Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation Second Quarter 2018 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 August 7, 2018. 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 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 the call.

Sapiens expressly disclaim 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 call of today call, we will refer to non-GAAP financial measures.

A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release, which was issued before the market opened this morning.

A replay of this call will be available after the call on the Investor Relations section of the company's website or via website links that appear in the earnings release that we published today. I will now turn the call over to Roni Al-Dor, President and CEO of Sapiens.

Roni?.

Functionality, configurability, integration, technology, implementation and support. Sapiens DECISION was recognized as a Hot Vendor in digital business platforms 2017 by Arogan Research Inc. for empowering business people with an intuitive visual model and ability to apply the DECISION logic across system and process.

As I've stated on prior earnings calls, our plan for 2018 is based on four pillars, and we continue to make good progress. First, continue to deliver doubt-digit growth in our P&C line in EMEA. We remain on track with new customer wins in the region, and our growing pipeline of target customers.

Sapiens marketing and sales team are continuing reaching out to EMEA with targeted campaigns and marketing activities to generate new business opportunities. During the second quarter, we actively participated in insurance events globally, including in UK, where we are building visibility for our enhanced digital platform.

Second, increasing our North America P&C businesses. In the second quarter, we added new customers, expanded with existing customers and continued building a pipeline in a crucial growth region, which is tied directly to our successful acquisition strategy. Third, recover our Life and Annuity businesses.

In prior quarters, we focused on supporting our existing North America customer based on leverage this relationship for future growth in the market, while now we're focusing on new opportunities for our open and Closed Books platforms.

We continue to expand our component-based life solution businesses in North America this year, and we are confident we will continue to gain new customers in the region. And four, cross-selling to our existing customers. In Q2, we are focused on building the infrastructure for cross-sell and up-sell activities.

The initiative is aimed at increasing our cross-selling opportunities. I would like to note that while this process has just begun, we're already seeing our clients interest in this expanding offering and profitability.

For the remainder of 2018, we will focus on maximizing our assets, namely our leading solution, customer and employees to increase topline growth. We will continue to run an efficiency business that will allow us to scale our growth and meet our profitability targets.

We are very fortunate to have a global customer base of over 400 insurance carriers, and we are pleased to work with them as their trusted advisor and partners. I would now like to turn the call over to Sapiens CFO, Roni Giladi, to discuss our financial results and outlook for 2018..

Thank you, Roni, and good morning, everyone. As you see from our results, our second quarter, demonstrated strong execution against our target for 2018, which was; establish the foundation for growth and significantly improve profit compared to last year.

Our non-GAAP revenue in the second quarter totaled $72.5 million, up 5% from the second quarter of 2017 of $69.2 million. Over the last quarters, we continued to show growth in our P&C division. We are starting to see growth also in P&C in the U.S. base. Our revenue in North America, totaled $34.6 million and represents 47.7% of our total revenue.

Europe revenue that includes new UK, rest of Europe and Israel, was 44.8% of total revenue this quarter. And APAC in South Africa, represents about 7.5% of our total revenue. Moving to gross profit. Gross profit grew by over 15% and gross margin raised by 380 basis points to 42%, validating our effort to expand Sapiens margin.

Gross profit this quarter totaled $30.4 million compared to $26.4 million in Q2 of last year and $30.3 million in Q1 of 2018. We are now in recording mode to follow the demand we see for our products and services, and therefore, our gross margin is being affected negatively by this.

Nevertheless, we continue to invest in our offshore capabilities, which now represent 25% of our delivery team and will allow us to improve margin in the short and midterm. Moving to operational costs.

R&D expenses in the second quarter of 2018 totaled $9.9 million compared to $10.8 million in the second quarter of 2017 and $10.3 million in the prior quarter.

The reduction in R&D investment compared to last year, is due to the fact we closed part of the investment line in StoneRiver Stream following the acquisition of Adaptik, and the efficiency plan, which started last year and continues during 2018. SG&A expenses totaled $10.9 million compared to $12.4 million last year and $11.1 million in Q1 of 2018.

The improvement in SG&A expenses compared to the prior period is mainly due to the cost savings and reductions in our workforce and back-office services, following two efficiency programs that we implemented post acquisition of StoneRiver and in Q4 of last year.

As a result of the above, our operating income this quarter totaled $9.6 million compared to an operating income of $3.2 million in the second quarter of 2017 and $8.9 million in Q1 of 2018. Operating margin improved in Q2 to 13.2% compared to 4.7% in the same quarter of last year and 12.5% in Q1 of 2018.

Our adjusted EBITDA this quarter totaled $10.4 million, reflecting 14.3% of total revenue of the quarter compared to $4.2 million or 6% of total revenue last year. Financial expenses this quarter totaled $1.3 million.

The financial expenses this quarter, included $0.8 million interest expense of our debenture, and $0.4 million interest cost due to change in fair value of future period hedging instruments. Tax expenses, this quarter totaled $1.8 million representing an effective tax rate of about 21.6% compared to 23.8% of last year.

Net income attributable to Sapiens shareholders for the quarter was $6.4 million or $0.13 per diluted share compared to $1.9 million or $0.04 per diluted share in the second quarter of last year. As of June 30, 2018, we had cash and cash equivalent of $59.2 million and total debt of about $80 million, which needs to be paid over the next eight years.

The GAAP operating cash flow in the first half of the year totaled $9.5 million compared to $7.1 million in the first half of last year. As we stated on prior earnings calls, our focus in 2018 is improving our profitability and building the platform for growth for 2019 and beyond.

The second quarter was the first one we consolidated Adaptik on a full basis. We expect to see improvement in profitability in that division, together with improvement in other divisions following the efficiency program we implemented in the fourth quarter of last year.

This improvement will contribute to our ability to further improve our profitability towards the end of the year. Overall, all of our financial indicators were much better in H1 of 2018 versus H1 of 2017, due to immediate actions we implemented at the management.

Based on the strength of our results in the first half and our outlook for the remainder of the year, we expect to see further improvement in the second half of the year compared to the first half.

Therefore, we are raising our guidance to 2018 full non-GAAP revenue of $285 million to $290 million, up from prior guidance of $280 million to $285 million. We're also increasing full year 2018 non-GAAP operating margin. We now expect full-year operating margin in the range of 13% to 13.2% compared to our previous guidance of 12% to 13%.

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

Roni?.

Thank you, Roni. Our 2018 priorities remain, improving organic growth, improving non-GAAP operating margin to a range of 13% to 13.2% by year-end and increasing cross-selling to our customer base. We continue to leverage our investment and foundation we are creating for long-term growth, increase profitability and improve shareholder value.

I would now like to close our prepared remarks and open the call for questions.

Operator?.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Tavy Rosner of Barclays. Mr. Rosner, please go ahead..

Hi, thanks for taking my questions and congratulations on the strong quarter.

Just looking at guidance and the increased guidance for this year, was there a particular division or geography that's kind of driving the incremental revenue expectation?.

Hi, Tavy. This is Roni G. As Roni stated in the beginning, we focused in on the P&C area in Europe. We continue to focus to grow and in the States post acquisition of Adaptik and the acquisition of StoneRiver. So we see positive indicators from the States, duplicating what we have in Europe. This gives us good signs to continue and to raise the guidance.

This is on the revenue side. On profitability, I think this is across the board, this is coming from all divisions and all geographies as we implemented our efficiency plan in the company..

That's helpful. And then as a follow-up on the margin side.

Are you, kind of, done with all your profitability programs? That means that everything that you had to implement this already up and running? Or do you think you have more coming on the line perhaps expanding your offshore capabilities and so on?.

This is something that we do not stop. Obviously, we implemented efficiency plans in 2017, two ones, one in Q1, the other one in Q4. We didn't complete the efficiency plan, and we are still focused in how to improve profitability.

As we mentioned beginning of the year, this year is more focused on profitability and building the foundation for growth for next year. There is still a lot of room for us to grow for the offshore capabilities. We did a significant move on the delivery side. There is potential to us also for the R&D.

So there is room and, I think the short term that we established of about 15% is still valid. We are looking to this as a short-term – not short term, mid-term guidance..

Thank you very much. Appreciated and congrats on the stronger results..

Thank you..

The next question is from Mayank Tandon of Needham & Company. Mr. Tandon, please go ahead..

Thank you. Hi, Roni and Roni and Yaffa. Great job on the numbers. Just want to dig a little bit deeper into the growth by geography. I think, just looking at the numbers here, Europe had been very strong last quarter, but it was a relative underperformer.

Could you just comment on what may have triggered that? Is it just tough comparisons? Is it FX, or is there something more underlying? And also if you can also talk a little bit about the strength in North America this quarter?.

The first one is a headwind against the currency rate. The dollar is strengthening against Euro, Pound and Shekel, and therefore we see a decrease when compared to the revenue we'd be able to achieve on a constant currency basis. This represents probably half of the difference there.

And the additional one is just the projects that have, because of our nature, we are at the end implementing projects with milestones. Some of them have been extended and therefore we have some delay in revenue that will appear in the coming quarter. So we still see a growing growth in Europe.

In the States, as we acquired recently Adaptik, it's only been last year, we see starting seeds of growth. Roni can talk about this in detail. But we still see growth in this area, again, focusing mainly on P&C side. This is only – we are consolidating Adaptik in first quarter.

This time, we started to consolidate them in March of Q1, and in one month, this is a full quarter, but we see a starting growth is this area already..

Great. That's very helpful color. And just to get some context around FX.

What was the impact on revenue and if you could even talk about the impact on margins and EPS this quarter from currency?.

Yes. So on the revenue side, if we analyze this year-over-year, we see the exchange rate on the revenue side, they contribute about 1% of the – on the growth. If we're talking about the full year numbers and on the profitability, a growth of about 0.5% on the profit.

If we look about quarter-over-quarter, there is improvement on the revenue of 2%, but organic growth can be 8%, if we're excluding all the factors that we mentioned last time in Japan, the South Africa, India and Poland..

Correct. One final question from me on margins.

I just want to get a little bit more color, I think you touched on this in your prepared remarks, but as we look ahead in terms of the margin drivers, is it going to be more SG&A leverage our do we model in some gross margin improvement as well to get that margin target? And maybe if you could also talk a little bit about your steady-state margin goals, once you anniversary all these sort of moving parts like the Adaptik acquisition and also the divesting of some of these assets that you called out?.

Yes. So if we look at the last several quarters in a row, we see there is an increase in the gross margin of the company. And this quarter we have been slightly down about 0.6%, mainly coming, as I mentioned, on the project side that we delayed some of the revenue, and therefore, the profitability.

And on top of that, we started to recruit a resource for the company as we see the revenue coming. And, obviously, this is has an effect of negative impact to gross margin as we need to recruit, train, and only after a while, they can contribute. So this is another factor. Our plan is to improve the margins.

I will not say right now our target, but a few basis points is reasonable. As I mentioned earlier, we are working on the offshore capability of Sapiens. Today in India we have about 600 employees. We have a target to almost double this amount in the mid-term, building the infrastructure and management to achieve this target.

This will allow us to improve gross margin. So the improvement is not only on the SG&A and R&D is also coming from gross margins..

Great. That’s very helpful. Thank you, guys..

The next question is from Avishai Kantor of Cowen. Mr. Kantor, would you like to ask you question..

Yes, hi, thank you so much for taking my question. I going to try to go a little bit deeper on the traction in P&C North America. Basically, I'm trying to understand what is driving the improved traction which you are seeing, experiencing.

Is it strength in the overall market? Is it in specifically improved win and conversion rates? Maybe it was – maybe Adaptik was a game changer here for Sapiens, despite being relatively small.

Can you just specify a little bit maybe more into detail what is driving that strength?.

Yes. Hi, Avishai. So as you know, in the P&C, we have 3 types – 4 types of business in the U.S. We have our reinsurance business, we have our workers comp business, we have our Stingray business, and we have our Adaptik and Stream, together. The two last ones, they are really the main growth engines today.

It is our Adaptik and Stream and Stingray, two of them. And I think the Adaptik acquisition, we're very happy with it. So I think in relatively very short time, we are doing integration between Stream and Adaptik.

And we are already signed a deal as we mentioned in our opening remarks that we – Georgia Farm Bureau from – formally they are ready to go together with Adaptik as a solution. So it's the first one that we can demonstrate the integration between Adaptik and Stream.

And the overall, based on what we thought at the beginning and we don't – all what we have is positive surprise from this acquisition, that Adaptik and Stream together are very well recognized in the market and the integration is relatively very small. And we also built a pipeline for it, and we did an investment in our conference as you know.

So all in all, it's a very positive momentum and that will be our main growth engine. As we mentioned, our plan was to duplicate our success in Europe, in U.S. with the P&C. That's one. The second one is Stingray, is still for the lower tier, very well received, and we have more deals than what we expected.

We have some delivery challenges in our business, but besides this, it's well received and so on. In the reinsurance it's more or less the same. We continue to grow. We right now see a few new deals. We signed deals, so it's okay business. The last one is our workers comp. In the workers comp, that's a different business.

There's not a lot of deals every year, but if one deal is coming, it's very big. Right now, we are competing in a few opportunities. We hope to get one of them and that can be good enough to us to show another growth. So I just summarized, these four types of business.

One and the second one is very positive growth, and the other is one that's okay, and the other is just waiting to see if we sign one of the big deals. Just to finalize, we at Sapiens the investors, they will recall, two to three years ago it was almost nothing business for us in U.S.

Right now, we have millions and million dollars, a lot of customers In October, we have a big conference, Adaptik, Stingray, StoneRiver, all of them coming to a planned conference of Sapiens, and we would like to duplicate what we did in Europe. So, we're very positive..

So is it fair to say that the new contract that you won, that you mentioned, is just basically an integration of Adaptik and Stream capabilities? That's the first real relatively large contract, which you would be able to use as a reference going forward?.

Yes. 100%. And the good thing is it came from commitment to our existing clients, and I'll just say one more thing, we have a lot of StoneRiver clients that potentially this is what we need to go to them, with Adaptik and Stream. So this is what we call a up-sell opportunity that we have right now..

Perfect. Congrats. And my next question to the CFO, regarding the raise and the revenue guidance for 2018.

If I had to break where the incremental revenue is coming from between the EMEA and North America, what's a split roughly?.

I would say, evenly, slightly more to the States..

Okay.

And my last question is, any update you can give us on the Life segment which we didn't really speak about this call?.

Yes. We based on our information that we gave, we made the decision on ALIS to put all the effort in Europe and slowdown the effort in the U.S. We see a few things will come hopefully in Europe, new ALIS business, but we are feeling positive. In the StoneRiver Life, it's again more or less the same as in the past.

And we're also waiting for new business in Closed Book. So again, it's not dramatically growth, but we see some light at the end of the tunnel..

Okay. Good luck to the rest of year..

Thank you..

Thank you..

The next question is from Justin Furby of William Blair. Please go ahead..

Thanks guys. Congrats on good Q2. Roni G, just for you to start.

In terms of, if you look at this year, can you remind us what the mix will look like in your view, between North America P&C, international P&C and the Life business? And then when you look out over the medium-term, over the next few years, what do you think the biggest changes in that mix will be?.

So on a overall basis, obviously we see right now the P&C growing much faster than the Life. We see slowdown, or stable slightly slowdown the Life in the States while Europe is stable, potentially with some growth. On the P&C Europe and the States, we are growing.

Overall, if we look at the P&C in the States, this represents about 33% of our business and P&C in Europe about 25% of the business. If we look at the Life, we are talking about the Life in the States of about 11% or 12% and about 15% in Europe..

Okay, got it. Very helpful. And if you look at North America on the P&C side, and Roni Al-Dor, a lot of color unpacking the 4 different pieces there.

But just to be clear, is that – is it growth that you are starting to see there, is that organic in Q2? Or you expect it to become organic growth in the back half, or where are we exactly with that process? And if you look out to, sort of, the next 12 months or so, is it possible where North America could get to a gross level similar to what you are seeing in Europe and sort of that double-digit area?.

Hi, this is Roni G. So the growth this quarter is we're talking about 1 quarter with the mix of M&A. Adaptik, as I mentioned, is fully consolidated this quarter compared to past in Q1. If we talk about the organic growth on a full-year basis, as I mentioned is up about 6% to 7% on an overall basis, while P&C in Europe is growing double-digits.

Our expectation is to grow double-digits on P&C, the cosystem, Adaptik, Stream and Stingray, again, double digits – high double digits in the States. As Roni mentioned, the Life in – not the Life, sorry, the range you went in multiple conversations, probably will grow single-digit, mid to single digits..

Okay, got it. For next year, there are obviously a number of moving parts this year. But do you think that the overgrowth should become more normalized, whatever that growth expectation will be in 2019? Are there any more moving kind of components to the model to think about? Thanks..

We are not providing at this time of the year our guidance to 2019. We'll talk about this either end of this year or early next year. Again, our target is to run around 10% to achieve this. Right now we are not there, but we are aiming, we are planning to see it today to try to achieve this next year..

Okay. Maybe, one more if I could sneak it in. I think one of you competitors in P&C market talks about the market as a whole being something like $2 trillion of directorate and premium in the P&C space to go after.

Do you have any sense of where you are if you look at your 400 or so customers, or however many on the P&C side, where you are in that penetration – from a penetration standpoint?.

Justin, we do not track this amount. I can check and talk to you later, but we do not have this figure..

Okay. Great. Thanks guys. Congrats on a nice quarter..

Thanks so much..

Thank you very much..

The next question is from Ethan Etzioni of Etzioni Portfolio Management. Please go ahead..

Yes. Thank you. I'm missing something with the numbers here. Looking at the first half your income was about $144 million. Now – so the guidance you're giving for full year, essentially means that the second half is flat.

What am I missing?.

Hi, Ethan. This is Roni G. As we stated earlier in the year, our target this year is priority number one profitability. Just to remind you the comparable profitability in the first half of the year of 2017 was about four points – close to 5%. So we know we need to improve it significantly and this is what we are aiming, and this is what we're doing.

And we are beginning to achieve the results. The second priority is to build the foundation for growth, for down the years, in 2018 and onwards. The guidance is built on that.

As we progress during the year and we eliminate some of the risks, for example, the deal that Roni mentioned about Stream and Adaptik Georgia Farm, we have been able to increase the guidance although we do not see a significant improve – or a significant increase in revenue in Q3 and Q4.

If we look at the overall, we see significant growth on the P&C area, while some of the areas that you see are still flat and some are in declining, for example, Life in the States. So the guidance is based on that. As we continue further in the year, we will look into the guidance. But right now, this is what we see..

So essentially, the decline in Life in the States is offsetting the growth in the P&C and offsetting the growth of the new ones that you had?.

Correct. Correct..

Okay. I just want to make sure. I understand. Thank you very much..

Thank you..

[Operator Instructions] A further question of Ethan Etzioni of Etzioni Portfolio Management. Please go ahead..

I also wanted to ask about your global tax rate.

How should we model that going forward please?.

Ethan, as we had the tax reform in the States, we already in the Q1, we provided our percentage. You can see that right now we are running about 21% to 22%. If we'd like to be conservative, 22%. This is what we need to look to further through the years..

Thank you. End of Q&A.

There are no further questions at this time. Before I ask Mr. Al-Dor to go ahead with his concluding statements, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1 (888) 254-7270. In Israel, please call 039-25-5918. And internationally, please call 972-3-9255918, Mr.

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

Yes, thank you, and thanks for all your participation for joining us today on the call. Have a good day. Thanks..

Thank you. This concludes the Sapiens International Corporation Second Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect..