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

Tavy Rosner - Barclays Capital Richard Baldry - Roth Capital Partners.

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation Second 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, August 5, 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 this 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. We are presenting our results on a non-GAAP basis which will give the clear view into the operation state of the business.

A replay of this call will be available after the call on our Investor Relations section of the company website or via the webcast 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 today. We will provide a business update and discuss our 2015 second quarter financial results.

This was a strong quarter for Sapiens with a solid financial results driving by diverse base revenue and improved efficiency from an operational business model as we continue to leverage to benefit our customers.

We are reporting revenue of $43.4 million, another quarter of double-digit growth and increasing operating profit of 61%, and even compelling the driver of beyond our performance.

Revenue growth driven by product line diversity comprise of both, new and existing customer, and the margins improved resulting from the investment we have made in R&D and test development.

The demand of our product and services remains strong as customer look for solution to drive down the cost of doing business and delivery important services to the client. The investment we have made in product innovation are posing to be instrumental is a number of wins with both new and existing customer.

Given now success in first part of 2015 and now our business blend for the second half, we are raising our guidance for the full year. This in clear reflects the acquisition of Insseco that we announced last week, as well as improved financial performance year-to-date which enable us to raise our profitability guidance.

Last week we announced the acquisition of Insseco, a custom provider for insurance market. Insseco has an established business in the police insurance market and provides services for the major customers in Poland including software insurance carrier.

With 1,514 insurance professionals in Poland Insseco posted abrasive Dominik [ph] process in both class and pension and processing casualty space. Through this acquisition, we are entering into new markets and expanding our already solid footprint in Europe.

By expanding our existing workforce in Insseco, highly qualified and experienced insurance professional team, we established a regional development and delivery extension in Poland; this will enhance the support to Insseco customers' base and support our global operation.

In addition, it will create opportunity to introduce our leading software solution to the local police in joint market. Sapiens is paying approximately $9.1 million in this transaction which is expected to close during the month of August 2015.

On a churning 12-month basis, Insseco generated approximately $11.5 million in revenue and the acquisition is creative to Sapiens earning by third quarter. This acquisition is well aligned with our vision and extends our global presence, customer base and delivery capabilities by adding Dominik to complement our solutions.

It's always a swing acquisition such as this remains part of our growth strategy. We continue to look especially of opportunities that will expand our geographic presence, expand our customer base and provide us with access to solution and product that are complementary to our existing offering.

We remain highly selective in opportunities we undertake. Our ongoing financial performance, healthy balance sheet and lack of – in our portfolio sold us the opportunity to be extremely selective in the acquisition transaction we undertake. Turning to our core business for just a moment.

The Insseco acquisitions we announced earlier this year – the majority of our growth continues to be organic. The credit fell with new and existing customers. During the second quarter, the number of wins further expand our base of revenue and enhanced our competitive position.

Most recently we announced the GoLive [ph], a leading blast insurance based in South coast selected patients early so core solutions that support the complete policy lifecycle for Sapiens legacy involvement and support all of its life [ph].

Our solutions were chosen due to its model technology, debt functionality, flexibility and mobility through support, Go-Live diverse product portfolio.

By installing and deploying our solutions, the company will be able to improve their time to market for new products, reduced IT cost associated with supporting and maintaining the legacy involvement, and better leverage data to better serve the customers.

We also recently announced that our decision platform has been selected by top peer UK financial institution for deployment at the start of enterprise wide business improvement initiative. Through our decision modeling platform, the institution will be able to separate business logic from supporters.

The solutions utilize decision as a centralized location of showing and managing all logic. One other new business before we move is the selection of IT structure by Quantum, a Malaysian based insurance company. Quantum began in 2014 to serve local, commercial, institutional and individual customer we spotted casualty and general insurance services.

Quantum will be able to launch its insurance business with a modern and agile platform operating in the cloud giving the company distinct technology advances and quickly introduce new and innovation product while using the total cost of ownership.

As you know, we have invested heavily in R&D cost to construct technology solutions that are not only cutting edge from the technology perspective, but wholly incorporate business and proceed this is relevant and operationally for our customers operation.

Each of these new contract wins are largely the result of these investment that prove our ability to meet and exceed our customers' requirements and expectations.

During this quarter four customer have gone live and moved our system to production which means our solution is being used as the core operational platform whether actually run the business. As I said in the past, GoLive is a significant event for both, Sapiens and the customer.

It is the measure of the motivation of Sapiens ability to deliver and the customers' ability to adapt a roll out and new technology or the organization. Turning for just a minute to our sales and marketing effort.

During the second quarter we continue our effort to strengthen our brand and broadcast our story by participating in IASA, the Insurance Accounting and System Association Annual Educational Conference and Business Show in Las Vegas.

We also participate in Think Tank, as insurance network technology conference posted by the insurance network in London.

During this showcase, insurance industry professionals were able to discover how industry leader such as Sapiens are applying new technology to include efficiency and improve insurance provider, operating model and customer services.

This industry events are the key element of our sales and marketing program, and every act will generate new lead network with significant customer and key phase with a changes that going within our industry. I would now like to turn the call over Roni Giladi to discuss the financials.

Roni?.

Thank you, Roni and good morning, everyone. Our momentum continues in 2015 with Q2 revenue of $43.4 million and a strong non-GAAP operating margin. Revenue in the second quarter was $43.4 million, up 12.4% from the second quarter of 2014. Excluding the negative impact of currency exchange rate revenue growth was 22.3%.

Our revenue for the quarter by type breakdown as follows. License revenue totaled $2.6 million or 6% of total revenue during the quarter compared to $4 million or 10.3% of total revenue in the second quarter of last year.

Services revenue which includes maintenance revenue grow to $40.8 million or 94% of total revenue during the quarter, up from $34.7 million in the second quarter of last year. Let me now turn to geographic analysis of our revenue. We achieved revenue growth across all our geographic regions; North America, Europe and APAC.

Our growth was significant in North America, an important growth market for Sapiens where we reported increase of 20.6% in revenue, compared to the second quarter of 2014. During the second quarter, we started a consolidated reduction in revenue. Please note, that the impact of reduction revenue is not material to our results.

Turning now to profitability. Our non-GAAP gross profit for the second quarter of 2015 was $18.6 million, up $2.9 million compared to the second quarter of last year. Gross margin was 42.7%, up from 40.6% for the second quarter of last year.

As we discussed in Q1 conference call, at the end of 2014 we started to implement an efficiency program that mainly affected our growth of revenue. We initiated offshore recruitments of employees with lower costs in Bulgaria and in India.

In addition, the erosion of new Israeli shekel versus the dollar reduced our cost of revenue as the majority of our delivery employees are based in Israel. Also, we started to see improvement in gross margin of our life and pension in division. As a result, we see improvement of 2.1% in gross margin compared to last year.

You can also see trends of improvement in gross margin starting 2013. Our investment in R&D in the second quarter of 2015 totaled $3.9 million compared to $4.5 million in the same quarter of last year. The reduction in R&D expenses is primarily due to exchange rates and shifting of R&D employee to support our delivery effort due to our revenue growth.

Our selling, general and administration expenses totaled $8.2 million this quarter compared to $7.1 million in the second quarter of last year. The ongoing increase in SG&A expenses that started early last year was the result of our continuous increase in sales and marketing efforts over the last several quarters to support our future growth.

Our non-GAAP operating income for the second quarter of 2015 increased by 61% to $6.7 million from $4 million in the second quarter of last year. Non-GAAP operating margin this quarter was 14.8% of total revenue compared to 10.4% of last year.

The improvement in operating margin was a result of 2.1% improvement in gross margin, a reduction of 2.6% in R&D investment which was offset partially by increase of 4.3% investment in SG&A. Tax expenses this quarter was $1.2 million compared to tax expenses of $400,000 in the second quarter of 2014.

Our tax rate for the first half of 2015 was 15.9% within the range we provided in the beginning of the year of 15% to 17%. Non-GAAP net income for the second quarter of 2015 was $5.2 million or $0.11 per diluted share, a 45.2% increase compared to $3.6 million or $0.07 per diluted share in the second quarter of last year.

Turning to our balance sheet, as of June 30, 2015, we had cash, cash equivalents and security investments of approximately $90 million compared to $80 million as of December 2014.

From a cash flow perspective, for the first six months ended June 30, 2015, we generate $22.2 million in cash from operating activities, significantly stronger than the $11.9 million in the first half of the year.

The increase in cash flow was mainly due to our improvement in operating profit, completion of project implementation milestone and renewal of maintenance agreement, and improvement in our net income. During the second quarter we pay dividend in the total amount of $7.2 million to our shareholders.

As we announced last week, we acquired Insseco and products. We will start consolidating Insseco figures in our financial statements during Q3 of 2015 upon the closing of the agreement. We expect that Insseco transaction will be accretive to Sapiens's earning starting from mid-Q3 and beyond.

Turning to our guidance, we are raising our 2015 full year guidance for both, revenue and operating margin. We expected revenue in the range of $176 million to $180 million which represent growth of approximately 20% on a constant currency basis, an increase over our previous guidance of $174 million to $178 million.

We are increasing our full year 2015 operating margin guidance. We expect operating margin of 14% to 14.5% of total revenue, and increased over our previous guidance of 12.13% of total revenue. At this point, I would like to turn the call back to Roni Al-Dor for closing comments.

Roni?.

Thank you, Roni. The first half of 2015 was marked by strong financial performance, two acquisition and new businesses turning to be upon our foundation for future growth. Yet these business model that generate revenue from a diverse, yet complimentary solution of different geographic.

We have assembled and invested in innovation product and sales and marketing program to properly support the launch and delivery to the market place. Our success in the third quarter of the year and strong market demand of our product give us the confidence to raise our full year guarantee of 2015.

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

The first question is from Bhavan Suri. Please go ahead..

Hey guys, can you hear me okay? Yes, thanks. This is Alfred [ph] chipping in for Bhavan. Congrats for the quarter. And I know you guys talked to your continued implementation efforts of lower costs in India and Eastern Europe.

And I was just wondering if you could just provide some color on how that's progressing and if there is additional plans in the back half of the year, primarily from India that should be beneficial to operating margins..

Hi, this is Roni Al-Dor. As you know we stalked India from the beginning of the year, it looks promising, it takes time to build up to train the people. This is the danger [ph]. In second part, we are just in the starting point, so it's also we expect to get a benefit at the end of the year and mainly for next year..

Okay, thanks.

And – I know you guys own a pretty nice bottom line beat for the non-GAAP operating income, and I was wondering how much of it was due to the currency effects of the shekel versus dollar and the offshore recruitment efforts and the improvements in gross margin of life and decision, I know you guys mentioned those three but I was wondering maybe what the percentage contribution from each was?.

Hi Alfred, this is RoniD, although earlier we've shown improvement in operational in compared to previous three quarters, and last year of course, it's coming from a multiplying region as we mentioned improvements in the last convention sector as we mentioned and just significantly in May of previous year to develop the product, the offshore implementation and the efficiency program that we already started in this 2014.

All in all, the guarantee effect – it was slightly below 1% in total margins and rest is coming from the free elements that I mentioned, not breaking demand but only chance is about less than 1%..

Okay, thanks.

As I look at the strong growth and services versus license we're getting down year-over-year, could you maybe provide some color in terms of what grown that shift and may be how we should think of license growth over the next two quarters?.

Hi, this is RoniD again. Basically when we mentioned our revenue mix license versus services, we always mentioned that we like additional revenue from existing customer, growing them also in retail product all the time.

What we see is and what we like to emphasize is to analyze our revenue in a total consolidated basis and not only by vertical license that is there. And we will see the strength likely, potentially improving although the next quarter but this will not be dramatically.

Again, what we think it's more important to us is total revenue and if we can generate more profit from this revenue and we've able to show this..

Okay, thanks.

And just one more from me, and sorry if you've already mentioned this but – I know you guys are expecting to close the acquisition of Insseco in early, sometime about – and we're just wondering if that acquisition was included in your updated full year revenue guidance?.

That's for the business we feel we didn't complete the closing, the quarter closing, so we will be in need of slightly in Q3 results. We implemented the Insseco and obviously we'll review our revenue guidance as we progress over the year and integrate the Insseco entity into Sapiens..

Okay.

So just to be clear, the Insseco revenue contribution has been included in full year guidance?.

That's there..

Okay, thank you. That's it for me, thanks guys..

Thank you..

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

Hi, thanks for taking my questions. First, I just wanted some more color in Insseco, you gave several reasons why you made the acquisition, you've talked the workforce and the existing software and the customer base in Poland.

But what's the main driver and the value generation from that? Is it primarily the workforce or you really – you're really going to use their existing software to try to put that into your other customer?.

The main thing is the workforce, and the second thing is also the local presence and the customers they have.

We're letting to single now on their product to replacing to the other, definitely we are interesting to work in the Central Europe as you know from the past, our business is West, Central and now it's good for us to enter to the East European business. So it is to think the product is less than important for us..

That's helpful. And then I was looking on if you could have some feedback on the overall insurance software market.

It seems like there is more and more player, and when I look at different press release and contract announcement, is that something that you feel and need to – do you get to feel some pressure on pricing when you pitch for new contracts?.

Yes, the answer is yes, definitely we seem more opportunity but in the same times we see more competitors and new comers, and all sorts of positive equities acquiring other companies just recently. So for database, and I almost believe few months we see another investment in this area.

But again, second, as you know we are well positioned, we are 150 customers, we are well recognized by the analyst, we are the local person. So we have advantage to all of those new comers but in terms of price issue, definitely we see pressure on this area..

Thanks. And maybe one last for me. I looked at your guidance for operating margins and I mean this year there was some help on the customer, as you mentioned the shekel obstruent's [ph].

So if you would just look at business, going forward beyond 7.15%, is that kind of range sustainable on the operating margin side?.

I doubt, this is Roni, the answer for that us yes, we would like to sustain this operational margin and continue in the same time our growth. As I mentioned this is not only coming guarantee, this is coming from efficiency program and offshore initiative that we started this year and we led to the improvement also in next years..

Great. Thank you very much..

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

Thanks. The cost is little bit – given the quick benefit you've seen from – early into that effort or in the long term, how much of the operations or projects do you think can shift into an offshore model? So wouldn't that gauge of how much that could swing the top and bottom line? Thanks..

We believe in the next year not in this year. Next year we want to see around 20% of the services can come from the offshore. And also we have – we cannot get all the benefit from the profit rise because also we have pressure from the customer that wants to see the benefit as well.

So we will plan to give from in-shore offshore module to the customer and when they are offshore, they can get out of the benefit. We have taken, if we can do R&D expenses, then we can get the benefit..

Okay. And when the acquisition shift a layer into the model. Do you have an early indication of how that will point some of the P&L lines, there are gross margins similar – and maybe the global line cost as well? Thanks..

Hi, Rich, this is Roni. I think the current guidance that we mentioned – we basically provided what we would like to emphasize, it's top line and profitability of the company.

This is taking into effect the differences between the IBEXI and the Insseco, each of them has different criteria but overall our implement is in guidance towards the end of the year..

Okay. Congrats on the quarter..

Thank you..

Thank you very much..

The next question is from Nicole Giliack [ph] of ION Management. Please go ahead..

Hi, Roni and Roni, this is Nicole. I think my first for you, one, do you – in the first half of this year but now have $99 in cash on the balance sheet. What are your stats on the efficiency of your balance sheet? I'm assuming you give an acquisition an addition to shareholder returns.

What's the potential for further capital allocation?.

Hi Nicole, this is Roni. Sapiens do not have any dividend policy. Last time that we issue dividends was two years ago, this is – this was after the [indiscernible] and the recent one was about few months after the good result of 2014. So we do not provide policy and we do not tell, it's as will come, we'll consider this.

So be cautioned, the balance sheet was $90 million, is to basically support our growth in the company, obviously we are generating the cash but we would like to continue to do acquisition. As we mentioned with positive M&A, the customer base geographic penetration or complementary product.

We – in the last five years completed six M&A and we like to continue doing so. The next M&A that we like to see is bigger size in revenue, obviously that can have significant impact on the company financial..

Look forward to it.

My second question is, around ALAS, how the efforts progressing to move monitor acquisition with respect to the corporate effort?.

The marking of the policies including – again, it takes time, as you know, we have the vitamin sources, getting the license annuity, in the retirement we are still in a heavy investment situation. We opt to see more important in the 2016. And in an obvious week, it's slightly better..

All right. Thank you..

[Operator Instructions] The next question is a follow-up question from Nicole Giliack [ph]. Please go ahead.

Nicole, do you like to ask a question?.

Hi, no. I had no follow-up question. I didn't press any button..

Okay. 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 US, please call 1-888-295-2634; in Israel please call, 03-925-5918, and internationally please call, 9723-925-5918. Mr.

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

Yes. Thank you for all you for joining our call. We will talk to you again in the next quarter. Thank you very much..

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