Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation Fourth Quarter and Full Year 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, February 28, 2017. .

It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens's CMO and Head of Corporate 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 or other forward-looking statements, and the safe harbor provision in the press release issued today also apply 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, a change 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 our Investor Relations section of the company's website or via the website link, which appears in the earnings release that we published today..

I will turn the call over now to Roni Al-Dor, President and CEO of Sapiens.

Roni?.

Thank you, Yaffa, and good morning, everyone. Many of you joined our conference call 2 weeks ago, during which we discussed our acquisition of StoneRiver. So thank you for joining the call today as well. .

Sapiens delivered another solid quarter with double-digit revenue growth and a strong performance across all of our offering and across all of our territories, driven by increased demand of our products and services.

I'm very pleased with our continued geographic expansion, our organic growth and the opportunity we see to accelerate our business with the current M&A activities. .

During this call, we will provide business update and discuss our fourth quarter financial results and our outlook for 2017. Today, we are reporting quarterly revenue of $57.1 million, up to 17.3% over the fourth quarter of 2015. Our full year revenue total is $216.2 million, up to 20.6% compared to $179.3 million in 2015.

As in previous quarter, the demand of our product and services remained strong, and we continue to improve our position in the market by expanding our businesses with existing customers and by winning deals with new customers. .

During the fourth quarter, we record a number of new wins to further expand our revenue base and enhance our competitive position. Generali Nederland select Sapiens for its life portfolios, Generali South of the Generali Group, one of the largest European insurance provider, and we were selected to administrate a large portion of its life portfolios.

Our implementation, which include consolidation many of Generali Nederland's life book system onto Sapiens Solution in order to release significant operations reserve by lowering its IT cost and improving operational efficiency. .

In P&C, LB Group choose our IDIT P&C suite as its new policy administration solution. For LB Group, a member-only insurance company based in Denmark, Sapiens IDIT insurance suite was selected by LB Group, new core insurance system for general lines businesses.

This is a multimillion euro engagement, and it's covered the launch of 26 products over the next 2 years and the implementation of 4 LB Group brands.

Key to our selection was our strategic relationship between Sapiens and LB Group, who previously select Sapiens reinsurance to manage its reinsurance program and help the company comply with European regulation.

To support our Nordic expansion, a leading area for insurance and technology innovation, and as part of our effort to better service the Nordic customer and expand our footprint in the market, we established a new head office in Copenhagen, and recruited an experienced regional director.

We believe that insurance in the region are currently limited by their legacy system, and they are considering how to best prepare for the future. We see a significant opportunity for Sapiens to grow in this market by expanding its relation with existing regional client, like LB Group, and by attracting new ones.

We continue to maintain an intense R&D program to improve our product offerings and to further enhance our investment in technology platform. .

This quarter, we launched a consumer and agent portal for life and P&C insurers. Sapiens portal is pre-integrated with the Sapiens ALIS and Sapiens IDIT software suite, and will provide our clients a fully digital experience. Later in the quarter, we released an update Sapiens DECISION version 6.2.

The enhancement 6.2 version feature advanced compliance flexibility and improved user experience and accelerate policy change capabilities, and it was designed to reduce the costs of implementation and changing regulations and policy in support of accelerated application development.

Our investment in technology over the past few years have lead the development of advanced and innovation product, helping us to expand our businesses with both new and existing customer. This investment in technology have led to market recognition, and we were recognized by outside [ph] professional for our industry-leading offering. .

In December, Sapiens was named as a "Top 10 Core System Solution Provider" of 2016 by a panel of experts, professional technology leaders assembled by insurance CIO outlook. Sapiens was cited for its commitment to constantly improving and advancing to meet the true business and technology need for the insurance and financial services industry..

To deliver on this commitment, we will continue to make ongoing R&D investment and improve our core product and maintain leadership position in the market, especially in the areas of the capitalization and customer experience.

We are also pursuing demand in new areas, such as mobile access, self-service, IoT device and wearable technology with these investments. .

Today, over 200 customers worldwide are using Sapiens solution. We worked and continued to work closely with these customers to help them maintain their system and maximize efficiency. We support them with introduction of new capabilities or expanding for their businesses. .

During 2016, more than 16 customers have gone live to move into production, which means our solution is being used as their core operational system. Go-live is a major event for both Sapiens and customer. It is a major demonstration of our ability to deliver and of our customer's ability to adapt and roll out a new technology across the organization. .

I would like to wrap up my prepared remarks with some comments on our most recent M&A transaction, our largest acquisition to-date, which we announced earlier this month. As you know, on February 15, we announced the acquisition of StoneRiver.

The StoneRiver acquisition significantly expands Sapiens's presence in North America insurance industry by increasing our U.S. customer base with an additional 200 customer, expanding our local insurance expert presence with the team of 500 professionals, and improve our insurance practice and professional services capabilities and offerings.

It will also accelerate our footprint in the U.S. P&C space, a strategic priority for us. .

StoneRiver solution complements Sapiens' existing offering, and will allow us to accelerate the growth in the new ISM globally in both P&C and life and annuity markets. .

To conclude my remarks, I would like to summarize the key highlights. We posted yet another strong quarter, highlighted by double-digit revenue growth and double-digit operation margin. We won new customer and expand our businesses with existing customer across all of our products in all line and territories.

We are confident that we will continue our expansion and growth in 2017. I would like now to turn the call over to Sapiens's CFO, Roni Giladi, to discuss our financial results and outlook for 2017. .

Thank you, Roni, and good morning, everyone. Revenue in the fourth quarter was up 17.3% from the fourth quarter of 2015, with revenue growth across all regions. Our gross margin was 41.8%, down from 44.2% in the fourth quarter of last year. Our investment in R&D and SG&A grew by plan during the fourth quarter.

R&D expenses in the fourth quarter of 2016 totaled $6.2 million compared to $4.4 million in the same quarter of last year. SG&A expenses totaled $10.2 million compared to $9.8 million in the fourth quarter of last year. .

The increase in R&D was the result of our investment in the group capabilities for the Sapiens ALIS and the investment in the development of Sapiens's total in our digital suite. Our operating income totaled $7.5 million, 13.1% of operating margin compared to $7.4 million or 15.1% operating margin in the fourth quarter of 2015.

The reduction in operating margin is mainly due to higher investments in R&D and the impact of the currency exchange rates. On a constant exchange rate, our operating margin will be approximately 15%. Our adjusted EBITDA this quarter totaled $8.3 million, reflecting 14.5% of total revenue for the quarter.

Tax expenses this quarter were $1.5 million, representing an effective non-GAAP tax rate of about 20.5%. Net income for the quarter was $6 million or $0.12 per diluted share compared to $6.3 million or $0.13 per diluted share in the fourth quarter of last year. .

Although operating profit this quarter was slightly higher than last year, our EPS was lower by $0.01 due to financial expenses in Q4 of 2016 compared to financial income in Q4 of 2015 and the currency impact. Eliminating the currency impact this quarter, our EPS this quarter will be higher by $0.02, and will total approximately $0.14. .

Turning now to the full year results for the 12 months ended December 2016. 2016 revenue totaled $216.2 million, up 20.6% compared to $179.3 million in the prior year. Our revenue exceeded our guidance range of $211 million to $215 million or annual growth of 18% to 20%. This increase was despite the devaluation of most currency versus the U.S.

dollar that happened in the second half of 2016. If we eliminate the currency impact, our growth rate this year was 23.1%. R&D investment this year totaled to $22 million, an increase of $5.8 million or increase of 35.4% compared to last year. SG&A expenses increased by $4.5 million or 12.5% compared to last year.

The increase in R&D and SG&A was to support our current and future revenue growth by enhancing our products and increasing our services. After our investments, total non-GAAP operating profit in the full year was $29.6 million compared to $26.5 million in 2015, an increase of 11.6%. Our operating margin was 13.7 compared to 14.8 in 2015.

Our operating margin was in the midrange of our guidance of 13.5% to 14%. Again, if we eliminate the currency impact, our operating margin this year will be around 15%. Our fully diluted earnings per share totaled $0.49, up 8.9% compared to $0.45 in 2015..

Let's move to balance sheet. As of December 31, 2016, we had cash and cash equivalents and security investments of $96.4 million. This amount is for the partial payment for the acquisition of Maximum Processing, and the cash dividend of about $10 million during the year.

We currently have no debt, but we do expect to fund portion of the StoneRiver acquisition with new bank debt. .

Moving to StoneRiver. We are all very excited about this acquisition. Upon closing, StoneRiver will become fully owned by Sapiens. As I mentioned on our last call, StoneRiver 2016 non-GAAP revenue were approximately $80 million on a full year basis. The company revenue are a mix of growing, stable and declining product sales.

We assume that some of StoneRiver revenue for the transaction will not continue with that in 2017. StoneRiver is currently profitable, but below top end profitability range. .

I would like to turn now to our guidance for 2017. Our annual guidance for 2017 includes StoneRiver results on a pro rata basis. In addition, this year, we took specific decision to deemphasize our noninsurance and financial services revenue that are not in our focused territories and with low margins. .

the acquisition of StoneRiver on a pro rata basis and taking into effect that some of StoneRiver revenue will not continue in 2017; two, a decision to deemphasize certain elements of our noninsurance and financial services business, which will result in reduction of revenue in 2017; and third, currency devaluation.

Eliminating the impact of the currency devaluation and the reduction of noninsurance revenue and financial services will result on organic growth, excluding StoneRiver, at the range of 12% to 17%. .

Moving to operating margin. We expect full year 2017 operating margin approximately at 13%. Our operating margin guidance is affected by 2 entities. First, Sapiens. On a stand-alone basis, Sapiens profitability is approximately 14%. And on a constant currency basis, Sapiens's profitability will increase to the level of 16%.

Second, StoneRiver profitability for 2017 is at the level of 8%. To summarize, on a consolidated annual basis, we expect our profitability to reach 13%. Please note that the Brexit impacts only part of 2016, and will have full year effect in 2017.

In addition, the Israeli Shekel strengthened versus the dollar in the last few months, which negatively impact us, as half of Sapiens's costs in Israeli Shekel. Second, StoneRiver profitability is lower than Sapiens's profitability.

As we mentioned, we expect that StoneRiver contribution to our profits will start from Q3 onwards after the reorganization expenses related to the merger that we expect to have in Q2. .

I would like to indicate that following the StoneRiver acquisition, we expect our tax rate to be in the level of 25%. In addition, as we finance the transaction from our internal sources and some bank debt, we'll have financial expenses rather than financial income in 2017. As a summary, I would like to mention the following.

Post-acquisition, our insurance revenue will account for approximately 90% of our total revenue, an increase from 80% in 2016. We will significantly enhance our North America presence, which would represent 50% of Sapiens's total revenue in 2017 versus 34% in 2016.

Sapiens's organic growth on a stand-alone basis and on constant currency basis is between 12% to 17% in 2017. .

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

Roni?.

Thank you, Roni. Our fourth quarter marked by strong financial performance based on our business model that generates revenue from diverse and complementary suite of solutions in core geographic and product sets. .

I'm pleased with our continued geographic expansion, our organic growth and opportunity we see to accelerate our businesses with M&A activity, particularly with the close of StoneRiver. We are confident that we will continue to deliver strong performance in 2017. .

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 Bhavan Suri of William Blair. .

As we look at the acquisition here, obviously, that's a big part of sort of the '17 and '18 strategy. Just a little bit more color on what you think the synergies there could lead to. So operating margin of 8% today.

But post-synergy, what margin do you think that business could have?.

Bhavan, this is Roni G. StoneRiver acquisition is a strategic acquisition to Sapiens. We mentioned all the positive impact on penetration to the States and significant customer base that will allow us to grow in the future. We are in the business on the insurance, and obviously, impact takes time.

We are in long sale cycle, and obviously, we'd like to integrate it in a very conservative mode. So I assume that we'll see impact only in the second half of 2018. On a consolidated basis, we mentioned this year, about 13%, but we have a plan to reach 15% on the second half of 2018. .

Got it. If you look at StoneRiver's business model, you said it's sort of very similar to Sapiens, lots of services with customers. Obviously, with your acquisitions in Poland and India, you have moved some of the services offshore, which has helped margin.

How much of StoneRiver's services piece is offshore? Is that an opportunity for margin expansion within that business?.

Yes, StoneRiver today have some offshore capabilities, less than the Sapiens. We are already in discussion how to -- can integrate this with Sapiens offshore. Again, obviously, this will take time, but they are slightly below Sapiens. We are, today, 20%, slightly below, and they have about half of us. .

Got it, got it. Okay, maybe one for Roni Al-Dor here. You've entered the P&C market through a couple of acquisitions now in the U.S. Some are lower tiers.

But as you think about the next -- not even the next year, but the next 12, 24, 36 months, do you think that there's an integration between IDIT and the StoneRiver products to start targeting Tier 1 P&C carriers in the U.S.? Or do you think it's -- IDIT is not going to come to the U.S.

You're just going to take the StoneRiver products and enhance those to target Tier 1 P&C carriers? How should we think about that technology offering, and then the opportunity over, say, 24, 36 months?.

Yes, Bhavan. So we made the strategic decision not to penetrate with IDIT to the U.S. market, and the main 2 reason is, one, we believe it will cost us a lot and will take us many, many years, and we decide to show the time to penetrate to the U.S. So -- and that's one.

So in terms of U.S., we would like to invest in our Stingray product for the lower tier and niche area, and this is -- looks very promise right now.

And we believe that the stream that this new product, but based of many, many years’ experience and already in production, we can see that, together, with our knowledge and our marketing in sales, we can grow in U.S. market.

In terms of synergy, everything around digital and analytics, and few things on [ph] the underlying technology, we definitely see synergies. So we plan to use the same portal and analytics that we are building -- by the way, not just for the P&C, for all of our product suites fully integrated with StoneRiver products. .

Got it, got it. And then one last one for me, if I might here for maybe both of you. If I look at the growth rate you've given us on organic basis, obviously, currency excluded, and then I tie that to StoneRiver's $80 million run rate, it feels like that there's a small gap there.

Just trying to understand how conservative you guys are being or what the revenue declines on some of the lines at StoneRiver that you're divesting, or not investing in, or just letting sort of churn away looks like? How should we think of the puts and takes between the 12% to 16% organic growth, and then you add StoneRiver to that, which should be sort of say -- you said $80 million run rate stable.

It feels like there's a little bit of gap. Help me walk -- work through that, please. .

Bhavan, this is Roni G. I would like to explain this. So I would like to split the answer into 2, StoneRiver and Sapiens, and I would like to start with Sapiens. In the call, we mentioned that Sapiens took a strategic decision to deemphasize the noninsurance or financial services in territories that are not core territories for Sapiens.

Core territories for Sapiens, for example, are the States, Europe and Israel. The level of revenue that we are talking about is very close to around $20 million. The reason that we are doing that, again, it's not the core basis of Sapiens, and profitability in that area is low.

So if we take our revenue, 2016, excluding this revenue, and let's take in, for example, 13%, not 15%, 13% organic growth, plus the devaluation of all currencies against the dollar that around make us lose about $10 million, adding StoneRiver, on a pro rata basis, will [indiscernible] the level of revenue we indicate, $270 million to $280 million.

On the StoneRiver part, as we mentioned, although 2016 was $80 million, we are only consolidating some pro rata and some of the revenue of StoneRiver will not continue with us in 2017. The reason for that, we have some duplication of revenue, some revenue that are related to the same product that, obviously, will impact 2017 revenue.

So combining the 2, Sapiens' strategic decision, the currency and StoneRiver, this is the revenue level that we achieve. .

The next question is from Tavy Rosner of Barclays. .

Mostly on the guidance, if I may. I mean, you talked a lot about the different assumptions.

Could we talk with what you mentioned about deemphasizing of certain activities, how does that work? Are you planning on selling or divesting some of these businesses? I'm thinking about how the decisions fit into that, and then you said that those activities were structurally less profitable.

So assuming that you no longer emphasize on them, what's the impact to operating margin net-net [ph] without those?.

Tavy, this is Roni G. So just to clarify, Sapiens's focus today on the insurance and financial services, and when I say financial services, I mean decision. So this is -- will remain our core focus.

When I'm saying is not on the insurance or financial services, we also mentioned not in the core territories, which means all the revenue in U.S.A., Israel and Europe will remain the focus of Sapiens.

So taking the revenue, which is outside of what I just categorized, we analyzed the profitability of 2016 will reach, without a -- including the currency effect of about 15%. The reason for that we are doing project and with a very low margin that, yes, grow our revenue, but do not contribute to the bottom line.

Together with StoneRiver, that will allow us to grow, we took this decision together. And what we are doing, we are -- continue the activities there, but with much less effort on getting new projects on this product line. This is the reason for the revenue growth. So we are not going to close.

We are just going to reduce the effort of revenue [indiscernible]. .

Okay, that's helpful.

And do have a sense -- I mean, looking again at the revenue guidance, when you make all the assumptions together, lots of moving parts there, but do you get a sense of how much of the revenues from StoneRiver will remain over time? Is that, perhaps, something like in the range of half of what they were last year? Do you have a way to quantify that?.

Yes. So I think we mentioned in the previous call 2 weeks ago that, historically, StoneRiver revenue were declining. This year, 2016, sorry, they closed at $80 million with some products, which are growing, some stable, some in decline mode. With our analysis, we still took a reduction in revenue, we see this. We see the customer that will not continue.

We see the duplication of revenue and product. So on the maximum side, let's say, up to 10%, this is the maximum. But this year will be a stabilization year for us. We are putting a lot of effort on our sales and marketing, our infrastructure in the States, and we believe we can turn this around in 2018, going forward.

We need to understand that the sales cycle in this business is long, and it's taking time. So we'll sow the fruit in 2018. .

Okay, that's helpful.

And looking beyond 2017, after you've integrated StoneRiver, so you see yourself as continuing to grow at the same organic growth rate, 12% to 17% beyond 2017?.

I will not say 17%. We all the time say 15%. We are not giving pro rated [ph] guidance for next year. But with the effort of Sapiens, I would say the same level of Sapiens. .

The next question is from Avishai Kantor of Cowen. .

So my first question is going back to the guidance. So you're talking about 12% to 17% organic growth in constant currency.

What can -- what needs to happen in order for us to reach the high range, the higher end of that range?.

Avishai, this is Roni G. In the business, there are a lot of ups and down. We are having right now significant opportunity in front of us in terms of pipeline. And talking about Sapiens right now, historically, not all of them happen, but some of them are very close and with very high probability.

So you can imagine that management is totally focused on this deal in order to close it, but we'd like to give the range, and I'll assume that let's take the midrange. I think a lot of impact was with currencies, if I'm taking the pound, the Brexit, was up in only second half of 2016.

This year will be a full year impact on Sapiens, also the euro right now. So just imagine that there is slightly change in currency, and we'll see additional growth, but we are not building on that. .

And my next question, it seems like you implicated there are some overlapping clients between you guys and StoneRiver.

Can you give us a sense how many clients overlap?.

Not a lot, very few. But I'd say, to be conservative, very conservative approach, I would say up to 10% of revenue duplicate of lines and product line, and customer that will not continue. .

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Al-Dor to go ahead with his closing statements, 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) 326-9310. In Israel, please call 039-25-5904.

And internationally, please call 9 (723) 925-5904. .

Mr.

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

Thank you, operator, and thank you to all the participants for joining us today. Have a good day. .

Thank you. This concludes the Sapiens International Corporation Fourth Quarter 2016 Results Conference Call. Thank you for your participation. You may go ahead and disconnect..