Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's Second Quarter 2019 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 5, 2019.It is now my pleasure to introduce your host Mrs. Yaffa Cohen-Ifrah, Sapiens' CMO and Head of Corporate Communications. Mrs. Cohen, you may now begin..

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 disclaim 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.During the course of today's call, we will refer to the 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 the 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?.

The Digital Future of Insurance in Austin, ISA Annual Conference in Phoenix and Insurance Innovation Nordic in Copenhagen. We'd exhibit boost in teams also in FinTech P&C Conference in London and The Annual African Insurance Forum in Johannesburg, where we met insurers looking for innovation solutions and support immigration away from legacy system.

It was very busy quarter for us.All in all, this was a very strong quarter that delivered improved cash flow and strengthened our balance sheet. Our offshore capabilities continue to improve and support our growth and we are expanding our digital capabilities with key partnership.

I would like to thank the Global Sapiens team for their commitment to our strategy and their enthusiasm for our future potential.I would now like to turn the call over to our CFO, Roni Giladi to provide more details on our financial results. Please go ahead Roni..

Thank you, Roni. I will begin my commentary with the review of the second quarter non-GAAP results followed by comments on the balance sheet, cash flow and end with our 2019 outlook.Revenue in the second quarter of 2019 totaled $79.5 million, up 9.6% from the second quarter of 2018.

Our revenue in North America totaled $39.2 million, an increase of 13.3% compared to last year and increase of 2.8% compared to prior quarter.

Revenue in Europe totaled $33.9 million, a 4.2% increase compared to last year and 5.2% increase compared to prior quarter.While our P&C segment continue to grow quarter-over-quarter we start to see initial stabilization in our Life and Annuity segment in the second quarter.

The 9.6% revenue growth this quarter represent organic growth and was negatively affected by currency fluctuation. When neutralizing currency impact, our growth rate would have been 12% with the currency of Q2 of 2018.Moving to gross profit. Gross profit this quarter totaled $34.8 million compared to $30.4 million in Q2 of last year.

Our gross margin this quarter increased to 43.8% from 42% in the second quarter of last year and 43.1% in Q1 of 2019.The improvement of 180 basis points compared to last year is due to revenue growth over better cost structure following the continued expansion of our offshore operations.

We had demonstrated improvement in gross profit and margin in the last several quarters and plan to continue in the future as part of our plan.Moving to operational costs.

In the second quarter we continued investing in R&D, with R&D investments of $10.5 million as compared to $9.9 million in the same period of last year and $10.2 million in the prior quarter.SG&A expenses totaled $11.8 million compared to $10.9 million last year and $11.2 million in the prior quarter.

During the quarter, we added to our sales, presales and customers access team to support our future growth.

We will continue to see increase in SG&A, following the additional investment in both P&C and Life and Annuities.Operating margin in the last six quarters improved quarter-over-quarter and in Q2 of 2018 margin improved by 260 basis points compared to last year.

While our revenue growth this quarter 9.6%, operating profit grew 31.4% reaching to $12.6 million, demonstrating our effort to grow in an efficient and profitable way. As a result our operating margin this quarter reached 15.8%.Again neutralizing currency impact our operating margin would pass the 16% with currency of Q2 of 2018.

Our adjusted EBITDA margin this quarter reached record high of 16.8% compared to 14.3% last year.Net income attributable to Sapiens shareholders for the quarter was $9.5 million or $0.19 per diluted share compared to $6.4 million or $0.13 per share in the second quarter of last year.

Tax and other expenses increased to $2.6 million as compared to $1.8 million last year with effective tax rate of 22%.Turning to our balance sheet. As of June 2019, we had cash and cash equivalent of $77.3 million. In the last six months, we increased our cash position by $12.7 million after $9.9 million payment of debenture.

The balance of Series B debenture at the end of the quarter is $68.7 million and will be paid in equal installments over the next seven years.

In addition, on July 11, 2019 S&P Global Maalot reconfirmed the Israeli A+ ratings with stable outlook for our Series B debenture.In our press release, we reported adjusted free cash flow to reflect the cash flow generated from ongoing business.

The adjusted free cash flow eliminates capitalized software, which are non-cash items and deduct capital expenditure that we invest on an ongoing basis.

In addition, we are adding back payments on account of past M&A agreements related to future performance targets in retention criteria, which are agreed on the acquisition dates of the acquired company usually for one to three years.During this quarter, our adjusted free cash flow totaled $14.6 million compared to negative adjusted free cash flow of $781,000 in Q2 of 2018 and $10.1 million in the previous quarter.

The increase in free cash flow and adjusted free cash flow is an indication to our continuous operation improvement, reduce unbuild amounts and improve collections efforts.

Next quarter, we expect to have one-time cash payment of approximately $7 million related to our investment in new office in India, which will amortize over the rent period.I would like to turn now to our guidance for 2019. Revenue.

Looking out to the remainder of 2019, we anticipate the primary growth driver to be the continued expansion of our P&C business. At the same time, we expect to see an improvement in our Life and Annuity business.We reiterate our full year 2019 non-GAAP revenue in the range of $318 million to $323 million.

However, we now expect revenue to be in the higher end of this range. The midpoint of our guidance represents growth rate of 10.7% and when neutralizing currency impact, our growth rate is expected to be 12.2%.Operating profit.

We continue to anticipate incremental margin improvement in the coming quarters as we manage our cost structure and enjoy economic of scale as the company continues to grow.

While we are improving our operation we are seeing weakness of the Pound and Euro versus the USA dollar and the strengthening of the Israeli Shekel versus Dollar, all are negatively impacting the company.As a result of improved operation while offsetting by negative currency headwind, we are increasing the guidance for non-GAAP operation margin to the range of 15.6% to 15.8% compared to our previous guidance of 15.2% to 15.6%.

In addition, there are two points I would like to address; our recently published dividend policy and the filing of our shelf perspective.In the last several years and starting from 2013, we distributed dividends to our shareholders in the total amount of $42.6 million. We did so without having a policy in place.

The company plans to continue to pay dividend and would like to formalize it with a dividend policy.The company has adopted a dividend policy that was published earlier today, which states that each year after publishing the annual audited financial report on Form 20-F the company will distribute a dividend of up to 40% of its annual non-GAAP net profit.The company Board of Directors may change the policy or take an exceptional decision regarding the distribution of dividends as a result of one-time event.

The distribution of dividends shall be made in compliance with applicable law and regulation as well as Sapiens contractual obligations.As a result of our performance, our Board of Directors approved the payment of cash dividend of $0.22 per share.

The dividend which amount to approximately $11 million in aggregate will be paid on Tuesday, September 3rd, 2019 to Sapiens' shareholder of record as of August 20 2019.In addition, we recently filed a shelf perspective with the SEC for a maximum share offering of up to $200 million.

We view having an active shelf registration as a capital market best practice that provide us with a maximum flexibility to execute on our long-term growth strategy.

Our previous shelf expired on November 2018 and the current shelf will be effective for the next three years.On the M&A front, we continue with our effort to find potential companies that fit our strategy in our evaluation range.

We're currently looking for small to mid-sized company with revenues in the range of $5 million to $30 million which will follow our strategy either geographic expansion, complementary products, or customer base.I would like now to turn the call back to Roni Al-Dor for closing comments.

Roni?.

Thank you, Roni. I'm pleased to see the company back on track with growth and margin expansion in the second quarter of 2019. Our 2019 priorities are growth and margin expansion.In the second quarter, we delivered on both of these goals.

In 2019 we are looking to continue to expand our P&C business in North America in EMEA and APAC, return our Life and Annuity businesses to growth, and deliver further margin expansion.I am pleased with our execution in another quarter of solid operating results in which we execute well against our long-term strategy, priorities of long-term goals profitability, and improving shareholder value.I would like now 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 Bhavan Suri of William Blair..

Hey, Roni, Roni. Thanks for taking my call and a nice job there. I wanted to just touch initially first on your comment that you -- sort of you're in a better position today to compete for the high-tip business in the past.

I guess I'd love for you to talk a little more about the opportunity there? And then what are you seeing in the competitive landscape that gives you that confidence?.

Hi Bhavan, this is Roni-A. Let's start with the European. We are pushing our EBIT for several territory in Europe. And as all of you know we are doing this for many, many years. We are building very good brand reference is very good. And that help us to go to the higher tier.So, it was a long time to compete on those tiers, but now we achieved it.

It's a big contract including a lot of what we offer its including everything core system, digital, data, many services sometimes. So, it's for many, many years and it's good. So, based on our brands, and our reference, and our products, that's in Europe.In the State, we have several solutions but what we have the workers' comp business.

This is -- in the future, we are looking for -- as you know we have a solution for workers' comp for State. And we are looking in the next year or two more business to come in the Adaptik and StoneRiver the new product that we offer. This is we are seeing a huge growth. Again, we start with smaller need.

We hire a lot of salespeople who've specialized on Tier 1 and Tier 2. And this is the target that we are looking and complementary to the low Tier. So all-in-all all of our P&C looking positive and going to the IoT as well..

Got it. Got it. Got it.

I think if you're looking at lower tiers primarily because sort of upper Tier is still sort of let's just say evolving and relatively nascent, but if I look at the lower tiers how significant of the deal size is [Technical Difficulty] as you've been going on bigger deals is there a change in sales force? How do you think about the positioning of the sales force for the larger deals for the higher tier providers? Do you think it'd still be a partnership approach with consulting companies that own some of those relationships? Or do you think it's more just about retooling or hiring the sales guys that can go win those large enterprise wins?.

Hi, Bhavan. This is Roni. The matter of fact with we already started to recruit the team members that relevant to the Tier 1 customers, especially in P&C in the state as we have this in Europe already.

So we have this already in the P&C side.On top of that, approaching the bigger deals required us to engage with some system integrators and we are doing so. We're already had discussion with some of them to potentially win potential customers in the future. So we are doing so.

We already recruited some people and we are engaging some system integrators..

Got it. Got it. Got it. And then one last one from me. As you look at the pipeline into 2020, just some color on how you're feeling about that pipeline in comparison to the pipeline coming into 2019? How do you feel about it? Obviously, you've hired the sales challenge. You've got the partnerships just some color would be helpful. Thank you..

I think based on the investment that we did in the last year just again to remind, we shared with you at the beginning of the year we start to build our customer success. They are taking care about our existing client. And as you know, we have more than 450 clients all over. By the way in the next September, we have a big client conference in Phoenix.

In October, we have in Rome.So we are putting a lot of investment in this area that help us to generate the pipeline. And in the State at the beginning of the year, we hired a Head of Sales. And we just hire from the competitive company people they are on the P&C on the Life on the workers' comp, reinsurance and so on.

So, based on all the investment and all the wonderful work that Yaffa is doing in all the marketing stuff and the branding. So all-in-all, we feel confidence with the pipeline that we have for 2020..

Great. Great. Thanks for asnwsering my questions. And congrats, and hi Yaffa, good to be back and look forward guys. Thank you..

Thank you..

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

Thank you. Good morning. Roni you mentioned several deal wins.

I just wanted to better grasp, is that a case of takeaways from other providers? Or are you replacing the in-house providers? Maybe some perspective on the dynamics in the space if it's more in-house driven? Or is it more takeaways from your competitors?.

I think it's more in-house or legacy as people in our industry if they replace and it work, they cannot go into replace them after few years. And most of our competitors are again the new ones are in the industry, let's say, 10 years, so we don't see a lot of replacement for those, but we are seeing a lot from legacy.

So in-house all the companies are more than 10 years..

That makes sense. And then just going towards guidance, Roni, you obviously talked about the constant currency growth rates 12% plus, which obviously is a very impressive. It's probably the fastest in several years. So just want to understand you're raising the revenue guidance for the remainder year.

Is that just a function of the FX headwinds? Or is it something else that you're factoring into the second half guidance on revenue?.

Hi, Mayank. We are factoring the currency headwinds that impact the company on reducing the potential revenue both on pound, euro and also -- yes pound and euro are mainly affected on this. So after calculating those, we are having a growth rate with currency exchange rate of 12.2%. So impact -- negative impact of the euro and pound going forward..

Okay. And then looking at margins, again really impressive performance in terms of getting the business back on mid-teens margin trajectory. So just looking longer term, how should we think about margins? Is there more upside as you scale, as you leverage offshore, which you've done obviously very successfully.

Just wanted to get a better sense of what the long-term margin profiles could look like? Again not looking for specific numbers but just maybe directionally where margins could go for a company like yours as you scale the business?.

Yes. So when we entered the year, the margin mid-term was about 15%, 17% and as we entered to -- into this year and execute on all our performance criteria, we'd like to shoot to 17%. This will come between short to mid-term period. When we are talking about what are the factors that can impact this? This is first of all is the offshore capabilities.

We recently announced a compass in India that can capture up to 1,600 employees. Today we have only 1,000. So the infrastructure is there and it's very productive.Well the scalability issue in the cost of goods sold we have the management. We need to team to -- and the management is a fixed price out of that.

And, obviously, as Roni mentioned we are signing right now deals. The pipeline looks very good, even better than the previous years. And this means also additional license also a factor in the gross margin. So if we factor all of these parameters, the 17% in the short to mid-term seems reasonable.

If we calculate our operational profit without currency, this quarter we're already at 16%..

Right. That's very helpful. Again congrats on the results, great job..

Thank you..

Thank you..

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

Hi, good afternoon. Most of the questions have been asked. Just maybe a follow-up on India. Can you remind us what's the structure of employees there per division; i.e.

R&D versus sales versus support staff? And how do you see the speed over time throughout the organization?.

Okay. Hi Tavy, it's Roni Al-Dor. India just to remind we acquired the company four years ago. At that time the number of employees was 150, now we are 1,000. The India has few things, one we are -- we see Asia Pacific as a territory. It's still small territory but its important and growth territory.

So we have people that's working in this territory and support. And in this case we are doing everything end-to-end, meaning sales, delivery and R&D.Again the product sometimes is they are doing in Israel or mainly in Israel and India but that's for the territory.

If we are talking and this is the major part of India is offshore for the other business we started with one product we did. As, you know, we have close to 10 products in the company. In each of the product we have R&D and we have delivery.At the beginning, we start mainly on delivery. Year-over-year we are moving more and more R&D.

So right now I think it's more or less let's say -- it's almost scheduled to Sapiens. So, if we have x percentage R&D, we have the same percentage there. Right now I can share with you that 90% of our products we are doing R&D in India -- again part of the R&D and the services is 100%.

So 100% of the services we're able to do it from India.All what I can share with you that in the last year we just added more than 200 people and not all of them are effective from day one. There is a time to train the people, it's time to move to transform the knowledge from other area to their. So the productivity still not 100%.

And this is again we believe over the year, we can improve also the productivity. And as Roni mentioned, we have just 1,000 and we plan ourselves for 1,006 for this building.In terms of management, we also invest a lot in the management. We have excellent CEO that runs this business in India and very professional.

Out of the four founders, three remains with us. We had few more management. So all-in-all we are very happy. And we Sapiens invest, we build a new – total new offices with all the IT or infrastructure very modern. So we see them as overall Sapiens employee..

Great. Thank you. Very much appreciated the color..

Okay. Thank you too..

The next question is from Bryan Bergin of Cowen. Please go ahead..

Hi. Thank you. I wanted to ask on the revenue outlook.

Reconsidering a consistent acceleration through the second half? Can you talk about the cadence we're anticipating over third quarter and fourth quarter? I'm curious how some of the deal ramps maybe progressing?.

Hi, Bryan, this is Roni-G. We see increase in revenue in coming quarters. Earlier, we discussed about pipeline and the trend of the deal signed. We are happy to announce that we already signed few deals in the Life. It wasn't in the last several years. And we have also some important things going forward in Q3 and Q4.

Obviously, there will be some impact into 2019 the second half, but not all. So this is on the Life Style.On the P&C side, we see Europe continue to grow double-digit side – double-digit figures, which is confidence and good.

And also in the states, if we look at the last year we go only let's say mid-single-digit and right now we are talking about double-digit. And this is through the integration between Adaptik and StoneRiver stream.

We'd see high pipeline and high deals that we signed and we potentially will go into sign Q3 and Q4.So to recap on that, we see continuation on P&C Europe, moving to double-digit growth in the U.S. Sapiens will continue us on Q3 and Q4 and change in trend in the Life that we started to see this quarter and will continue in Q3 and Q4 of this year.

All of that will grow our revenue in Q3 and Q4 of this year..

Okay. And then just a macro question here any sense acquiring concerns just given the increased volatility around broader macro and it certainly doesn't sound like it based on the momentum you're putting up here, but curious on how clients maybe behaving and some of the conversations that you are having..

We do not see any trend in the macro deals or opportunities. We do not have any operation in China for example. And the USA and Europe at least from our customer insurance carrier and the same trend continue. The only thing that is affecting us on the macro level is the currency.

And as we mentioned earlier, all of the currency currently are working against us. Euro and pound are weakening against dollars and the shekel strengthening, which all of this affect the company in the profitability..

Okay. Great. Thank you..

[Operator Instructions] There are no further questions at this time. Before I ask Mr. 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 two hours. In the U.S. please call 1-877-456-0009. In Israel, please call 03-925-5921. And internationally, please call 972-3-925-5921.

Mr.

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

Yes. Thank you for you and thank you for all participants for joining us on today's call. Have a good day..

Thank you. This concludes the Sapiens International Corporation's Second Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect..