Sapiens International Corporation N.V. (NASDAQ:SPNS) Q2 2022 Earnings Conference Call August 3, 2022 9:30 AM ET
Dina Vince - Head of Investor Relations
Roni Dor - President & Chief Executive Officer
Roni Giladi - Chief Financial Officer
Alex Zukerman - Chief Strategy Officer
Conference Call Participants
JiaXian Huang - Jefferies
Mayank Tandon - Needham & Company
Dylan Becker - William Blair
Chris Reimer - Barclays
Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's 2022 Second Quarter Financial Results Conference Call. Sapiens second quarter 2020 earnings release was issued before the market opened this morning and it has been posted on the company's website at www.sapiens.com. [Operator Instructions]
I would now like to hand the call to Ms. Dina Vince, Sapiens' Head of Investor Relations. Dina, would you like to begin?
Thank you, operator. I would like to welcome all of you to Sapiens conference call to review our second quarter 2022 results. With me on the call today are Mr. Roni Dor, President and CEO; Mr. Roni Giladi, CFO; and Mr. Alex Zukerman, Chief Strategy Officer. Following the summary of the results, we will all be available to answer any questions.
Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements. 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 sphere or expectations or otherwise. On today's call, we will refer to the non-GAAP financial measures. Our constellation schedule showing GAAP vs 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 website or via the website's link which is available in the earnings release we published today.
I will now turn the call over to Mr. A - Roni Dor, President and Chief Executive. Roni?
Thank you, Dina. I would like to welcome everyone to our call today. This quarter marks for us a steady and a confident step forward.
Our revenue in the second quarter revenue grew 3.1% year-over-year to $118.6 million or 8.9% on a constant currency basis. This reflects our ongoing growth from existing and new customers. In line with our strategy, we continue to grow our employee base offshore to support this growth while improving our profit. We now have over 2,000 employees in India to support our future growth and scale. These prudent actions increased our second quarter operating profit and lifted operating margin to 17.5%, an improvement of 30 basis points year-over-year.
Let's dive into the business. The market sentiment in the insurance software market continues to be solid. While there is a sense of longer decision process, the market need for digital transformation and this cannot be held back too long. Sapiens is well positioned with our broad product offering and global presence to be the vendor of choice for these large transformations. In addition, our large base of existing customers give us a solid ground for upselling and expanding our revenue and help us gain revenue visibility and confidence. We continue our R&D investment to maintain our leadership position and we have increased our investment in sales and marketing which results in our growing pipeline. The positive feedback from both our existing and new customers confirm that our strategy is delivering rewarding outcomes. We continue to see new opportunities and win new businesses. We currently have multiple blueprints as well as contract negotiations underway. Let's switch now to our regional performance.
In Europe, our market recognition is growing as is our pipeline. We are seeing bigger deals that include more products and regions than in the past, we are gaining more traction with higher Tier carriers. As we mentioned on previous calls, we have a potential European Tier 1 customer currently working with us on a large multi-company, multiproduct deal. This has moved to the blueprint phase and recently added another country to the blueprint. However, a recent change in the customer management has impacted the closing of this deal. As a result, in 2022, we do not expect to recognize substantial revenues from this customer. We continue our deep engagement with C-level managers of this customer and the tone is positive and productive.
In the U.K., our P&C pipeline in this market is expected to contribute already in the second half of 2022. One opportunity has completed the blueprint and has moved into the contracting. In Life and Pension in the U.K., we have a growing pipeline that will generate new businesses in 2022 and onwards. We have a solid P&C pipeline in the DACH region, where we see demand in all areas. Right now, there are a few important opportunities that are moving into the post blueprint stage and contractual discussion. In addition, we start building pipeline in Life and Pension. The local presence we have built in these large German-speaking market and the local references, we are proving to be the great baseline for future growth.
In the Nordic region, where we have become the dominant player, we have some significant opportunities in Life and Pension, they are in contractual discussion. These deals where we originally planned to close in the second quarter but now have shifted to the second half of 2022. In the meantime, we are working together based on the statement of work which we have signed with this prospect. This gives us confidence in our ability to close these newer goals. There are also several attractive P&C opportunity in this region that are also progressing well. In the Gera region, we are advancing with new opportunities in all stages and expanding on our pipeline.
In other European countries, we are working on new opportunities in various maturity levels. Overall, in Europe, we have a strong and growing pipeline and the deal sizes are increasing as a function of our larger product offering. Our core digital and managed services offering with our global footprint is appealing to both mid-tier and high-tier regional and multinational carriers.
As I mentioned, some of the deals that are currently in the process are likely to take longer to close than initially expected, especially where the scope of the deal has increased and requires more time and additional approvals. The most significant impact on European revenue was FX, mainly due to the strong dollar. We remain very confident based on our product position, European leadership and strong pipeline in Europe will continue to be a strong growth region going forward.
In North America, we continue to reap the benefits of our investments. In our Latin annuity business, we have growing demand for our product offerings, components and core solutions. In the component, based on our investment and market recognition, we have closed deals and we have a very strong pipeline in late stages. This quarter, we announced EquiTrust, a new logo for our North America Life business application. EquiTrust is partnering with Sapiens on our next-generation digital agent experience. Our end-to-end solution empowers EquiTrust team to increase sales with more intuitive and engaging experience. Our world-winning suite of app illustration and digital solutions will provide EquiTrust agents with smoother customer acquisition and service capabilities.
In Core Suite, we have invested heavily to reenter the U.S. market and we are achieving notable progress. We are post blueprint and are working together based on the statement of works towards signing the contract. Also, we have made significant progress with an additional prospect. Currently, we are in a contract finalization process. This gives us confidence in our ability to close these new logos. In reinsurance, we are a dominant global player. We have been expanding in our existing businesses as well as closing new businesses during the first half of 2022.
We have a strong pipeline ahead of us of high and mid-tier customers. The workers' compensation market is showing signs of improving, following the downturn during COVID. We now have a growing pipeline for our workers' compensation platform and expect to sign new businesses in 2023. In the second quarter, in cover insurance, the sessions customer update its offering with our Core Suite for the workers' compensation platform. Our North America P&C pipeline has grown and is maturing across several opportunities.
We anticipate closing some new deals within the next six months, thanks to the investment in the product, the team and the partners in our ecosystem. We are turning the corner in P&C in this key market. In the second quarter, we announced a partnership with Mindtree to support insurance system implementations and help drive digital transformation. Mindtree brings extensive domain, technology and consulting expertise and will focus initially on enhancing our delivery capabilities in our P&C business. South Africa continues to contribute to our growth. In the region, we have stepped up with a significant traction in both process and new businesses. With two of our substantial existing accounts, over the last six months, we have made significant cross-sell deal expanding into digital additional core system and, et cetera.
Another great example of our learn-and-expand strategy is the deal with our existing customer, Old Mutual, a leading insurance company in the region, commanding two offerings, our analytics solution and the reinsurance solution. This customer originally joined Sapiens through the TI acquisition. In APAC, we continue to see growing interest in the P&C offerings. We have completed the blueprint with a prospect in the region and we are progressing with several other opportunities. All these remain a key competitive differentiator for Sapiens. Our ongoing investment in product development has continuously improved our competitive position in the insurance software market and gained the recognition of industry analysts. This quarter's Celent recognized Sapiens claims solution for P&C and workers' compensation on its 2022 report for North America for standing out in functionality.
We keep investing and progressing in our insurance platform proposition combining our core data, digital and cloud offerings into complete platform solution. We see a strong acceptance and higher interest from the market from the proposition. This has been reflected in selling multiple products per deal and our ability to cross-sell our digital and data solutions for existing customers. This includes deploying certain digital suite as a stand-alone offering and over non-Sapiens core product. We keep investing heavily in advancing our native cloud capabilities of our leading products and constantly maturing and enhancing the benefit of our cloud proposition. The vast majority of all of our recent deals are fully deployed in the public cloud, AWS and Azure and we are taking advantage of our cloud services.
Our marketing activities gave us helpful feedback and confidence in our strategy. In May, we hosted an Executive Council in Nashville, where we met 20 C-level executives from our North America customer base and engaged in productive discussions. Feedback from this event was positive and confirmed that we are overcoming the challenges we face in the market. In June, we had an executive session in Spain with 70 C-level executives from prospective and existing customers to discuss our product and road map. We return to participate in multiple industry events face-to-face both in North America and Europe. In addition, we are back to our mega client conference in North America which was taking place in November this year in Washington, D.C.
Our M&A practice help us accelerate our growth. Now that we have completed the integration of recent strategic acquisition in DACH, Gera and the Nordics as well as the market valuation are starting to come back to reasonable levels, we are carefully reviewing a few prospects but not yet ready to pull the trigger on the deal. Looking ahead to the remainder of 2022. In this environment, we benefit from our product leadership, our large customer base and our ability to balance growth and expenses with our offshore capabilities. Our pipeline is materializing and our diversity gives us a solid spread of opportunities. Those deals that are delayed are not canceled and will close. We maintain deep discussion at the most senior levels with all potential prospects.
I will conclude with a general comment on the market. We operate in a market in which digital transformation is essential. Now more than ever, carriers must have the agility and efficiency while keeping customer satisfaction level high and a very competitive industry. Underlying demand is not disappearing, transformation projects are a "must have" and not a "nice to have." Customers might be more cautious in their decision process but the deal remain essential. Second business model enable us to navigate the current macroeconomic environment with added stability.
Today, 85% of our revenue comes from existing clients, giving us steady and high visible source of cash from operations. Our confidence in the insurance market and in our ability to address the market needs and maintain our leadership position remains high. We can confidently continue to execute our strategy to deliver growth and generate cash.
Now, I would like to turn the call to Roni Giladi, our CFO.
Thank you, Roni. I will begin with a review of the second quarter of 2022 non-GAAP results. All comparisons are year-over-year versus Q2 of 2021, unless otherwise stated. I will follow up with comments on the balance sheet and cash flow and wrap up with our guidance for 2022. As there a significant change in the quarterly results due to the currency headwinds, a significant part of the review will be dedicated to that. Just to note, the European currencies weakened versus U.S.A. dollar gradually quarter-over-quarter since Q4 of 2021 to date.
Revenue in the second quarter of 2022 increased to $118.6 million, up 3.1% from the second quarter of 2021. The currency headwind on the revenue is significant compared to the second quarter of last year. On a constant currency base, our organic growth rate compared to Q2 of 2021 was 8.9%. In addition, even when compared to the previous quarter of this year, on a constant currency base, our revenue in Q2 would have been $3.3 million higher than the reported one, reaching $121.9 million. Our revenue in North America amounted to $48.2 million, 3% higher than Q2 of 2021 and $0.8 million lower compared to Q1 of 2022, mainly due to time to close new logos. Our European revenue amounted to $59.9 million at the same level of Q2 of last year. The impact of the weaknesses in European currencies versus U.S.A. dollar was material to our European revenues.
On a constant currency base compared to Q2, revenue was higher by $6.7 million, reaching $66.6 million, reflecting a growth rate of 11.5%. This demonstrates our strong performance in the region. Revenue from rest of world which includes South Africa and APAC grew 23.8% to $10.6 million in Q2 of 2022 compared to the same quarter of last year, mainly from P&C deals in South Africa. Gross profit in Q2 of 2022 was $53.2 million, up from $51.7 million in Q2 of last year, an increase of 2.9%. Our gross margin this quarter was 44.9% at the same level of Q2 of 2021. We were able to maintain our gross margin percentage despite the currency headwind and the increase of labor costs.
Operating profit this quarter increased to $20.7 million, up 4.8% from $19.8 million in Q2 of 2021. Operating margin amounted to 17.5% this quarter. 30 basis points higher compared to 17.2% in the second quarter of last year. On a constant currency basis compared to Q1 of this year, our operating profit margin amounted to 17.8%, showing continued improvement quarter-over-quarter. This quarter, we celebrated our India operation, passing the milestone of 2,000 employees and we continue our investment to grow it even further. We experienced a lower attrition rate and even been able to increase our staff at an accelerated pace in the region compared to the last few months. This factor is a crucial element to continuously improving our profit margin.
Interest expenses in Q2 of 2022 amounted to $2.5 million, a result of $0.7 million of debenture in expenses and the remaining of $1.8 million expenses which were mainly due to hedging transaction expenses, compared to hedging income of an average of about $1 million on each of the last three quarters. Net income attributable to Sapiens shareholders for the quarter amounted to $50 million compared to $16 million in Q2 of 2021. EPS for the quarter amounted to $0.27 per diluted share compared to $0.29 per diluted share in the second quarter of last year. As I just discussed, the low net income and EPS is due to higher interest expenses in the quarter. EBITDA increased by 3.6% to $21.7 million in the second quarter of 2022 and our adjusted EBITDA margin amounted to 18.3%.
Turning to our balance sheet. As of June 30, 2022, we had cash and cash equivalents and short-term deposits totaling $176 million and total debt of $80 million which will mature in four equal annual tranches until January 2026. During the second quarter of 2022, we generated adjusted free cash flow of $4.2 million. The lower free cash flow in the quarter is mainly due to the following reasons: low net operating profit, bonus payments with regards to 2021 results and timing of contractual payments milestone as well as deferred payment paid by our customers in previous quarter which were recognized as the revenue this quarter.
In June, S&P Global Ratings Maalot upgraded Sapiens Series B debenture rating from IsraelA+ which is stable outlook to IsraelAA- with a stable outlook on the local scale. The rating upgrades represent another vote of confidence in Sapiens business model and strategy. Following our recently introduced dividend policy to distribute dividends on a same year annual basis, our Board of Directors declared a dividend of $0.23 per share, reflecting a total dividend of $12.7 million for the first six months of 2022. The ex-dividend date is August 16, 2022 and the dividend will be paid on August 30, 2022.
I would like to turn now to our guidance for 2022. Our revenue guidance considers the two main items: One, the impact of origin exchange headwinds; and two, the timing of the significant deal in Europe which we have previously discussed. With regards to FX turbulence, we are witnessing a significant weakness of all European currencies versus the U.S.A. dollar which began at the end of last year and has been continuously deteriorating ever since. The impact of our yearly revenue guidance from the previous guidance in May of this year amounts to $8 million. With regards to the anticipated European significant transaction which is still underway as we actively continued deep discussion based on only update, we decided to reduce the forecasted revenue levels until the end of the year.
The impact on our guidance amounts to $7 million. As a result, we are updating our revenue guidance from the range of $495 million to $500 million to a new range of $480 million to $485 million. We anticipate that Q3 will be the same level of Q2 of this year. We still have an additional $10 million of go-get revenue from new logos that will need to materialize in H2. We are confident that we can achieve this revenue due to the advanced stage with multiplied prospects where the commercial terms have been agreed upon and we are in the contracting phase and additional opportunities where customers are paying us prior to contract finalization to start the work.
In addition, because of our business model, we can offset new logo opportunities with additional revenue from existing customers. There is still risk that the global macroeconomic conditions will deteriorate from today which will impact our revenue guidance accordingly. Moving to operational margin guidance. We are revising our profit margin guidance upwards, from a range of 17.4% to 17.6% to a range of 17.5% to 17.7%. The main reason of improving profitability despite the currency headwind and the higher load cost is mainly our offshore strategic operation which supports Sapiens across the board, including delivery, R&D and corporate expenses.
To emphasize, during the last year, we have made tremendous progress in India. In Q2 of 2021, we had 1,533 employees. And today, we have 2,153 employees, gone from a total offshore ratio of 45.3% to 49.7%. As mentioned earlier, the currency headwind is significant. I would like to update you on a constant currency basis for the full year of 2022. The euro, British pound, Danish krone, Swedish krona and Israeli shekel have all weakened versus the U.S.A. Dollar between 10% to 13% since the fourth quarter of 2021. 50% of Sapiens' revenues are derived from European countries and therefore, the impact on revenue level was significant.
Our yearly revenue from the European region is expected to be around $240 million. Therefore, on a constant currency basis, we would have had an additional $27 million from the European region, contributing to our midrange revenue. As a result, the total revenue for the year would have amounted to a midrange of $507.5 million. This represents 9.5% growth rate on a constant currency basis, in line with our long-term business model. On the profit margin, the Indian rupee, Polish zloty which are our main offshore region as well as the Israeli shekel which should also support our global operation, has more cost than revenue in the local currency market. Therefore, when all currency weakened versus the U.S.A. dollar, we had natural partial hedge, resulting in an impact of 1.1% on our margin.
To summarize, on a constant currency basis, we are guiding 9.5% revenue growth with operational profit margin of 18.7%. This emphasizes one of our biggest trends continuing to grow while improving our profit.
With that, I'm turning it over to Roni.
Thank you, Roni. We have a strong pipeline, large customer base that is mature for expansion and vast geographic presence. I would like to emphasize our strength in our business model. One, balancing between gross and profit; two, risk mitigation due to numerous geographic operations across the world; three, white core offering and many business applications; four, we have a direct and long-lasting relationship with our customers; five, more than 85% of our business is driven by existing customers; and six, solid and strong balance sheet.
As the entire market is facing macroeconomic challenges, we Sapiens view this as an opportunity in several areas, improvement in the field of recruitment and retention of talent, lower M&A valuations and more. I'm proud of our global team and their ongoing commitment to achieving our goals. We remain committed to executing our strategy to deliver growth and improve shareholder value.
Operator, we are ready to open the call for Q&A.
[Operator Instructions] First question is from JiaXian Huang of Jefferies.
I'd like to start with a conversation around the conversations that you're actually having with clients in terms of -- can you talk a little bit about the impact in terms of the deals being pushed out? How should we really think about where clients are in that part of their journey versus where they were three months ago and where they're sort of trending? How much risk is there that we should think about this. I understand the long-term demand is still going to be there but how should we think about the nearer term?
This is Roni Dor. As a just to share with you, with all of you, we work with this client for a longer journey, starting the blueprint, as I mentioned, enter into a new country with another blueprint. And second was very, very close to close the deal. And then there was a reorganization in this client. And right now, we believe it is just a matter of time in Europe, everybody holidaying in this time. So we believe in intender, the new people can start to talk with us and only then it will be more clear when we will continue and what will be the size of the deal.
Just like to update it in terms of the guidance, we took out the revenue from this customer until the end of the year.
Understood. And then more broadly in terms of the clients. What is the source of the, what I would call pushing out of the contract negotiations. I understand that the macro concerns -- but if they need these solutions, is it a matter of being comfortable with their budgets? Do they need better visibility into the macro environment, meaning it's -- we're thinking they want to wait six months for tends to be more comfortable about where the environment is going. How should we think about the big picture and the broader conversations with the remainder of your clients?
I don't think the issue is the budget and the macroeconomics. I think this client is big enough and made the decision. The only question is that is, when things changes, people want to understand before they're signing these type of deals and maybe a change of the priority. This is, we call it multiproduct. It included our life, P&C, reinsurance, digital, not decision, by the way, digital data and so on. So it's more about priority, also a priority between their different area and so on. So I don't think the challenge is the budget.
Understood. So I apologize. I'll clarify my question. The second question that I asked is more about other clients. Where inventory that deals are being pushed out. And so it's a question of what will get the clients to sign those deals? Do they need better visibility? And so does that mean we're waiting three months, we're waiting six months? How long -- how does that work?
In the pipeline that we have today, the, let's call it, the deal that we plan to sign in this year. I think that there is two area of challenges. Beside the macroeconomics, the challenge that we had seen is growing and has more product and more solution and we are going towards the higher tiers. Each contract has become more complicated because it includes the suite of products, include cloud services or sometimes three, five, take six, seven years. So the complex of the deals, they become bigger, it also takes time. That's one.
Second, as I shared, we think all of you, we share with you that the way that we are going to all of these deals after they select us, between -- before we are signing the entire contract, we entered to a blueprint phase. The blueprint is the time that we are doing design, getting all the requirements and making sure that both sides understand their commitment and this will also take time. And then we have all the contract negotiation. So I think, again, in my view, the majority, maybe 80% of the delay is coming not just because microeconomic, it's because the situation about the deal size and what I explained. The rest is the 20%, I believe, still microeconomic people are thinking this is -- sometimes they are not afford based on their situation. But in our case, at this moment, I think it's more the 80% that we share.
And, if I need to add additional comment, I think as Roni mentioned, we are talking about this is a core system solution after a very long sales cycle. The prospects are wearing with us. And even recently, paying us in the meantime, we call it mobilization before the contract signed. So this is another evidence that we'd like to continue to ask. Yes, there is still a risk that you mentioned about macroeconomic that can change or change in decision. I think we mentioned this earlier, about $10 million which is right now in the plate.
Understood. And then one final quick question about just acquisitions. It sounds like the private markets are starting to reset expectations. Any color there? You talked about your deal pipeline, you're looking at potential deals now but valuations aren't quite at the level you would like them to be? How much of a gap is there at this point?
This is Roni. So as we start to see and not to the full degree of evaluation squeezing down. We are building our pipeline right now. We are talking with potential prospect by the way, globally. But I must say that in the public market, the people who decide about valuation is the public. And if we're talking about private ones, usually is the owner and there is more difficult to downgrade the devaluation from resales. So we see start of decreasing valuation, not significantly. We are building the pipeline.
The next question is from Dylan Becker of William -- the next question is from Mayank Tandon of Needham.
Thank you. Roni and Roni, congrats on the strength, at least on a constant currency basis, I totally understand the FX issues. My question really is more on the supply side, given that you do have such a strong services segment, how are you coping with the wage inflation pressures that many companies are dealing with and how are you able to manage the impact on margins?
This is Roni. So obviously, we have compensation review every year. We did this year, something which we are different from previous year. We did it twice already, focusing on the key people that is most like to preserve, making sure that the one that we cannot do the salary increase is promoting them to another level, giving them another opportunity, as in growth in the company and being able to maintain in the company. The pressure is still there. I think if it will continue, there also will be shift to customers. We have been able to shift this slightly to our customer but not to full degree. So this is the way that we are handling this right now internally.
Understood. And then just staying on the same theme, if let's say, the economic climate does worsen and there is an impact on the pipeline and as of deal conversions. What levers do you have to manage the profitability and ensure that your margins and earnings are still well protected?
So obviously, we in the company only basically started this process. We are carefully monitoring the potential deal that we need to sign until the end of the year and build how we build a team to support this with several opportunities, support it from R&D support it from monitoring the recruitment more carefully to making sure that we have the deal and then recruitment, focusing on area, on corporate that are flexible expenses that we can monitor. So obviously, we are looking at this.
The next question is from Dylan Becker of William Blair.
Maybe I wanted to start off a different way of kind of asking the macro dynamics too here. So you guys emphasized a lot on recurring projects with the existing customer base. As you think about your current pipeline activity and what you're seeing, have you noticed any change in cadence or pace of discussions relative to the net new customer acquisition versus the ongoing projects with the existing customer base? Whether that's blueprinting or starting the actual implementation? Because effectively, are the existing willing to continue to progress and you're seeing a little bit more hesitation from the net new? Is it a hesitation from both sides? I guess, any sense of the dynamic between the customer segments would be helpful.
Dylan, this is Roni. Our business model is basically say, build strongly on our existing customer. We have about 85% to 88% of our revenue coming from customers that's been with us, we've relationship with them. We know what they need and we are supporting their core system and life cycle of the business. We do not see any change today from those customers. We have continued to get. And as we mentioned earlier, potentially, this is also ability to compensate for a delay in new deal to come.
Okay, very helpful. And then, I guess maybe to as we talked about it sounds like a lot of strength on the life side and obviously in Europe with P&C as well. Can you talk about the benefit maybe of the conversations with the customers? You guys have talked about growing full suite emphasis in the past. But how much does that the globalization or the cross line of business kind of capability play in here? Effectively, are companies may be looking to standardize systems that they have both life and P&C businesses. Does it come up as a driver of adoption, especially maybe in some of your newer markets where you have an existing life relationship that can serve as a wedge to sell more P&C vice versa? I guess does that come into play to any extent on the cross-sell dynamics you guys are seeing?
Yes. Roni Dor. And then Alex can continue. First of all, about your previous question about the existing Roni give the answer but I would like to again to talk again about the new deals. In Sapiens, we believe that in order to grow, we can continue and do a lot of work with our existing customers, generating cross-sell, upsell, additional services, additional products, the huge investment that we are doing in our product. Also, we are coming with new release, generate more demand for obvious and so on. But we have a relatively big organization, a wakeup in the morning and looking after new deals.
I think I mentioned that we -- a lot of marketing activity, a lot of sales, quick sales, sales support, all of these. So we -- and all the help that we are getting from the analyst. There is many analysts, just the customers and calling them and ask them who is the best vendor in this area and they are sending the clients to us. So the new type of business is part of Sapiens and we see it and it's growing, definitely in the area that we have a very good brand. So that's one answer.
About the life P&C that you asked, we have more and more key advantage of Sapiens, this is something unique in Sapiens versus our competitors, that we have these two main core systems, Life and P&C and we have all the other components, digital and so on. So we have at least year one or two, hopefully, more clients that we have cross cross-sell between two of them. And we have also clients, new clients that see the advantage that we have the two products. So again but it depends on the territory, it depends on the area.
Got it. One last one, if I may to. We talked about, I think, a little bit of the offshoring dynamics as well, as kind of a little bit of potential margin installation. But how do you think about the gradual mix shift? It sounds like a lot more of the new deals are kind of moving to the cloud. I think we've talked about and you mentioned as well, adding some new partnerships to focus on the implementation side, going forward in some instances as well. But how do you think about the gradual kind of mix shift in the business as well but potentially providing an uplift on the margin front over time as well? And maybe when that could start to play into the model as well?
I will start with the uplift on the revenue and the margin and maybe Alex will also talk about this on the cloud solution. So obviously, I would say, in the last two years right now, we are -- most of the deal or pretty much all of them, more than 90% today are being on the cloud. This provide additional revenue lever that we didn't have in the past. For example, the infrastructure Tier 1, AWS, Microsoft Azure and to support it with Tier 2. The margin level on the Tier 1 is very small because basically, this is infrastructure from a third party. But the margin on the second tier is significant and relative very similar to our ongoing business. So mix of them. Obviously, it supports the revenue and I'm sure it can continue further.
So this is Alex. Just to complete what Roni mentioned, the majority of this are done in the cloud with full managed services, cloud services, a company then that increases not only the revenue but also the stickiness and the closeness with the customers. Now on top of what Roni said about providing the first two layers of the cloud services which are the technical hosting and the technical services around the cloud that this we provide today as part of our cloud services. And we are in a process of building also the applications support into the cloud services and thus providing 100% of full cloud services, full outsourced to us, to our customers. And this would be definitely another level of revenue. The type of it is long term, sticky and fixed across the long term. That's in our plans to add to our cloud services.
The next question is from Tavy Rosner of Barclays.
This is Chris Reimer on for Tavy. Actually, most of my questions have been asked already. I just wanted to clarify regarding the year-end guidance. You mentioned $7 million taking out due to the one European deal, correct? Just the one deal?
Yes. We are talking about this opportunity in the European market, Tier 1 customer, multi-country, multi-product that currently, in our guidance, although we have continued discussion with the customers, deep engagement where it took out the revenue in the guidance.
But that doesn't include any other deals that might have also been delayed.
We have, as Roni mentioned earlier, we have the existing and on top of that we have a significant pipeline, all of that is supporting the rest of the revenue.
And because you've mentioned the longer deal cycles because of the macro and also the deal sizes, should we be assuming that sales cycles will be longer versus the near term?
I think Roni mentioned that right now on the deals that we are doing, we are adding additional services, man service component that's making the deal volume the year and there also the sales cycle longer. This is something that we are hoping to continue because it will provide significant value to the company.
[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 two hours. In the U.S., please call 1-888-269-0005. In Israel, please call (03)9255938 and internationally, please call 9723955938. Mr. Al-Dor, would you like to make your concluding statement.
Yes. Sure. Thank you for all of you to joining us today. We welcome any follow-up questions, feel free to reach out Dina and Roni. Thank you for today.
Thank you. This concludes the Sapiens International Corporation's second quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.