Yaffa Cohen-Ifrah - Head of Corporate Communications Roni Al-Dor - CEO Roni Giladi - CFO.

Bhavan Suri - William Blair Mayank Tandon - Needham & Company Tavy Rosner - Barclays.

Ladies and gentlemen, thank you for standing by. Welcome to Sapiens International Corporation Third Quarter 2016 Results Conference Call. At this time all participants are 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 November 7th, 2016. It is now my pleasure to introduce your host Ms. Yaffa Cohen-Ifrah, Sapiens CMO and Head of Corporate Communications. Thank you, Ms. 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 applies 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. 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 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 Web site or via the Website link which appears in the earning release that we published today.

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 today. Sapiens continues to deliver a strong financial result third quarter. I remained very encouraged by our geographic expansion, our organic growth with both new and existing customer and the potential of ongoing M&A opportunity to enhance our goal and profitability.

During this call, we will provide the business update and discuss our third quarter financial results and our outlook for the remainder of the year. Today, we are reporting revenue of $55.5 million up to 22.4% over the third quarter of the last year.

We delivered growth and improved performance and cost in all of our offering and in all territories we are operating in. Driven by strong demand for existing customer and ramping sales from new customers.

As in recent quarter, the demand of our product and services remained stronger and we continues to improve our position in the market by winning strategically important deals with new customer. We expect this momentum in sales to continue throughout the remainder of the year.

We had a very busy quarter, we expanded our strategic relationship with Medical Protection Society, MPS with a multimillion dollar agreement to lead the complex implementation of MPS's membership system. Key component of the company's program to refresh their IT landscape.

MPS has previously selected Sapiens IDIT software suite to run its new membership system and now MPS has decide to expend their business with us by selecting Sapiens to provide professional services to lead the implementation effort.

Also Menora Mivtachim Insurance in Israel selected Sapiens IDIT software suit in a new agreement value at over $10 million. Menora has previously selected Sapiens to manage its life and pension as well as their insurance life of businesses. In addition, during the quarter 21st Century Insurance in the U.S.

a division of farmers insurance selected Sapiens Stingray PNC solution as it is new policy administration system. In another multi-million dollar agreement LB Group select the Sapiens IDIT P&C Software Suite as its new policy administration solution.

LB Group has previously selected Sapiens Insurance to manage their insurance program and help the company to comply with the European regulation.

This new agreement covers the launch of 26 insurance products over the next two years and professional implementation of four LB Group [indiscernible] as part of our growth strategy and in order to expand our global footprint we are focusing upon penetration in new growing territories.

The Nordic market, a leading center of insurance and technology innovation is such a target market for Sapiens. So as part of our strategy we have increased our investment in that market and launch a new Nordic head office in Copenhagen. In addition, we have recruited Helle Hølmer as the Sapiens Regional Director.

Helle has intensive experience from sales and IT and software companies such as IBM and has worked for more than 30 years with a client in Nordic financial sector. For the past 15 years, she has worked in consulting with Score System Transformation [ph] in insurance as well as life and pension, later as a partner in the Deloitte Consulting.

In our lifeline of business, two weeks ago we announced that Generali Netherlands selected the Sapiens closed books solution to manage this run off portfolio. Generali Netherlands is a part of Generali Group, one of the largest European insurance providers. We are seeing a strong interest in our close books offering across the European Continent.

Meanwhile, we are very active in engaging some new key solution partners during the quarter, to help our customer to embrace modern solutions beyond the quarter.

We partnered with Life Euro [ph] and entered the digital suite by integration which Life Euro digital confirmation solution for life insurance, enabling carriers to offer a personalized and digital customer experience to policyholder.

Sapiens also partnered with IDIOM to add personalized video capabilities to our insurance portfolio for both life and P&C. This particular partnership will allow our insurance customer to provide unique customer experience to their end users.

More strategically both of these partnerships Life Euro and IDIOM are part of our commitment to support our customer journey to the digital evolution.

In today’s world the expectation of policyholder are changing rapidly and Sapiens is working to stay ahead of both industry and consumer trends by offering our carrier customer a complete innovation digital suite of solutions. In the third quarter we announced the upcoming launch of several new product and capabilities.

By the first quarter of 2017 Sapiens ALIS policy administration solution will be expanded to include support of Group Life and we will be one of the only systems that supports the whole range of hybrid Group work side and individual life solution on a single platform.

We have identified the growing need of modern group life solution and we are set to service the many carriers that want to do with a single system. We have invested in [indiscernible] Sapiens ALIS so there is been multi-land carriers will be able to level a common platform in the near future.

We also launched a consumer and agent portal for life and P&C insurance. The Sapiens Portal along with Sapiens Intelligence, with enable our customer to provide both consumer and agents a fully digital self-service experience.

Regarding our DECISION product, we are working to expand existing capability of Sapiens DECISION by introducing a pre-integrated advance analytics components with the coming year. This will help our customer drive digital insights for their organization across multiple industries. Furthermore, we launched the Sapiens DECISION version 6.1 upgrade.

This with feature improving integration capabilities with enterprise application. In quarter three, our product continued to be recognized and awarded by getting this analyst. The Sapiens ALIS policy administration system won a vendor award from the IT group. ALIS will recognized for its outstanding preparation for future data intake.

Recognizing ALIS readiness to support the Internet of Things and variable electronic medical record capabilities. Sapiens was recognized as a one of the three notable vendor among the 40 evaluated. We have worked diligently on the frontend of the quality process when it’s come to new businesses and underwriting.

Further, in the recent Gartner report, Sapiens ALIS received the highest scores in three separate categories and was the top three at the other three, in valuation of 15 North America Life Insurance vendor. We are very proud of this achievement, recognized our devotion, our innovation and our commission to remain at the technology forefront.

We continue to make ongoing R&D investment to improve our core product and to maintain the leadership position in the market. We also see demand in new areas such as mobile access, self-services, Internet of Things and wearable technology that's we are targeting with these investment.

We are working closely with our customers and prospects to make sure we address their current and future business needs. In September we hosted a global client conference in Atlanta attracting more than 150 participants from 13 countries. Doing the event to shared our vision and road map, and continued the dialogue we maintain with our customer.

To conclude my portion, I would like to summarize the key highlight. We posted yet another strong quarter highlighted by double-digits revenue growth and double-digits operation margin. With continues to win new customers and expand our business with existing customer across all of our products, in all of our territories.

And we continues to invest in our product to maintain our leadership position. We remained confident that we will continue to achieve double-digits growth throughout 2016. I would now like to turn the call to the Sapiens CFO Roni Giladi to discuss our financial situation and outlook.

Roni?.

Thank you, Roni. And good morning everyone. Before I jump into our results for the third quarter, as a reminder we are presenting our results on non-GAAP basis, which we believe give a clear view in the operational states of the business.

There is a detailed reconciliation showing a GAAP to non-GAAP result in the financial tables of the earnings press release. Revenue in the third quarter was up 22.4% from the third quarter of 2015. This quarter, we started to consolidate Maximum Processing in result.

Our organic growth this quarter without the acquisition of Maximum Processing was about 18%. If we are also eliminating the impact of the devaluation of the British Pound as a result of Brexit, our organic growth this quarter was about 20%. Looking at the geographic breakdown of our revenue.

In the third quarter, we maintained a diverse geographic mix with a double-digit revenue growth in North America, Europe and A-Pac. Our revenue in North America represented 34.9% of total revenue. Europe which we include is Israeli operation represented 50.8% of our total revenue and A-Pac represents 14.3% of total revenue.

Our gross profit this quarter was $23.6 million compared to $20.7 million in the same quarter of last year. Gross margin this quarter was 41.8% down from 44.9% in the third quarter of last year.

Our gross margin this quarter declined compared to previous quarter mainly due to the increase in our investment in the recruitment and training of our delivery team to support our current and future revenue growth.

And due to the impact of the devaluation of the British Pound, that had the impact of approximately 1% on our margin compared to the same quarter of last year. R&D expense in the third quarter of 2016 totaled $5.8 million compared to $4 million in the same quarter of last year.

As Roni said earlier, in addition to our ongoing investment in our core products, we maintained elevated R&D investment in our complementary digital suite. Sapiens BI, Sapiens Portal and new group capabilities to our life product. SG&A expenses totaled $10.4 third quarter compared to $9.7 million in the third quarter of last year.

The increase in SG&A was the result of our ongoing increase in sales and marketing investments to win new business and to support our future growth and the impact of the first time consolidation of Maximum Processing.

Our operating income for the third quarter of 2016 increased by 5.5% to $7.3 million from $7 million in the third quarter of last year, representing 13% of total revenue.

Our adjusted EBITDA this quarter totaled $8.1 million increased by 8.3% from the $7.5 million in the third quarter of last year and reflecting 14.4% of total revenue for the quarter compared to 16.2% of last year. The reduction in operating and EBITDA margin is mainly due to higher investment in delivering and product investment.

Tax expenses this quarter was $1.6 million, representing an effective non-GAAP tax rate of about 20.6% as compared to $1.2 million in the third quarter of last year. Net income for the quarter was $6 million or $0.12 per diluted share, up from $5.8 million or $0.12 per diluted share in the third quarter of last year.

Turning to our balance sheet, as of September 30th, we had cash and cash equivalents and security investments of approximately $97 million with no debt compared to $94 million as of end of 2015. I would like to remind you, that this amount is for the payment for Maximum Processing. Turning to our 2016 guidance.

We are reiterating our full year revenue guidance of $211 million to $215 million or annual revenue growth of 18% to 20%. In fact, we currently expect a full revenue to come in the high end of the range we provided. This is despite the impact of the continuing devaluation of the British Pound in the fourth quarter.

We are maintaining our short term investment in Delivery and R&D, Sales & Marketing to support our accelerated growth and then we reiterate our full year 2016 operating margin in the range of 13.5% to 14%. At this point, I would like to turn the call back to Roni Al-Dor for closing comments.

Roni?.

Thank you, Roni. Our third quarter was marked by continuous strong financial performance based on our business models that generates revenue from a diverse yet complementary suite of solutions across geographies and product sets.

We expect to continue to win new customer and expend our businesses with existing clients across all of our product and geographic. And we extend our market reach with another strategic acquisition. We remained confident, that we are on track to reach our double-digits growth target for 2016. I would like now to turn the call over the operator for Q&A.

Operator, please poll for questions..

Thank you. [Operator Instructions] Your first question is from Bhavan Suri of William Blair. Please go ahead..

Hey guys, thanks for taking my question. I apologies for that background noise. I am on a plane. Congrats, nice job. Roni just a quick question first, it seems like the Nordics and that whole European region are doing very well. Just a little color on sort of who you’re winning against for ALIS and IDIT.

Sort of you know what's driving the significant large deal activity in that region?.

Hi Bhavan, yes we -- two years ago we decided we wanted to enter into a new territory and we started to invest in marketing and sales. And yes, we start to see the results, mainly on the P&C business, and I think one of the main advantage that we are coming in our business model.

So, beside the product the Sapiens business model that we are providing the software and services and right now talking about software and services and all the integration with BI and [indiscernible] and everything. So they like the way that what we are working.

Most of the deals, we are against Guidewire and Fadata and few local players like TI [ph]..

Great. That’s helpful.

And then when you look at why your win, is it because of the integration with [indiscernible] and BI or is it because of the policy management or billings components?.

Most of the cases its full end-to-end, so there is no question around our product. We have advantage again mainly on the policy, but they are also happy with all the rest. What -- in terms of the product they like to see that we are coming with end-to-end, included all at the end, they are not working with two players like local SI and vendor..

Got it, got it. And then just touch a little bit on the pipeline for DECISION. Obviously that’s been doing well historically. A little bit of how you started sell it into insurance and then just sort of how that pipeline is trending. Thanks..

Yes. As you know DECISION is disruptive [ph] technology, so it’s again takes -- the main issue there, the challenges that we have, it takes more time, because we need to educate, to explain going through the POC and then its term license. So the pipeline in terms of size is big, but to close deal, it takes time..

Got it. And then just a real quick one for Roni G. You obviously had a nice beat you, raised to the high end of the range, I’m just surprised you didn’t raise a little more given the strength.

Is there something sequentially that we might be missing or is this just sort of your natural sort of prudent approach?.

Yeah, Bhavan. I think the company the way we are, we like to [indiscernible]. We took the range of 211 to 215 [ph] and we said that we’re going to hit the higher end of the range. And this is despite the additional devaluation of the UK Pound against the dollar that is, it has additional by about $2 million.

So, despite this we feel very comfortable which did in that range, if it will be a surprised than we will beat this also, let’s see for Q4..

Great. Thanks, guys. Thanks for taking my questions and congrats. .

Thank you, Bhavan..

The next question is from Mayank Tandon of Needham & Company. Please go ahead..

Just a few questions. So just a follow up on Bhavan’s last question about the pipeline.

I’m just trying to get a sense of -- I know you’re not giving guidance for 2017 right now, but just based on what you’re seeing in the market, you’re win rate, what’s your sense of how ’17 is shaping up? If you could just give us maybe some broader context around how we should look at growth versus say what you will end up then ’16?.

Hi, Mayank this is Roni. We usually provide guidance by about February when we announced Q4 results for 2016 and probably we will duplicate this again this year. As we look at the pipeline in the current backlog that you’re seeing, we’d like to expect the organic growth of the rate of 15% as we say in year-over-year.

If we can accelerate this organically or through M&S, probably we’ll do so. But we’ll provide this on February of 2017. What we can see right now is the pipeline in DICISION is very strong in the other are also improving. .

Great. Okay and then, in terms of margins too, just wanted to get your sense. You obviously are going through an investment cycle here and you’ve talked about that very openly. But as you going to '17 can we get back to some level of margin expansion.

Again without qualifying it, but just may be more broadly speak to with your thoughts on and where you think margins will go overtime?.

I would like, Mayank, to answer on the need term level, not on 2017. We are, as we mentioned last quarter we reduced the operation margin to about 13.5% to 14%. We reiterate this guidance for this year. As we continue down the year we’ll like to traditionally invest in the R&D.

We’ll see benefit to this, we talked about -- earlier question was about pipeline, because of the investment we see bigger pipeline for us, so we'll continue. So guidance for 2017 probably we'll provide next year, but the mid-term goal of ’16, ’17 which is in two or three years this stays the same.

Let me remind everyone that the business on ongoing basis without the DICISION is today around 15.5% something like that..

Great.

that's helpful, and then a final question for me on the M&A side, I think you mentioned in your prepared remarks about doing more acquisitions, can you just give us a sense of should we expect may be a larger deal or a series of tuck-in deals and then what are some of the niches that you're looking to acquire into and how are the evaluation expectations out there in the market for the potential acquisition?.

Okay, hi, you ask a lot of question I try to give the full answer. We organized ourselves to do more scouting, meaning to talk to more potential M&A as before. So our pipeline is max better than the past. The evaluation is still an issue.

So we are losing business because evaluation for some reason and we try to understand why the fee is being more than strategic like us, but is the life. But overall we have now in the shortlist right now, people that we’re talking, but it’s still it’s in the process. In terms of big versus small, we are open to big and small.

Sometimes -- but we are talking for both side right now. And main reason for that we’re looking for is customer base and complementary solution. Again Sapiens prefer to say in the insurance business worldwide and something we want to penetrate to new territory or the same territory to have more presence and more complimented.

But definitely we plans to continue with our core main product, is what we are bringing, but again we can find the companies that can give some value add. .

Great. That's helpful. Thank you guys. .

Thank you. .

Your next question from Tavy Rosner of Barclays. Please go ahead..

Most of my questions were answered already. I was just wondering with the new wins, congratulations on the wins. Broadly speaking do you feel that in order to get those wins you had to kind of make an effort on pricing in order to be more competitive or just you didn't win thanks to price.

How did you feel the competitive environment at the moment?.

Yes. It’s all the time you know, sales for new deals, you have competitive environment so then sometimes it is fix wise. So the price is an issue and sometimes it depends on the situation where we have decreased the price list we want to have. So, the answer is there is a price pressure and depends on the case..

Okay. That’s helpful. And with regard to M&A, you mentioned that you have a pipeline potentially during the strategic move.

Would that be with regards to acquiring someone with complementary product or clients or productive and integration, what’s kind of direction you’re looking at?.

Exactly what you mentioned, so we are looking for client base and the complimentary solution. But again not something that we don’t plan to replace any of our product is mainly complimentary that we prefer to come in the ecosystem that we have..

Okay. That’s great. Thank you, Roni..

Thank you..

[Operator Instruction] There are no further questions at this time. Before asking Mr. Al-Dor to go ahead with his closing statements. I’d like to remind the participants that the reply of this call is scheduled to being in two hours. In the US, please call 1-888-269-0005. In Israel, please call 0-3925-5929 and internationally, please call 972-3925-5929.

Mr.

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

Yes. Thank you for you and the operator and thank you for all of all the participation for joining us today. And have a good day. See you next quarter. .

Thank you. This concludes Sapiens International Corporation third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect..