Sapiens International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's 2023 4th quarter and full year financial results conference call. Sapiens issued a press release before the market opened this morning and it has been posted on the company's website at www.sapiens.com. All participants are presently in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session.

Operator

I would now like to hand the call to Ms. Yaffa Cohen, Sapiens' Chief Marketing Officer and Head of Investor Relations. Yaffa, would you like to begin?

Speaker 1

Thank you, operator. I would like to welcome all of you to Sapiens' conference call to review our Q4 and full year results for 2023. With me on the call today are Mr. Roni Al Dor, President and CEO Mr. Roni Girardi, CFO and Mr.

Speaker 1

Alex Zuckerman, 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 provision in the press release issued today also applies 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.

Speaker 1

On today's call, we will refer to 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 want to turn the call over to Roni Al Dor, President and CEO of Sapiens. Roni?

Speaker 2

Thank you, Rafa. Thank you for joining us today. 2023 was the year in which Sapiens successfully execute our growth strategy across both our regions and our product categories. I'm happy to report that in Q4 of 2023, Sapiens again delivered strong growth and resilience. Let's dive into the details.

Speaker 2

I will start with highlights from 2023 and then review the Q4 performance. In 2023, revenue increased by 8.4% and operating profit rose by 12.8%. Our growth was distributed across the region we serve. On a regional basis, Europe was impressive 10.5%, North America achieved growth of 7.4%. Our annual operating margin was a robust 18.3%, reflecting our continuous commitment to operational efficiency and prudent financial management.

Speaker 2

I would like to emphasize several notable business achievements from 2023 that will serve a strong foundation for our objective in 2024. 1st, as promised, our North America business has experienced robust growth and we are well positioned to sustain this growth in 2024. We expand our North America sales and marketing team, reinforcing our presence and capabilities in this important market. This investment will ensure that we are equipped to continue to grow in this key region. 2nd, we successfully introduced the Global Customer Care Engagement Model, which is playing a pivotal role in enhancing our customer relationship and creating stronger connection with our client.

Speaker 2

Furthermore, we achieved significant increase in both new and cross sales, showcasing our ability not only to retain existing clients, but also to attract new ones. 3rd, we made significant progress in expanding our market share by signing about 30 new deals with both new and existing customer across core data, digital and cloud in P&C, workers' comp, life and reinsurance. This expansion is testament to our commitment to growth and increasing recognition of our value proposition in the insurance market. In addition, in 20 23, we completed multiple successful go lives globally. Lastly, we have recently started collaboration with CitiM Integrators to expand our reach and accelerated growth.

Speaker 2

To manage this new channel, we have hired a senior executive to develop our strategy and oversee the SI relationship. Our plan is to work with SI mostly in upper tiers and specific regions. We are currently in the process of selecting our preferred SI and are committed to this approach. As an example, in 2023, we partner with a leading SI in one of the large worker compensation deals in North America. We believe working with SI will have a mid- to long term impact.

Speaker 2

This achievement underscore our readiness to tackle the challenges and the opportunities in 2024. Now let's delve into our regional performance, starting with North America. As I mentioned earlier, our North America sales, marketing, customer success, sales support and product marketing team were expanded with the express goal of financing and supporting sales growth. These expansions aligns with the demand we have experienced in North America. We are particularly excited about the momentum we have experienced in the Life segment in North America and are committed to capitalize on this growth opportunity.

Speaker 2

We closed new deals in the Life and Annuity for both core and components, a significant step up from prior years. P and C and workers' compensation continue to be verticals in North America where we are adding new customers. In 2023, we signed new P and C customer and new workers' comp deals. Our proven track record in successful implementation and ongoing support were also key factor in winning these deals. Reinsurance remained an active segment in North America for 2023 and Sapient signed new customers on the platform.

Speaker 2

We are winning reinsurance with our award winning solution, enabling insurers to automate and manage end to end program with efficiency and control through seamless integration. In EMEA and APAC region, we signed P and C bills across all of our products and new bills for our CrossFit Life platform. Our pipeline and backlog coming into 2024 are strong across all of our product lines, including P&C and Life and Pension, delivered in SaaS model. This position us favorably to maintain momentum, secure new deals and expand our presence in these markets. Our commitment to growth in North America, EMEA and APAC is underscored by increasing in the size of our teams in these regions, including additional headcount across sales, marketing and product marketing.

Speaker 2

Furthermore, we anticipate continued momentum and growth in cross selling opportunity within our existing accounts across all regions throughout 2024. Additionally, our traditional territories in EMEA and APAC are showing significant growth potential, particularly in the Life and Pension and P and C space. This growth is a direct result of the investment we have made over the past 2 to 3 years, strengthening our foothold in these markets. As mentioned in the previous call, we believe that the APAC region, which has experienced growth and has shown our successful land and expand strategy will be additional growth catalyst for Sapiens in the near future. We are building a pipeline in this region and are excited about the progress we have made with current implementations.

Speaker 2

Now turning to the Q4. Our overall revenue growth in Q4 was impressive at 9.6%, and Q4 operating margin was 18.4%. I want to highlight 2 successful go lives in the 4th quarter. First, in the Nordic region, a leading Norwegian insurance company, JensdBi, or GPF, went live with Sapiens CoreSuite for life and pension and Sapiens Cloud Services for their individual saving. It is very exciting.

Speaker 2

GPF is the 1st Nordic customer to go live with CoreSuite, which will expand the insurer's digital capability, boost its leading market position. 2nd, a leading European automotive brand went live with Sapiens' Editsuite and Sapiens Cloud for the company's sales guarantee and warranty insurance lines of business. Sapiens solution replaced the company existing system portfolio management and claims management. Phase 1 of the implementation for automotive warranty took just over a year with the 2nd phase of product warranty implementation planned for 2024. And lastly, in the Q4, we were engaged by Saskatchewan Workers' Compensation Board to its core workers' compensation system.

Speaker 2

Saskatchewan WCB selected Sapiens' core suite for office compensation, digital suite and intelligence to transform its legacy core system with a modern integrated platform for efficient service delivery. In summary, our regional performance in EMEA and North America and strong momentum in 4th quarter as we exited 2023, position us well for continued growth and success in 2024. We remain dedicated to deliver value to our customer and shareholders. Looking ahead to 2024, I want to share some key initiatives that will guide our strategic direction. 1st, continue our transition to SaaS with all our products with our evolved Sapiens Insurance platform.

Speaker 2

Sapiens Insurance platform include an end to end integrated business led SaaS platform with advanced technology and data capabilities. The Sapient's insurance platform unifies our core insurance capabilities, our digital engagement solution, our advanced data capabilities and our ecosystem partners into a coherent, fully integrated yet modular platform focused on our customer business need, harnessing the power of our ML and AI capabilities, our decision management tools and our new generative AI capabilities to provide an innovating data driven operation. Sapiens Insurance platform operating value lies in technology standardization across all products using a common tech stack and reusability of components across our various proposition. The platform value proposition for our customer and prospect is aimed as an enhancing efficiency, driving growth and fostering innovation. Sapiens plans to continue leading with our SaaS based offering across all our markets and all our products.

Speaker 2

The new deals we are signing now are based on our SaaS model, which aligns with our core strategy going forward. In parallel, we are engaging with our existing customer base across our solution to initiate SaaS transition program for customers currently on prem. 2nd, expanding North America, where we have made significant investments and sustain our growth in Europe, where we have a strong footprint by leveraging existing localization and reference to acquire new customer. In addition, focusing on cross selling to existing customer to take advantage of our wide range of product Sapiens offers. In conclusion, we are exciting about the opportunity that lie ahead in 2024.

Speaker 2

Our strong performance in 2023 and strategic initiatives position us well for continued growth and success. Now, I would like to turn the call to Roni Giladi, our CFO. Roni?

Speaker 3

Thank you, Roni. I will begin my commentary by reviewing the Q4 and full year 2023 non GAAP results, followed by comment on the balance sheet and cash flow. I will wrap up with our guidance for 2024. Revenue in the Q4 of 2023 was $130,900,000 an increase of 9.6% compared to $119,500,000 in the Q4 of 2022 and slightly higher than the previous quarter. On a constant currency basis, our revenue grew by 7.5%.

Speaker 3

Revenue mix. Revenue from Recurring Software Products and Reoccurring Post Production Services totaled 19.4 $1,000,000 compared to $77,700,000 in the same quarter of last year, a $12,700,000 increase or 16.3% growth from Q4 of 2022. This recurring software product and reoccurring post production revenue represented 69.1% of our total revenue in the 4th quarter compared to 65% in Q4 of last year. We are extremely pleased by the overall growth and the growth rate of recurring software products and reoccurring post production revenue. Geographic breakdown.

Speaker 3

Revenue in North America was $54,900,000 compared to $50,800,000 in the year ago quarter, an increase of 8% $4,100,000 Revenue in Europe was $65,200,000 a year over year increase of 14.7 percent compared to $56,900,000 On a constant KMC basis, revenue in Europe grew by 10.3%. Revenue in Rest of World, which includes South Africa and APAC, was $10,800,000 a decline of 8.3% compared to prior year quarter due to customer Phase 1 go live in APAC. Profitability. Operating profit and margin in the Q4 of 2023 were $24,200,000 and 18.4 percent of total revenue, respectively, compared with $21,100,000 and 17.6 percent in Q4 of 2022. We expanded our profitability by improving our gross margin by 40 basis points and reducing our operational expenses margin by 40 basis points also.

Speaker 3

Although in terms of dollars, operational expenses increased. This resulted in an 80 basis point improvement in our operating margin. We are confident that we can continue to both grow our business and further improve our gross margin. During the quarter, we had net financial income of $600,000 coming mainly from interest income, which was partially offset by interest expenses of $500,000 related to our debenture. Net income attributable to Sapiens shareholders for the Q4 of 2023 was $20,100,000 up 11.4 percent from $18,000,000 in Q4 of 2022.

Speaker 3

Earnings per diluted share was $0.36 for the Q4 of 2023, up 12.5% from $0.32 of the Q4 of 2022. Turning now to our full year results for the 12 months ended December 31, 2023. 2023 revenue increased to $514,800,000 up 8.4% compared to $474,800,000 in 2022, and in line with our higher range of our guidance. North America revenue represented 41% of total revenue and European revenue represented 50% of total revenue. On a constant KMC basis, our annual revenue increased by 8.1% in 2023.

Speaker 3

In 2023, revenue growth came mainly from 9.8% revenue growth in Europe on a constant currency base, 7.4% growth in North America, and I would like to remind you that in 2022, we grew 4.3% in North America, and Rest of World, which grew by just under 2%. For the revenue mix in 2023, revenue from recurring software products and reoccurring post production services totaled $342,000,000 compared to $300,000,000 in 2022, a $42,000,000 increase or 14% growth. This year, we will start to report our annualized recurring revenue or ARR numbers. We will provide ARR results quarterly. Our ARR revenue includes subscription, term license, maintenance, application maintenance and cloud solution.

Speaker 3

The ARR run rate is the sum of these revenue as per the last quarter ended multiplied by 4. Our ARR for Q4 of 2023 totaled $164,800,000 reflecting 13.5% growth from Q4 of 2022. I want to highlight the following. Gross profit increased in 2023 by 30 basis points. Operating margin increased to 18.3%, increase of 70 basis points.

Speaker 3

Earnings per diluted share was $1.35 compared to $1.21 in 2022 and EBITDA increased 11.7% to 19%. Turning to our balance sheet. As of December 31, 2023, we had cash and cash equivalents and short term deposits totaling $202,000,000 and debt of $60,000,000 which is scheduled to be paid in 3 equal payments, of which the first one was paid in January 1, 2024. Turning to our adjusted free cash flow. June 2023, we generated adjusted free cash flow of $70,600,000 compared to $36,100,000 in 2022.

Speaker 3

Our adjusted free cash flow in 2023 was 94.1 percent of our non GAAP net income, compared to 53.7% in 2022. We achieved strong cash flow in Q4 and the full year, demonstrating our ability to convert net profit to free cash flow. And finally, in terms of M and A, we acquired a small company at the end of 2023 to strengthen our presence in the Nordic region. The transaction aligned with our commitment to better serve our clients in this key market. The impact of the acquisition is immaterial to 2023 2024 results.

Speaker 3

Today, we are introducing the following guidance for 2024. Revenue. Non GAAP revenue in the range of $550,000,000 to $555,000,000 represent growth of 7.3% at the midpoint. This growth anticipates high single digit organic growth in North America and in Europe and low single digit growth in the Rest of World. Operating margin.

Speaker 3

Non GAAP operating margin is expected to be in the range of 18.1 percent to 18.5%, representing a stable operating margin at the midpoint compared to 2023 operating margin of 18.3%. I want to explain the rationale behind our guidance. As previously mentioned, we began offering subscription a year ago, primarily in North America and for a specific product line. This year, we plan to expand and offer our subscription for new deals for all products globally. Additionally, we intend to transition our current customer to a subscription based model in the upcoming years.

Speaker 3

The continued transition to SaaS for new deal will result in: 1, convert part of revenue from post production services to subscription revenue 2, shift of revenue that are currently part of preproduction revenue, which are non recurring into subscription revenue, which are recurring and will be recognized over a longer period. The financial impact will be reduction in our total revenue in the short term, 1 to 2 years, and an increase in our recurring revenue and ARR in the mid to long term. We expect the impact of our annual growth rate due to the change to be around 1% headwind to revenue. Therefore, our growth rate would have been approximately 8.3% at the midpoint had we not made the shift to subscription regarding revenue. Operating profit.

Speaker 3

Over the past few years, we have successfully managed to increase our revenue while improving our profit and margin. However, this year, we have made a strategic decision to continue our transition to SaaS and increase our sales and marketing investment to further accelerate growth into 2025 and beyond. Despite these strategic steps, we aim to maintain our operating margin, while simultaneously increasing our operating profit. The impact of the transition into SaaS and increased investment will be partially offset by increasing our offshore ratio, operational efficiency and reduction in G and A expenses. We believe this strategic decision will better serve the company's long term growth and improve our recurring revenue and shift more revenue to ARR.

Speaker 2

I will now turn the call back to Roni Hendor. Roni? Thank you, Roni. 2023 was a year of growth and profitability highlighted by accelerating growth in North America and continued growth in Europe and Rest of the World. We delivered revenue growth for the year, surpassing the $500,000,000 mark and healthy increase in our operating profit of almost 12.8% to achieve an operating profit margin of 18.3%, demonstrating our ability to profitability scale our business.

Speaker 2

Looking out over the remainder of 2024, our priorities are 1, to transition all of our products to SaaS delivery model with Sapiens Insurance platform and second, leverage our investment to drive performance in all our key regions, North America, EMEA and Rest of the World. I would now like to close our prepared remarks and open the call for questions. Operator, we are ready to open the call for Q and A.

Operator

Thank The first question is from Dylan Becker of William Blair. Please go ahead.

Speaker 4

Hey, gentlemen. Doing that job here. Maybe starting with Ronny A or maybe even Alex too. You guys have talked about kind of the SaaS transition, the focus on data and integrated systems. So I'm wondering to what extent that coming up in conversations with data and real time decisioning kind of causing a shift in how carriers think about their risk exposure and their risk management given kind of some of the compounded complexity of legacy and siloed systems that they're operating in today, how that kind of helps fuel this overall SaaS conversion and momentum you're seeing?

Speaker 5

Hi, Dylan. This is Alex speaking. So definitely, this is actually giving us a strong push in the view of our customers due to the issues that legacy systems has with antiquated data management and closed systems. And we see here a proposition that we are coming to the market with the platform proposition that enables seamless integration of the core processing capabilities to data and analytics, providing not only a retroactive analysis of what happened in the business, but actually ability to take decisions and manage the company workflow based on data. And we're using also our decision tool that is a tool that's sold to the market, but also now used inside our platform to increase automation and to manage the data properly.

Speaker 5

And this brings us the ability to run a much more data driven proposition and which is definitely resonates with the market.

Speaker 4

Got Okay. Super helpful. Thanks, Alex. Maybe, Ronny, a for you, encouraging kind of to hear about the headcount investments here and how that's fueled by the broad based kind of demand you guys are seeing. I wonder how to think about kind of the balance between investing in this go to market capacity and kind of the needed implementation support as well.

Speaker 4

You called out a higher, and kind of doubling down on partner ecosystem. But wondering how you think about the balance between the two and how this can maybe accelerate that shift towards a more product oriented revenue

Speaker 2

base? Okay. Hi, Diren. This is Roni. So a few questions that you asked, I'll try to answer them.

Speaker 2

One about the product versus services and all the system integration. In sections for the last many years, we are shifting R and D to India. So we can do a good ratio between offshore, onshore. And we build a very strong organization that allow us to develop more things with less and that allow us to shift things from pure R and D to sales and marketing organization. In terms of the we as I mentioned on the call that we are taking very serious the SI, but it's still not the majority part of our revenue.

Speaker 2

And we also based on the decision that we made, we don't see huge overlap between what we plan to bring and what they are saying. And we believe that maybe we can lose few percent of the revenue, but we can get more business. So we don't see some dramatically change on the ratio part.

Speaker 4

Got it. Okay. That makes a lot of sense. And then lastly, maybe touching on Ronny G. So appreciate the ARR disclosure, a nice growth here as well as kind of the post production side.

Speaker 4

Wonder what's the right way of thinking about kind of this ongoing mix shift towards these two segments? And it sounds like it's kind of picked up, and given that these kind of are the areas driving a lot more of the growth versus that kind of lower margin services side?

Speaker 3

Thanks, guys. Hi, Dylan. So first, you're right. Both of these verticals, the ARR and product and post production services will go faster than the company growth. This is as we feel the implementation piece all the time we are increasing the layers of this revenue stream.

Speaker 3

I can say that in the ARR piece, we also going to shift some of the revenue, which is in the post production to the ARR, revenue that include, for example, that we categorize as services, for example, upgrade or implement the application maintenance and over time with the new deals will be part of the subscription and increase our ARR. So overall, both of these categories will go faster than the company grow going forward.

Speaker 4

Got

Operator

The next question is from Kevin Kumar of Goldman Sachs. Please go ahead.

Speaker 4

Hi, thanks for taking my question. I wanted to ask about the progress towards the cloud. It sounds like that's increasingly a focus here. I guess how many customers migrated to cloud in 2023? And more strategically, how do you think about kind of incentivizing customers who may be on on premise to kind of make the jump and transition over the cloud?

Speaker 2

We are for a long term, we shift we build our cloud services organization and we shift the majority of our product to the cloud. I think what we are now coming with the main message that's our proposition. So if the past, it was more flexibility, people can choose 1 or the other. At this moment, based on all the investment and the maturity of our product, we are coming to the market SaaS proposition. That means that the software and part of the maintenance and all the cloud services is coming as one package.

Speaker 2

And we are just in very, very specific case approval by me, by myself, we can allow to do something different. But it's a journey that it takes time, but for the new business, this is our main message.

Speaker 4

Got it. And maybe one on kind of dissecting the growth between kind of new logo adds this year versus kind of cross selling and expansion. How is that evolving? Where does that land, I guess, for 2023? And how are you thinking about that mix of new versus expansion in 2024?

Speaker 4

Thank you.

Speaker 2

We can Roni, you can answer also. But we in seconds, we have a huge client base, but we also believe that we must need to continue to bring new business. So Sapiens many, many years, we are not type of company are saying, okay, we sold to these customers, let's the majority of our work to move them to the cloud. We are definitely putting a lot of effort to bring a new business in parallel to shift to the cloud. So it's definitely not our main focus just to move to the cloud.

Speaker 2

This moment, we have continued investment. And as I mentioned, we increased investment in our strategy in product marketing, in marketing, sales and CEC. So overall, we increased the investment and we are looking for a both incremental.

Speaker 3

Evan, maybe I will add one more sentence. In terms of new logo give or take, we are at the same time, but the number of deals or product that we saw to the same customer is bigger than last year. And also from growth opportunity, this is a significant improvement from 2022. This number of growth opportunity, additional product to existing customer also we are right now very close to almost 30 new deals in 2020 3 together, new logo and cross sell opportunity deals.

Speaker 4

That's helpful. Thank you for taking my questions.

Speaker 3

Thank you.

Operator

The next question is from Mayank Tandon of Needham and Company. Please go ahead.

Speaker 6

Great. Thanks. Good morning, guys. This is Sam on for Mayank. Today, I wanted to touch on outlook for the year.

Speaker 6

Could you guys talk about some of the macro assumptions you have built into the revenue guide and maybe provide any commentary on how we should think about the revenue and margin trajectory throughout the year?

Speaker 3

If we look in the last 2 years, European market was growing double digit or close to double digit. Macro environment slightly slower than in the past, not significant, but slightly. And as we've said, we are going to grow in the European region, high single digit. In North America, we did turnaround. If I'm looking back 2 years, we almost did not grow over there.

Speaker 3

Last year, we grew 4% and this year, close to 8%. And we mentioned that we are going to grow next year high single digits. And in APAC, which include APAC in South Africa together, we have a nice pipeline also in APAC and we are going to have a mid single digit also in rest of all region towards 2024. We mentioned that we are going to grow about 7.3 percent at the midpoint between $550,000,000 to $555,000,000 But we also mentioned because of the transition to SaaS that we continue to do, we started this in 2023. The impact on the revenue is about 1%.

Speaker 3

So overall, we are expecting to grow without this at 8%.

Speaker 6

Got it. That's helpful. Nice little color on that. And then just given you guys have been experiencing a couple of quarters of stronger growth, are you guys seeing any changes in terms of competition or win rates across whether it's Europe, North America or APAC?

Speaker 2

Not something dramatically. In the we have several products, I think in the workers' comp, we're in a leading position in the reinsurance, we are leading position. In the last few years, we see much stronger on the life and the competition is not as difficult. I think the area that we are seeing all the time more competition is around the P and C and also different between North America, it's many players, but in Europe is majority of North America is Guidewire and all the rest is more local company like RGA or Killen and so on, all locally in Asia. So more competition on the P and C, all the rest is more or less the same or even Sapiens in better position than it was in the past.

Operator

The next question is from Aleksey Gogolev of JPMorgan.

Speaker 7

Hello, everyone. Thank you for the question. I was wondering if you could disclose the number of customers that are on the cloud. I seem to recall that at the end of 2022, you were saying there were about 120 customers on the cloud. Any update on that number, please?

Speaker 3

Probably have additional 20 plus customer on the cloud as of today. We do not have the exact number, but it's probably close to 150.

Speaker 7

Perfect. Thank you, Rami. And now that you're disclosing ARR, would you be able to say what is the share of cloud customers in ARR?

Speaker 3

The vast majority of the ARR is a customer that's on the cloud.

Speaker 7

Perfect. And I also wanted to ask you about PMC in North America. I recall that back in 2022, you were saying revenue contribution of PMT in North America was about $50,000,000 Any update on that number or perhaps how it has grown over the last year?

Speaker 3

Can you repeat the question, Alexei?

Speaker 2

The P and C.

Speaker 7

Yes. Share of P and C. Alexei, we're building in North America.

Speaker 2

In North America, we have 3 product lines beside the workers' comp, it's also P&C, but we categorize in difference. We have what we call CoreSuite Life, and we have the NPL, it's a company that we acquire and then we have, I think it's very old. So all of this is more than what you mentioned in terms of the revenue. And so all this business continue to grow. It was couple of years of slowing down based on many delivery challenges and to complete to develop our product suite.

Speaker 2

Just a quick reminder, in the core suite, we acquired many years, StormReaver and then we acquired Adaptik, and then we integrate and build ourselves our digital sorry, building system. So together, all of this done, we decide to go back to the market. We signed 22 deals last year, and we hope to see more business this year.

Speaker 7

Thank you, Alex. So just to clarify, is P&C North America growing faster than overall North America roughly at the same level?

Speaker 3

We are not providing by product in the region. The overall life in the company today is going slightly higher than the P and C, but this is overall normal company.

Operator

The next question is from Chris Reimer of Barclays. Please go ahead.

Speaker 8

Hi. Thanks for taking my questions and congratulations on the strong results. Honestly, most of my questions have been answered already, but I did want to ask if you could touch on relating to the 2024 strategy. You mentioned the select and expanded use of SIs. I was wondering if you could just elaborate a little more on that, how you expect it to play out and how it may be different from what you've already done with SIs?

Speaker 2

Okay. I will try to answer. 2nd business model for many, many years that we are developing our own product, doing implementation and then doing the cloud services. What we and most of our competitors are doing majority of product, Some case, they are doing part of the delivery and they are sharing with the SI. We made a decision not today long like in the last one or 2, but right now we did some increased seriously of this decision.

Speaker 2

First, as I mentioned, we hired a dedicated, very senior person that's she came from the competitors and helping us to build the SI partnership and we and she's not alone with somebody else. That's one. We also believe that our product is mature enough to work with SI. SI. And right now, we are in the selection to see who is the right partner for us because we don't want to work with 20 SI, we want to limit it and we are now in definition where to put investment.

Speaker 2

So we don't plan to do it in all territory and not all the product. As I mentioned, we see health that we need from them on the higher tiers. And we also believe that in this case, the overlap will not be high because they are doing also a lot of consulting and things that Sapiens didn't do at the past. And just to give you any information, in general, when Sapiens is giving offer to the clients like X million, the customer is also has the work that he is doing by himself. It's almost 1 to 1.

Speaker 2

So the SI can do this part and we can don't see huge overlap on the higher tiers. And then we can go also to the territory that we are segment is not doing any business today, as an example, France, and we can consider to work with them. And in best case, we're interesting to shift more work for them because we don't have the local people. At the past, Sapiens' decision was to acquire a company, but we don't want to continue to acquire in all in every countries in the world, so we decide to work with SRI.

Speaker 8

Thanks. That's really great color. Thanks for that. Also, if you could just touch on the gross margin expansion. Given the transition you mentioned to the products, I'd say, SaaS offerings, do you expect any change to the gross margin?

Speaker 8

I think it was previously you noted that it was 50% to 56% in recurring segment?

Speaker 3

Yes. So due to the transition that we mentioned moving to SaaS subscription and shifting from post production services to subscription or some high value to the subscription coming from the implementation, obviously, we are going to see a slight increase in the subscription gross margin with a lower gross margin on the implementation on the one time revenue, the preproduction revenue. The impact is about 0.2% on the product and postproduction revenue gross margin going up and 2% of the implementation reproduction revenue going down. The overall blended is about 50 basis points down. At the same time, we are doing all the time improvement in the company in terms of offshore product maturity, and we are thinking that we'll be able to offset this decrease with the efficiency that we mentioned.

Speaker 8

Got it. Thanks a lot. That's it for me.

Operator

There are no further questions at this time. Before I ask Ms. Cohen to go ahead with her closing statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U. S, please call 1-eight eighty eight-two sixty nine-five.

Operator

In Israel, please call 039255938. And internationally, please call 9,723-nine

Speaker 4

255938.

Operator

Ms. Cohen, would you like to go ahead with your concluding statement?

Speaker 1

Yes. Thank you for joining the call today. Please note that Sapiens will participate in the Needham Technology Media and Consumer Conference on May 14, 15 in New York City. We look forward to speaking with you soon and are always happy to answer any follow-up questions. And thank you again for joining.

Operator

Thank you. This concludes the Sapiens International Corporation 4th quarter 2023 results conference call.

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