Sapiens International - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's second 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. All participants are presently in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. 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?

Yaffa Cohen (CMO and Head of Investor Relations)

Thank you, Operator. I would like to welcome all of you to Sapiens' conference call to review our second quarter 2024 results. With me on the call today are Mr. Roni Al-Dor, President and CEO, Mr. Roni Giladi, our 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. 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. 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?

Roni Al-Dor (President and CEO)

Thank you, Yaffa. Thank you for joining us today. Let's start by reviewing the second quarter results. Revenue totaled $137 million, marking a 6.6% increase compared to last year, while operating profit reached $25 million, representing 18.2% of total revenue. This quarter showcased solid execution, with North America deliver double-digit growth and Europe delivering mid-single-digit growth. 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 GenAI capabilities and providing tailored, unique solutions. I'm happy to share that we have successfully launched our Intelligent Insurance Platform in the second quarter, 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 intelligence, and core business process solution with machine learning and GenAI 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 through a SaaS subscription model with smooth deal structure and price accordingly. Pivoting now to our second 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 system 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. 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 the 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 live solution had several North America go live in the quarter, including CoreSuite, IllustrationPro, UnderwritingPro, and we continue to progress with customer upgrades. One of the go live that we would like to highlight is Republic Life Insurance. This is a Caribbean first digital direct-to-consumer insurer, made possible by Sapiens' CoreSuite for Life and Annuity and Sapiens' DigitalSuite deployed on Microsoft Azure Cloud. Customers can acquire life insurance policies with point-of-sale decision and manage their policies through our innovating customer portal, providing an enhancement, first of its kind experience in this region. Also, this quarter, Pan-American Life Insurance Group, PALIG, went live with Sapiens' IllustrationPro, SaaS solution on Microsoft Azure Cloud.

Sapiens empowers PALIG to consolidate its enterprise illustration standard, streamline process, and expand product offering. After extensive competitor analysis, PALIG selected Sapiens to consolidate illustration in a single platform and enable their insurance with a faster time to market within North America market itself. Sapiens' IllustrationPro will accelerate and streamline process, providing an exceptional user and agent experience. 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 CoreSuite for MPL solution to promote growth, innovation in the medical professional liability industry. By expanding and augmenting our MPL capability and product for policy administration, finance, claims, and risk management, and seamless integration with value-added vendor solution, Sapiens meets the needs of MPL insurers in rapidly consolidation MPL market. We are proud of our leadership in MPL ecosystem and are committed to this market.

Our advanced solution unburdens insurers from complex business problems, enabling business users 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. Our workers' compensation team has made significant progress during the second quarter and implemented the three 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, we had a few successful go-lives with our IDITSuite, Tia Suite, SCIPSuite, and ReinsuranceMaster this quarter. I would like to highlight one of the largest, most complex P&C go-lives with Bangkok Insurance, BKI, a leading insurer in Thailand.

BKI went live with Sapiens' property and casualty platform, including IDITSuite for P&C, ReinsuranceMaster, and Sapiens' DataSuite. 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&C platform solution. AI is becoming a focus point on this market. We see generative AI model, the Sapiens Insurance Platform, can support the 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 bids are now SaaS platform-based. As we said in our previous call, digital over legacy is also a theme for Sapiens in the EMEA region. This particularly effective for smaller carriers and tier organization.

Insurance in the EMEA region want 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&C platform in various regions, including Europe, South Africa, and APAC, is reflected in our growth for our pipeline in this market. Life and 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, especially for bank insurers.

We are Life and Pension players looking at platform transformation in group and individual investment, Pension and Annuity, in addition to protection and the simpler line of business, such as funerals. Those trends are reflected in the strengthening of our pipeline Life and Pension platform across Europe, South Africa, and APAC. In the Reinsurance 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. Insurers face growing pressure to increase capital to sustain their operations, driven by reassessment of natural catastrophe risk 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 conditions in Reinsurance contract. Insurers must comply with the Reinsurance requirement and therefore must adapt and fine-tune their underwriting guidelines and practices. Sapiens' Reinsurance solution enables reinsurers to automate and manage end-to-end programs, covering both ceded and assumed. Sapiens is the world's leading software vendor for Reinsurance, with over 100 customers using our Reinsurance solutions. Moving to our marketing activity, the second quarter is typically our event season, and this quarter we participate in 20 trade shows globally, 14 in North America, four in Europe, and two in APAC. We are encouraged by the feedback we received from trade show participants and the potential new business leads that were generated. 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 second quarter demonstrate strong financial and operating performance, marked by solid revenue growth and profitability. We are effectively executing our 2024 priorities, including transitioning to SaaS model with Sapiens Insurance Platform and leveraging our investment across key region. 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?

Roni Giladi (CFO)

Thank you, Roni. I will begin my commentary by reviewing the second quarter, 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 second quarter of 2024 was $137 million, an increase of 6.6% compared to $128 million in the second quarter of 2023. On a constant currency basis, our revenue grew by 7.1%, reaching total revenue of $138 million. ARR for Q2 of 2024 total $169 million, reflecting growth of 12.1% compared to Q2 of 2023. We continue our journey of shifting revenue to subscription from recurring and non-recurring revenues.

Revenue mix. Revenue from recurring software product and recurring post-production services totaled $98 million, compared to $83 million in the same quarter of last year. A $15 million increase or 18.7% growth from Q2 of 2023. Geographic breakdown. Revenue in North America was $58 million, compared to $52 million in the comparable quarter, an increase of 11.1% or $6 million. Revenue in Europe was $66 million, a year-over-year increase of 5%. On a constant currency basis, revenue in Europe grew by 6%, reaching $67 million. Revenue in the rest of world, which includes South Africa and APAC, was $13 million, a decrease of $0.5 million or $2 million 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 reoccurring 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 second quarter of 2024 was $25 million and 18.2% of total revenue, compared to $23 million and 18.2% in Q2 of 2023.

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 and beyond. Net income attributed to Sapiens shareholders for the second quarter of 2024 was $21 million, up 13.1% from $19 million in Q2 of 2023. Earnings per diluted share was $0.37 for the second quarter of 2024, up 12% from $0.33 for the second quarter of 2023. Turning to our balance sheet. As of June 30th, 2024, we had cash and cash equivalents and short-term deposits totaling $186 million and debt of $40 million.

On April 18th, 2024, we paid cash dividend of $16 million, or $0.28 per share for the second half of 2023. Adjusted free cash flow for the second quarter of 2024 was $6 million, compared to $12 million in Q2 of 2023, mainly due to temporary time difference between revenue recognition and payment milestone. Also, in this quarter, Maalot S&P Global, a part of the global rating firm, Standard & 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 debenture as AA-. The rating confirmation reflects the ongoing confidence of the market and experts in Sapiens. Moving to our guidance. We are reiterating our 2024 guidance.

We expect Non-GAAP revenue and operating margin in the range of $550 million-$555 million, and 18.1%-18.5% on profits, respectively. I will now turn the call back to Roni Al-Dor. Roni?

Roni Al-Dor (President and CEO)

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 and the outlook for the remainder of the year, we remain confident in meeting our 2024 guidance. This ends our prepared remarks. Operator, we are ready to open the call for Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Please ask your question in a loud and clear voice. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Dylan Becker of William Blair. Please go ahead.

Dylan Becker (Equity Research Analyst)

Hey, gentlemen, nice job here. Maybe, Roni, starting with you, you called out, the Microsoft partnership, the Intelligent Insurance Platform. Maybe can you give us a sense of employee receptivity, customer feedback, how they're looking to, to leverage kind of that embedded intelligence in their core systems to drive better decisioning? And maybe, Roni, too, for you, on the flip side of that, what, what this can mean for that broader business mix, given some of the ongoing strength we've seen, in post-production and in ARR?

Roni Al-Dor (President and CEO)

Hi, Dylan. With your permission, I will ask Alex to answer about question about Microsoft. Okay?

Dylan Becker (Equity Research Analyst)

Of course. Of course. Yeah.

Alex Zukerman (Chief Strategy Officer)

So hey, Dylan, this is Alex speaking. So we have a strategic partnership with Microsoft around not only general AI, GenAI 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 GenAI and algorithmic AI within the business processes. 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 are already running a POC with the customer in order to put the first go of that into production. And the feedback so far are quite encouraging.

The market is very, very looking into how can GenAI be used to enhance efficiency and to provide better service to the customers.

Roni Giladi (CFO)

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 an avenue, first of all, to bring new logo on board. Again, with the support of Microsoft, we feel more powerful when we are offering our product. 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 customer 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.

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 one year or two years. This is a trend over the next five years, but can create significant revenue stream going forward. Significant.

Dylan Becker (Equity Research Analyst)

... Okay, great. That's really helpful. Thank you, thank you both. Maybe to going back to Roni A, or maybe Roni G here, good to see North America revenue accelerate again. I know you guys have made some strong investments and a push there. Any type or sense of the types of wins that you are seeing here, has that kind of shifted at all? Maybe what Microsoft can unlock in moving upmarket there, but the broader kind of pipeline transformation, if you will, in North America would be great. Thanks.

Roni Al-Dor (President and CEO)

Yes, I will take it. As all of you know, in North America, we have almost five different type of business. Just to remind you, we have the Life, including our CoreSuite and the, what we call component. And then we have the, on the P&C, we have our CoreSuite and the workers comp, and then we have our decision management, and then we have the Reinsurance. So overall, we are continued to grow on the Life, very good on both component and CoreSuite. Workers comp, as we mentioned, last year, we signed the three 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 grow. In the CoreSuite, P&C is more stable right now.

So the overall, those are the areas that we are seeing, huge growth. Just to remind all of you, in CoreSuite Life, we just brought them back in the last two to three years. Based on the contracts we, that we sign and we plan to sign, it's a, it's a huge growth. I think the combination that we are coming now with continued CoreSuite and the component, plus all digital, and we are including on the, on the platform, looks very positive.

Dylan Becker (Equity Research Analyst)

Okay, great. Thanks, guys. Appreciate it.

Operator (participant)

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

Kevin Kumar (VP)

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

Roni Giladi (CFO)

Hi, Kevin. I will take this. This is Roni G. Yes, we can see this trend of implementation or pre-production 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. And the idea is a shift from two-line items. One is from the implementation, the other one is from the recurring services into the subscription revenue line. So obviously, this have impact also on the pre-production implementation services, and we see the trend of going up on the post-production 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.

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

Kevin Kumar (VP)

Great. Thank you for that. And then maybe one on just kind of where you're allocating net new resources. Roni, I think you talked about increases in sales and marketing investments. You know, what segments of the market do you see the most opportunity? Where are you allocating some of these new resources? Any color there would be helpful.

Roni Al-Dor (President and CEO)

Hi. Firstly, we've already made the majority of the investment, so meaning, hiring, organizing, management, and then so on. So we are-- It took us time, but right now we are on board. And the majority is, first 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, seven different region, including, South Africa and, in Asia, so in terms of the investment. And I can share overall, we are doing it in the, in all the, all the segments, in, marketing, growth marketing, sales, and also existing customers.

In terms of alliances and SI, last year we hire a dedicated SI manager in North America, and 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.

Kevin Kumar (VP)

Great. Thank you for taking my questions.

Operator (participant)

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

Chris Reimer (Equity Research Analyst)

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, 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 or people who want to not transition? Yeah, anything about the timeline.

Alex Zukerman (Chief Strategy Officer)

So this is Alex speaking. In general, we still keep seeing a high interest of carriers in core replacement. The main drivers are, first of all, operational efficiency, especially in a volatile market, financially wide. And carriers are always looking to how can they improve their operation, reduce their operating costs, and be more efficient. This is beefed 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 core replacement interest.

Sometimes we see a bit, a longer time that the carriers take to perform their due diligence and their bid processes, especially in our cases, we move into a larger deal 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 their review and analysis, but a strong trend of interest in core replacement, since legacy solutions are more and more prohibiting the business from going forward and from reducing its operating costs.

Chris Reimer (Equity Research Analyst)

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

Alex Zukerman (Chief Strategy Officer)

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

Chris Reimer (Equity Research Analyst)

Great, thanks. That's it for me.

Operator (participant)

If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Ms. Yaffa 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 two hours. In the U.S., please call 1-888-269-0005. In Israel, please call 03-925-5938, and internationally, please call 972-3-925-5938. Ms. Cohen, would you like to make your concluding statement?

Yaffa Cohen (CMO and Head of Investor Relations)

Yes. Thank you everyone for joining our call today. We look forward to discussing our third quarter results on our next earnings call. We welcome you to contact us if you have any further questions.

Operator (participant)

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