Q4 2019 Earnings Call

During the course of the call today. We will refer to non-gaap financial measures a Reconciliation schedule showing gaap versus non-gaap results has been provided in our press release wage issue before the market opened this morning and replay of this call will be available after the call on our investor relations section of the company's website or via the website, which is available in the early release that we published today. I will turn the call over to run outdoor president and CEO of sapience Rani.

Thank you. Yeah.

And thanks to everyone who are joining us today to review our fourth-quarter and full-year 2019 Financial results. I will start with a few of them followed by an overview of our progress in 2019. Only get a deal will share our outlook for 220. It needs repair comments.

Tippin's finish 2019 on the very strong note with Revenue goes accelerating in the second half of the Year highlighted by fourth quarter goes off of 80% One of our strongest quarter top-line gains in the recent years tells goes came from extension in our pin see businesses in North America off an email as well as improvement in our location and unity businesses recent acquisitions and internal investment in our cost of the product improve our competitive position. We say why did range of insurers solution support by technology services for prayer and post-production?

Is it?

In the past. So business is benefiting from two key trends in the insurance industry the continued migration from Legacy system to model flexible call and cloud-based solution as well as the need to meet the customer's expectation for digital personalized experience. The insurance carrier see settings innovating Insurance solution in a central to gaining Competitive Edge by providing Superior outcomes for all the stakeholders, including their internal teams policyholders in agent

We filled the increase of Leverage in false Porter by driving more capacity to our offshore entities which produced Improvement in Cosmopolitan. We continue to expose students Improvement economy of scales, which control over spending resulting in non-gaap operating melting rising over to 65% off.

Is it?

Results for non-gaap net income increased 34. 8 per cent to 10. 6 million or 21 cents of diluted earnings per share this song by all means an outstanding quarter and fantastic finish to the year. Let's shift to new businesses and expansion for off existing partnership recently announced Thursday. We signed a new PIN see wins as well as new businesses in life and pension and add a few go live in the quarter and add another exciting partner to our physical consist.

We announced two wins in us for open sea and life annuity businesses.

Thomas Union Mutual Insurance Company of Michigan announces the part of digital transformation project that the company will replace it or Legacy systems recipients called sweet for Property and Casualty as well as our Advanced analytics solution delivers over the cloud sapiens solution are expected to get over it costs and decrease time to market for future product in the insurer as well as provide a digital and personalized experience to its policyholders dead.

Patrick life insurance of

Upgrade its life and annuity underwriting capabilities recipients underwriting Pole and is a good example of our ability to partner with a third-party to deliver seamless integration dissolution improve the customer experience and by accelerating agents ability to make policy decision provide a more cost-effective underwriting process for the insurer.

The email team so notable wins in the fourth quarter in both beans in life.

What's selected sapiens? He did sweet for Property and Casualty Insurance Master for digital transformation program. The insurer is replacing its Legacy it Staffing Solution to facilitate the digitalization of its entire P&C and health insurance segments as well. It's claims-handling seconds Advanced analytics off and digital tools will increase productivity and reduce time-to-market.

Hold on Google Play.

Of South Africa expanded strategic long-term partnership recipients by adding our Flagship course wait for life and pension to transfer its business and improve flexibility speed of forces and enhance the customer experience important differentiation in a very competitive market. Another anticipated benefit is reduced of operational costs from streamline automation for all of customer partner and personal.

Overall June 2019. We signed 34 new logos. It costs all of our products and territories today over 500 customers worldwide are using same solution. We will continue to work closely with this customer to help them to maintain the system and maximize efficiency. We support them with the introduction of the new capabilities all expenses of their businesses in the fourth quarter. We had go live with Equitable life in Canada. One of the Canadians largest life insurance companies Equitable life is modernized its new business process recipients underwriting Paul for life and annuities the insurance expect to significant decrease its turnaround time with our web-based solution for automated underwriting a new case management.

Going mm.

Teen more than 50 customers have gone live and move into production, which means our solution is being used as the co operational system call live in a major event for both sapiens and customer. It is a major demonstration of our ability to deliver of a customer ability to adapt and all out a new technology called the organization's

We continue to expand our insured the partnership ecosystem. We slightly cool platform that allows us to deliver our solution including our coffee and see and life and pension annuities offering. We see customer-facing solution the chief the time incentive redundant paperwork process to completely digital platform to increase sales closed Thursday and improve the customer experience. We also continue with our m&a activity in 2019 in October. We expand our European footprint with the Coalition of calculo a leading Insurance software solution and services provider to Burien region. We see this position as a catalyst for long-term goals by setting up in school and digital switch into the market with high percentage of In-House system and where we see good growth potential for both open sea and life and pension course wage.

this acquisition

Old boxes of emanate go strategy which geographical expansion in Newmarket going our customer base and improve our existing products and services back on board in calculus teams of experts Consulting and solutions 220 started off with announcement in January that we are expanding our footprint in the Baptist religion basic position of a german-based in shorter company some Kumho so, Services Insurance in Germany, Switzerland and Austria helping them to set up their business is model and obtain marketing Edge. We successful e-commerce environment sapience with costs is Complete product and services portfolio alongside this room, offering to their customer in the region. So, is the one of the most Innovative companies in the large dark region in an area that has been part of sapience long-term goal.

Oh investment in R&D enhancement across all platforms are paying of and once again to work.

Industry expert during the quarter of course with for life and pension one and excellent awards for his Advanced life and pension technology in email.

The length report indicates same sapiens heavy investment in sapience call for life and pension as well as sweet Cloud Readiness future itchiness and it took place in the previous quarter. I will say P&C did sweet was recognized gain as a leader in Gartner magic quadrant for non-life insurance platform in European for sapience home sweet on the marketing front in October. We hosted our Global Climate conference in Rome more than hundred and fifty participants from a approximately Thursday, including Insurance and financial services customer and Prospect discuss the future of insurance industry Trend in safety strategy and vision.

For the we advance our businesses globally in 2019 going Revenue.

Oh by 12. 2% to 325. 7 million the high end of the annual guidance range increase Revenue combined with significant operating leverage from our actual operation improve sapiens, don't get any operating margin by 240 basis points to 16% the high end of our guidance range. This was a strong exceptional deal of execution or many fronts and I want to congratulate the Sapient Global team for their outstanding work in 2019 off the results. We delivered in 2018 show that our strategy is walking and by focusing our investment to deliver profitable goals, we can significantly and took all the value. We remain focused on building uniform Global platform of innovative digital Insurance solution to advance our competitive position as One Stop Shop for Thursday.

Still Still we sentence for the

In services department for 220 is very robust, and we see further opportunity to increase operating efficiency and improve margins.

We sit long balance sheet and expanding portfolio of product and solution a deep support team to meet the end-to-end needs of our clients support our goal and going globally footprint sapience is well-positioned to deliver a long-term sustainable growth. I would like now to turn the call over to our office to provide more details on our financial results, please go ahead only thank you Ronnie. I will begin my commentary with a review of the Ford Courtenay results annual result and Then followed by comments on the balance sheet cash flow and at the end our outlook for 2020.

Avenue in the fourth quarter of 2018 total 86.7 million dollar up 18.1% from the fourth quarter of 2018. The 18.1 Revenue growth was positively impact by the calculator position and the first time consolidation and organic of this quarter was 14.7 months. I live in North America total 41.8 million and increase of 19.5% compared to last year.

Revenue

Total thirty seven point five million dollar up twenty 1.6% increase compared to last year and up 13.5% off eliminate Cal kro, first-time consolidation moving too gross profit profit this quarter totaled thirty eight point four million dollar compared to thirty five point three million in Q4 of last year our gross. Margin this quarter increased to 44.3% from 42.7% in the fourth quarter of last year off in 44.4 in Prior quarter. We have delivered continuous Improvement in gross profit in every quarter of 2018 and plan to continue to improve it off future.

moving to operational profits

operating profit total 14.3 million this quarter compared to 10.8 million of 2018 and 13.5 million month in Prior quarter operating margin increased in the fourth quarter and also 16.5% despite. The impact of calculus low profitability in was above Q4 2018 by 170 basis points. The Improvement in operating margin was mainly due to Improvement. What's the mileage you

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Debut to stop and shareholder for the quarter was 10.6 million or $21 per diluted share compared to seven point eight million dollar or $0.16 per diluted share with the fourth quarter of last year, which reflects 31.3% EPS growth.

Turning now to the full year is on for the 12 months ended December 31st, 2018 at the beginning of 2010. We stated that our goal for the year. We're off.

Double-digit golf of Revenue with life and annuities Revenue stabilizing and the remaining segments stable organic growth of approximately 10% off on the mountain front. We stated operating margin Improvement that would come from offshore Corporation and improve economic of scale supporting higher top-line. I'm very pleased to say that we exceeded our 2019 revenue and Mountain gold. I will explain in detail or progress this Matrix.

I know.

2018 Revenue where three hundred twenty five point seven million dollar up 12.2% and slightly exceeding the high end of our guidance range of 323 / 325 million dollar that was update last quarter.

Each quote there in 2018. We delivered increased Revenue year-over-year annual organic growth in 2018 was 12.5% off eliminating the 1.9% negative impact of currency and 1.6 positive impact of m&a. We delivered strong double-digit growth in package. In addition. We stabilize our life and annuities Revenue with small growth towards the end of the year in 2018. We saw our organic growth rate wage rise from 3% in 2018 to 12.5% this past year putting sapiens back on track as a growth platform.

You can profit in the full year was fifty two point two million dollar compared to 39.6 million in 2018 and increase of 32% off operating margin improved sequentially throughout the year from 15.3% in q1 to 15.8% in Q2 to 16.4% in two or three and reaching 16.5% into phone.

Morning, basis operating Mountain Ridge 16% and Improvement of 240 basis points compared to last year.

Tax expenses for the year with 10.3 million dollar representative and effective non-gaap tax rate remain at the same level of about 20.8% as in last year increased 28.4% to 55.7 million in 2019 from 43.4 months in 2018. Our adjusted ebitda margin was 17.1% for the year compared to 14.9% last year.

net income

For the was 38.9 million or $0.77 per diluted share compared to Twenty Eight Point 1 million or 56% off the chair in 2018 EPS increased by 37.5% respectively compared to last year.

Turning to our balance sheet as of December 31st. We had cash and cash equivalents of 66.3 million Hour Cash does not include twenty two point five million dollar that was on Esco for the acquisition of some Kumho.

Total death was 68.7 Million at the end of the year and on January 1st 2020. We paid the annual principal payment for our Series be dead in the amount of 10 million-dollar. The remainder of our depth will be paid over the next six years.

I'd like to touch on adjusted free cash flow in the fourth quarter. We reach $18 free cash flow and 58.9 million for the full year of 2009, reflecting our ability to convert net profit to cash generation, which is another positive indicator for sapiens performance.

We'd like to.

There now to our guidance for 2020 in 2020. We anticipate non-gaap Revenue in the range of $377 to $383 million dollars and non-gaap operating margin in the range of 16% to 16.5%

On the revenue side, we expect continued double-digit growth for PNC Revenue single-digit growth for life and annuities revenue and stability in the rest of the business office.

Our long-term Target for the company is organic growth of 10% which will be accelerated additionally by m&a.

In 2020 our Midtown Grove Target is 16%

We expect organic growth to be around 10% And in addition, we'll a positive impact of the last week was stationed in Spain with a full year impact and Georgia starting February 2020.

we

Expected investment in these two territories to provide Revenue growth in 2021.

Operating margin Improvement is anticipated to come from continuous Improvement in South Plains activities. And we expect separate Standalone margin to pass 17% off movement will be offset by the low profitability of the acquired companies, which we expect to improve mainly in the second half of the Year this year. We trade off an improvement in operating margin for the benefit of higher Revenue growth. We anticipate that our annual tax rate will be similar to last mm.

In addition we anticipated the number of diluted shares will go by about three hundred thousand every quarter as we continue to recruit talented people and I am showing the shares issuance on behalf of some Kumho acquisition.

on them

We started 2020 with the announcement of the acquisition of the german-based ensure tech company some Kumho and we are continuing to look for opportunities across and all of America with small to mid-sized companies.

You know goes 2018 the company announced its dividend policy that states that the company will pay out up to 40% of our annual non-gaap net profit off. We will announce our dividend amount after publishing the annual audited financial report on form 20th, which is expected towards the end of March.

Many of you may question on the potential impact of sapiens Business from The coronavirus at this time. We see minimal impact on our business from the coronavirus. Guns. There's no tears Revenue in China and overall has limited exposure to the Apec region are Revenue in Singapore Thailand Hong Kong and Japan represent about 3% of our total revenue. We continue to monitor the situation and update the market as needed to summarize 2018 was the year of a strong growth for sapiens as we exited the year with double-digit growth and operating margin above 16% as we entered a 2020 we expect to accelerate our goal Freight while continuing our progress of margin expansion.

we'd like

No to turn the call back to Orlando for closing comments only thank you, honey. We have off to a strong start in 220 with new European Inquisition. Am I mean to continue investing to fill the goals are Global sales team is focused on executing so sales priority of lending new customer cost setting to existing one the customer sixteen provide critical support of our customers globally the leadership remained focused on delivering goals and margin expansion as wage execute against our long-term objective of improving shareholder value would like now to close our prepared remarks and open call for questions operator.

Thank you. Ladies and gentlemen, at this time. We will begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press * if you're using speak or Club kind of left they had for pressing the numbers. Please ask your question and a loud and clear voice. Your questions will be pulled in the order. They are received. Please stand by while we pull for your questions.

So first question is from Tavi roster of Barclays, please go ahead guys my questions that the results it's just a long-term forecast a little bit, you know you introduce.

camp at 10%.

And that's on the percent of the midpoint including for the multiple acquisition. So I guess she can you run through the different moving parts. I mean you you you discuss a little bit about the different segments. I mean, can you give some granularity of what's going on across the segment off by geography and if you can talk about an organic basis, that would be helpful.

I thought maybe see the only g at the starting point of your remarks. We was very hard to hear you. I will try to answer and please let me know if I answer the call of your question. So we mentioned that our organic growth going forward will be around 10% And this will be accelerated by additional m&a of course. What we did in what is the will be on the forward this year 2020. We are presenting about 16.7% of Total golf combined from and we mentioned that our organic growth excluding some Kumho or calculus is 10% the rest off anything about 24 million dollar will come from this to acquisition during this year. We expect the defaults from this to acquisition will come in to mm. Yep.

I'm so afraid the business nature. We see significant growth in the state in all of America coming from our P&C mainly from our P&C and good pipeline there. I would say five digit the highest in the company today in terms of Europe. We see golf in pin see double-digit in life moving from stability to be in the mid small organic growth on the life, which is a change compared to last year and stability in the other business meaning technology and decision. I mean to focus Area North America and Europe anything that would like to ask on top of this.

Thank you. That's very helpful. This is Chris have you got disconnected? So I was just following up on his question. That's that's very helpful. Thank God no further questions.

The next question is from my youngest Anthem. Neither my company, please go ahead thank you congrats on a strong finish 2019 maybe 4,000 Ronald or first Ronnie. What is the pipeline look like this year versus a 12 months ago. And are you seeing increase adoption of cloud-based modern systems within the insurance client base versus 12 months ago, or is it pretty much data school with what you've been seeing the last six to twelve months.

Yeah, hi. This is olny L door in terms of the pipeline. The pipeline is definitely stronger than previous year and it's also based on our investment in the sales and marketing and also in the customer success and the company Revenue grow, you know the goal in numbers. We need more pipeline in terms of to achieve the the double-digit goes as we are looking for. So that's about the pipeline is only mentioned is coming from email South Africa Asia and the US and the whole dimension name is strongest in PNC. But we also see more opportunity on the life in terms of a cloud. There is more open for the cloud option down. So we built our many services. So it's also give us some advantage in the market right now. So they're our system that we are supporting not just clouds we have giving all the application supported.

on the based on the menu service capability

Great, and then as a follow-up, I just was curious. If you're seeing some of your tier three or two or five clients, maybe push more towards a subscription type model. Is that something that's of interest to the clients or is that not something you anticipate in the near to medium-term? You still expect to be primarily focused on term license sales. It just curious in the context of some of your computers have been talking more about subscription type deals, especially within that tier. Three t r v client base. This is the only G. We do not see any material requesting a customer to move to subscription and we are continuing with them license both in Europe and in the state and on top of this provided the the minute services that only mentioned, we are looking into this but we will do this move into subscription-based. But if we'll do this will do this very gradually only for the new business at the beginning and special are dead.

So if we move to subscription again gradually over time not in a a not in a rush as they impact on the financial results.

Great and then one final question in terms of competition again, just looking at guide wire and some of the other larger players in the market. Are you seeing them become more active in that sweet spot for you when it comes to the competitive landscape or the still pretty much uh, you know, in terms of the competition still being confined to some of the smaller players when you're going head-to-head against them and these type of deals.

We continue to see guide was everywhere. But we are also in those area we have in most of the case. Definitely New Hope We are in the final most of the time together with Geico in the state you as you know, there is few other players like Ingenuity majesco and others so we are competing with them, but we are in think we are in good shape song today.

Excellent, so no change. No great. Great job guys. Thanks so much. Thank you very much.

The next question is from Brian Bergen of Catlin, please go ahead.

Hi, thank you wanted to start on margin. So just as far as the guidance goes curious how you expect to open the year just get you know, understanding that some come out comes in at a lower level. It'll take you some time to to work that up. So help us understand how how the Cadence of margin will flow through 2020 and then in heard your comment on 17% or so. Martin what what are the levers you still have in in your base there to continue to help on margin?

I Brian this is only G I will start with the Q4. We announced operating margin with the 16.5% operating margin. If we look out the entire year the Improvement in operating margin came almost only from the gross margin Improvement in a position of calculo is another territory new orbit would lie to have a present for future growth. But the operation today is breaking even and they'll fall shifted the operating margin of the company to fold down words without calculus or operating margin was 17% If we look further how we can improve today. We have like 41% of a team of Shoreway capabilities. We still can have a to 3% going forward in the next midterm.

in order to improve

Operating margin in terms of 2020 on top of calculus. Some Kumho is the same concept with like presence in the region, which we do not have today, you know to accelerate and go away when you in the future the operation today is below 5% of operation in the both feet and also have it on our imagine they'll for what we see is small Improvement towards the year from 16% on the full year off the guidance between 16 to 16.5 obviously management. Target is to which the higher level of this may summarize this by fifty basis points above what we have in life than in Sixteen in nineteen.

Okay. Thank you that was helpful. And then with with some of these larger wins material and wins Tier 1 and 2 carriers, can you talk about just how the the nature of those engagements may be different than your traditional base and that you're three through five. I'm thinking, you know on in terms of the team you require to service those the potential profitability over the longer-term. If you can give us a sense of color around that, thank you.

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The theater one customer that they will signing also having managed services on top of system implementation. Obviously this require further investment in the beginning, but after going live the minute services in post-production support is supposed to increase Revenue over all the deal size is I would say close to twenty million dollars in can even to 2213 can go up to five years.

Thank you.

The next question is on the Bond Street William Blair, please go ahead.

Hey guys. Thanks to my questions and a nice job there. I just want to follow up a little bit starting off on gross margin so easy. This will be for you. But but you've talked about sort of services model how you talk about Cloud a little bit talk about subscription and term licenses as you think about gross. Margin you mentioned offshore, but does the license part of services part and the cloud part provide better gross margin than the Professional Services as part of the business. And so does that provide a lever? So some color just around how those gross margins for those businesses are off and how is they grow? Will that be a lever for gross margin expansion?

I believe on the managed services will provide less.

Lizard in the ghost mode in perspective, but it will come mainly after going live not in the first day one or two years. So potentially near number three. We supposed to have higher gross margin in terms of our profitability in terms of subscription. We did not start a delicious. This is have negative impact on financial if we start we do this very moderately and which check one location then move to another and only on the new business not on the all the existing one month still potentially. The manager is says we have leverage and your number three a subscription will do this in a way that will not impact financial and on top of that will be the offshore operation that we should move out and services and profitability.

Got you. Got you. Got you. Okay, and then I want to touch Now sort of fundamentally on the business. If we look at the life of the nobody's business. You have seen some improvement your guidance some growth. I guess, you know what's changed in that business? What? What do you see in the pipeline? Let's change from decision-making from customers to sort of drive that Improvement that we've seen over the last couple of quarters and now you're sort of sucked into twenty-twenty.

type of an

The issue is not the market is small in sapience. We two years ago with the side to put to stabilize the the lifetime pension business long as we have some issues. So we put more effort on the other end D and make sure that customer satisfied. We are stabilized the system in our life. Then we start this on the then we start to go to the market and what we are seeing relatively after two years. We see a lot of interest in the market. We sign a few deals in 2019. We started with a few selected us still not signed. So we that's the positive that we are seeing all what I mention is mainly in Europe South Africa rest of the world, but right now we are starting to put more investment also in us so overall it's not just because the market is because the same

internal

I'm still Fair competition is we don't have here a a guide wire. So we we have a good competitors like all like fast life here. But we in terms of our product we are can be proud of what we offer.

Got it. Got it. Thank you and then touching on for a little bit you touched on guide wires competitor everywhere tier-one all the way down to your 5. Are you seeing Duck Creek as well? Or is that sort of still tied to tier one tier two? Cuz obviously they they do offer sort of a subscription-based model across all. I was wondering if you see them run into them or if that's something you see less off.

In in your faith, we understand the stuff to put investment in a you know, what they call it come back to Europe, but we still don't see them maybe once out of 20 or 30 deals. And in yours. Definitely we are seeing them a lot but in Europe, we don't see but I believe in the long-term. We will start to see them.

Got it. It's very helpful. And then just touching lasyone decision a little bit. You know, it's not one you talked about a lot, but obviously the product is very applicable and I think we talked about it last time of that. I'm now seeing interest in the insurance based just on update on how decisions doing and sort of the Cross sell into the insurance base for that product.

A decision we are doing okay. We are not as dry as we wants to but again the people it's the people that start to use it really love it. But I'm still we see challenges to enter to a new client. But when the client start to see it, we can see more and more and more way client. So so what we are doing right now, we are putting sapiens sales force and not just decisions Central to help to bring a decision to the insurance market and we as you age now, we have some big win in the very large clients that compete reference and we can go to other clients as well.

Got it.

Thank you to my questions guys. Nice job, and thank you, bye-bye.

If there any additional questions, please press star one. If you wish to cancel your request, please press start to please stand by while we pull some more questions.

There are no further questions at this time before I asked mister outdoor to go ahead with his closing statement. I would like to my participants that are replay of this call is scheduled to begin in two hours in the US. Please call one 880-295-2634 in Israel. Please call 039-255-9001 and internationally, please call +97-238-925-5901, Mr. Hold or would you like to make your concluding statement? Thank you operator and thank you to all the participants for joining us on the call today. Have a good day.

Thank you. This concludes the CPU international corporation fourth-quarter and full-year 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.