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

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's First Quarter 2017 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, May 15, 2017. It is now my pleasure to introduce your host Mrs. 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 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 website or via the website link which appeared 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 Ifrah, and good morning everyone. Thank you for joining the call today, Sapiens reported this morning its first quarter results reporting double-digit revenue growth driven by a mix of organic growth and M&A for our recent acquisition of StoneRiver, Inc.

However offsetting these to some extend in the near term, particularly in operational profitability were primarily two factors, the halt of a software development project with significant customer at the beginning of integration of StoneRiver.

Roni Giladi will go into more detail on both of those and other shortly, but we do face some challenges ahead in the near term. The halt of software development project with significant long-term customer were certainly a major event. This impacts both our revenue and gross margin.

That said we have a plan in place to improve our cost structure and to return to double-digit operational margin in the second half of 2017 and we believe we are on track with that plan at this time. Turning to the quarter, we are reporting revenue of 56.5 million up to 14.1% over the first quarter of 2016.

We believe market demand for our solutions remain intact and we have a solid pipeline of business ahead of us. On the M&A front, towards the end of the quarter we closed on our acquisition of StoneRiver.

StoneRiver significantly expands Sapiens presence and the scale in the North America insurance industry and especially help us further acceleration our growing market footprint in the US P&C and life and annuity space.

It strengthens our position as a leading innovating global software solution provider offering end to end solution to the global insurance industry.

Meanwhile, on the deal front Alexander Forbes, the pan-African financial services group, has selected Sapiens for its full portfolio including Sapiens ALIS for life and annuity, Sapiens IDIT and Sapiens Reinsurance for property and casualty together with the Sapiens PORTAL, Sapiens INTELLIGENCE and Sapiens DECISION for decision management.

This co-system will provide end-to-end integration digital capabilities across all lines of business and Sapiens will serve as a primary implementation partner.

We consider this as a major win as this is the first time that the customer, which will certainly be a significant customer going forward, they chosen all of our solution, and they chose them all at the start of their relationship.

Also we have already gained a new customer with our StoneRiver offering, the Catholic Order of Foresters has selected StoneRiver’s LifeApply and LifeSuite software solution. In addition, Hallmark Financial Services insurers in North America is now in production with Freedom Reinsurance System.

This was a great example of the type of customer that Sapiens look to gain in North America with StoneRiver and others acquisitions along with potential growth selling opportunity with our other growth Sapiens offerings. After the end of the first quarter, we were selected by a leading Nordic insurer for Modernization Project worth over $30 million.

This new significant customer select a wide range of Sapiens solutions to modernize its environment including the Sapiens P&C solution IDIT Insurance Suite for policy, claims, and billing. The Sapiens Reinsurance suite of products and the Sapiens INTELLIGENCE and Sapiens PORTAL components of the Sapiens Digital Suite.

Also the insurance processing environment will be managed via Sapiens hosted services leveraging the Microsoft Azure as cloud environment. This is another great opportunity for us and it demonstrates the range of our solution, delivery capability and commitment to the Nordic market which we will support out of our new Head of Office in Copenhagen.

We continue our innovation efforts in the first quarter. Sapiens unveiled its full-life insurance transformation suite which is now available for life and annuity provider at the 2017 Life Insurance Conference in late April, the leading event for the insurance industry.

This new product suite is a result of Sapiens strategic initiative including an increased investment in the company digital vision and enhancing group support in Sapiens ALIS as well as the recent acquisition of StoneRiver. All offering can be deployed on premise or via cloud-SaaS model with the option of fully managed services model from Sapiens.

Also during the quarter, StoneRiver enhanced it's offering with their state compliance management model for the eFreedom annual statement system that manage state forms for compliance, with regulatory and statutory reporting standards, nearly 80 companies have already selected this product.

In addition, within Sapiens co-offerings, Sapiens launched DECISION upgrade suite version 6.2 designed to reduce the cost of implementation and changing regulation and policies in support of accelerated application development. We continue to be recognized by outside professional for our industry leading offering.

Early this month, StoneRiver was named among this year the Top 10 policy administration solution provider by Insurance CIO Outlook magazine. This is the second consecutive Insurance CIO Outlook Top Ten appearance for StoneRiver having been named Top Ten claim processing and management solution provider in 2016.

To conclude my portion, I would like to summarize the key highlights. We posted yet another quarter highlighted by double-digit revenue growth driven by a mix of organic growth and our acquisition of StoneRiver. We won new customer and expand our business with existing customers. We are confident that we will continue our expansion and growth in 2017.

I would now like to turn the call over to Sapiens CFO, Roni Giladi to discuss our financial results and outlook for 2017..

Thank You Roni, and good morning everyone. Revenue in the first quarter was up 14.1% from the first quarter of 2016. Our growth in the first quarter was impacted by several factors both positive and negative. One, on April 27, we announced drop on a major software development with a significant long-term customer has been halted.

Due to this event, Sapiens had material impact on Q1 revenues. Also we do not expect to generate any additional revenues from this customer in 2017. Please note that we are encouraging advanced discussions with the customer and expect to reach amicable solution shortly.

The discussion was positive and we expect to final settlement to provide among other things that the parties will have no future claims against each other. Second, fluctuation in currency exchange rates also has an impact on our revenue.

If exchange rates were constant, our revenue would have been $2 million higher compared to the comparable quarter last year. The difference is mainly due to the devaluation of the British pound.

Third, and as we discussed previously on Q4 conference call, Sapiens made a strategic decision to deemphasize certain elements of our non-insurance business in non-core regions, which resulted in a reduction of revenue in the APAC in the first quarter of 2017.

Fourth, following the closing of the StoneRiver acquisition towards the end of the first quarter, we began to consolidate StoneRiver results, which offset the negative factors that we have mentioned about.

If we analyze our organic growth this quarter on a constant current basis, excluding the non-core revenue that we decided to deemphasize, our organic growth rate this quarter would have been 5% despite the significant impact of the loss of revenue due to the health of the software development project.

Without the impact of the lost revenue, due to the health of the development project, our organic growth rate would have been in the range of 15%. Moving on to gross profit, gross profit this quarter totaled $20.5 million compared to $21.6 million in Q1 of last year and $23.8 million in Q4 2016.

Our gross margin this quarter was 36.2, down from 43.5% in the first quarter of last year and 41.8 in Q4 2016. The decrease in gross profit and margin compared to last year was mainly due to the following. As previously discussed, in Q1 2017 we had planned for several million dollars of revenue associated with the customer held development project.

This revenue historically created higher margin than the company average. Without these expected revenue to offset the cost we had incurred in the full quarter, the impact on the gross profit and margin was material. Additionally, the currency exchange rate impact on our gross margin was significant.

On a constant exchange rate, gross margin would have higher by approximately 200 basis points compared to Q1 2016. Moving to operational growth. Our investment in R&D and SG&A grew during this quarter. R&D expenses in the first quarter of 2017 totaled $7.3 million compared to $4.6 million in Q1 of 2016 and $6.2 million in Q4 of 2016.

The increase in R&D expenses this quarter compared to the first quarter of 2016 was the result of our continued investment in the development of the new group capabilities for Sapiens ALIS, Sapiens PORTAL, our Digital Suite and included investment in StoneRiver.

Please note that Sapiens standalone R&D investment this quarter were comparable to that in Q4 of 2016. We are currently making elevated investment in StoneRiver relative to the revenue they currently contribute as compared to Sapiens standalone.

SG&A expenses total $11.5 million compared to $9.6 million in the first quarter of last year and $10.2 million in Q4 of 2016. Most of the increase was due to the first time consolidation of StoneRiver.

Our operating income totaled $1.7 million represent operating margin compared to the $7.3 million or 14.8% operating margin in the first quarter of 2016. The reduction in operating margin is primarily due to the following.

One, the decrease in gross profit as I explained earlier, two, higher R&D and SG&A expenses as a percentage of revenue in Sapiens standalone. Due to the decrease in revenue following the consolation of the development project.

Three, a 120 basis points impact from currency exchange rates on operating margin on top of growth profits due to the strengthening of the Israeli shekel during the period.

If you assume a constant exchange rate during the period, operating margin would have been approximately 6.2% compared to 3% reported due to 2% currency impact on gross profit and 1.2% on operational expenses.

As previously announced in April, we expect the operating profit margin for the first half of 2017 will be impacted following the development project and will be in the range of 3% to 4%. Our adjusted EBITDA this quarter totaled $2.5 million reflecting 4.5% of total revenue in the quarter.

Financial expenses this quarter totaled $208,000 compared to financial income of $80,000 in the first quarter of 2016. The increase in financial expenses is mainly due to interest payments on the new 40 million bank debt used to finance the StoneRiver acquisition. Tax expenses this quarter was $324,000 representing effective tax rate of about 25.4%.

Net income for the quarter was $1.2 million or $0.02 per diluted share compared to $6 million or $0.12 per diluted share in the first quarter of last year. Turning to our balance sheet, as of March 31, we had a cash and cash equivalents of $35.1 million following the acquisition of StoneRiver of $100 million.

During the quarter, we raised $40 million in new bank debt to partially finance the acquisition and our working capital. The loan is dollar base and paid equally every quarter over a period of five years. Operating capital this quarter was negative and totaled $7.3 million compared to a positive cash flow in the amount of $4.5 million in Q1 of 2016.

The main reason for the negative cash flow was operational loss of $2.2 million compared to operational income of $4.9 million last year and increasingly considerable for about $10.5 million compared to $6.7 million dollars in Q1 of 2016.

The increase in trade receivable is mainly due to the shifting in time in payment milestone which will be halted in the coming quarters. I’d like to turn now to our guidance for 2017. We reiterate our recently revised annual guidance for 2017. We expect revenue between $265 million and $275 million representing annual revenue growth of 23% to 27%.

This growth is despite a major revenue loss due to the halt of the development project. However, the [indiscernible] is expected to be partially offset by the acquisition of StoneRiver and the planned revenue increase from new project we have announced and expected announcement this year.

Moving to operating margins, Sapiens has also expected full-year operating profit margin to be between 9% and 10%. We expect operating profit margin for the first half of 2017 to be between 3% to 4%, increasing to 13.5% up to 14.5% in the second half of the year.

To return to double-digit operating margin in the second half of 2017, Sapiens begins a restructuring and reorganization program at the end of the first quarter and continuing to the second quarter. We anticipate total restructuring cost in the second quarter of this year to be up to $5 million.

This program will help us to reach our 13.5% to 14.5% operating margin goal for the second half of the year. To improve our gross margin within this program we are pursuing the following initiatives. Cost savings and efficiencies. Synergy integration of back office operation and delivery between Sapiens and StoneRiver.

The offshore program with Sapiens capability for the StoneRiver operation and realigning the organization and shift employee away from the concept of development project to other growing vertical and downsizing as necessary.

R&D, combination in the R&D effort for both companies particularly those that can jointly exploit previously development asset and additionally reducing the R&D investment in Sapiens standalone following the completion of the development effort for [indiscernible] group capability.

As you can see, we are acting upon several initiatives to improve our results going forward. The combination of these initiatives together with the halt of the development project are challenging that, but we are confident in our ability to execute this initiative based on previous experience and following the action we already implemented.

I’d like now to turn the call back to Roni Al-Dor for closing comments.

Roni?.

Thank you, Roni. Overall, we delivered double-digit growth for the quarter. We view the whole of the software development project with the significant customer as an isolated one-item event. We remain very excited about our acquisition of StoneRiver and its contribution to our overall business addressable market opportunity.

Our businesses remain strong and customer demand for our product and services remain high. We are confident that we will continue to deliver growth 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 Justin Furby of William Blair. Please go ahead..

This is actually Vinay in for Justin. I have two quick question, one I wanted to start off with, could you give it a sense for the path forward in the retirement, just some sense around investment there on the product side as well as go to market? And how does that opportunity compare let's say relative to Life and P&C.

And then I have a follow-up on the model..

Are you there?.

Were you able to hear me?.

Can you repeat the question, I’m sorry..

Yeah sure, no worries. So again, Vinay in for Justin. So wanted to start off with asking about the retirement market and the path forward in that market in terms of investment around product and go to market? And just how that opportunity compares to let's say Life and P&C..

Roni Al-Dor, hi Justin. So that is two different market, the retirement market is big in terms of players but it’s relatively small in the US in terms of number of vendor. In terms of competition, there are two, main one is BPO solution.

The Life system is all over the world in terms of the number of opportunities by far much bigger than the retirement. But as well in terms of competition they were much more competitive than the retirement..

And then just a follow-up on the model, Roni Giladi, this one is for you.

So, I know you’ve unpacked StoneRiver for the full year but I was just hoping if you can give us puts and takes in terms of the organic growth for the full year with StoneRiver, the de-emphasis and then the roughly net 5 million that you’re losing out from the project, so if you could just unpack that quantitatively that will be helpful.

I then I know that you don’t guide the quarterly, but any sense for where that revenue might be coming out in the first half versus second?.

Hi Justice, this is Roni. So as we started in the end of the year we gave guidance of 270 to 280, and we mentioned that about 12% to 15% will be organic growth. About two weeks ago we revised our guidance to 265 to 275, $5 million less. This is coming from two verticals or two factors.

The first one is what we mentioned about the halt of the dilution with a significant customer, obviously the impact from this customer was much higher than $5 million. But due to our organic growth and recently significant deals that we signed that we mentioned.

One in South Africa and other one is in Nordic, we are confident that we can capture this revenue from the half of the project. And on top of it is StoneRiver, currently, on the StoneRiver piece, we have the same confidence as we said in the beginning of the year.

Obviously, we know they may slightly better right now, better than what we know before, but the overall confident is okay, even slightly even better. So we do not revise the revenue that we say for them. So most of the revenue is coming from consolidated StoneRiver end of Q3 and organic growth that offset the halt of the project..

[Operator Instructions] There are no further questions at this time. Before I ask Mrs. Yaffa Cohen-Ifrah to go ahead with his concluding 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 1-877-456-009. In Israel, please call 039255940.

And internationally, please call 9723-925-5904. Mrs.

Yaffa Cohen-Ifrah, would you like to make a concluding statement?.

Yes. Thank you operator and thank you all participants for joining us on today’s call and have a great day..

Thank you. This concludes Sapiens International Corporation first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect..