Q2 2020 Sapiens International Corporation NV Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to Sapiens International Corporation second quarter Twentytwenty results Conference call. At this time, all participants are not listen only mode. A brief question and answer session will follow.
The formal presentation for operator assistance during the conference.
Press Star Zero as a reminder, this conference is being recorded August 4th Twentytwenty.
With us on the line are Mr., Roni Al Dor, President and CEO and Mr. Roni Giladi CFO.
Before I turn the call over to Mr. Roni Al Dor, I would like to remind participants that this conference call may contain projections or other forward looking statements and the safe Harbor provisions in the press release issued today also applied to the content of the call.
Hey, peons expressly disclaims any obligation to update or revise any of these forward looking statements, whether because of future events no information a change in its views or expectations or otherwise during the course of the call today, we will refer to non-GAAP financial measures are weaker.
So we Asian schedule, showing GAAP versus non-GAAP results has been provided in our press release issued before the market opened this morning.
Replay of this call will be available after the call on our Investor Relations section of the company's website or via the web site link which is available in the earning release that we published today.
As a reminder, the quarterly earnings release was issued before the market opened this morning.
It has been posted on the company's website at Www Dot sapiens Dotcom I will turn the call over to Roni Al Dor, President and CEO sapiens Roni.
Thank you all per they still and thanks to everyone. Joining me today to review our second quarter financial results.
Oh, we stopped and although guilty quartile followed by an update on our businesses.
Only getting a d., we follow we submitted that Youre the second quartile financial results.
Scott updated guidance full deal.
Our second quarter results showcased our ability to delever, our solutions to our existing customer and on bold you'll be disease.
By the continuing box Colby the sleeps you globally.
Revenue goal by 70% to $93 million.
Again by goal in North America and email.
Last week, we announced that we shouldn't have been placed technology and leading CNC solution Bendel focus on NPL did my because my brought these markets in North America.
[laughter] between support densely customer and product.
For additional products and services to build costs mill 11, I didn't know how to and then so PNC coal speed to provide holistic wont see lunch solution for the end market.
We paid 19.5 million gallons sold they try you would fix didn't maybe on in revenue in 2019, we shouldn't operational loss.
Like you sell a private acquisition, we plan to integrate didn't play operation we sell on PC based acquisition to be accretive in 2021.
The second quarter was productive thanks to the global sick and feed they pulled the leisure you'll win go lives.
And the upside in the quarter.
It should be licenses insurance, if somebody will insurance protection provider selected sapiens or scope BMC platform and advancing the D.C. silk sell it at goals and meet demands for peak lunch no insurance for those.
Great Big insurance, and you'll just see base homeowners insurance, let's say, it's been so cloud based sums formation full insurance and financial management.
She had been solution will allow great bay to better manage that accounting.
And on somebody told you see some implementation of solution is already underway.
Since the beginning of Twentytwenty, we experience a going destruction, we sold decision plus all the children's pockets.
Following the broking places like old we still one banks now we sit going into lives for sure using DCE platform for most people use cases.
So for all new customers public you show the adoption of second <unk> platform.
American sampling sure.
We'll utilize that will decision platform gross vars relation companies to create the operational efficiency and improving operations.
Oh Boy I'm sure, we'll be using decision to leverage existing technology, we saw a common language between business and domain.
Did you know the why because you mentioned a park.
The momentum in the country operated EMA, such as UK, No Big Southeast Asia, and South Africa.
In addition, we sell to expand the footprint, indicating a bit allegion following some coupon calculate acquisitions.
We've continued to integrate these entities it once it begins and I've seen some improvement in devil position of performance.
Both some coal mining cocoa law of well establish their local market.
Investing in going to send can lucky in these two regions.
The market these positive accepting sitcoms global presence and comprehensive product offering that is now set bolted by local professional team.
In North America, <unk>, you're going to go a moccasin wallet share and it didn't think it wellness fall since you offering as well as getting traction we sell the election and you'll see product.
Its policy role for B and C. The goal components. So it's all coal suite. So PNC North America was recognized by selected as one of the Topsides Ben bills in the U.S. markets.
They still do they just functionality and advance technology.
Oh, you always team is doing great job blending and extending go businesses and moving up market.
Oh investment in R&D helped us maintain the leadership position overall for the portfolio.
The second quarter, we made upgrades to a key components you know wonderful for you.
For example.
I would like coal sweet you'll leave using cloud they people see picture. It includes like configure products and processes, that's accelerated no insurance product launches.
We lunch and you'll version of <unk> cloud based digital suites for both been see in life and annuity and we have lives in your version of our cloud based insurance underwriting solution, we said you'll insurance interface.
Okay. So obviously small theirs, we see an increased demand for managed services. It was also well the convergence.
I will then it services offerings, but also the amendments value to our customer you will be joining the call we'd lighting.
This platform allows get is to focus on the businesses, but we take care of that Axalta geopolitical info.
We continue to expand our partner ecosystem to support our cups allows.
The late 15 shore thick and digital innovation.
In early July we announced a spouse and she was quite young people to help old customer drive efficiency by quickly designing a multi funding managing the liquidity documents.
And then other examples of sick himself with cloud analytics to provide is it fuels eight or dougs.
Well I'll walk us compensation customers.
Because he sees disruption related to open that make it is a defensive fabs unsealed insurance companies to me great their legacy platform and he had competitive advantage by offering Multistem solution.
While improving the operational efficiency, we see an industry wide trends in which probably 90 does accelerate the shifts to begin to plus all the cost efficiency improving customer experience being.
These bait sale driving future opportunity for safety and did you sell is a key and everything that could response to the market dynamics cost efficiency and regulatory change and our digital offering enables customers to manage called business function policy administration claims and.
Feeling principled they'll digital transformation.
In short kit that slope for you'll did you some structural they should the value of sapiens is a strategic partner for their businesses.
We believe the most carriers that started looking forward, you'll see them, we continue as planned and selective bendel to launch the opens formation.
Oh, please stop with limited little please phases.
Yes, some four sets of taking longer to close the transformation project.
Well do they may levels, Twentytwenty I'm pleased to say that didnt, even a boost to our existing customers. The ban on track with some minimal impact on our revenue stream.
Do you need to see Goldstein sales, so recent customer, which for the viability of phone calls and shuffle subsets business or the.
The customer success team is dedicated to extend the gold relations with existing clients and he is doing an outstanding job almost in gold and hence you tell offering to increase our wallet share.
We continue to invest in both salespeople and marketing these skills to support these growing revenue stream.
In parallel we expect to continue insight you know project, we said you'll custom though the to their lives. They did become so inflammation is the key to build businesses.
The Colombian involvement and changing how we don't business development and marketing.
Oh seems to have more focus on developing remotes glycosylation and digital marketing tools to address the sleek the travel and the lack of face to face event.
This effect the short term benefits flowing cost related to troponin marketing, we have accelerated their online engagement model and will conduct our first mutual climb cultural into the fold.
We have also been very active.
SWEPI mouse and but he must use of books, we placed face to face session.
Thanks to the emanate from second to demonstrated its experience in this space, which is affects once acquisition, we have done to date.
Over the past decade, you have completed Multan doesn't strategic acquisition to expand our platform a bid season and geographic presence.
The acquisitions, we made in the past few years in North America and now more recent team you'll provide this platform so all future organic growth.
We have proven exactech gold to seamlessly integrated acquired companies into once they've been.
Spending our customer base and product portfolio, while managing into one efficient operation that organization.
He says that allow us to goals our value proposition extend our operating margin I mean hopeful.
The top 10 years.
We will continue to procure additional M&A opportunities.
I would like to use diesel pull Julie P to show with fuel that fit camps was recently added to the V.
Thanks.
The index collects the price will still be size companies, which high Mark CAD Tel Aviv exchange.
In closing I would like to say that say since global team remains focused on the exact you'll see go was thought to GE since we expect you'll customer would it be slow to close.
Booked more focus to level the advantage of our large global client base and eight solution portfolios.
We're continuing to invest in our call and digital offerings.
And devote resource to product development to maintain our leadership position in deposits.
We will continue to develop abilities to meet the growing demand for cloud and managed services offerings.
Yeah, well position to continue girls in the longer on.
I would now like set them to call over to our C. For what do you get a b to provide mold details on our financial results. Please go ahead draw on the.
Thank you only.
I will review the second quarter non-GAAP results, followed by comments on the balance sheets and cash flow.
And and we don't guidance for the remainder of 2020.
This quarter was the first full quarter impacted.
By the Colby 19 bundling.
Why do we met our revenue guidance, we exceeded our profitability due to measure we took to reduce spending in reaction to the uncertainty.
Condemning.
With regards to all walk forward.
Well the loose a walk we couldn't drugstores and shifted to more you know.
We ask our worldwide employees, mainly on the corporate side to use accrued vacation days.
Industry marketing events in conferences, we'll consider and as a result associated marketing expenses whether views.
Typically as a global company our teams are required to Glover extensively.
This quarter due to Oklahoma restriction and in many cases going dean requirements for doors, we incurred low talk at a compensation expenses efficiency measure that we took a gross oil yoga free division and departments.
In the second quarter, we froze recruiting.
We remain at the same level of employees as at the end of Q1 of 2020.
While shifting employees to growth area.
Well the about factors reduced cost and improved our margin into second quarter.
I will provide further detail in my guidance comments concerning the impact on the rest of the year.
Revenue.
Revenue in the second quarter of 2020 increased 17% to 93.1 million dollar.
Form $79.5 million in the second quartile of 2019.
The organic revenue growth was 10%.
In addition, the M&A contribution of our cultural and some Qumu acquisition was 8%.
And was offset by 1% due to currency impact.
Our revenue in North America totaled 46.6 million dollar an increase of 19% compared to last year.
Mainly due to strong growing BMC.
Europe revenue totaled 41 million dollar, 21% increase compared to last.
Mainly due to acquisition in the region.
Revenue for low familiar Guy Newell combined.
Rented 94% or far business.
Gross profit.
Gross profit this quarter totaled $41.9 million compared to $34.8 million in the second quartile of last year.
And in jeans, though 20%.
Our gross margin this quarter increased 120 basis points to 45% for 43.8% in the second quartile flux deal.
In addition, gross margin increased by 100 basis points from Q1 of 2020.
Operational expenses R&D in ESG me, including distribution of Gokul Incent, Google increased from 22.2 million dollar to 25.1 million dollar and remain the same level of Q1 of 2020.
Our SDMA cost grew mainly due to an increase of provision for doubtful account.
Due to the uncertainty in the market.
Moving to operational profit.
Operating profit totaled $16.8 million this quarter compared to $12.6 million in Q2 of 2000 and deep.
And 14.6 million dollar in the prior quarter.
Operating margin increased in the second quarter 218 person.
220 basis points improvement from Q2 of 2019, and 190 basis points from Q1 2020.
If we analyze our improvement from the prior quarter, we see that while we were able to grow revenue by 2.8% in this quarter.
Of course base only grew by a person.
Interest expenses in Q2 were $63000.
This quarter, we had zero point $8 million interest expenses related to our debt.
While we have zero point $8 million income related to edging transactions.
We expect to have a quarterly cost of approximately $1.2 million related to be venture in Q3, and Q full of 2020.
Net income attributable to stuck out to shareholders for the quarter was 15.3 million dollar compared to $9.5 million in the second quarter plus deals.
Lectin, 40% growth.
Diluted EPS increased to 26 cents from 19 cents of last deal.
Turning to our balance sheet as.
As of June Thirtyth, we had cash and cash equivalents of $128 million and total debt of $120 million spread over the mix 5.5 years.
To strengthen our balance sheet in early June we completed the public offering of $16 million Nonconvertible series B debenture listed in Bolivia stock exchange.
These days either the same them over the debenture, we raised in September 2017, and together represent the total debt we have of 1000 $20 million.
We completed this raises to strengthen our balance sheet and to provide capitala for future M&A.
During July Milo.
Part of standard <unk> Poor's group reaffirmed the company Israel, eight plus stabile rating.
In the second quarter, we achieve $14.7 million in free cash flow. We continue to have high conversion from net profit to free cash flow.
In closing I, we'd like to turn into our guidance for 2020.
Our business model has shown is strength in Q2 during the first full quarter impacted by covert 19 bundling.
And as shown our resilience in this challenging environments.
We are benefiting from higher repeatable business from existing customers, we hi, stickiness and visibility, which allow us to continue to grow the company.
Routing for using our revenue and profitability guidance.
On the revenue side, we raised the bottom range by 8 million dollar and the top range by 4 million dollar.
Primarily due to a recent they'll see acquisition.
These bring our revenue guidance to a new range of 376 to 381 million dollar.
Reflecting an increase of the midpoint by 16.2% yield video.
Both of which 8% is attributable to organic growth.
You too operating margin jump to 18%.
However, some of the measures taken in Q2 will not continue in the second half of the year.
Such as the use of accrued vacation days.
In addition.
We have resumed recruiting employees globally to support our goal.
And our marketing activities.
Also resumed and pivoted to digital strategy.
Based on the above operating margin in the second half of the yield for sapient without Delphi is in the range of 17% to 17.3%.
Delphi, which we just acquired.
We'll be consolidated in our reporting beginning of August 1st.
While still probably will be positive impact on seconds revenue.
These gallantly not profitable on a standalone basis.
Based on the above we are increasing our guidance for the full year consolidated profit to the range of 16.5% to 16.9%.
From the previous guidance of 16% to 16.5%.
With regard to drill fight we are entering a process to turn around its business performance in 2021 to sapient level of profitability.
To summarize we remain confident in our outlook for the remainder of 2020, we the following.
Our ability to achieve revenue growth and expand margin.
Our cash position of 128 million dollar by the end of quarter.
Which will allow us to continue to pursue other Amy based on our strategy.
And our ability to generate free cash flow.
Quarter over quarter.
Our we'd like to know to turn the call back to only a little for closing comments.
Bonnie.
Thank you only.
The customer sets 16 is doing an outstanding job, providing critical support all customers globally.
It seems global sales team continues to focus on signing new businesses in this challenging market conditions.
Our leadership team remains focused on delivering goals and margin expansion as we execute against our long term objective of improving shareholder value.
Shifting to is well positioned for success and growth.
I would like now to close out the 30 miles and open the call for questions operator.
Thank you ladies and gentlemen at this time will begin the question and answer session. If you have a question. Please press star one if you wish to cancel your question. Please press star to if you're using speaker equipment kindly, what's the handset before pressing the numbers. Please ask your question in a loud and.
Clear voice.
Questions will be pulled in the order. They are received please standby while we pull for your questions.
The first question is from buy bonds or sorry from William Blair. Please go ahead.
Morning, guys.
Afternoon, your time, congrats nice job there.
I wanted to touch its first Roni Al Dor review.
You mentioned majority of implementation work has continued through college.
I just want shuffled the moon deal perspective touched a little bit we've had some delays reluctance on what you're seeing the pipeline. How does the pipeline look and are you seeing elongation of sales cycles or there's some deals still happen lumped essentially how new deal and the new logo once again.
Hi, Brian.
Hey, good morning, Folio, intensify and new business, a with several challenges they face challenges is to get delayed.
As you know we have a the way that we are we are getting late season, we see a lot of say marketing events say confidence in the insurance.
On the lease and there any kind of a digital lam events and like now a lot of them out there not working for us. So we'll see to getting elites true it through the anomalies that said most of them a highly respected what we are bringing and format.
Hello, marketing, so that's a well number one the second that challenges.
Is the personal relationship and the confidence to give to those customer.
That's also kind of challenge and they felt one is two and two we closed the deal. So those are the challenges.
Yeah.
What we what we are first of all we are they walk England's on all of those challenges see how we are moving the investment to other type of their marketing events other type of relationship and so on a steel as still challenges, but as we mentioned we continue to closing deals and also beatle.
The pipeline I think the advantage that we have in fuel fall competitors sees the size of sapiens.
That's also in this time and Sean So we felt walking with the Big company like say Penn said, we have a.
Outstanding good reference.
And there we are we know how to walk as remotely so there.
The long gone so full for the question. These as seen challenges, but we are we see some we see progress.
Got it but.
That's helpful. I guess I want to touched a little bits.
On a Delphi and the second just just.
When you look at that in the medical professional liability market, then I'll touch sluggish just to jump.
The market opportunity looks like there due to competitive out there any difference.
It definitely is definitely the market treated in New York full days.
The Delta challenges was that say for many many years and they lead the this business. The main challenges that said they'll probably a them. It very good if they insurance is focusing on med Mal least insurance, it's tough to ask any other line of business, what we call multi line.
There are probably has a lot of challenges and this is a why we start to win deals.
That takes out to a win deals and day one children, we don't really see a lot of guidewire in this area. So those are the main competitors. We also one few deals to deposit.
Right now because we have already have met model.
Customer together with all the knowledge and that know how for Delphi. The combination of phase two of them. We definitely we will continue to lead this market.
We have very close to faulty customer many and a lot of knowledge and for many many years, they're very good track cycled dimensional and was that technology and to support the multi line.
Got it got together and then maybe one last one.
Obviously the.
Rates for the full year.
Less than even half of Delta as revenue and so just help me understand sort of a conservative future building into the core business. The organic part of business sort of how you guys thinking about that growth and sort of.
Uh huh.
Our second some challenges or slowdown business or is it just kind of im just trying to understand what you've built in there for the full year given that the rate will sort of Delphi about Norman.
Hey, I believe on a this is on energy. So if you remember in end of.
Q1 of 2020 will reduce our guidance by 2%.
The acquisition of.
Delphi.
He is a on a fully base is supposed to be about $6 million.
So the increasing the revenue is mainly coming from Delphi, we do not expect like not organically to go sapient stand alone basis. So the incremental is coming only from the filing this living.
Got it if I might squeeze one last one insight.
The upside and gross margin.
What I was just as much as I'm sure I understand what the thank you.
Yes.
All the factors that I mentioned in my prepared remarks, basically infosys operational expenses in gross margin.
For example, a the time off that we ask a employees a to use.
A course, it into our company and to freeze in the recruiting.
This is another facto who over your gross margin up by 1% compared to previous quarter going for filled a further in Q3 in Q4, we do not expect all the things will happen as I mentioned earlier, we are like knowing the recorded mode. We've opened position of almost 200 employees.
To support our golf, we do I'll note implementing any a use of a vacation days. So they gross margin will not be as it in Q2, but we expect that it will be probably in the midrange 45.5, something like that.
Thank you guys appreciated match up.
Thank you.
The next question is from Tabby Rosner of Barclays.
Please go ahead.
Hi, guys. Thanks for taking my question congrats on those from the Gulf.
Just following up on your last comment or on the on organic growth, but you mentioned that you don't expect though.
Pickup in the inorganic growth is your comfort to your previous estimate.
And I guess, just looking at the broader context on of core or now I would have.
On the one then expected more insurance company to kind of turn to you guys you know for digitalization.
I was there and I understand the marketing or challenges given that you cannot attend conferences and everything so would you say booking.
Add to the next.
18 months' that's the pipeline is kind of growing.
Kind of down the road.
It's and it's a challenge is question a in one hand insurance a company really understand the demand Foley digital and this is the major major thing for them in the other and most of them believed that the.
Well since impediment cannot be the same as it was the path.
Data Cmos competition, so the all of them out to understand the demand they are there.
I think he's a everything it R&D in short taking in Opel open enabled for them to open for them. It's also they need to open the technology and the laughing keys expenses.
So I think this is also something that separates really helps to the insurance company to reduce their long term expenses.
But there right now think that said the people all now.
Analyze and nobody really know how long. This 12 it can be so it's at times its people postponed the decision. So it's difficult right now to give estimate for 18 months again. This is this situation that we are seeing right now and this is where.
We are taking conservative approach.
I appreciate the color. Thank you.
Thank you.
The next question is from.
Brian Burgeon of Cowen. Please go ahead.
Hi, guys. Thank you.
Wanted to follow up on deal closure. So it's obviously heard the commentary on slow transformational deal progression, but but I'm curious if you did see any behavior change as to Q progress and then if you've had anything incremental as far as willingness to sign in July it's really anything on the margin at least that you're seeing of potential improvement or is it really just being.
Consistent throughout this period.
Oh, Yeah, I indices, there on energy as already mentioned, a obviously, we see declining pipeline.
Because all of the factors that we mentioned earlier.
That we do not have a opportunity to meet even conference as a market in either the move to dig it out instead of face to face and prepare light now in let's say some uncertainty so putting something in hold all of that.
Basically a reduced the number of new deals that go signing today, but we are still signing new deal we do not see slowdown in July versus a Q2.
Okay.
And then just does on the cost reduction.
What efforts are sustainable versus those variable selling expenses and R&D that may come back and they had the bad debt provision one timer in there really are their operational cost efforts that you've been able to pull forward that you think are lasting.
Yes.
Oh sure area, we can do this.
Jim what we see if we started the year in Q1 of 2000 in the 20 with 16.1. They operational profit we now see a Q3 and Q4 at the level of 17% to 17.3%.
A so full shows some of the efficiency is that we took we can continue a full they make stop of the year end going forward and the this full why well passing the 17% operational mode and so the answer for your question is social yes.
Okay, and the reason I ask how should we be thinking about that longer term margin profiles on the other side of it.
I think only going forwards offense need to continue the 17 plus percent, obviously, sometimes we'll do M&A and we are pursuing M&A. So the question the what will be happening with the acquisition of any company in particular most of the company that we acquired so far have lower gross margin then sapiens.
So initial a few quarters, though basically to conduct a little bit down but over time, and we have a little bit with all the acquisition that we did we ought to be unable to do to encourage them to the level of stock down the same will up and also we did fine.
Okay. Thank you.
The next question is from on Marine valve art.
From legacy value partners. Please go ahead.
Hi.
Yes, so congratulations collaborations for another great quarter with impressive.
I would like to act in January.
Thanks for calling for him.
The Israeli you talked about.
Workers' compensation product and some major tenders.
In the U.S. and I'd like to know what.
Yeah.
What's the current situation there we've quoted and.
They're related.
Aspects, we see and you've talked about as they are really promising area fuel business.
Okay. It.
First of all good that you listen to all the they then so it's meant to fuel the okay and this is a basically this area, it's really affecting the colgate older workers compensation business. So right now based on our information that the government is slowing down and.
All the other speed that's planned to.
Send to company like cost sees a ceiling process.
Every quarter, they are well getting a in the near future who can get data and we'll see the waiting right. Now we don't really believed that we will get saying this quarter.
Hopefully in the next quarter, we will see a few of them, but right now it's not the we are not very optimistic to start to get.
Okay. Thank it back next quarter it was actually pretty good for me at least.
And now the question, please and what to do you see any change in a hiring trends and some.
You know a human capital.
An ability in this the environment Youre. After all you are strong and stable company.
And maybe especially in Israel, but also in other key market procure.
Eastern Europe et cetera.
I can until the first question in terms of hiring game Chloe.
And they said they said.
The better to say pence at this point.
The Pella your NOL look to solve that problem not raising money. So that people are they more open and more interesting to come to sapiens also because we are bringing a lot of innovation to our life product is also has so the overall is positive and also less people are living sapient in there that.
At the past the people are more from one vendor to another so right now it's much more stable and and again, but it still for good people, it's a difficult like care.
But generally it's on the positive side.
In terms of Capitala what is the question only the second one a human capital you know human capital availability, but you are.
Okay.
Just to adjust to conclude on that.
In Q2, we froze all the position that we had and right now we are in the recruiting more and we have right now 200 to open position in the company that were looking to truly quotes and those I mean, they only mention in terms of stem cells hiring right now is mostly a favorable for companies to record in let's say.
Two compared to a few months ago.
Okay. That's great to hear thank you. Thank you guys. Thank you very much.
If there any additional questions. Please press star one if you wish to cancel your request please press star too.
Please standby, while we pull for more questions.
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 18774, 560 009 in Israel. Please call 039 to five five 901 and internationally. Please call nine seven to three nine to five five.
901, Mr. Outdoor would you like to make his concluding statement.
Yes, Thank you all potato and thankful to all the participants for joining us today have a good day.
Thank you.
This concludes the sapiens International Corporation second quarter Twentytwenty results Conference call. Thank you for your participation you May go ahead and disconnect.
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Yes.
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