thanks.
Yes. The reason that we feel comfortable to keep this double digit growth is several reasons. One, as you know, in North America, more or less, it’s 100 deals a year for the P&C and out of that, I think close to 40 is Guidewire today. And based on where we believe the Stream and Adaptik and the new report, analyst report that show that our offering tend to be very, very close to Guidewire and Duck Creek. So, we can be one of the three big players in the U.S. after all this investment that we did. So, we have -- we don’t need to close more than few to continue to grow double digit. That’s on the Adaptik. We have few advantages. I don’t think this is the time to talk about it, technology versus Guidewire. So, we believe that we can find enough clients to close with us.
On the tier 4, tier 5, we are market leader in this space. So, definitely we close deals, we feel comfortable, we continue the momentum again. And the next one is reinsurance. We are global, one of the top player in the -- together with SAP we are the biggest one. And the next one is workers’ comp, second we acquired StoneRiver, we put a lot of investment to establish our product. Right now, we are answering for a few RFP. So, we have four areas to grow. And this is why we have good confidence that we can keep this growth momentum.
Okay, got it. And I guess Roni G, last quarter you gave a lot of detail around moving parts. I think one of them was a big project that was being -- taking a longer approach and longer scope to it. Is that still the case? As we move throughout the year, does that become any bigger or smaller of a year-on-year headwind for your numbers?
We mentioned the South African deal. This is a deal that you are referring to. This was also the case why we gave the guidance on revenue at this level. We would like to play management conservative all on this and play very safe. Currently, we do not see -- we have some revenue but we do not anticipate right now increasing this level of revenue.
Okay, got it. And then, maybe one last one. I think, Roni, you mentioned the U.S. life market in the core space, you are kind of focusing on Europe. Is that a competitive thing, a demand thing or what drives that decision? Thanks.
No, when we acquired StoneRiver, they had three products for the critical component base. We have a lot of customers in this area. We are also investing in our product. We just announced a new release for this product. So, we -- there is an area that we can see growth. Again, this is not like core system, it’s not [indiscernible] deal, but each of the deals, and we have a lot of, so we can see a nice growth in this area as well.
The next question is from Avishai Kantor of Cowen. Please go ahead.
My first question is, if you can talk a little bit specific, what really drove the overperformance in profitability and margin during the quarter?
So, on the revenue side, we have few factors that helped us. I would say, the first one is better integration with Adaptik stream solution that helped us to preserve some of the revenue that we anticipated to be in risk that we mentioned in the closing when we signed the deal. The second one is a slightly better decision deals that came early in the year that together with the new standard -- accounting standard help us. And the third one is up to $1 million came from currency exchange rate that was in our favor. So this is on the revenue side.
On profitability, the currency didn’t help us. I would say the main reason is integration plan that we started last year in Q4 across all the regions and we continued throughout this quarter. This is one. And the second one, slightly improvement from the decision, the revenue and profit.
So, were those integrations -- new integration actions have started in Q4, were those kind of integration 2.0 stage following the first stage of integration, those were new actions that were taken that you didn’t speak at the beginning or how do you think about that?
The integration, I would say, some of them took faster than what we planned, some of them slightly pushed into Q2. But overall, if I see the overall picture, better process and execution from our side?
And then, Roni A, talked about cross-selling opportunities in the U.S. that you’re now really starting to process. Do you need to take any corporate actions to materialize on those opportunities, meaning do you need to change or augment your sales and marketing strategies in the U.S.?
Hi. The cross-selling is not just by the way in U.S., maybe I shared with you, but we see the same is in Europe. And the main thing that what we are doing with sales and marketing organization, separate to the division, but in the division, we are putting more effort on the account managers and those type of things we already did last year. And this year, we are putting more emphasis in this area. And this is why we -- this is the way that we are taking care about the cross-sell, up-sell opportunity.
Just one comment on that. The cross-sell that we are seeing is mainly coming from the complementary product, not the core solution. Meaning for example when we sell P&C to existing customers or new customers, we are selling all the other complement like BI, total, digital, reinsurance to either existing or new one that increase our revenue per customer.
Okay. And my last question on India. Can you talk about your hiring as much as you can, your hiring trends, or hiring plans for the India delivery center?
Yes. First of all, we are very happy with India operation. We just came back trip from there. And we are right now after two, three years that we acquired this organization we -- it’s four times bigger than what we acquired then. And we almost do everything there. We at the beginning, we used them more as staff augmentation. Right now, they are able in all of our products. And as you know Sapiens, we have almost 8, 9 products, each of them, they have the level organization and in some of the cases, the R&D organization, in few of the product they are able to do end to end, meaning they are managing the client from project manager point. So, again, we are moving more and more things to India, in order to improve our overall profitability. And we are very happy. The last thing that we are doing also there is all of our analytic, BI analytic, we are mainly developed there. So, overall, very positive. Right now, we continue to hire there, train there and build the right management for them.
Just one comment also from my side. We mentioned earlier that we started cross-selling plan across all divisions globally. The one area that we remain intact is India. And as Roni mentioned, we continue hiring there.
So, basically it’s fair to say that India was a major driver for the overall performance in operating margin in Q1?
Partly, it’s not all, it’s partly. And we expect this also to do additional improvement throughout the year, again in moderate phase, slowly quarter-over-quarter.
[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 1-888-782-4291. In Israel, please call 03-925-5918, and internationally, please call 9723-925-5918. Mr. Al-Dor, would you like to make your concluding statement?
Yes. Thank you, operator, and thank you for all participants for joining us today. Have a good day. Thanks.
Thank you. This concludes the Sapiens International Corporation’s first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.