Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, May 12, 2014. It is now my pleasure to introduce your host, Ms.

Yaffa Cohen-Ifrah, Sapiens' Vice President of Corporate Marketing and Communications. Thank you. Mrs. Cohen, you may now begin. .

Thank you, and good day, everyone. Our quarterly earnings release was issued before the market opened this morning, and it has been posted on the company's website at www.sapiens.com. Representing the company on the call 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, other forward-looking statements. And the Safe Harbor provision in the press release issued today also applies to the content of this call.

Sapiens expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information and changes in its view or expectations or otherwise. Also during the course of today's call, we will refer to certain non-GAAP financial measures.

A reconciliation schedule showing GAAP versus non-GAAP results have 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 the Investor Relations section of the company's website or via the webcast link, which appears on the earnings release that we published today. With that out of the way, I will turn the call over to Roni Al-Dor, President and CEO of Sapiens.

Roni?.

Thank you, Yaffa, and good morning, everyone. Thank you for joining the call on which we will discuss our financial results for the first quarter of 2014. This was a strong quarter for Sapiens and a solid start to 2014. We continued our revenue growth, delivering $36.6 million in revenue, an increase of 16.3% for the first quarter last year.

Just importantly, Sapiens continued to sustain its competitive position by enhancing local presence and reputation in the marketplace and growing our market share. .

During the quarter and up until now, we won several important new deals. Some of them, we have already reviewed in our annual earnings calls.

As we explained in the past, each agreement is strategically important because each new win translates to several millions dollars in short-term revenue and long-term relationship with the customer that typically leads on additional significant recurrent revenue stream. Let me discuss some of these wins, broken down by segments. .

In the life and pension space, we signed an agreement with a premier life insurance provider in North America. The company has licensed Sapiens ALIS for life and pension to support its business in North America. Sapiens will support the implementation of ALIS and the migration of policies into the Sapiens ALIS platform.

This is a multiphased project and is expected to follow with ongoing maintenance and support. Also in life and pension space, we signed with Wesleyan Assurance Society in U.K. Wesleyan selected the Sapiens Closed Books platform to administrate its run of business.

This contract follows Wesleyan's decision to run some of its new business with the Sapiens ALIS platform. We also signed an agreement with Altshuler-Shaham, an Israeli firm in the field of asset management, which selected the Sapiens life and pension solution to support the company's Israeli-based greenfield life insurance operations. .

Turning to our property and casualty solutions. We signed an agreement with a major pan-European insurance company, which selected our IDIT solution for P&C for implementation in U.K., France, Germany, Italy and Spain.

In addition, the leading U.K.-based insurer, Hiscox, chose Sapiens for IDIT solutions for the P&C as its common platform for its global retail insurance business. This win immediately expand to our footprint in the U.K. market, which is an important strategic region for Sapiens.

Finally, Hollard, South Africa's largest independent insurance group, selected our Reinsurance solution, opening up this important regional expansion as well as further validating our solution as the leading reinsurance platform for carriers in the market..

Our position as a market leader is consistently a key contributor to our success in winning these new deals. Sapiens is constantly highlighted by industry analysts for our technology and functionality leadership in our field. But I think the most important factor in our success is having good reference customers.

In our businesses, winning new deals is just the beginning of a long-term relationship. And a key milestone in this relationship is successful delivery and implementation of the solution. We are pleased to share with you that this quarter, we have successfully gone live with several key projects worldwide.

Each of them adds another good reference to our portfolio. .

To support future growth, we continue to invest in our life and pension, property and casualty and DECISION offerings. These products represent our growth engines.

As we discussed in our annual conference, we are planning to launch our Retirement Services solution during the second quarter of 2014 and our ALIS new major release will be launched in the second half of 2014.

In our property and casualty space, we have focused our product development efforts to create a market-leading user interface and experience, emphasizing our market-specific capability both in terms of specific geographically and industry markets. This should further increase competitiveness and our out-of-the-box customer business benefits.

Again last but not least, Sapiens' DECISION. This product is now being further developed to address and pinpoint risk and compliance needs, such as Volcker Rule. This risk and compliance market is a very promising target for DECISION.

As we allow our customers to address the high-risk challenges, we are working with our partners, customers and prospects to further enhance the offering as we see growing demand..

On the new business side, we have been increasing our investments in sales and marketing across all our growth product lines to help us to expedite market penetration and increased sales. Towards this end, we continue actively to recruit new sales and account executives and further enhance our local presence in the relevant markets.

I would like to share with you some of the next steps that will further help us better deliver on our growth strategy. .

As mentioned in previous call, we are introducing organizational change to bring us closer to the customer and improve synergies between the different insurance divisions. This is why we are now organizing ourselves and business development teams to operate a single force across all insurance product lines in each territory.

Aligning our insurance-focused sales organization under a single new business group will help us better target new business in the insurance.

This new business growth will be focused on new customer acquisition across our entire portfolio and will interface with all target market segments, life and pension, reinsurance and property and casualty, in each of our target territories. .

But as I mentioned earlier, we are focused on building long-term relations with our customers. And in light of rapidly growing customer base, we are now also enhancing our account management team to nurture this relation and grow our business in our recent customer base.

Lastly, to further support our growth initiatives, we have continued to look at M&A in the target markets with a goal of expanding our geographical presence, growing our customer base and enhancing our portfolio. .

At this point, I would like to turn the call over to our CFO, Roni Giladi, to review the financial results in greater detail. And following this path, I will summarize.

Please, Roni?.

Thank you, Roni, and good morning, everyone. Today, we will be analyzing our result on a non-GAAP basis, which we believe better convey the operational state of the business. There is a detailed reconciliation to a non-GAAP result in the financial table of the earnings press release..

Revenue in the first quarter was $36.6 million, up 16.3% from the first quarter of 2013 with significant growth across all of our products, life and pension, P&C and DECISION. Let me break down our revenue by type. First quarter license revenue grew to $3.9 million or 11% of sales from $3.5 million and 11% of sales in the first quarter of last year.

Our service revenue, which includes maintenance, grew to $32.7 million from $28 million in the first quarter of last year. .

Our global sales and account management teams are focused on further expanding our revenue in our target market, U.S.A. and Europe, building our revenue for the second half of 2014 and the backlog of 2015. We are reiterating our revenue guidance for the year 2014 within the range of $154 million to $158 million.

Our guidance consists of organic growth only. And as you can see from the first quarter results, we are on track to achieve it. .

We then conclude, and I would like to turn to profitability analysis. Our non-GAAP gross profit for the first quarter of 2014 was $14.6 million, up $1.2 million compared to first quarter of last year. Gross margin was 40%, down from 42.8% for the first quarter of last year.

Our gross margin for P&C, DECISION and legacy products remained high while the gross margin for life and pension is still lower as we explained in our previous call. As you all know, our life and pension revenue represent about 50% of total revenue, therefore, impacts the total margin.

We expect to see the same level of gross margin into 2014 and gradual improvement in gross margin in 2015..

Non-GAAP operating expenses, excluding COGS, for the first quarter of 2014 were $11 million compared to $10.1 million for the first quarter of last year. The increasing operating expenses was mainly due to increase in certain marketing investments, which were designed to support the growth of the company.

These investments include recruiting of sales executives, presales and marketing executives. We expect to see this trend of continuing increase in our sales and marketing investment throughout the year. .

Even including those investments, our non-GAAP operating income for the first quarter of 2014 increased 8.9% to $3.7 million from $3.4 million in the first quarter of last year. Our operating margin was 10% compared to 10.6% last year. In 2014, our revenue is expected to grow at a double-digit rate.

However, we will not see operational margin expansion due to the investment mentioned above. Non-GAAP net income for the first quarter of 2014 was $3.4 million or $0.07 per diluted share compared to $3.4 million or $0.08 per diluted share for the first quarter of last year.

The weighted average number of shares used to the computing of diluted EPS was 48.5 million, which grew by 19% compared to Q1 of 2013, mainly due to the financing in November 2013. .

Moving to our balance sheet. At the end of the quarter, we had cash and cash equivalents of approximately $75 million compared to $70.3 million as of the end of December of last year. The rest of the balance sheet items did not change materially. .

Shifting to cash flow. We generated this quarter $6 million in cash from operational activities, significantly stronger from the $3.5 million in Q1 of 2013. The ability to generate free cash flow, along with our strong cash position, will support us with our ongoing M&A efforts to acquire companies, mainly to accelerate our growth. .

At this point, I would like to turn the call back to Roni Al-Dor for closing comments.

Roni?.

Thank you, Roni. Sapiens is focused on achieving our organic growth. We are making investments in variety of areas with the goal of financing our technical advantage in the industry and expanding our sales organization to accelerate organic growth.

Specifically, we are investing in the sales force to support our life and pension, property and casualty and DECISION products as well as extended R&D investment for this product with the goal of improving the product maturity, mainly in ALIS.

As a global player in this market, we are uniquely positioned to continue to build on our leadership position, grow the company and drive shareholder value..

I remain very excited about the future of Sapiens. This insurance market is incredibly demanding modern technology. Many potential customers are utilizing legacy systems, which are expensive to maintain and cannot match today's capabilities.

We are benefiting from the transformation of these legacy systems, where insurance companies are going through a core technology replacement cycle. Industry analysts continue to praise our technology as a global player in the market.

We are uniquely positioned to continue to build on our leadership position, grow the company and drive shareholder value. .

I would now like to turn the call over to the operator for Q&A. Operator, please poll for questions. .

[Operator Instructions] The first question is from Chris Reimer [ph] from Barclays. .

This is Chris [ph] on for David Kaplan.

First question is if you can give a little color on the split between P&C and life and maybe where you see that split in 3 to 5 years?.

This is Roni G. Overall, our revenue split is about 50% coming from the life and pension, about 30% is coming from the property and casualty, about slightly below 10% on DECISION and the rest is the technology.

What we see is an obvious trend of all the 3 growth engines, life and pension, P&C and the DECISION are growing while the technology has slightly been decreasing. We see this trend continues in the near future, even gradually. And the share of the 3 product lines will increase over the technology. .

Okay.

If I could also ask about DECISION, what is its traction like with new customers? And has it worked well as an upsell to existing customers?.

Yes, this is Roni Al-Dor. The upsell on the existing customers, as you remember, we -- the current situation that we sold the platform, the DECISION platform, when we start with one area in each of our customer. And as we grow, we potentially grow by number of user in the same vertical or we are moving to the next vertical.

So both, I think, we start to see. About the new customer, again as you -- just to share again with all of you that selling platform technology is a long sales cycle. We build a very nice pipeline. We see a lot of demand. We also start to invest in our solution in the mortgage, in the risk and compliance area, so we believe that we are in a good track. .

The next question is from Bhavan Suri of William Blair. .

Just a question maybe for both Ronis here.

Given the traction in DECISION, just to follow up from the previous question, what do you think that ends up becoming as a percentage of revenue, again maybe not in '14 but in '15? How do you think about that growth vis-à-vis of the core business?.

This is Roni G. If I'm looking at this quarter, I would like also to repeat on the previous one. So the 3 growth engines grow about almost 19%, all of them together. If I'm looking going forward, 2015, '16, obviously the growth rate of the DECISION should be higher than the life and pension and P&C. And we will see this growing faster from the rest.

A few points, first of all, we see the traction from the market. Second thing is right now, a smaller size, so the ability to grow higher percentage is also is there. .

Yes. And just remind us, Roni, DECISION is sold as a term license. And so obviously, the recurring revenue there on a license portion should also be helpful.

Is that correct?.

The answer is yes. We started selling the DECISION on perpetual and shifted to term license in view of long-term recurring revenue. Obviously, when we are talking with top-tier financial investment banks in the States and also in Europe, they are looking for opportunity to shift to perpetual.

We need to balance between this and our desire to have recurring revenue. .

Yes. Okay. When you look at the sales headcount, 2 quick questions. One, just if you can quantify how many people you're adding.

And two, give us an idea of sort of when you add someone, how long does it take to ramp for them to be sort of fully productive on a quota-carrying basis?.

We currently have 5 [ph] sales manager and also we put some sales support around it. So it's a relatively is a lot for us. And about the time, it depends on the field. So I think it's a more easy in the life and P&C. The DECISION, it will take a little bit more, but again no more than 1 quarter. .

Okay. And then you guys brought up M&A as an area of potential use of cash.

Sort of what areas are you thinking you would add here to support the existing P&C, so it's supporting IDIT or ALIS and DECISION? Or are you thinking that you'd add a totally separate set of stack here?.

First off, I would like to share that relatively our pipeline is very good right now in the M&A. Again not a single on the table right now, but we have a pipeline. We lost a few deals based on the prices we gave because the price is still high.

As you know, the private company -- most of the case of public companies, they are looking for a much higher multiple that we are. But right now, we have strong pipeline and we see, right now, we have on all the area, in the life, P&C and DECISION. Also I can say maybe 60% or 70% of them also in Europe, and then [indiscernible] in the States. .

Okay. And then one last one for me.

Given that you're releasing ALIS in the back half of this year, do you think there could be a sort of uptick once ALIS is launched? I mean, I guess, my question is do you have customers waiting to purchase ALIS once the development is done?.

Yes. I think this is a good point. I think we -- in general, we're right now better than the past in terms of the delivery and the investment that we are doing. We plan -- as I mentioned before, we plan to launch our new Retirement Services in this quarter and the new 6.5 version in the next quarter, next half of the year.

And I believe that all the market see it. A week ago, we went to ACORD LOMA. It's one of the events. And then 2 weeks from now, we go to another event, IASA. So again based on our information, people are interested to see our progress in this area. .

The next question is from Mayank Tandon of Needham. .

I think this first question is for Roni G.

Roni, just remind me again in terms of seasonality on the revenue side, how does that progress over the course of the year? Is there any lumpiness in the quarterly trends on revenue?.

So we are working with big organizations, Tier 1, 2, 3. And the horizon is very long. So usually, our contract with them are also long. And we do not feel any seasonality. I can say that sometimes, probably end of the year, we are getting into close to going live and customers also would like their solutions to be live before year end.

So we get revenue stream slightly higher. But overall, I can say that the revenue stream is not having an effect of seasonality. .

Okay. That's helpful. And then I know you did mention something about gross margins. But just to be clear, were you saying that gross margin will be down year-over-year this year, and then you'll see some improvements next year? I just didn't hear the exact words that you said around gross margin. .

Yes, sorry for the technology interference in the previous session. No, I didn't say the gross margin will be down. Our aim is to stay at the same level as we are right now. As we mentioned, ALIS is a -- or the life and pension is [indiscernible] about 50% of total gross margin. And they are below gross margin.

This year, we are going to have available both the retirement and the 6.5. So gradually, in 2015, we'll see increase. .

Okay. Sorry to nitpick a little bit.

So 2014 gross margins will be similar to 2013 levels? Or is the 40% number for the first quarter more of an indication of where you'll be running at for the rest of this year?.

I think the 40% that we have right now, this is the level that we should expect. .

Understood. And then just moving down the P&L, wanted to get a better grasp of some of the operating expenses between R&D and SG&A. I know you talked about investing on the SG&A side.

Again how should we think about the investment levels for the rest of the year?.

So I would say that we are shifting more into sales rather than into R&D. We are doing both but much more on sales this year. As Roni mentioned, we added additional party member this quarter.

And potentially, we are looking ahead to recruit, with all the 3 growth engines, additional sales team, account management, presale to support our -- all of our sales activities. I would say that the sales will grow a few percentage compared to what it is right now over the year. .

Okay. And then again just in terms of margin terms, I know you don't give specific guidance.

But is the 10% number that you delivered in the first quarter a good indicator where you'll be at for the rest of this year?.

Yes. We do not provide guidance on this percentage. But overall, this is the base that we'd like to stay with. .

Sure. And then just one final, a P&L question, taxes. I noticed you aren't paying taxes.

Can you just remind us of what the NOLs are like? And then how should we think about the tax rate, not only for this year but also into '15?.

Yes. So we have about a $20 million of NOLs. This means that on the -- where they come, the technology of this is that basically we do not pay tax right now. But all of our operating units in the U.S.A., U.K, Japan, France, Belgium, all of that, we are paying tax based on tax treatment.

We should look at this year at about 10% tax rate, then up to 15%, and next year, over to 15%. So around 10% this year and 15% next year. .

Okay.

So first quarter was an anomaly though because you didn't pay any taxes in the first quarter?.

It was very small amount. I think it was about 7%. It should be around 10%. .

Okay. And then just one final question. I know in the past, both of you have talked about building channel partners, namely the SI [ph] is working with them to get more leverage from your platforms.

Maybe just talk about how that's progressing? Have you been able to lock in some of these relationships? And then are they starting to actually pay dividends?.

Right now, we don't have any huge change, meaning still the major part of our business are direct sales. And this is what we build. Case-by-case, in the DECISION or in other area in the region that we are not there, we start to build partnership. But this is again -- it will take more time. .

The next question is from Richard Baldry of Roth Capital. .

Can you talk about geographic sort of strengths, weaknesses you saw throughout the quarter? Any variability there?.

This is Roni G. We provide geographic breakdown on a yearly basis. I can say that on the territories that we are focusing, U.S.A. and Europe, we grew about 19% this quarter. .

Then on a specific line item, if we look last year, R&D is actually down sequentially.

Can you talk about any seasonality to the R&D spend, whether you think that's repeated this year or if that was sort of an anomaly last year?.

The R&D, if you look at it, is based on the non-GAAP figures, not on the P&L one. So if we exclude the capitalization that we had this quarter, which was higher than previous one, we will see that the R&D didn't went down. As a matter fact, it's almost the same level.

So if we exclude the capitalization, it was $1.4 million this one and previous -- or comparable quarter was $1.1 million. You will see it is at the same level. .

And then just lastly, in terms of the M&A pipeline you're looking at, can you talk a little bit about the scale of the kind of companies you're looking at? Would these be significantly incremental on the revenue side or really more marginal but maybe gives you better geographic reach in certain areas, something strategic?.

Most of the opportunity that we have right now is between 5% to 20% with 1 more mile bigger than this. So again it will depend how it work. So it's again, one much bigger and all the rest is at average of as I mentioned. .

[Operator Instructions] 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 2 hours. In the U.S., please call 1 (888) 295-2634. In Israel, please call 03-925-5901.

And internationally, please call 972-3-925-5901. Mr.

Al-Dor, would you like to make your concluding statement?.

Yes. Thank you very much all of you joining the call. We are looking forward to talk to you again in the next quarter. Thanks. .

Thank you. This concludes the Sapiens International Corporation First Quarter 2014 Business Results Conference Call. Thank you for your participation. You may go ahead and disconnect..