Sapiens International Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's 2nd Quarter 2024 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.

Operator

All participants are presently in a listen only mode. Following management's formal presentation, instructions will be given I would now like to hand the call to Ms. Yafa Cohen, Sapiens' Chief Marketing Officer and Head of Investor Relations. Yafa, 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 Q2 2024 results. With me on the call today are Mr. Roni Al Dor, President and CEO Mr. Roni Giladi, our 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 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.

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

Speaker 2

Thank you, Yafa. Thank you for joining us today. Let's start by reviewing the 2nd quarter results. Revenue totaled $137,000,000 marking a 6.6% increase compared to last year, while operating profit reached $25,000,000 representing 18.2 percent of total revenue. This quarter showcased solid execution with North America delivered double digit growth and Europe delivering mid single digit growth.

Speaker 2

Our profitability performance was notable this quarter with an operating margin in the target range and a 13% growth in net income. Before I discuss the business details, I would like to remind everyone of our 2024 priorities. The first is to transition our solution to SaaS model with Sapiens Insurance platform and the second is to leverage our investment to drive performance in all of our key regions. Let me explain how we are doing this, starting with Sapiens Insurance Platform. Sapiens recent collaboration with Microsoft and accelerate the use of AI in our platform, enhancing it with advanced gen AI capabilities and providing tailored unique solutions.

Speaker 2

I'm happy to share that we have successfully launched our intelligent insurance platform in the Q2, a significant and exciting milestone for Sapiens. The platform represent the next generation of our insurance solutions and use AI to help our customer drive growth and efficiency. It incorporates digital engagement, data intelligent and core business process solution with machine learning and JI capabilities, Designed to help insurers seamlessly innovate their offering and process, the platform enables them to stay competitive in a dynamic market with intelligent data driven business decision and hyper automation of business process. For our customers, the platform's pre integrated design ensures rapid deployment and seamless implementation, accelerating growth by supporting end to end insurance process across all line of businesses. The platform is delivered throughout such subscription model with new deal structure and price accordingly.

Speaker 2

Pivoting now to our 2nd priority for 2024. Let me highlight how we leverage our investment in all of our key regions to drive good performance. In North America, our strategic investment in research and development, product innovation and employees, together with our new partnership with Citym Integrator, have created a robust effective platform to support our ambitious goals in this region. The positive momentum in the life business continue. In the second quarter, we signed a new platform deals with a leading life accident and health insurance company.

Speaker 2

The insurance carrier selected the Sapiens platform for life to modernize its platform, expand its TPA services and enable it to scale quickly as it enters to new market. The platform also enables their insurance to implement its long term care insurance specialty. We are pleased to deliver the end to end solution the carrier was looking for and to accommodate its long term care market needs. Additionally, our life solution had several North America go live in the quarter, including that we would like to highlight is Republic Life Insurance. This is a Caribbean 1st digital direct to consumer insurer made possible by Sapiens' core suite for life and annuity and Sapiens Digital Suite deployed on Microsoft Azure Cloud.

Speaker 2

Customer can acquire life insurance policies with point of sale decision and manage their policies throughout innovating customer portal, providing an enhancement, first of its kind experience in this region. Also this quarter, Pan America Life Insurance Group, Pelig, went live with Sapiens, Illustration Pro SaaS solution on Microsoft Azure Cloud. Sapiens empowered Pelig to consolidate its enterprise illustration standard, streamline process and extend product offering. After extensive competitor analysis, Helix selected Sapiens to consolidate illustration and single platform and enable their insurance with a faster time to market we see North America market itself. 2nd, Illustration Pro will accelerate and streamline process, providing an exceptional user and agent experience.

Speaker 2

In Property and Casualty, several North America projects went live this quarter, and we are progressing with customer upgrade. We continue to invest in our core suite for NPL solution to promote growth innovation in the medical professional liability industry by expanding and augmenting our NPL capability and product for policy administration, finance, claims and risk management and seamless integration with value added vendor solution, 2nds meet the needs of NPL insurers in rapidly consolidation NPL market. We are proud of our leadership in NPL Ecosystem and are committed to this market. Our advanced solution unburden insurers from complex business problems, enable business user to take control of the process. We create a synergy between those two worlds, giving MPL insurers a clean bill of health to empower them to succeed.

Speaker 2

Our worker compensation team has made significant progress during the Q2 and implemented the 3 projects signed in 2023. As mentioned in our previous call, we see this market as a significant opportunity for Sapiens in the U. S. And Canada in the years to come. Moving to EMEA and Rest of the World.

Speaker 2

We had a few successful go live with our Redid Suite, Tier Suite, Skip Suite and Reinsurance Master this quarter. I would like to highlight one of the largest most complex P and C goal lies with Bangkok Insurance BKI, a leading insurer in Thailand. BKI went live with Sapiens Property and Casualty platform, including EduteSuite for P&C, Reinsurance Master and Sapiens Data Suite. We were chosen for our integration capability, end to end solution and proven ability to meet regional regulations. Overall, we see continuous demand in the market for our P and C platform solution.

Speaker 2

AI is becoming a focus point in this market. We see generative AI model, the Sapiens Insurance platform can support insurance value chain to provide customer in this region with a higher effectiveness and support achievements. We see an appetite for an insurance platform as offering across all solution line and tiers. The majority of our new business leads are now SaaS platform based. As we said in our previous call, digital over legacy is also thin for segments in the EMEA region.

Speaker 2

This is particularly effective for smaller carriers and tier organization. Insurance in the EMEA region won the ability to roll out platform in multiple countries, which may have different languages, currencies and regulations. With its global footprint, Sapiens has built this capability into its offering and is uniquely positioned to support clients in successful multi country implementation. This capability is an important differentiator for us in EMEA. The increased demand we have seen for our P and C platform in various regions, including Europe, South Africa and APAC is reflected in our growth for our pipeline in this market.

Speaker 2

In the large pension space, demand is growing across EMEA and APAC, with increasing appetite for more business automation and AI enabled solution to drive new business to market and improve services. We are seeing business channels wider to retail, white labeling, specialty for bank issuers. We are seeing large life and pension players looking at platform transformation in group and individual investment, pension and annuity in addition to protection in the simpler line of business such as funerals. Those trends are reflected in the strengthening of our pipeline for our life and pension platform across Europe, South Africa and APAC. In the reinsurance shown space, we also see a growing interest for platforms across EMEA, APAC and North America to enable capacity and manage solvency as the business look to grow and diversify.

Speaker 2

Insurers face growing pressure to increase capital to sustain their operations, driven by reassessment of natural catastrophe risks due to climate change and recent surge in inflation rates, which elevate risk liability. Accordingly, the demand for reinsurers is on the rise, creating a favorable market for reinsurers. The current trends we see in the reinsurance market are in the increase of reinsurance rate and cost for reinsurers and strict underwriting terms and condition in reinsurance contract. Insurers must compliance with the reinsurance requirement and therefore must adapt and fine tune their underwriting guidelines and practices. Sapiens reinsurance solution enable reinsurance to automate and manage end to end programs covering both seeded and assumed.

Speaker 2

Checkatrade is the world leading software vendor for reinsurance And this quarter, we participate in 20 trade shows globally, 14 in North America, 4 in Europe and 2 in APAC. We are encouraged by the feedback we received from trade show participants and the potential new businesses lead that we'll generate. Our North America Client Summit is scheduled for September in Austin, Texas. We look forward to updating you on this exciting event at our next investor call. In conclusion, the Q2 demonstrates strong financial and operating performance marked by solid revenue growth and profitability.

Speaker 2

We are effectively executing our 2024 priorities, including transitioning to SaaS model with Sapiens insurance platform and leveraging our investment across key regions, our success in North America, our positive momentum in our life, pension and annuity line of business and our ongoing innovations in all of our product lines demonstrate our commitment to deliver innovative, comprehensive solution globally. 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 Q2 2024 non GAAP results followed by comments on the balance sheet and cash flow. I will wrap up with our guidance for 2024. Revenue in the Q2 of 2024 was 130 $7,000,000 an increase of 6.6% compared to $128,000,000 in the Q2 of 2023. On a constant currency basis, our revenue grew by 7.1% reaching total revenue of $138,000,000 ARR for Q2 of 2024 totaled $169,000,000 reflecting growth of 12.1% compared to Q2 of 2023.

Speaker 3

We continue our journey of shifting revenue to subscription from recurring and non recurring revenues. Revenue mix. Revenue from recurring software product and reoccurring post production services totaled $98,000,000 compared to $83,000,000 in the same quarter of last year, a $15,000,000 increase or 18.7% growth from Q2 of 2023. Geographics breakdown. Revenue in North America was $58,000,000 compared to $52,000,000 in the comparable quarter, an increase of 11.1 percent or $6,000,000 Revenue in Europe was $66,000,000 a year over year increase of 5%.

Speaker 3

On a constant currency basis, revenue in Europe grew by 6%, reaching $67,000,000 Revenue in the rest of world, which includes South Africa and APAC, was $13,000,000 a decrease of $500,000 or $2,000,000 increase compared to previous quarter. Gross margin this quarter was 45.7% compared to 45.2% in Q2 of 2023, an increase of 50 basis points. This increase is steady improvement in the last several quarters and was mainly due to higher ratio of recurring and recurring revenue versus one time revenue and increase in the offshore ratio by 1% to 52.2% from overall company. Profitability. Operating profit and margin in the Q2 of 2024 was $25,000,000 18.2 percent of total revenue compared to $23,000,000 18.2 percent in Q2 of 2023.

Speaker 3

Although gross margin improved, the operating margin remained at the same level due to strategic decision to increase our sales and marketing investment to further accelerate growth into 2025 beyond, as mentioned earlier this year. Net income attributed to SapGen shareholders for the Q2 of 2024 was $21,000,000 up 13.1% from $19,000,000 in Q2 of 2023. Earnings per diluted share was $0.37 for the Q2 of 2024, up 12% from $0.33 for the Q2 of 2023. Turning to our balance sheet. As of June 30, 2024, we had cash and cash equivalent and short term deposit totaling $186,000,000 and debt of $40,000,000 On April 18, 2024, we paid cash dividend of $16,000,000 or $0.28 per share for the second half of twenty twenty three.

Speaker 3

Adjusted free cash flow for the Q2 of 2024 was $6,000,000 compared to $12,000,000 in Q2 of 2023, mainly due to temporary time difference between revenue recognition and payment milestone. Also in this quarter, Malhot S&P Global, a part of the global rating firm Standard and Poor's Financial Services, has confirmed the long term issue rating for Sapiens as AA- with stable outlook, while also confirming the rating for Sapiens Series B Dependsure as AA- The rating confirmation reflects the ongoing confidence of the market and experts in SAPIEN. Moving to our guidance, we are reiterating our 2024 guidance. We expect non GAAP revenue and operating margin in the range of $1,000,000 to $555,000,000 and 18.1 percent to 18.5 percent on profit respectively. I will now turn the call back to Roni Ldo.

Speaker 3

Roni?

Speaker 2

Thank you, Roni. This quarter demonstrates solid execution highlighted by double digit growth in North America and mid single digit growth in Europe. Our profitability performance was particularly impressive with our 13% growth in net income. Given our performance to date the outlook for the remainder of the year, we remain confident in meeting our 2024 guidance. This ends our prepared remarks.

Speaker 2

Operator, we are ready to open the call for Q and A.

Speaker 4

Thank

Operator

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

Speaker 4

Hey, gentlemen. Nice job here. Maybe, Rami, starting with you, you called out the Microsoft partnership, the intelligence insurance platform. Can you give us a sense of early receptivity customer feedback, how they're looking to leverage kind of that embedded intelligence in their core systems to drive better decisioning. But maybe Ronny Chi for you on the flip side of that, what this can mean for that broader business mix given some of the ongoing strength we've seen in post production in ARR?

Speaker 2

Hi, Diren. With your permission, I will ask Alex to answer about question about Microsoft, okay? Of course, yes.

Speaker 5

Hi, Dylan. This is Alex speaking. So we have a strategic partnership with Microsoft around not only general AI, Gen AI and other AI, but in general across the cloud and the Power BI as well. And as Roni mentioned, we released our intelligent platform. The part of this intelligent platform is the massive usage of Gen AI and algorithmic AI within the business processes.

Speaker 5

We see a tremendous interest in the market. We get really, really good feedback both from our customer base and from the analyst community. And we're already running a POC with the customer in order to put the 1st go of that into production. And the feedback so far are quite encouraging. This is the market is very, very looking into how can Gen AI be used to enhance efficiency and to provide better service to the customers.

Speaker 3

Thanks, Alex. I will follow-up regarding the second question. This is Roni G. Obviously, the partnership with Microsoft is significant for Sapiens and also for our customer and prospects. We see this avenue, 1st of all, to bring new logo on board.

Speaker 3

Again, with the support of Microsoft, we feel more powerful when we are offering our products. So additional new logo down the road. And as Alex mentioned, we are doing conferences together with Microsoft globally. The second one is the existing customer base. As all of you know, we have today about 150 customers that are already in the cloud, but we have many other that we sold the product many years ago and we'd like to transition them to the cloud in the coming years.

Speaker 3

This can generate additional revenue stream, which is recurring in nature, ARR and accelerate the growth of this line. Obviously, we do not expect this to happen in 1 year or 2 year. This is a trend over the next 5 years, but can create significant revenue stream going forward.

Speaker 4

Okay, great. That's really helpful. Thank you, Bob. Maybe going back to Ronny A or maybe Ronny Chi here, we could see North America revenue accelerate again. I know you guys have made some strong investments and a push there.

Speaker 4

Any type or sense of the types of wins that you're seeing here? Has that kind of shifted at all? Maybe what Microsoft can unlock in moving up market there, but the broader kind of pipeline transformation, if you will, in North America would be great. Thanks.

Speaker 2

Yes, I will take it. As all of you know, in North America, we have almost 5 different types of business. Just to remind you, we have the life, including our core suite and what we call component. And then we have on the PMC, we have our core suite and the work comp. And then we have our decision management, and then we have the reinsurance.

Speaker 2

So overall, we are continuing to grow on the life, very good on both component and core suite. Workstorm, as we mentioned last year, we signed the 3 deals we see we extended these deals, but we are looking forward to new ones. And the same in reinsurance. So those are the areas that we see growth. In the cost with P and C, it's more stable right now.

Speaker 2

And so the overall, those are the areas that we are seeing a huge growth. And just to remind all of you, in CoreSuite Life, we just brought them back in the last 2 to 3 years. And based on the contract that we signed and we plan to sign, it's a huge growth. And I think the combination that we are coming now with continuing CrossFit and the component plus all digital and we are including on the platform, it looks very positive.

Speaker 4

Okay, great. Thanks guys. Appreciate it.

Operator

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

Speaker 4

Hi, thanks for taking my questions. I wanted to ask about the revenue segments and the trends you're seeing there. The preproduction revenue is continuing to decline and you're seeing kind of strength in the software post production side. So maybe can you talk a little bit about kind of the drivers there of that and how do you think that kind of shapes out for the remainder of the year? That would be helpful.

Speaker 4

Thanks.

Speaker 3

Hi, Kevin. I will take this. This is Roni G. Yes, we can see this trend of implementation or preproduction implementation service slightly going down. If you remember, early in the year, we announced that we are moving to subscription globally all product of the company.

Speaker 3

And the idea is to shift from 2 line items. 1 is from the implementation, the other one is from the reoccurring services into the subscription revenue line. So obviously, this has impact also on the preproduction implementation services and we see the trend of going up on the postproduction services and software products. So this is one phenomena that impact our revenue stream on that. The second one is we had some delay in signing new logo deals in early in the first half of the year.

Speaker 3

We are very encouraged on early Q3 of progressing significantly with prospective customer that will fulfill this revenue line item also.

Speaker 4

Great. Thank you for that. And then maybe one on just kind of where you're allocating net new resources. Ronny, I think you talked about increases in sales and marketing investments. What segments of the market do you see the most opportunity?

Speaker 4

Where are you allocating some of these new resources? Any color there would be helpful.

Speaker 2

Hi. Firstly, we already made the majority of the investment, so meaning hiring, organizing, management and so on. So we are it took us time, but right now we are on board. And the majority is, 1st of all, we'd say it's in North America and in Europe. The challenge in Europe that we because we are working in many territories and we have language issues and so on, so it's almost like 7 different regions, including South Africa and Asia, so in terms of the investment.

Speaker 2

And I can share overall, we are doing it in all the segments in marketing, gross marketing, sales and also existing customers. In terms of alliances and SI, we hired last year, we hired a dedicated SI manager in North America. In the last half years, we hired the same position in Europe. So all the idea of to start to work with alliances is putting also investment there.

Speaker 4

Great. Thanks for taking my questions.

Operator

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

Speaker 6

Hi, congratulations on the strong results and thanks for taking my questions. I was wondering if you could talk about how carriers today are prioritizing their large core system modernizations and if there's any one point that leads that decision making process? And then following on that, are you seeing any changes in timeline, sales timelines due to the transition or people who want to not transition anything about the timeline? [SPEAKER CANDIDO BOTELHO BRACHER:]

Speaker 5

This is Alex speaking. In general, we still we keep seeing high interest of carriers in core replacement. The main drivers are 1st of all operational efficiency especially in a volatile market financially mixed

Speaker 2

up

Speaker 5

a lot today with the capabilities of This has mixed up a lot today with the capabilities of data management, including AI and digital capabilities and cloud capabilities, there are a lot of them in order eventually to both drive operational efficiency and also growth in particular areas. The trend is still strong in terms of a core bid processes, especially in our case since we move into a larger build with the platform. So not selling only the core, but actually selling a turnkey solution with digital, with data capabilities, with AI and the core together with our SaaS offering. So there's multiple aspects for them to review. It takes a bit more time sometimes in the in their review and analysis, but a strong trend of interest in core replacement since legacy solutions are more and more prohibiting the business to from going forward and from reducing its operating costs.

Speaker 6

So the sales cycle, you would say it's still pretty long, 1.5, 2 years?

Speaker 5

Sales cycle would move between, let's say, the 9 months for smaller, maybe non core deals of our business applications of digital to the area of 12 to 18 to 24 even months on the large forecast information. This is more or less not changing compared to the last year.

Speaker 6

Great. Thanks. That's it for me.

Operator

There are no further questions at this time. Before I ask Ms. Yafa 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 039 255938. And internationally, please call 9,723-9255-938. Ms. Cohen, would you like to make your concluding statement?

Speaker 1

Yes. Thank you, everyone, for joining our call today. We look

Operator

Thank you. This concludes the Sapiens International Corporation's Q2 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.

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