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Sapiens International Corporation NV  (NASDAQ:SPNS)
Q1 2019 Earnings Call
May. 06, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2019 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 6th, 2019.

It is now my pleasure to introduce your host, Ms. Yaffa Cohen-Ifrah, Sapiens CMO and Head of Corporate Communications. Ms. Cohen, you may now begin.

Yaffa Cohen-Ifrah -- CMO & Head of Corporate Communications

Thank you, and good day, everyone. Our quarterly earning release was issued before the market opened this morning, and it has been posted on the Company's website at www.sapiens.com. Representing Sapiens 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 provisions in the press release issued today also apply to the content of the call. Sapiens expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in its views or expectations or otherwise.

Also, during the course of today's call, we will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued before the market opened this morning. A replay of this call will be available after the call on our Investor Relations section of the Company's website or via the website link, which is available in the earning release that we published today.

I will turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?

Roni Al-Dor -- President & Chief Executive Officer

Thank you, Yaffa. Sapiens continued to execute on our strategy to increase our topline goals and improve our profitability. I'm pleased to see that our momentum for 2018 continue in the first quarter of 2019. In the quarter, we focus on achieving our key objective for this year; winning new customers, cross-selling to existing customers, building customer success team to support our growth, leveraging offshore capabilities and managing overall course to improve operating profit.

As a result of this focused approach, our revenue growth in the quarter accelerated due to our North America segment which was 23% due to a very strong gains in our P&C businesses as well as goals in our European P&C businesses. In the quarter, we announced that Arizona-based KW Specialty, selected Sapiens cloud solution. Our Core Suite CoreSuite for Property & Casualty, ReinsurancePro, will support KW Specialty's wholesaler distribution model, enabling them to support policy billing claims and reinsurance as they launch a new insurance carrier. We were also pleased to announce that Gjensidige Group selected our P&C reinsurance solution over the cloud for its P&C and digital transformation project. This is a leading Nordic insurance group and we are very pleased that they have selected our solution. The first phase of the agreement will support Gjensidige operational in Denmark with an option for expanding into other region and various Sapiens solution.

After the end of the quarter, we announced two more wins. The first was Folksam Group, one of Sweden's largest insurance company, who selected Sapiens IDITSuite for Property & Casualty as its new digital core solution. The second was King Wai Insurance from Thailand that selected Sapiens IDITSuite for Property & Casualty to become the top digital insurance in Thailand. And lastly, a great example of cross-selling success in the quarter, Tier 1 South African Bank choose Sapiens to expand their Property & Casualty solution offering. This was existing Sapiens life & annuity clients that select our IDITSuite for Property & Casualty to support the increased need and the requirement for their customer.

We had three important go-live in the quarter. Georgia Farm Bureau with Sapiens P&C claims solution to streamline their process and increase their speed to market for their North America insurance and agents. Catholic Order of Foresters launched Sapiens Electronic Insurance Application software to modernize their application process. Lastly, Oregon Mutual Insurance went live with our policy administration system on the cloud for it' Property & Casualty homeowners line. Our best-in-class digital P&C platform is winning new businesses and taking market shares with its ability to offer and improve customer experience in highly configurable solution.

Just after the end of the quarter, we announced the new version of Sapiens IDITSuite Property & Casualty which feature automatically claims payment, next best action, providing instant claim payments to save time for agents and insurance and automatically identifying customer next best action, streamline process and increase customer satisfaction. We are constantly improving our offering by leveraging our onshore and offshore R&D team and by expanding the global base of insurtech technology and companies us to our ecosystem partnerships. Today, we have a comprehensive digital solution and digital hub that facilitates an open communication API-based platform, enable carrier (ph) fluid interaction with insurtech companies, ecosystem technology providers and business partners. We are well positioned to grow with state-of-the-art product platform.

As we discussed in our Q4 conference call, we execute a complete rebranding in the first quarter of 2019. Our new brand identity highlights Sapiens as a unified global provider of insurance software solution. We have integrated 11 acquisitions and their various products into our offering and have now unified all these assets into a (ph) luxury brand with new product name that clearly describe the main function of each product across our suite of insurance platforms.

In the quarter, we deliver enhanced margin performance with gross margin, operating margin, and net income all improving compared to last year. To support our goals in US and to build a pipeline for next year, we appointed a new Head of US Sales and add two new executive to support our US Life and Annuity sales activities. We are leveraging our offshore capability to lower our overall spend which help offset this planned addition to our sales and customer success team in the quarter. As a result, our operating margin expanded and this led to an increase in net income. I would like to thank the dedication of the Sapiens team in delivering these outstanding results.

I would like now to turn the call over to our CFO Roni Giladi to provide more details on our financial results. Please go ahead, Roni.

Roni Giladi -- Chief Financial Officer

Thank you, Roni. I will begin my commentary with a review of the first quarter non-GAAP result followed by comments on the balance sheet and end with our 2019 outlook. Revenue in the first quarter of 2019, totaled $76.8 million, up 8% from the first quarter of 2018, reflecting the improvement in growth rate compared to last year. Our revenue in North America totaled $38.1 million, an increase of 22.9% compared to last year and increase of 9.1% compared to prior quarter. Revenue in Europe, totaled $32.2 million, a decrease of 6.6% compared to last year, and an increase of 4.3% compared to prior quarter. Revenue in North America and Europe represent close to 92% of our total revenues.

Moving to gross profit. Gross profit totaled $33.1 million compared to $30 million in Q1 of last year. Our gross margin this quarter increased back to 43.1% from 42.6% in the first quarter of last year, and 42.7% in Q4 2018. The improvement by 50 basis points compared to last year is due to revenue growth and economy of scale and better cost structure following the increase in our offshore operation.

Operational costs. In the first quarter, we continue our R&D investments and incurred investment of $10.2 million as compared to $10.3 million in the same period last year and $9.7 million in the prior quarter. Although the total amount of R&D investment is generally flat compared to last year, our R&D headcount continue to increase as we manage cost effectively with onshore and offshore operations.

SG&A expenses totaled $11.2 million compared to $11.1 million last year and $10.8 million in the prior quarter. We continue to grow our sales, presales and customer success team to support our future growth. As a result of all of the above, our operating profit this quarter improved by 32.6% compared to last year and totaled $11.8 million or 15.3% operating margin compared to $8.9 million or 12.5% in the first quarter of 2018. This is the first time that operating margin exceeded 15%. Our operating margin this quarter improved due to improvement in gross margin and R&D investment ratio.

Our adjusted EBITDA this quarter improved by 25.9% and totaled $12.5 million compared to $9.9 million in last year, reflecting 16.3% of total revenue. Net income attribute to Sapiens shareholders for the quarter was $8.4 million or $0.17 per diluted share compared to $6.3 million or $0.13 per diluted share in the first quarter of last year. While our revenue grew 8%, our net income this quarter increased by 33% compared to last year. Tax expenses increased to $2.3 million as compared to $1.7 million last year and with effective tax rate of 21.4%.

Turning to our balance sheet, as of March 2019, we had cash and cash equivalents of $63.4 million as compared to $64.6 million at December 2018. Our cash position remained at the same level while we paid the first annual principal payment of our Series B debenture in the amount of $9.9 million in Q1 of 2019. Net cash provided by operating activity this quarter totaled $10.6 million compared to $9.2 million in 2018. This quarter for the first time, we implemented new accounting standard AFC 842, which require to present future commitments under lease agreements against assets for the right to use these assets. While there is impact on the balance sheet, there is no impact on the P&L.

I would like to turn now to our guidance for 2019. Looking out to the remainder of 2018, we anticipate the primary driver of growth to be continued expansion of our P&C segment in North America and Europe regions, along with stable outlook for life and annuity segments. We remain confident in our ability to achieve our full year 2018 guidance. As a result, we are reiterating 2019 full year non-GAAP revenue in the range of $318 million to $323 million. We expect to see incremental revenue growth and growth rate throughout the year. In 2018, we anticipate incremental margin improvement quarter-after-quarter, as we manage our cost structure, allowing us to deliver economic of scale with our current infrastructure. We are reiterating our non-GAAP operating margin in the range of 15.2% to 15.6%. However, we now expect to be on the higher-end of this range.

I would like now to turn the call back to Roni Al-Dor for closing comments. Roni?

Roni Al-Dor -- President & Chief Executive Officer

Thank you, Roni. After a year of transition in 2018 for Sapiens, I am pleased to see the Company back on track with growth and margin expansion in the first quarter of 2019. Our 2019 priorities are continue to expand our P&C businesses in North America, EMEA and APAC, return our Life and Annuity businesses to grow and deliver further margin expansion. I am pleased with our execution in another quarter of solid operating results in which we execute well against our long-term strategies priorities of long-term growth, profitability and improving shareholder value.

I would like now to close our prepared remarks and open the call for questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time we'll begin the question and answer session. (Operator Instructions) The first questions from Mayank Tandon of Needham & Company. Please go ahead.

Mayank Tandon -- Needham & Company -- Analyst

Thank you. Congrats on the results. For Roni Al-Dor first. Roni, could you talk about these wins that you announced. Are these displacements of competing vendors or are you replacing legacy systems and then maybe just talk about like what is determining these client wins? Is it functionality? Is it price? Is it a combination of both? That would be helpful. Thank you.

Roni Al-Dor -- President & Chief Executive Officer

Hi, Mayank. I think in the question you answered also the answers. So yes, we definitely signed a few deals in the quarter. And I think a most of them on the P&C business, mainly in Europe and -- when we say Europe, it's rest of the world and also in the United States. In all the cases, we are competing with close to 90% with Guidewire. But say also with the others. I think the main reason is definitely not the price, is terms of our functionality, our business model that is one hand to shake, is on the reference that they are getting from their clients, the confidence and so it's mix of all of this and very long-term. We don't have any functionality issue right now. We improve our digital offerings. So we are good also in those area. And most of those company it's to replace their legacy system and again, we are in a competitive situation, but we as you see we signed deals.

Mayank Tandon -- Needham & Company -- Analyst

Great, that's helpful and then I guess the question for maybe for Ronnie Giladi would be a follow-up to that would be you've had these deal wins, you had a strong first quarter to start the year, but you held your guidance on revenue intact. But just curious in terms of your thought process around the potential drivers to that range. Are you being conservative? Or do you think like these deals will take time to ramp up? That's why, you're holding guidance intact despite the strong deal activity in the quarter.

Roni Giladi -- Chief Financial Officer

Hi, Mayank. Thank you. Beginning of the year we started our revenue guidance at the range 8%, 10% organic and we are maintaining this level. Basically, this is a slightly I call the -- slightly higher than what we anticipated in the quarter. We will see the growth rate and obviously, dollar value going up quarter-over-quarter, as we continue during the year. As more deal will come, they are mainly on the bookings side and the revenue of impact of that is not significant. Obviously, the deal that come early in the year are more significant ones. So we'll see increase in revenue and increase in revenue growth rate, but we are leaving a conservative revenue for the year.

Mayank Tandon -- Needham & Company -- Analyst

Okay. And then one final question from me on margins. Obviously, really impressive performance on the margin side. It's good to see margins back to that mid-teens level. Just looking ahead though like what is the optimum margin level for the Company and still growing at let's call it a low double-digit pace? And then maybe if you could talk about the levers that you still have to drive further margin expansion, if we can assume that going beyond the 2019?

Roni Giladi -- Chief Financial Officer

Of course, so before we enter 2019, our mid-term operational margin was between 15% to 17%. This year is the first time that we entered the range. We are right now at the level of 15.3% and as we mentioned, we will see also here improvement on operational margin as we continue quarter-over-quarter. The leverage that we have today are basically coming from two-folds. The first one is the scalability. As the Company is growing, some of the cost is fixed based and therefore there is operational leverage on that and the offshore operation that also improve. Today we're almost 1,000 employee in India. This give us significant powerful momentum to improve profitability. We mentioned that the R&D for example stayed the same level but we'd like to mention that we almost recruited 100 employees in India to this segment to the R&D. So although the growth is not significant in the dollar value, in terms of effort is significantly higher. This allow us to improve operational margin. Looking ahead, we are right now shooting for a level of 17% operational margin in the mid-term.

Mayank Tandon -- Needham & Company -- Analyst

Got it. And that's very helpful. Great job guys. Thank you.

Roni Giladi -- Chief Financial Officer

Thank you.

Roni Al-Dor -- President & Chief Executive Officer

Thank you.

Operator

The next question is from Bryan Bergin of Cowen. Please go ahead.

Bryan Bergin -- Cowen and Company -- Analyst

Hi. Thank you. I wanted to get a sense up here on the overall macro. North America has clearly picked up nicely. I'm curious, if it's all a function of the market share gains you're referencing or also to pick up an underlying demand. And then on that note, I'm curious if you're seeing any notable changes in spending behavior from clients that may have seen recent M&A or leadership changes?

Roni Al-Dor -- President & Chief Executive Officer

We continue to see growth in North America. We definitely is a competitive situation but we are also -- based on all the acquisition we are range of the product that we are bringing to the market is become big and big and big. We are also focusing on their lower tier and mid tier. So in general, it looks right now positive. We don't see any negative changes at this moment.

Bryan Bergin -- Cowen and Company -- Analyst

Okay. And then on the Life and Annuity business, you mentioned that was your priority here to return to growth. Can you just talk about some of the top strategic priorities in that part of the business for you to get there?

Roni Al-Dor -- President & Chief Executive Officer

Yes we are -- right now it's a steady state. Just to remind, we have three-product offering. We have what we call component is a mainly North America, illustration underwriting. We have our -- a core suite for life -- is mainly right now in Europe. But we plan to put back investment for North America. We just hired two new sales people in order to put more effort in that area and where the consolidation matter. This is the area that is what we call it the path closed book, we plan to see more and more demand mainly in Europe. So the overall, right now it's steady state but we believe based on their booking that we plan to sign this year, we will see more growth in next year.

Bryan Bergin -- Cowen and Company -- Analyst

All right. Thanks very much.

Roni Al-Dor -- President & Chief Executive Officer

Thank you.

Operator

The next question is from Tavy Rosner of Barclays. Please go ahead.

Chris Reimer -- Barclays -- Analyst

Hi, this is Chris Reimer on for Tavy. Excuse me. Thank you for taking my question. I was wondering -- most of my questions have been answered already, I just wanted to ask about North America and the increase there in revenue growth. What was basically driving that? Was it consolidation mostly?

Roni Giladi -- Chief Financial Officer

The North America growth is coming from the -- our product on the P&C market, Adaptik integrated with Stream. We see high demand to this. We've been able to close several deals that impact the revenue. The pipeline also is looking good. So this is mainly P&C of North America.

Chris Reimer -- Barclays -- Analyst

Okay. And could you give any color on how many contracts are cloud based? And what kind of acceleration you're seeing with cloud-based product?

Roni Giladi -- Chief Financial Officer

Yes, out of the several deals that we announced recently, I would say 40% are coming on the cloud base. We see high increase in cloud-based RFI or RFP coming to us. More on the USA say, I would say more than 50% of the RFP are coming on cloud base and in Europe base, slightly lower, I would say 30%, 35%. We obviously been able to answer this on the demand level in terms of ability to execute and deliver this.

Chris Reimer -- Barclays -- Analyst

Thank you very much. It's very helpful.

Roni Giladi -- Chief Financial Officer

Thank you.

Operator

(Operator Instructions) We have a follow-up question from Bryan Bergin. Please go ahead.

Bryan Bergin -- Cowen and Company -- Analyst

Hi, thanks for taking the follow-up here. I just wanted to ask on the M&A pipeline. Can you just give us a sense -- you've obviously, lapsed Adaptik by a year now, plus -- and that's integrated. Any comments on your key priorities in the M&A channel? And then how are you finding value in the channel?

Roni Giladi -- Chief Financial Officer

Hi, this is Roni, again. Our last M&A was Adaptik one that we did early in 2018 where we said that we are going to integrate this with the Stream. We are right now a year behind and we are feeling that the integration is fully completed. After this acquisition, we strategically made some slowdown on this vertical in the M&A side and focused on the operational side in terms of revenue growth and operational margin. In the last quarter, we mentioned that we opened our eyes of discounting pay in terms of looking for customer base, geographic expansion or complementary solution. We are looking right now on deal on the small size to medium size. I would like to comment that the pipeline is increasing. We are looking into it. This is our field with vertical of growth on top of new customers and existing ones. The valuation quite so is higher than what we saw in the past. The entire reinsurance market is in higher valuation. We are looking to do some potentially during this year.

Bryan Bergin -- Cowen and Company -- Analyst

Okay. Thanks for the color.

Operator

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 US, please call 1 (888) 295-2634. In Israel, please call 039255918. And internationally, please call 972-3-925-5918. Mr. Al-Dor, would you like to make your concluding statement?

Roni Al-Dor -- President & Chief Executive Officer

Yes. Thank you to operator and thank you for participation for joining us today call. Have a good day.

Operator

Thank you. This concludes the Sapiens International Corporation first quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.

Duration: 29 minutes

Call participants:

Yaffa Cohen-Ifrah -- CMO & Head of Corporate Communications

Roni Al-Dor -- President & Chief Executive Officer

Roni Giladi -- Chief Financial Officer

Mayank Tandon -- Needham & Company -- Analyst

Bryan Bergin -- Cowen and Company -- Analyst

Chris Reimer -- Barclays -- Analyst

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