Q3 2022 Sapiens International Corporation NV Earnings Call
Okay.
Thank you.
You bet.
[music].
Ladies and gentlemen, thank you for standing by welcome to the Sapiens International Corporation's 2022 third quarter financial results Conference call Sapiens third quarter 2022 earnings release was issued before the market opened this morning and it has been.
Posted on the company's website at Www Dot sapiens dotcom all participants are presently in listen only mode. Following management's formal presentation instructions will be given for the question and answer session. I would now like to hand, the call to MS. Deneuve, Inkjet sapiens head of Investor Relations Dino.
Would you like to begin.
Thank you operator, I would like to welcome all of you to second conference call to review, our third quarter F. 'twenty to 'twenty two results.
With me on the call today are Mr. Roni Al Dor, President and CEO , Mr. Ron <unk>, CFO and Mr. Alex two came on as Chief strategy Officer.
Following the summary of the results, we will all be available to answer any questions.
Before we start I would like to remind everyone that this conference call may contain projections or other forward looking statements.
The safe Harbor provisions in the press release issued today also apply to the content on the call.
Sapiens expressly disclaims any obligation to update or revise any of this forward looking statements, whether because of future events, new information a change in its views or expectations or otherwise.
On today's call, we'll 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 website or via the website link which is available in the earnings release with published today.
I will turn the call over to Ronny outdoor president and CEO of SAP Hana Ronnie.
That should be enough I want to welcome everyone to our call today.
This quarter, we believe that so long as a result, despite the currency headwinds.
Revenue reached $119 million.
It's on a constant currency basis, we go to the center.
Passing poultry this quarter.
$21 million.
Presenting an operating margin of 17.6%.
On a constant currency basis, our operating profit margin was 18.9% showing continuous improvement quarter over quarter for the past deal.
The DNA of safety and causes for glass, we spoke with stability given the scope of our business global footprint.
Oh, the fulfilling large existing customer base, we have many levers we can push to drive our business and challenging time, including managing profitability.
So in Gulf States long ago, we can use competitive advantage to expand our business pipeline up into our existing client base close deals and take the necessary measures to improve profitability.
Despite the effects of currency headwinds.
This quarter, we have several examples of how we are doing it successfully.
During the quarter, we successfully expanded our customer base globally.
Now more than ever we are engaging with Scott for Mt operates in multi countries and we can also then why is there a range of products and services.
But does your investment we made in addition, yes.
Thus in the Nordics region.
Some are highly productive.
In North America, we are making significant all the ways, we sell street called solution.
P&C life and annuity and work has gone as well as why we sell a business application solution like insurance and life component.
We continue all our go to market platform offerings with a focus on cloud native deployment, which is all before and they set up or more than 90% of all new logging we all in the cloud.
We also see a trend of our existing customer.
Transitioning from language solution that we saw it go two hour call them cloud solutions.
The global insurance self says what does he call these highly attractive to us.
Still in the early days of incredible industry transformation and the insurance carrier continues to advance.
All the causes them to remain relevant and competitive and compliance.
As a global player.
Most people product lines and cloud capabilities, they fancy position in a sweet spot for weight gain of decent volatility.
Our cloud contracts are usually multiyear long term contract as well as embedded additional cloud solution and therefore, there's a revenue estimate for the long term.
Looking at our regional performance.
In Europe , we are proud of our best in class product in P&C and life and now considerable geographic footprint.
And games with multinational highest city carriers and kidney largest deals that include more products and services.
And did that page and we expand our presence within the acquisition in 2020.
Becoming a market player as we win new logos and Germany, while building a solid pipeline for the future.
The age of German living provider of insurance, so that you've got your industry recently signed we safeguards to replace these countries than cell module and complete call system on the cloud to enable continual end to end processing.
In addition, another allowed German player is in the final stage of contrasting with shaping.
In the North America market, our investment of course, our threet full solution angle.
All life and annuities product line, we recently signed a new contract with a major financial services entity. That's a next take them to the retail it's like an insurance services in the Americas.
This award winning core suite for life, and annuity and digital suite South solution will provide the next generation customer obsessed and service experience.
Another postbank is currently in the final stage of contracting.
In the workers' compensation space.
Both have heavily during the pandemic, we've seen four events in the pipeline.
As well at the same stage that you are involving.
The P&C line of business is gaining momentum with growing pipeline and advancing in the same stage.
Our business application solution that chain, Sean said life component of continue growing.
For example agents, leaving mutual insurance company signed for six Inferential, Paul Tornante deal customers internal control process automated calculation and reporting.
For insurance for replace aged Collins application.
As part of our continuous enhancement of North America Operation, We will come back Gary shown with me joining sapiens is the EVP and Chief revenue Officer.
We're all getting he will oversee all of sapiens North America go to market excuse me six and we'd be leaving the change of accelerated growth by winning new logos and expanding business with existing customers.
Next week November seven two benign.
We are hosting our customer summits for North America in Washington D. C. This event, we will make face to face with many customers for the first time in the two years.
Well, the fall harvest and 50 gig and clothing customer Newport, They ensure picks toughness and don't see other lease and thought leader with Pos.
Please see page 16.
16 breakout session.
All of these three base.
Thank you as always a great opportunity to enhance our relationships and showcase our product and solution.
That's just the world, which include South Africa, and APAC, how they emerge.
The market for sapiens <unk>.
We are seeing a growing demand for sapiens for both P&C and life and annuity.
Or which product portfolio allows us to expand and deepen relationships with our customer and grow our wallet share.
This is a cloud native insurance platform provides comprehensive and holistic solution combining coal data analytics and did you can extend all deploying the cloud.
Accordingly, most of our meal cost solution deals include the additional stake in small games, such as second intelligent KOL data and analytics and digital suite.
Sweet sitcoms cloud services and our visits application or digital also continues to progress and gaining traction both in the U S.
T mobile on top of our call solution and as a standalone composition deploy although non stayed consistent.
Another example is our latest win in North America I.
I mentioned earlier with our digital capabilities.
Physical salto and the transformation project.
On the M&A towards for the last two years, we have been active but decided not to proceed with several opportunities.
Two high valuations.
These days, we are evaluating several opportunities for acquisition, but we remain committed to all of a cultural thing there's been a valuation that benefits our shareholders.
We have dedicated a team walking on the M&A for them.
To summarize our business is strong growing 8% organically on a constant currency basis, while improving quality and gradually shifting to the cloud.
Have a nice confidence about our long term outlook dull business.
There are many aspects of the business model that says to us.
From our competitors.
A large percentage of our revenue comes from existing customers and we continue to see new car.
Customers.
Second we have a diverse competitive product offering.
Thus, we are a global scale and cost efficient operating model, which combined offshore and onshore so allow us to remain efficient while growing.
Well, we continue to lead the market both in P&C and life in all countries, where we operate.
I am positive about the progress with our North American pipeline and the number of hospitals that they cause.
<unk> us as the preferred vendor and enter the blueprint forces.
I would like to turn the call to one hour.
Our CFO Bonnie.
Thank you Ronnie.
I will begin with a review of the third quarter of 2022 and non-GAAP results.
Comparison.
We'll go to you versus Q3 2021, unless otherwise stated.
I will follow with comments on the balance sheet and cash flow and wrap up with our guidance for 2022.
All at all this quarter and the remaining part of 2022, we have decided to add additional disclosure to explain the tremendous impact of the currency headwind on our revenue versus the comparable period.
Revenue in the third quarter of 2022 increased to $119 million up 0.5% from the third quarter of 2021.
On a constant currency basis, our organic growth rate compared to Q3 of 2021 was 8%.
Revenue would have been $8 9 million higher than Q3 of 2022.
Even when compared to Q2 of 2022, when a constant currency basis revenue would have been $3 $1 million higher than reported.
Our revenue in North America amounted to $49 $6 million slightly.
Slightly higher compared to Q3 of 2020, what we.
We see first signs nor familiar go will go beyond 2023.
Our European revenue amounted to $56 9 million.
Compared to $59 7 million in Q3 of 2021.
The impact of weaknesses in European currency versus the USA dollar was.
It wasn't material to our revenue from the European region.
On a constant currency basis, our revenue in Q3 of 2022 ammo to $65 $7 million, reflecting organic growth of 10%.
This demonstrates our strong performance and leading position in the Europe region.
Revenue from the rest of the fraud, which include South Africa, and APAC grew 28, 6% to $12 6 million in Q3 of 2022 compared to the same quarter of last year.
All of these coming mainly from the P&C.
The fluctuation in this region was immaterial.
Gross profit in Q3 of 2020 to $53 5 million at a similar level as in Q3 of last year.
Our gross margin this quarter was 45% 10 basis points lower compared to Q3 of 2021.
Despite the currency headwinds and increased labor cost, we have maintained our gross margin percentage.
On a constant currency basis, our gross margin was 110 basis points higher reaching 46, 1%.
Operating profit this quarter reached $29 million slightly lower compared to Q3 of 2021.
Operating margin amounted to 17, 6% this quarter on a constant currency basis, our operating profit margin amounted to 18, 9% shown continuous and steady improvement during the past years.
This quarter, we celebrated growth milestone with over 5000 employees and contractors.
And we continue to grow.
Offshore ratio this quarter past, the first time, 50% benchmark.
This is a significant milestone and a key part of it due to our continuous improving operating margin.
Interest income in Q3 of 2022 amounted to $82000 during the quarter, we had debenture interest expenses of $6 $80000 offset by income of 600000 bottles for mainly interest investment and hedging transaction.
Net income is due to something to shareholders for the quarter amounted to $16 9 million compared to 17 million in Q3 of 2021.
EPS for the quarter amounted to 30 basis points better diluted share compared to 31 basis point better diluted share in the third quarter of last year.
Turning to our balance sheet.
As of September 32022, we had cash and cash equivalents and short term deposits totaling 166 9 million.
And total debt of $80 million.
Which is scheduled to mature in full equal annual trenches until January 2026.
During the third quarter of 2022, we generated adjusted free cash flow of $1 9 million due at all.
The lower adjusted free cash flow was the result of the delay in signing new deals because of the macroeconomic environment.
Which translated to reduced upfront payment from new customer as well as the reduction in deferred revenue.
In addition, a contributing factor was the slowdown in collection impact in our DSO did increase from 50.
50, 947 days in Q3 of 2021 to 69, one days this quarter.
During the third quarter, we paid a dividend of 23 cents per share, reflecting total dividend of $12 $7 million for the first six months of 2022.
It's below dividend policy, we will announce the second half of 2020 to be within when we publish our Q4 results.
We'd like to say or no dog that is for 2022.
In the previous quarter, we have provided guidance that still included $10 million at least due to the macroeconomic environment, which could cause a delay in signing new deals.
We now can say that $4 million out of this $10 million at risk materialize.
In addition.
<unk> D will bring currency continued to weaken versus the USA dollar.
Since our last guidance.
So 2022.
The impact of the currency headwind from our previous guidance amounted to additional $3 5 million.
Therefore, we are revising our guidance to a new range of 472 to 478 million.
From 482 485 million.
At this stage, we are confident in the business. However, we are continuing to be exposed to the FX impact.
Our new revenue guidance reflects a growth of two 5%.
If we measure organic growth.
On a constant currency basis versus last year.
It would have amounted to 8.4%.
As we all know they can't impact the global companies such as ours that have allows operation in Europe and that would be both in the USA dollar is tremendous this year.
Just to provide a better understanding USA toetoe and rest of world, where they're not impacted by the currency headwind.
But though you were being digitally lost in a constant currency basis around $27 million in revenue.
Moving to operational margin guidance.
Despite the continued weakening of FX from last year and the previous quarter. We are reaffirming our profit margin guidance range of $17 five to 17, 7%.
Our profitability 11 is affected mainly by our revenue as we do not have a proportional correlation between revenue and expenses in the local currency.
Due to our offshore business model.
Our profit is significantly impacted negatively in territories like U K, Denmark, Switzerland, Sweden, and he is being offset in countries, where we have more cost than revenue such as India, Israel in Poland.
To summarize.
The operating margin remain at the same level as of last deal at 17, 6%.
On a constant currency basis, we are improving our operating margins to mid range of 18, 9% in 2022.
An improvement of 130 basis points.
It's the best business model is solid and strong and prove itself even in uncertain times.
Full financial perspective.
We continue to grow within our growth range of 8% to 11% organically.
We continue to improve our profitability.
And we are paying dividend on a semiannual basis.
From a business perspective.
Well diversified in many aspects.
Such as having several go system and business application solution, covering both P&C and life and annuity.
We are a global company operating in more than 30 countries.
We are providing both licenses and implementation and postproduction services to our customers.
And having more than 600 customers.
With no customer will generate revenue higher than 5% of our business.
Our top 10 customers represent only 26% of our business.
All of that provides business flexibility and risk mitigation to our shareholders.
With that I'm, turning it to Roni al Dor.
Good morning.
Thank you all of the overall level. This is small then is dear to.
While we navigate the changing global economic environment.
We are dedicated to driving shareholder value as evidenced by our commitment to grow and improve margins.
And with that operator, we are now ready to open the call for Q&A.
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 star two if you are you.
Using speaker equipment currently with the handset before pressing the numbers.
Please ask your question in a loud and clear voice.
<unk> will be polled in the order they are a seat please standby while we poll for your questions.
The first question is from Dylan Becker of William Blair. Please go ahead.
Hey, guys.
I wonder if you're kind of touching on the delayed kind of contract that you're talking about I guess, maybe how have the customer conversations continued to see trends over the last kind of several months here how is the emphasis on digitization versus them maintaining kind of that status quo.
Shifting at all what's enabled them to delay here and has that strategic prioritization on core modernization and really shifted at all.
Hi, This is roni al Dor.
And to answer your question there was several topics and they mainly delay it's on the it's on the construct and the final decision I think we are continuing to see demand from the market and the sales cycle in our business.
As long.
At this time everything get on the contract and the commercial side in their negotiation in this area are taking longer and longer we incipient also to protect ourself. You also are giving.
Somehow uptime to our customers because we are entering two what we called blueprint stage.
Two to make sure that we have and the customer understand the size of the deals.
And this is the majority of the of the delay to closing the deal. So we are still a C demands in terms of the competitor situation. We're in a good shape.
We are very very good the win rate, but its still delay because the old processing in the Intel's process, you'll have a we call it tier three phases.
You have to bring the opportunity then to sell it to convince the customer that we are the right one and then to close at the close of part taking longer and longer.
The latter we'd like also to add you asked about so it's about digital in this.
And they'll say, we can say that the majority of our deals that we are starting today will include cloud services and digital solution, we are happy with it and regarding the delay in the decision.
He sees a we can say in very late stage of the process with the customer and we also had additional solution like mobilization that the customer pays upfront payment for additional work until the legal team are finalizing some so we are not seeing them cancel all in pushing to the right.
Got it okay. So yes still very late stage more a matter of timing than anything okay that makes sense.
I guess to you you noted on the call are you just noted earlier in your commentary.
Emphasis on on migrating those existing customers that have made decisions in the past George you're kind of modernize cloud solution here can you walk us through maybe what the economics look like relative to that that migration opportunity with those customers, maybe compared to a net new deal and how are you thinking about it.
In devising maybe there's more captive audience as you think about capitalizing on again be the existing customer base, which should be a lower touch kind of nature.
So first of all we'd like to split. These two two is the new deals that we see more than 90% of all the new logos that we signed a taking of course these them on the cloud.
And we have additional digital services. So this is a factor number one regarding the existing customers that we have more than 500 customer that still are not on the cloud.
This is in North America over that we can push the M. D. C. 's time that will eventually will evolve this is a long process.
Existing customer that we'd like to go to the cloud it probably we pay additional one or $2 million.
On a yearly even year regarding dosing services peer one well the agnostic to AWS and Microsoft Azure They I T.
Services and the minutes services, so potentially $1 million to $2 million, but again. This is very long process that will happen in the next few years.
We are just starting this process. We can see for example that we already have succeeded but it's only the first step into Germany.
Got it okay that makes sense, maybe its maybe one last one if I could squeeze it in here to.
Around kind of like the cloud capabilities in Europe , as well you've been acquiring in.
Tore.
Its domain expertise here, maybe to what extent do you guys start to see that benefit of that local expertise in regions given the complex regulatory framework and maybe somebody international data initiatives proposed in these regions. It seems like that would be a competitive advantage for you guys. The wonder if youre seeing that play out in your customer conversations.
And this is a this is Alex speaking so spot on I think this is a this is a tremendous a differentiate though and then added value for us in our European operation. The fact that we can bring on one hand, our global view of the industry and a global R&D efforts together with a very strong loan.
<unk> presence that resonates very very well with the local customer base. So the German teams in our Spanish teams and Danish and Norwegian teams, they are making a huge impact and the difference in our ability both to sell into the liver, we see the customer appreciation for that and then definitely.
Italy is a.
It provides us valuing in a really good understanding of the local capabilities local regulation to local needs and being able to sell them into our plans on a global scale. So we find this combination that works very very well and very well accepted by the market.
Got it thank you guys.
Yeah.
The next question is from Chris Reimer of Barclays. Please go ahead.
Hi, Thank you for taking my questions I wanted to ask.
Gross margins.
And considering the amount.
You mentioned, 90% already a few quarters.
Pretty high.
Cloud new deals.
When do you think we might be seeing an uptick in gross margins as a result of.
The mix in <unk>.
Linux.
So we see a uptick currently already in Q3 and the result, we see the can the reported one is 45%, but we if we look at the constant currency basis. We are elevated at 46, 1% more than 100 basis points when compared to our previous U.
This is coming from mainly from the offshore operation over the last year, we increased the offshore ratio by 5%, we busted offshore ratio by from 45 to almost slightly above 50%. So this is one factor.
The optics and moving to the cloud will not happen in the first the first or second years, probably will be in the field in the going forward. Because initially initial step all of the additional investment that we need to provide with the customer so probably from the Seattle deal going onwards from new logos moving to the cloud we will see optical zone.
Uh-huh. Thank you that's helpful.
In terms of the delays in closings.
You have mentioned it before and I missed it but is that something you're seeing in a particular region or is that something you're seeing across geographies.
We see this sits in the global a global view in North America, Europe , and APAC and South Africa.
Globally.
Great. Okay got it. Thank you that's it for me.
If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two please standby, while we poll 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 18882690005 in Israel Please call.
039 to 55938 and internationally. Please call 970 239 to 55938.
Mr. Al Dor would you like to make your concluding statement.
Yes. Thank you for joining the call today, we look forward to speaking with you soon and we are always happy to answer any follow on questions. Thank you.
Okay.
Thank you. This concludes the sapiens International Corporation third quarter 2022 results Conference call. Thank you for your participation you May go ahead and disconnect.
[music].