Sapiens International Corporation N.V. (NASDAQ:SPNS) Q3 2023 Earnings Call Transcript

Sapiens International Corporation N.V. (NASDAQ:SPNS) Q3 2023 Earnings Call Transcript November 8, 2023

Sapiens International Corporation N.V. reports earnings inline with expectations. Reported EPS is $0.34 EPS, expectations were $0.34.

Operator: Welcome to Sapiens International Corporation’s 2023 Third Quarter Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Yaffa Cohen-Ifrah, Chief Marketing Officer and Head of Investor Relations. Thank you, Yaffa. You may now begin.

Yaffa Cohen-Ifrah: Thank you, operator. I want to welcome all of you to the Sapiens conference call to review our third quarter results for 2023. With me on the call today are Mr. Roni Al-Dor, President and CEO; and Mr. Roni Giladi, CFO; and Mr. Alex Zukerman, Chief Strategy Officer. Following the summary of the results, we will 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 provisions in the press release issued today also apply to the content of the call. Second to expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our expectation or otherwise.

On today’s call, we will refer to the non-GAAP financial measures. A reconciliation of GAAP to 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 link, which is available in the earnings release we published today. I will now turn the call over to Roni Al-Dor, President and CEO of Sapiens, Roni?

Roni Al-Dor: Good morning everyone, and thank you for joining us today for Sapiens third quarter 2023 earnings call. Sapiens has delivered another strong quarter in 2023, and I want to start highlighting some key points that demonstrate result. First and foremost, we remain committed to deliver results that align with the expectation we set earlier this year. In each quarter of three quarters in 2023, we have delivered revenue growth with expanding margins. The third quarter was yet another strong quarter for us, marked by further improvement in our operating margin. Revenue in the third quarter of 2023 totaled $130.8 million, up to 9.9% year-over-year. Operating margin this quarter increased to 18.4%. We are seeing continued momentum in key regions.

In North America our investment and increased sales team have contribute to our success in 2023, and in Europe we have maintained our strong performance and we are exciting about our momentum. Let’s start with North America, where we are gained traction through new logos and expansion with existing customers. Revenue in North America increased by 10.7% year-over-year. One example is our recent win with the American Armed Forces Mutual Aid Association a non-profit financial solution provider for military families and veterans who selected Sapiens Pro Series Customer Acquisition SaaS solution, consisting of Sapiens ApplicationPro, IllustrationPro, UnderwritingPro, and Intelligence, as a part of its legacy modernization and automation initiative.

AAFMAA selected Sapiens based on our proven ability to deliver timely, quality products and services in a digital environment, enabling them to better serve their members. This is a new Sapiens customer who’s implementing this schedule for completion during the second quarter of 2024. Workers Comp is category where Sapiens is gaining strength in North America. In the third quarter, we announced that South Carolina State Accident Fund, a state agency that offers guaranteed workers compensation insurance for governmental entities, selected Sapiens core suite for workers’ compensation to provide a more intuitive system and detail of workflow automation. SAF [ph] will also implemented Sapiens digital suite and Sapiens intelligence for more engaging user experience and enhancing processing, respectively delivery through Sapiens SaaS platform.

Moving to EMEA. Europe continued to be a key region for growth. Sapiens revenue in the territory increased by 13.8% year-over-year continued the growth momentum we saw in previous quarters. The Nordics [ph] are focused region in Europe where we continue to gain ground in the third quarter Aktia Life, one of the Finland’s top life insurance first Sapiens as it partners to lead its core system transformation via Sapiens CoreSuite for Life and Pension. Sapiens was selected for its proven experience in complex insurance ecosystem integration and for providing an end-to-end cloud-first digital enhancement platform for individual and group product across life, wealth and pension insurance. Aktia has recently experienced rapid change in customer behavior its digital efforts are critical steps towards enhancing efficiency and elevating the customer experience along the new product offerings.

Moving to South Africa. In the first quarter, a long standing customer of Sapiens in South Africa, a Tier 1 bank, expand its use of Sapiens CoreSuite for Life and Pension to launch its group risk proposition. The expanded use of Sapiens CoreSuite for Life and Pension is part of the bank strategy to launch new and improved products to its customer base. Adopting Sapiens CoreSuite for Life and Pension satisfied the requirements for complete and robust policy administration solutions. In addition, the Tier 1 South African Bank, which expanded its relationship with Sapiens into new territory, went live in Namibia. Recipients did suite for property and casualty. As the core system for its short term non-life insurance business there. The bank already used to IDITSuite for its short term operating in South Africa and Sapiens CoreSuite for Life and Pension for its Life and Annuity businesses.

IDITSuite was chosen by the bank for its expansion in Namibia based on its positive experience with the existing Sapiens relationship and the successful implementation in Sapiens IDITSuite in South Africa. This win exemplifies how our holistic relationship with our customer through their lifecycle can be growth driver for Sapiens. Shifting to our product portfolio, established product capability and functionality to compete effectively in any region. Sapiens goes further with a comprehensive product offering and dynamic platform that supports the entire product life cycle to bring holistic solution to customer with business application, digital data, and decision management products on top of our core P&C and life platforms. All our product segments including Life, P&C, workers compensation and digital performed well again in the third quarter.

We remain committed to provide innovative solutions that meet evolving needs to our clients. We are receiving awards and endorsements for industry analysts for our CoreSuite for Life and Pension platforms in North America and EMEA. This supports our growth expectation for this product line in this critical region. In the third quarter, Sapiens Reinsurance Master platform was named as Luminary Solution in Celent Ceded Reinsurance Solutions Global Reports. Sapiens CoreSuite for Life and Annuity platform was named as Luminary Policy Administration Solution by Celent in North America. Sapiens CoreSuite for Life and Pension, Celent 2023 Excellent Awards of the Breadth of Functionality category in EMEA region and was named a Luminary Solution. On October 2023, we hosted our North America Customer Summit in Tucson, Arizona.

I want to take a moment to discuss the importance of our Customer Summit, which was critical event for us. This year’s summit was the largest ever with over 500 attendees from 145 companies, including new and longtime customer from all of our business vertical P&C workers comp, life, venture [ph] and decision financial compliance. In addition, we hosted prospect and industry experts from Celent, Datos, Microsoft and more. We are empowered by the trust and the confidence our customers have in Sapiens. We were also proud to have 23 partners that attended with 18 sponsoring the events. Microsoft was the Gold sponsor and other industry leaders supported our summit further underwriting the strength of our partnership and the value they bring to our customers.

Our Customer Summit is a platform for meaningful discussion about our roadmap solution and industry trends. We had panels featuring industry analysts and customer offering valuable insight into our industry future and confident insight in our strengths and capabilities for our prospects. This summit focus on our cloud based digital and data offering across our core suite and business application solution, which enable our customers to grow while realized operating gains. We had a fantastic feedback from attendees and there is tremendous excitement around the improvement our offering can bring to their businesses. The success of our Customer Summit reflects the collective efforts of our sales, customer success, marketing delivery, and management teams in the North America region.

Our short leadership and strong partnership spirit enable our customers to run their most critical business functionality successfully. During the conference, we announced the launch of Sapiens Decision Model.AI, Generative AI Solution to Enhance Automation Speeds, Integrated Microsoft Azure OpenAI Services. Decision Model.AI the first product in second decision AI portfolio will address the growing market demand for decision management technology driven by machine learning and AI integration. I want to take a few moments and address the situation in Israel. As you all know, Sapiens is a global company founded the headquarter in Israel. On October 7, Israel was under terror attacks by Hamas, a terrorism organization. 1,400 people were killed in the attack and 242 were kidnapped civilians, babies, children and eligible people.

This attack forced Israel into a war. Our thought are with all the people who are suffering from the situation and those who have lost loved ones. Sapiens is a mature global organization with key members and operation across the globe. Our global operation includes development and support centers in 22 countries including the United States, Europe, India and Israel. Additionally, we have a global operations centers with well established business continuity program among these centers. We are well prepared and organized to continue supporting our customer employee during these challenging times. In conclusion, we are confident in execution our strategies effectively across our established region in various product category in which we compete.

Our team’s dedication highly execution level have been factor in our long term record of success. This confidence fuels our commitment to deliver excellent results to our customer and shareholders. Now, I would like to turn it over to CFO to provide more detail on our financial performance.

Roni Giladi: Thank you, Roni. I will begin with a review of our third quarter 2023 non-GAAP result. All comparisons are year-over-year versus Q3 2022 unless otherwise stated. I will follow with the comments on the balance sheet and cash flow and wrap up with our guidance for 2023. Revenue in the third quarter of 2023 increased to $130.8 million, up 9.9% from the third quarter of 2022. On a constant currency basis, our organic growth rate compared to Q3 of 2022 was 6.9%. Our revenue in North America totaled $54.8 million, comparing favorably to $49.6 million in Q3 of 2022, an increase of $5.2 million or 10.7%. The increase in North America revenue was due to growth across most of our line of business and reflect our momentum in this region.

In the last five quarters, our North America region grew quarter-over-quarter, reflecting the initiative and investment we implemented to grow this region. Our European revenue totaled $64.7 million a year-over-year increase of 13.8% compared to $56.9 million in Q3 of 2022. On a constant currency basis, reflecting organic growth of 7.5%. Revenue from the rest of world, which includes South Africa and APAC, declined 10.6% to $11.3 million in Q3 of 2023 compared to $12.6 million in the same quarter of last year. The decline in revenue is temporary and is mainly due to project go live. Overall year-to-date, our revenue in all our region are growing. Our year-to-date growth comparing to nine months ended September 2022 on a constant currency basis was 8.3% reflecting 7.2% growth in North America, 9.7% in Europe and 6.5% in the rest of world.

I will move now to revenue mix. Revenue mix in Q3 of 2023 from recurring software product and reoccurring postproduction services totaled $87.4 million compared to $75 million in the same quarter of last year, a $12.4 million increase or 16.6% growth from Q3 of 2022. We are extremely pleased with the momentum and growth of our recurring and reoccurring revenue stream, which as I will remind you, have higher gross margin than our one-time implementation and the company overall gross margin. This recurring software product and reoccurring postproduction services represent 66.8% of our total revenue this quarter compared to 63% in Q3 of last year and 64.3% in Q2 of 2023. Gross profit, in Q3 of 2023 was $59.3 million, growing by 10.7% compared to Q3 of last year.

Our gross margin this quarter was 45.3%, 30 basis point higher compared to Q3 of 2022. Operating expenses were $35.2 million, an increase of 7.8% compared to $32.6 million in the third quarter of 2022. Both of our R&D and sales investment have grown this quarter to support product position and sales effort globally. Operating profit in Q3 of 2023 was $24.1 million, an increase of 15.1%. Operating margin increased from 17.6% to 18.4%. During the quarter, we had tailwind from the new Israeli shekels versus the USA dollar, which reduced some of our cost and was partly offset by higher investment. Net income attributable to Sapiens shareholder for the third quarter of 2023 was $19.1 million compared to $16.9 million in Q3 of 2022. EPS for the quarter was $0.34 per diluted share, an increase of $0.04 or 13.3% compared to $0.30 per diluted share in the third quarter of last year.

EBITDA increased by 12.4% to $24.8 million, or 18.9% of revenue compared to $22 million or 18.5% of revenue in Q3 of 2022. Turning to our balance sheet and adjusted free cash flow. As of September 30, 2023, we had cash and cash equivalents and short term deposits totaling $173 million with a total debt of $59 million, which is scheduled to mature in three equal annual tranches until January 2026. During the third quarter of 2023, we generated an adjusted free cash flow of $1.7 million compared to $1.9 million in Q3 of 2022. During the third quarter, we paid a cash dividend of $0.26 per share reflecting a total dividend of $14.4 million for the first six months of 2023. As per our dividend policy, we will announce the second half of 2023 dividend when we announce our 20-F reports for 2023.

I would like to turn now to our guidance for 2023. We are reiterating our full year 2023 non-GAAP revenue guidance at the range of $511 million to $516 million, which reflect year-over-year growth of 8.1%. At the midpoint, however, we are increasing our non-GAAP operating margin guidance from a range of 18% to 18.2% to a range of 18.2% to 18.3%. To summarize, this was another strong quarter. Our revenue grew 9.9% or 6.9% on a constant currency basis. Our software product and reoccurring postproduction services grew by 16.6% and represent 66% of our revenues, and operating margin was 18.4% with an EBITDA margin of 19%. In closing, I would like to leave you with the following thoughts. First and foremost, we understand that the ongoing war in Israel may raise concern about potential implication on Sapiens business.

We are closely and continuously monitoring the situation, ensuring that our Israel employees are safe and Sapiens business continuity is kept intact. However, given the current situation and global macro concerns, I would like to provide some high level color on our 2024 revenue trajectory. We have never provided this level of color before in Q3, but given the abovementioned issues, it’s appropriate to us to give you, our investor, some sense of our visibility. We continue to be conservative and feel comfortable with delivering on current consensus estimates at $550 million revenue in 2024. To reiterate what Roni Al-Dor stated, Sapiens is a global organization with distributed operation worldwide. 93% of Sapiens revenue are generated globally outside of Israel.

85% of our employee are located outside of Israel and we have local management position and customer facing employees in each country we operate. The vast majority of our sales team is outside of Israel, close to our customer and prospects. We work with global banks around the world. We have a strong balance sheet with $170 million in cash with significant portion of our cash in USA dollars. With that, I will turn the call over to Roni. Roni?

Roni Al-Dor: Thank you, Roni. We deliver a strong quarter, given great success across our business, geographically and by product line. Importantly, we remain committed to deliver results that align with the expectation we set earlier this year. I will now ask the operator to please open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Dylan Becker of William Blair. Please go ahead.

Dylan Becker: Hey gentlemen, appreciate the question and great to hear that the Sapiens team and families are doing safe and well. I think I speak for everyone on the call and hoping for a quick resolution to the conflict there. But Roni, maybe talking about the demand drivers and kind of the accelerating need for change. Wonder when you’re talking to those clients, what’s the biggest driver? Is it their emphasis and need to drive efficiencies? Is it may be skewed towards new growth initiatives? Assuming it’s maybe a little bit of both, but wondering how your customers are thinking about prioritizing that spend today?

Alex Zukerman: Yes. This is Alex here. And Dylan, I’ll try to answer your question. When we look at our customers, they have several drivers to do business with us. One major driver is operational efficiency. And they need in this a bit non-stable financial climate to ensure that their business and their processes are fully operational with clear efficiency. Now, for us, our solutions across the board, when we look across our data solutions, our digital solution, actually our core solutions, they all have strong capabilities around operational efficiency, from bringing high level of automation to the processes, low code, no code, the ability to extend and extend the ability of users to perform their activities. All the direct-to-consumer and digital engagement tools that we provide those all together in our platform, a very strong driver for our customers to engage with us.

Another driver that we see is the ability to quickly identify an open niche or blue ocean type of business by the insurance companies and go quickly after this business. And this is where they really look for our capabilities around strong configuration, low code, no code, and the ability to deploy our systems in a record time in order to allow them to go to market.

Dylan Becker: Okay, got it. Super helpful. And then maybe too, there’s nice momentum in the postproduction product. And I think in the North American segment there seems like the prior sales restructuring is seeing some nice traction, but also how customer receptivity has changed, if at all. Now, we’re seeing a little bit of a recovery from carriers and loss ratios. You’re seeing that rate environment. Is that opening up the willingness to incentivize spend in this area?

Roni Al-Dor: I hope I can answer your question. It was a little bit difficult to hear you. And so just to share with everybody, we increase dramatically our sales organization, the marketing part, the account management part and the marketing. So all the three areas we start to see in early stage new things that we didn’t see it at the past, just because we are covering more customer than it was at the past. We did an outstanding client conference. I mentioned, I don’t want to repeat it. It’s also generated a lot of interest around digital data, cloud decision part and so on. So, we see as Sapiens growing and we are also, we have much more to offer, also on product and also on services. If I didn’t answer your question, let’s say ask again.

Dylan Becker: No, no, that makes sense. And then Roni, maybe too, if I could squeeze one last one in. So coming out of the conference, the common themes throughout, seem to resonate around strength in areas like workers comp, reinsurance and maybe even medical malpractice, I guess. What’s the secret sauce from a product perspective there? Is it the content? Is it again, the specialization around particular lines? Anything to call out there, as it was another area of encouraging commentary. Thanks, guys.

Alex Zukerman: Yes. So this is Alex again. So I think we need to look here. There are two major vectors that draw this attention of the market to our solutions. One is the unique capabilities across each one of our core platforms. When we look at workers comp, where we definitely have a remarkable traction and success. The comprehensiveness of the solution, its unique product market fit, the way it gives the solution on a functional level to the users and the business of worker compensation is exceptional and this is how the market recognizes it. Together with the hyper strong technology, everything is deployed in the cloud in a SaaS model, strong integration to external ecosystem partners that we brought together to the game.