Yaffa Cohen-Ifrah - VP, Corporate Marketing and Communications Roni Al-Dor - President and CEO Roni Giladi - Chief Financial Officer.

Mayank Tandon - Needham Bhavan Suri - William Blair Tavy Rosner - Barclays Capital Richard Baldry - Roth Capital Partners.

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation First Quarter 2015 Results Conference Call. All participants are present in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded, May 06, 2015.

It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens’ Vice President of Corporate Marketing and Communications. 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 or other forward-looking statements and the safe harbor provisions in the press release issued today also apply to the content of our call.

Sapiens expressly disclaims any obligations 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. Also, during the course of the call today, we will refer to certain non-GAAP financial measures.

A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued before the market opened this morning. A replay of this call will be available after the call on our Investor Relations section of the company’s website or via the web link, which appears in the earnings release that we published today.

I would like to 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. We’ll provide today business update and discuss our 2015 first quarter financial results. This was a strong quarter for Sapiens and a solid start to 2015. We continue our revenue growth delivering revenue of $41 million, 12% growth year-over-year.

The diversity of our revenue across geographies and product line demonstrates the demand of our product to a range of customers, both new and existing and the industry demand for innovative business solutions. During the quarter, we announced plan to acquire IBEXI Solutions, an Indian based provider of insurance business and technology solutions.

The acquisition of IBEXI follows a longstanding relationship between our two companies. IBEXI has been selling the Sapiens IDIT Software Suite for seven years in Asia Pacific and providing support for IDIT existing customer base.

With its strong local management and self presence in Asia Pacific and with a team of 118 insurance and technology professionals, IBEXI is serving 18 insurance companies in both the property and casualty and life, pension and annuity markets, including leading insurance companies in India.

IBEXI offers IT business consulting services to insurance companies on both co-insurance and supporting systems. In addition to its own insurance product Business Intelligence, BI, an insurance portal, IBEXI also provides implementation services for insurance business solution.

IBEXI’s insurance product will expand Sapiens’ portfolio of solution offering providing Sapiens’ clients with immediate benefits. IBEXI’s end-to-end services approach includes product led services from initial system analysis and design, all the way to data migration implementation and up to testing, training and deployment.

We expect this robust set of business skills will enable significant expansion of our services to clients, both in Asia Pacific and in other geographic locations. IBEXI will enhance the Sapiens team with extended and highly experienced team across all Sapiens solutions globally.

With a larger and more geographically spread professional services team, Sapiens will be well positioned to provide services and support to our global customers with better, cost effective offshore resource for all of our solutions.

We continue to actively seek and evaluate additional acquisition targets that expand our geographic presence, increase our customer base, provide us with products that are complementary to our existing portfolio of insurance and financial services solutions. The continuous execution of our M&A plans remain important aspect of our growth strategy.

We have built rich portfolio and solid balance sheet that provide us the flexibility and the products, the opportunity to be selective in transaction we may undertake.

We see a lot of competition on target companies for acquisition probably because more players like ourselves but also private equity firm appreciate the potential of the insurance market. Having said that, we will only acquire companies that fit our M&A plan and will be reasonable in terms of valuation.

Beyond acquisition, the majority of our growth continues to be organic driven by increased sales on our new and existing business. Certainly the investment we have made in our products and sales organization to enforce the fundamentals of our business are paying off.

During the quarter, we recorded a number of new wins that proves our strong competitive position. In property and casualty business, our customer Hiscox has been recognized for its achievement that was again through the deployment of Sapiens IDIT.

Hiscox was selected by Celent to receive the Model Insurance Award for the transformation and optimization of its retail insurance business.

Key to this effort was successful implementation of Sapiens IDIT P&C Software Suite selected as a single platform to consolidate Hiscox’s legacy system and support new businesses, including Hiscox’s new direct home insurance product.

In addition, our Australian customer Achmea was also recognized by Celent and won Model Insurance Award for its innovation, use of emerging technologies to protect and service farm customers. This is a strong recognition of our ability to deliver true business value to our customers through the deployment of our solutions.

Announcements such as these demonstrate the power of P&C solution and this reference accounts are also driving strong demand of our industry leading offerings. Our P&C pipeline continues to expand and we are encouraged by the strong demand we are seeing within the P&C segment.

In the retirement services, during the first quarter, we announced the successful go-live at one of the industry leaders of the eligibility component of Sapiens retirement platform.

This important milestone brings Sapiens retirement into production is the evidence of our product readiness for the market, supported by our expertise and commitment to strategic market segments. We are on the right track to become a leading technology provider to the U.S. retirement services industry.

In life, pension and the annuity business our Closed Books solution, a unique offering specifically designed for cost and process efficient legacy portfolio administration was successfully implemented and is now in the production at Wesleyan Assurance Society.

Subsequent to our success with Wesleyan, we officially launched Closed Books to the border European life and pension insurance market. Sapiens Closed Books match well the increased interest in legacy portfolio management trend we are seeing across the industry.

Sapiens Closed Books is a unique solution for life and pension insurance and is ideal for addressing the administration of legacy portfolio challenges shared by most insurance. We increased our investment in our sales team to support this demand and are also collaborating with SI in order to meet this demand.

Let me turn to our ALIS 6.5 product which is our core policy administration suite for life and annuity market. Following the quarter end, we announced that Tennessee Farmers Life Insurance Company selected ALIS for an IT modernization project, designed to support full portfolio of life and annuity products.

For the first time, an ALIS customer will deploy our solution in the cloud toward partnership we have established with NTT DATA which I will elaborate later in the call. Our commitment to the life and annuity market is solid as we continue to enhance ALIS to offer greater benefit to our customers.

Out of our ongoing support for product includes comprehensive testing to ensure functionality and operability. This past month, we conducted benchmarking exercise whereby we simulated a large scale working environment for ALIS 6.5 that was based on mixed insurance product portfolio typical of tier 1 life and annuity’s company.

The benchmarking served to test our product and not surprisingly achieved impressive results. By building a virtual lab in a cloud environment, we successfully simulated an environment and 1,600 parallel online users and 10 million policies whereby we could use rapid best processing time and subsequent average screen respond time.

The outcome demonstrates the scale of readiness of our product, regardless of the number of users or policy counts. This next generation software suite has the proven ability to efficiently support even the largest insurer with the high volume of users and policies.

In DECISION, the product usage, the number of customers and the number of users is expanding and they can see clear benefits from our DECISION solution.

In addition to our experienced sales team for DECISION, we are expanding our sales efforts and announced this week a teaming agreement between Sapiens’ DECISION and Persistent, a global leader in the software product development and technology services.

The collaboration between Persistent and Sapiens’ DECISION will provide client with significant competitive advantage via process automation and business wealth management.

Persistent and Sapiens previously worked together to achieve seamless integration between Appian a leading provider of modern business process management solution and Sapiens DECISION. As you know, over the past few years we have invested significantly in our technology. Ongoing investment is marked in order to maintain technology leadership.

Moving forward, we plan to continue with our investment in order to keep our product fresh and aligned with the market demand, also at a lower level as a percentage of revenue that’s in the recent past.

At the same time, we continue with our investment in our sales and marketing to expand our market reach, further strengthen the Sapiens brand and increase awareness. Most recently, we presented our range of offerings at 2015 Life and Insurance Conference in Washington DC, one of the industry’s largest gathering of industry professionals.

We also participated in Future Protection Conference in the UK expanding the brand recognition of Sapiens and our proven solution. June 2015, we plan to continue broadcasting our message and Sapiens brand through conference attendance and leveraging successful deployment.

This strategy has been proven effective for lead generation, customer networking, and care, and critical channel for keeping finger on both industry trend and expectations.

In addition to our target sales and marketing initiatives, we are also looking to expand our sales channel by collaborating with partners and other third parties who can enhance our capabilities, expand our geographic coverage and further accelerate our growth.

We are actively seeking partnerships with firms whose capabilities complement our own that can provide us with additional capabilities such as cloud and provide entry in a new geographic location where we do not currently have the presence or enrich our portfolio for the benefit of our customers.

An example of this, a recently announced alliance with NTT DATA in North America. Through our partnership with NTT DATA, our ALIS Solution can be delivered using the cloud model. Tennessee Farmers is the first benefactor of this particular partnership.

Cloud deployment will open new markets for Sapiens ALIS, offering a solution for customers who wish to enter to this innovating approach to call system deployment. Another example is the pending agreement we discussed before between Sapiens DECISION and Persistent. You can expect to see more of these types of alliances in the near future.

I would now like to turn the call over Roni Giladi to discuss the financials.

Roni?.

Thank you, Roni and good morning, everyone. We started 2015 with first quarter revenue of $41 million and a strong non-GAAP operating margin. As a reminder, we are presenting our results on a non-GAAP basis which we believe present a clear view of the operational state of the business.

Revenue in the first quarter was $41 million, up 12% from the first quarter of 2014. In our previous call, we discussed the negative impact of foreign currency exchange rate versus the USA dollar on our revenues. In the first quarter, foreign currency further eroded.

If we eliminate the negative impact of currency movement in the first quarter compared to the fourth quarter of 2014, our revenue would be higher by approximately $1.4 million. Our revenue for the quarter by type breakdown as follows.

License revenue totaled $3.3 million or 7.9% of total revenue during the quarter compared to $2.4 million in Q4 of 2014 and $3.9 million in the first quarter of last year. Service revenue which includes maintenance revenue totaled $37.8 million during the quarter compared to $39.3 million in Q4 of 2014 and $32.7 million in first quarter of last year.

Let’s look at geographic breakdown of our revenue. In North America, revenue for the first quarter totaled $13.7 million or 33.4% of total revenues compared to $10.8 million in the first quarter of last year, reflecting an increase of 27.1%.

In Europe which includes Israeli sales, revenue totaled $23.2 million or 56.5% of total revenue, similar to the first quarter of 2014. As we know, most of the negative impact of currency exchange rate was in this region.

Revenue in APAC totaled $4.2 million this quarter or 10.1% of total revenue in the first quarter compared to $2.8 million last year, an increase of 50%. Let’s turn now to profitability. Our gross profit for the first quarter of 2015 was $17.7 million compared to $17.5 million in Q4 of 2014 and $14.6 million in the first quarter of last year.

Gross margin in Q1 was 43%, up from 41.8% in Q4 of 2014 and 40% of the first quarter of last year. In the last several months of 2014, we started to implement an efficiency program that mainly affected our cost of revenues.

The efficiency plan primarily included release and replacement of contractors with employees and initiation offshore recruitments of employees with lower cost mainly in Bulgaria. In addition, the additional erosion of new Israeli shekel versus the dollar reduced our cost of revenue as the majority of our delivery employees are based in Israel.

Our investment in R&D in the first quarter of 2015 totaled $3.9 million compared to $4.3 million in the same quarter of last year. Our selling, general and administration expenses totaled $8 million this quarter compared to $6.7 million in the first quarter of last year.

This increase in SG&A was the result of our continuous increase in sales and marketing efforts over the last several quarters to support future growth. Our operating income for the first quarter of 2015 increased by 58.5% to $5.8 million from $3.7 million in the first quarter of last year.

Operating margin this quarter was 14.1% of total revenue compared to 10% in the same quarter of last year. The improvement in operating margin was a result of 3.1% improvement in gross margin, a reduction of 2.1% in R&D which was offset partially by increase of 1.1% investment in SG&A.

Our adjusted EBITDA this quarter totaled $6.2 million, an increase of 53.7% compared to $4 million in the first quarter of last year. Our adjusted EBITDA reflects 15.1% of total revenue. Financial expenses this quarter totaled $330,000 compared to financial income of $46,000 in Q1 of 2014.

The interest expenses are mainly attributable to the impact of devaluation of monetary assets and hedging expenses resulting from currency erosion. Net income for the first quarter of 2015 was $4.7 million or $0.10 per diluted share, a 40.1% increase compared to $3.4 million or $0.07 per diluted share in the first quarter of last year.

Let’s turn to our balance sheet. As of March 31, 2015, we had cash, cash equivalents and security investments of approximately $87 million. From a cash flow perspective, we generated $11.9 million from operating activities in the first quarter of 2015, a significant improvement from the $6 million in the first quarter of last year.

The increase in cash flow was mainly due to the improvement in our net income, reaching project payment milestone and the renewal of annual maintenance agreement. Following the recommendation of management, our Board of Directors approved a cash dividend of $0.50 per share.

The dividend which is approximately $7.2 million in aggregate is to be distributed June 1st to our shareholders upon shareholder approval. Our continued growth and improved profitability have led to generation of positive cash flow and a healthy balance sheet with the strong cash position and zero debt.

As a result, we have the flexibility to distribute this cash dividend to our shareholders and continue to pursue and execute our merger and acquisition strategy. As we announced during the quarter, we acquired IBEXI. We will start consolidating IBEXI figures in our financial statement commencing Q2 of 2015.

We expect that IBEXI revenues and profit will be immaterial for Sapiens this year. Turning to our guidance. For the full year of 2015, we are reiterating our guidance for revenue in the range of $174 million to $178 million and operating margin guidance in the range of 12% to 13% of total revenue.

As we discussed earlier, we see significant fluctuation in all our currencies versus the USA dollar and the currency movement affect both our revenue and costs. As the year progress, we will be monitoring and evaluate our guidance and update accordingly if necessary.

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

Roni?.

Thank you Roni. Our first quarter financial results and operating highlights reflect a solid business position for future success. Sapiens today has a diverse yet complementary suite of solutions and expanded sales organization with target marketing strategies, a broad range of customers and healthy balance sheet.

We are well positioned to achieve our operational and financial targets for 2015 while at the same time reinforce our fundamentals for growth and success beyond that. I would now like to turn the call over the operator for Q&A. Operator, please poll the questions..

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question is from Mayank Tandon from Needham. Please go ahead..

Roni and Roni, I wanted to first start off with the revenue contribution from these big deals that you won over the past several quarters.

Could you just talk about how they are contributing today and how you expect them to ramp over time and could that potentially have a positive impact in terms of revenue growth in ‘16 if not in ‘15, on a constant currency basis?.

We recently announced several deals. In last quarter, we also announced one in the life and pension and one in the P&C.

As we mentioned over the past several conference calls, when we sign a deal, this is usually for a period of 18 months to up to 24 months; this is typical range of implementation of our project, and we see ramp up of revenue over time.

The starting point are revenue but not significant one but as we progress and reach the middle of the time, the revenue up to the highest. So, we see the revenue ramp during Q2 slightly and also from Q3 and onwards, this is our incremental revenue as any deal will come..

And then on the income statement, I am just looking at the contribution of license and maintenance and services.

Given the strong license revenue in the first quarter relative to the fourth quarter, first, can you just give us some color in terms of what drove that and then how should we be thinking about the trends for the rest of the quarters in ‘15?.

Obviously some of this is reflecting by deals that we signed earlier and completed some percentage of completion of revenue during this quarter, and this drove the higher license amount.

We currently see higher pipeline or stronger pipeline that we saw in the previous quarter and this is obviously -- will have effect on the license amount and potentially will increase it over the next quarter. It will not happen in one quarter but over time the same revenue that we discussed earlier.

So potentially, we could see with additional new bids, increase in license..

And then on the maintenance and services side, the revenue dropped off relative to the fourth quarter sequentially, what should we make of that? And then given the maintenance renewal cycle, would you expect the maintenance business to start growing sequentially from 2Q onward?.

I will try to answer this from what we said in the previous call. As you’ll remember, we mentioned that we should grow this year at a rate of 17% but because of currency erosion versus the dollar, the reporting revenue will be only 12%.

And as we told last time and basically as we thought what happened this quarter compared to Q4 of 2014, there was additional erosion in euro and in shekel. And as we mentioned earlier, the additional erosion impacted our revenue mainly on the services side by $1.4 million. So, if we add this we had reported even higher and stronger growth in revenue.

As we continue to have conversion of the pipeline into a closing contract, we should also see the revenue in services going up..

I have two quick questions and I will jump off. First is on the FX. I know you said on a sequential basis, there was a $1.4 million hit but relative to when you gave guidance in late February, what is the FX impact? I am just trying to get a sense of what the impact is on guidance versus when you gave in late February..

We do this calculation Mayank and the impact was about 600 K..

So, not major.

And then the final question is in terms of margins given the outperformance in 1Q, are you still keeping margins intact with your guidance, may be to provide us some color in terms of what your thought process is in terms of investments and then drivers for the rest of the year?.

Yes, of course. So right now, we are only starting the year, we are only in the first quarter of 2015. You see the impact of currency exchange rate on our results in terms of revenue and also by the way on profit. We feel confident with the guidance that we gave about 12% to 13%.

And as we mentioned in the call, as the year progress and you see, we build more our revenue and probability, we’ll probably consider building this but not at this very point..

The next question is from Bhavan Suri of William Blair. Please go ahead..

Hey guys this is Baron [ph] for Bhavan. I was just wondering if you guys could give a quick update on the retirement services pipeline. I know you had one customer go-live during the quarter.

I was kind of wondering how your discussions with other potential customers are progressing?.

We are continuing with all of our investments, we hope to enter to A&D [ph] phase or more scoping with one of the clients soon but things delay, but we are continuing to put a lot of investment in the retirement services. So, we feel optimistic..

Okay. And then on the P&C side of the business, can you kind of talk about may be potential players down the road of entering the U.S.

market and may be if you had any competitive wins against Guidewire during the quarter?.

We see positive momentum for second now in the P&C. It was quiet period, so we didn’t announce a lot of customers, if you remember last year. So right now we see positive momentum, almost every deal we are competing with Guidewire. But we already announced the deal and we hope to see a few more deals in this year.

So, we don’t see any more new competitors but Guidewire is a market leader today but we in terms of the product, we position ourselves very strong. We are very focusing on the what we call specialty line, so this is -- and we also have hedge solution so they don’t have it.

So we try also to find out a niche that we are advantaged and also to find out what type of customer that happy to see us doing the full system integration and not just to sell the product. And this is how we’ve tried to differentiate ourselves between us and them..

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

Hi, thank you for taking my question. Just going back to the revenue mix, if I remember correctly, I think you had 8% of total going to license.

I was wondering if you could remind me your strategy with regard to system integrate or you talked about perhaps to integrate the DECISION product, what’s the view with regard to the other product line?.

We are currently working and focusing on the DECISION part, working with system integrator. We announced in recent press release about this I think yesterday and I can tell you we are working with other firms to be able to extend our sales effort and sell DECISION as a technology platform to many players with the system integrators.

We are doing this also in Europe and in the States. Regarding the other product line, we recently announced a deal in the States for the life that we’re working also with NTT DATA on a deal. So this is one thing that can work with us and potentially not heavy as with the DECISION. We are doing this with P&C but in much smaller volume.

So the focus is mainly on the DECISION side rather than the P&C or life..

And on Closed Books, you mentioned you are extending the offering to the European market, can you give us some color what you view the addressable market there?.

We have I think one of the best products in the market today called Closed Books. We just announced the second client are in production right now. And there is -- what we see in the market now in Europe, a lot of consolidation. They are looking how to take the insurance company reduce the cost of all of these, all policy.

And what we are coming to the market is with a product that’s relatively -- it’s cost them less to do all the data migration to our product and that they can add that to the consolidation. All of these deals is five, six, seven, eight years deals or more than these.

In this case, we are working, in some cases with system integrator if their customers are looking for BPO solution, but in other case we can also work with customer. So right now we see a lot of interest in our product.

We are -- very soon we enter to at least to BOC [ph] so big clients want to see and to build the ROI together with us and the system integrator. And I hope quarter three, four we can hope to see some results..

The next question is from Richard Baldry of Roth Capital Partners. Please go ahead..

Thanks. It looks like Asia Pacific was your strongest territory and that’s may be because it’s off a smaller base.

But could you talk about whether there’s any regional factors, may be the state of the industry there, or other item might be driving that faster growth and how sustainable you see accelerated growth in that region?.

So Asia Pacific is -- we divide Asia Pacific by three regions, one is Japan, and this is we’re more selling our email solution, this is we see a lot of growth in this area. And the other thing is mainly Australia and Southeast Asia; this is which we are doing right now with IBEXI. So, each of the three territory is in different situation.

All I can show to you then, they’re second growth engine for us. So, we’re primarily investing there in the States and Central Europe and West Europe but we still have clients in those territory and we see a potential there. But that’s not priority one for us..

And if we look to that other income line with the financial expenses for ForEx and hedges, how do you see that line trending as the year goes or just another way of asking how you feel about currencies and how they are embedded into your current guidance?.

So, we in the company have a policy to protect our profitability across all currencies for the rest of the year. Obviously we are doing much more hedging as the quarter is close to what we are standing right now and the ratio is decreasing towards the end of the year.

And the fluctuation obviously is dependent on what currency is impacting our operational results. As we see for example, the currency will impact positively. Our operation will have expenses in the other way around.

This quarter we saw the expenses; this came in mainly from monetary assets that we have erosion against the dollar and some hedging expenses that we protected our profitability. So, we would have formed the operational profit but we basically hedged some expenses for this..

Thanks. And the last one would be the dividend that you announced. Can you talk about sort of your overall theory on that? It looks like your balance sheet obviously could sustain that on an annual basis and your profitability.

Will the determination be made whether to do that year-to-year based upon factors like acquisition, productivity or other things we should be kind of keeping an eye on? Thanks..

If we look at the balance sheet that we have today, as we mentioned we have today $87 million in the bank, we are generating cash quarter-over-quarter and we foresee this also in the future. So we feel very strong about it. The dividend, we do not have any policy in the company about distributing dividend.

As a matter of fact, this is the second time that we did this; we did this two years ago. And this is a way of rewarding our shareholders but time simultaneously we will not have any ideal opportunity that we have in the M&A strategy. So, we will continue to do M&A and execute for this together with the dividend..

[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 two hours.

In the U.S., please call 1-888-782-4291; in Israel please call, 03-925-5904 and internationally you please call, 9723-925-5904. Mr.

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

Yes. Thank you very much for joining the call today. And we will see you again next quarter. Thanks a lot..

Thank you. This concludes the Sapiens International Corporation first quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect..