Welcome to the Sapiens International Corporation Fourth Quarter and Full Year 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded February 26, 2019. It is now my pleasure to introduce your host, Mrs. Yaffa Cohen-Ifrah, Sapiens’ CMO, Head of Corporate Communications. Mrs. Cohen, you may now begin..

Thank you and good day everyone. Our quarterly earnings release was issued before the market opened this morning and it has been posted on the company’s website at www.sapiens.com. Representing Sapiens 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 disclaims any obligations 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 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’s website or via website link, which is available in the earnings release that we published today.

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

Roni?.

core solution, complementary life solution for underwriting electronic application and illustration and Consolidation Master for the management of runoff businesses. In 2018, we maintained our growth in our complementary life solution, which gained Sapiens no customer win in the region.

During this quarter, we went live with Catholic life insurance one of the top 10 fraternal benefit society in the U.S., which launched Sapiens’ electronic application for its life and annuity businesses.

We saw our core solution during the quarter, a current life and annuity customer, a Tier 1 South African bank extended use of Sapiens’ core suite for life and annuity, with addition of annuities in funeral [ph] businesses. This customer originally chose us in 2015 and there has been a successful production results ever since.

On the product front, in December, we announced enhancement to our core suite for life and annuity. We enhanced core functionality, improved features and new digital capabilities. These new features allow our customers to easily create and rapidly launch product. The recovery of our life and annuity business clears the foundation for growth in 2019.

In addition, we see increased demand for our Consolidation Master solution and our pipeline is building nicely, as in our complementary life solutions. Moving to our North America DECISION management activity, during the first quarter, a top tier insurance in U.S.

selected Sapiens DECISION of business decision management solution that now includes underwriting and product-creation capability to modernize its insurance application and provide the highest level of services to its customers.

Lastly, on cross-selling to our existing customer, in the past few years, we significantly expand our solution and services offering with new product development initiative and focus acquisitions.

In 2018, we made a strategic decision to build a new team to evolve our previous customer support model from a siloed by business support approach to what we are now fully integrated customer success team, this support all of our product lines. We recorded several key executive in 2018, and we will continue to expand this team in 2019.

On the marketing front, at the beginning of February, we announced complete re-brand highlighting our solution to unified global provider for insurance outlook solution. Sapiens’ solution portfolio now feature for more descriptive product names to help prospective and existing customer until expand our solution.

We already signed our website and marketing collateral to reflect Sapiens’ human-to-human H2H approach to build stronger relationship with customer and improve communications about the capabilities. I’m happy to share with you that since the launch, we are receiving positive feedback from our customer and from the industry experts.

Our investment in R&D and enhancement, because our platforms are paying off with new customers win and increasing businesses with existing customer. It is also a lead recognition from industry experts. Last December, Sapiens was recognized as a leader in Gartner Magic Quadrant for non-life insurance platform in Europe for Sapiens’ IDIT suite.

We are positioning the leader quadrant based on our completeness of vision and ability to execute. Sapiens’ centralized digital division, which collaborates with insurtech and partner to develop new insurance solution, is significantly enhanced our non-life offering to Europe.

On the digital front, we focused in 2018 on enhancement of our digital offering and leveraging our digital division.

Today, we offer a comprehensive digital solution that is fully- integrated with our core solution, including customer and agent total and digital hub that facilitates an open communication, API-based platform, which enable carrier to interact with insurtech companies, ecosystem technology provider and business partners.

Sapiens’ open architecture ensures seamless interaction with any service under any technology aligns provider to easily choose the building blocks they need and they integrate these elements into their own insurance ecosystem, enable success today and securing a stronger competitive position for the future.

Our digital unit plays a critical role in supporting our sales and marketing teams, who are already responding to an increase in demand for our digital solution worldwide, so overall, a good end to successful 2018. I would now like to turn the call over to our CFO, Roni Giladi, to provide more details around financial results. Please go ahead, Roni..

one, gross margin improvement due to the headcount expansion with offshore operations where we can grow the team very cost-effectively to support our delivery efforts, to accommodate that we planned to expand our facility in India with further capital investments; two, in addition, increasing revenue with leverage coming from improved economic of scale with our current infrastructure able to support higher top line growth that will allow us to improve operational margin.

As we said in the past, our mid-term operation margin goal is to be in the range of 15% to 17%. And in 2018, we expect for the first time to enter this range. To summarize all, 2018 was a transition year for Sapiens, and we plan to be back on track with growth and margin expansion in 2019.

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

Roni?.

Continue to expand our P&C businesses in North America and EMEA, growth in our life and annuity business and margin expansions. We are executing on our strategy to drive sustainable long-term growth, improved profitability and improved shareholder value. I would now like to close our prepared remarks and open the call for questions.

Operator?.

Thank you. [Operator Instructions] The first question is from Mayank Tandon of Needham & Company. Please go ahead..

Hi good morning. This is actually Kyle Peterson on for Mayank today. Thanks for taking the question.

Just want to see in terms of the P&C growth outlook for the year, is that will that be kind of split pretty evenly between North America or Europe or kind of how are you guys looking at the geographic growth for the coming year in P&C?.

Hi this is Roni G. In 2018, we saw double-digit growth from the P&C in Europe and rest of the world. And while we see growth single-digit growth on North America P&C, as we look at 2018, we see both of the area growing double-digit growth.

We have some indicators coming from recently from the stake where we signed several deals on the P&C side and we have very good pipeline to continue. So, we’re confident on the double-digit growth on the P&C as a stake. And in Europe, we’re continuing the trend as we had in the past, this will continue going forward.

So basically, evenly both of them double digit..

Great, that’s good color. Good to see acceleration in North America. And then just wanted to touch on the life and annuities business, I know you guys mentioned stable with a little bit of positive bias.

Just want to see your overall thoughts, just what it might take to be able to return to a little bit of positive organic growth in the life and annuity space?.

Hi this is Roni Al-Dor. We are seeing the life and annuity 3 type of solution. One is our core, what we call today Sapiens’ core suite for life and where is the component, include illustration and underwriting, and then we have the runoff businesses calling today Consolidation Master.

The 2 areas that we plan to continue to see a growth between single and double digit is the component in the runoff. In our core suite, we still see a business many from Europe. This is what we made a decision 2018, and this is going forward. So, the overall is growing, but not as high growth like the P&C..

Okay, great thanks. And last one for me and then I’ll hop out. Just want to touch and see if you can give any background on the M&A pipeline. What you guys might be looking for? Whether it’s specific capabilities, geographies, product offerings? Any color would be great..

Hi this is Roni G. As we mentioned in 2018, we had a decision to slow down our activities into the M&A, focusing on operational and building the foundation of organic growth.

As we close to end of the year in Q4 of 2018, we started discounting processing in the company, looking basically for the angle that you mentioned, either additional complementary solution, customer base and also geographic expansion territories that we do not have present today. We’re in early stage, and we’re looking to do so.

And hopefully, we can announce something in 2018, but right now in very, very early stage..

Alright great. Thanks for the color. Good quarter guys..

Thank you..

The next question is from Avishai Kantor of Cowen. Please go ahead..

Hi good morning and good afternoon everyone. My first question, so we are talking about 10% organic growth for the year a, stronger second half versus the first half. And you mentioned that the reason is, I would say delays in some ramp-up within U.S. clients.

Are we talking about one specific client or a handful of clients?.

Hi Avishai, this is Roni G. We are talking about the specific customer, on specific item. I do not see the something that it goes above. Very specific and we convert on the first half of 2018..

Okay thank you for that clarification. And then you’ve been able to throughout 2018 and what seems to be going forward into 2019. You’ve been able to post very nice gradual margin expansion despite as you characterized, continued investments in U.S. sales and management capabilities. Obviously, this is coming from back office and delivery capabilities.

How much more levers do you and you were talking about moving some of the functions to India.

How much more of lever do you have in the business model to support that margin expansion?.

Hi again, this is Roni. Our guidance for 2018 basically take into effect additionally, acceleration or lever in the model. We have significant stuff right now, doing delivery, but we would like to accelerate also the R&D part. This will also improve our margin going forward.

And also, without their offshore as we scale our business and growth the revenue with some economic of scale that will improve margin. Our midterm range is 15%, 17%. We think we can achieve this in the midterm. 2019 will be the first year that we are entering this range with the range of 15.2% to 15.6%.

And as Q4 already with 14.8%, we are enriched with this range..

Great. And then, is the accelerating U.S.

pipeline driven by new or existing clients? Is that is, it driven by your strong marketing efforts in the second half and then the re-branding, what’s driving it?.

I think the first part is coming from the new customer. We see a lot of promising opportunities coming on the P&C platform on the stake. As Roni mentioned, we also established a current customer-centric team that will support to improve or increase the revenue from existing customer.

I think we see this increase in revenue potential revenue towards the second half of the year but right now, what we see is more on the new customer coming on..

And my last question for the team, can you talk can you give us a sense on cloud-based wins for your platforms.

I mean, do we see an acceleration in the ratio or the mix of cloud-based platform contracts?.

Yes, the answer is yes, we see more and more interesting in cloud solution for all of our products. So, the answer is yes..

Okay.

And I assume this is a long-term – this is another long-term lever to your margin expansion?.

Yes..

Great thank you so much and good luck in 2019..

Thank you..

Thank you..

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

Hi good afternoon. Congrats on the solid quarter. All of my questions were basically answered. I guess that is follow-up on the M&A one. Before you made that comment that you’re looking into additional M&A next year I mean, given your 10% organic growth am I to assume that you would also take ‘19 as a break.

So, I guess looking at your where your balance sheet is.

Would you go into taking that if you saw an interesting opportunity on the M&A front?.

Hi Tavy, this is Roni. So, as we mentioned, we’d like to wake up the still level of growth in the company. And the 10% is only organic and we’d like to accelerate it. And we’re right now focusing on talking M&A, not big M&A, and we think we can the cash position that we have allows us to do this acquisition.

In case, we’ll see something which is bigger opportunity, we always opportunity to look at equity or debenture. Today, we have a debenture of about $80 million [indiscernible] 8 years will give us a lot of flexibility.

And if we look at our EBITDA for next year, we’ll be close to $50 million and obviously, the ratio of EBITDA to debenture is very low and increased debenture. So, both angle, are open to us, equity or debenture. If we see big M&A, we consider at the time and opportunity, we’ll talk on M&A..

That’s helpful and just a broad one on life and specifically on the core aspect.

We’ve spoken about the decline last year over the I’m just curious fundamentally, have you explained that just kind of insurance company postponing the investment decision into layer of time? Or simply you realize that they have [indiscernible] alternatively days and they can just stay with their legacy core and then figure something out later..

Hi Tavy, this is Roni. When we enter 2018, we set a specific goal to our life division to focus first of all on existing customer. We basically put all the effort, not searching for new opportunity, but to maintain our existing customer, customers that some of them are going live and some of them are basically in preproduction phase.

And obviously, when post production phase come, obviously, there is some decline in revenue. This is the event that happened to us in 2018 basically on the core life business. So right now, we have a level that the customer are possible realize and basically the revenue is stable.

During that we continue to look for opportunities and we have some pipeline in the life division mainly on the run of business, mainly on the components of the solution but also very few on the life. We’re right now working on that but right now we’d like to conservative, and we’re mentioning the business is being stable..

Thank you Roni I appreciate it..

Thank you..

Thank you..

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

Hi guys. Thanks for the question. Nice quarter.

Just to start off in the P&C business, can you remind us what percent or give a sense for the coming in as cloud deals versus people hosting on-premise? And then in terms of the success that you’re starting to see there in North America, what kind of insurers I think are you resonating most of the terms of the sizes whether it’s commercial? Whether it’s personalized just any more color on North America and what you’re seeing there would be helpful.

And then I’ve got one quick follow-up..

Yes, this is Roni Al-Dor. In the P&C North America, we have few types of solution the, workers’ comp is going for the stake and for the Tier 1 clients. And our core solution is mainly for Tier 3, 4 and sometimes Tier 2. All of them are looking for cloud and hosting as a smaller-companies more interesting for them.

On the reinsurance, we’re also seeing more Tier 1 clients, Tier 2, Tier 1 type of clients..

Super helpful. And then if you look at Europe, I’m just checking with P&C. Any notice that Brexit is having some sort of impact in the market in the U.K. specifically? I was just curious what you’re seeing there. And then what areas within Europe specifically, are you seeing the most pipeline growth on the P&C side? Thanks..

Okay. So, we don’t see any impacts of the Brexit until now. In terms of Tiers, we’re in Europe, we’re many moving towards Tier 2, So Tier 3, 2. And the Nordic is very hot area for Sapiens as well as UK. We also start to see some deals in the Duck area, mainly in Duck. But also, we are working, what you call, rest of the world.

We’re working also in the South Africa and Asia Pacific. So those are the areas that we are working right now..

Okay, great. And then Roni, Roni G, on the acceleration and growth, maybe I missed it, but are you is it sort of single-digit growth in the first half and double digit in the back half? Is it sort of what you’re pointing to? Or any more color there would be helpful. Thanks..

Hi Justin. So obviously, the 10% is a blended one. We see the first half slightly below and second half is higher. This is what we meant when we talked about the growth for 2019..

Okay fabulous. Thanks guys and see you next week. Cheers..

Thank you..

Thank you..

[Operator Instructions] There are no further questions at this time. Before I ask Al-Dor to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1-888-295-2634, in Israel, please call 03-925-5918, and internationally, please call 9-723-925-5918.

Mr.

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

Thank you to operator and thank you to all the participants for joining us on today’s call. Have a good day..

This concludes the Sapiens International Corporation fourth quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect..