Q4 2022 Sapiens International Corporation NV Earnings Call
Speaker 2: Thank you for standing by. Welcome to the Sabians International Corporations 2022, 4th quarter and full year financial results conference call. Sabians issued a press release before the market opened this morning.
Speaker 2: and has been posted on the company's website at www.sabians.com. All participants are presently in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session.
Speaker 2: I would now like to hand the call to Ms. Yapha Cohen, Sapien's Chief Marketing Officer, and head of Investor Relations. Yapha, would you like to begin?
Speaker 3: Thank you, operator. I would like to welcome all of you to Sapiens Conference Call to review our fourth quarter and full year results for 2022. With me on the call today are Mr. Ronny Aldor, President and CEO , Mr. Ronny Gilady, CFO , and Mr. Alex Zuckerman, Chief Strategy Officer.
Speaker 3: Following the summary of the results, we will be available to answer any questions.
Speaker 3: Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements.
Speaker 3: The safe-harbo provision in the press release issued today also applied to the content of the call. Second, expressly discleans any obligation to update or revise any of these forward-looking statements whether because of future events, new information,
Speaker 3: a change in its views or expectations or otherwise. On today's call, we will refer to the non-GAAP financial measures. A reconciliation of GAAP to 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...
Speaker 4: call today. It is my pleasure to welcome you all to Q4 and annual investor conference call. In today's call, we will discuss safe and squarely and annual results and provide insight into our future plans.
Speaker 4: We appreciate your continuous support and looking forward to sharing our progress with you.
Speaker 4: In 2022, we made significant achievements in our business, including the successful delivery of 90% of our new deals through the cloud and remarkable increase in the number of multi-product deals for our acceptance platform leading to larger bill size.
Speaker 4: After several years of dedicated investment and efforts, we successfully resumed growth in North America, a key market for us. Our hard work is paying off with new work deals across the life, P&C, working compensation and reinsurance sectors.
Speaker 4: Together, with notable growth in our pipeline across those sectors, we expect a positive impact on our future success and growth in the region.
Speaker 4: Our growth in North America, particularly in the fourth quarter where we saw growth in life and PNC deals was another contributor to our success this year.
Speaker 4: In Europe , we have taken significant steps to enhance our near-shore integration capabilities in our key regions, which has helped to reinforce our strong presence in this market.
Speaker 4: Our efforts in Europe resulted in continued growth and have been recognized by industry analysts who named Saipense as the leading provider across both life and pension and poverty and casualty.
Speaker 4: Last week, Sapiens PNC Solutions won an excellent award in the Celent EMEA Policy Administration Report. This week's
Speaker 4: This recognition reinforces our industry leadership and increases our brand awareness in the insurance markets.
Speaker 4: Overall, during 2022, we signed 18 new logos across all of our products and territories.
Speaker 4: In 2022, we met our revenue and operating margin guidance. This achievement is especially remarkable given the challenging business environment in 2022. In particular, the results reflect consistent progress in EMEA and APAC, which played major role in achieving this success.
Speaker 4: In addition, our cloud insurance platform offerings allow us to focus on closing deals that include co-products plus one or more additional applications.
Speaker 4: such as digital, data and cloud, resulting in the majority of contracts for multiple products and an increase in the average deal size.
Speaker 4: Throughout 2022, we focus on maintaining operating profit and positive cash flow.
Speaker 4: We sustain a gross margin of 45% and expand our offshore team to lower operating costs, which enable us to maintain an operating margin of 70.6%, even in the face of inflation.
Speaker 4: The insurance industry is undergoing a major transformation and one of the most significant trends in the market is the movement of core system to cloud. Cloud is becoming the de facto choice of most carriers when replacing legacy solutions or implementing new capabilities.
Speaker 4: In the long run, as we continue to move our customers onto the cloud platform, we can manage numerous customers on the same resource and improve the efficiency of our operation.
Speaker 4: The insurance industry is adapting the growing trend of the increasing importance of data. Tepid provides comprehensive data capabilities as part of its platform, providing several layers of data solutions to carriers, from operational reporting and managing dashboard data.
Speaker 4: through advanced analytics to ML and AI use cases.
Speaker 4: Digital engagement and customer experience remain at the forefront of priorities for carriers, both for direct to consumer and direct to businesses.
Speaker 4: as well as digitally transforming the way they work with agents and brokers and other distribution channels.
Speaker 4: This trend is driving the increased adoption of the Sépiens Insurance Platform, which offers core solutions along with additional offerings in digital data and cloud.
Speaker 4: The integration of data digital with our decision solution creates a smart platform layer that automates processes, promotes data-driven decision-making, and provides insightful, intelligent decision-making capabilities while delivering significant benefits to our business with a larger deal size.
Speaker 4: The ecosystem marketplace further enends these capabilities. We are leveraging our extensive ecosystem to provide customized and highly relevant solution to meet the unique needs of our customer.
Speaker 4: Sepins partners with over 60 insurance technology providers to offer custom solutions for clients.
Speaker 4: Let's shift to focus on regional performance starting with North America.
Speaker 4: Tepin's made strategic advancement in our North America business during 2022.
Speaker 4: With successful close, life deal in the third quarter. A major financial services entity selects safe and co-sweet along with our digital Swiss Salsa solution. This combined solution provides them with next generation customer sales and service experience.
Speaker 4: SAP NSCORE administration solution and pre-integrated digital enablement platform will enable them to offer cloud native solutions, life insurance services that are customer-centered and innovative.
Speaker 4: In 2022, Sapient saw growth in our North America core life and business application businesses, acquiring new logo and advancing other deals.
Speaker 4: With a strong life pipeline, our outlook for 2023 is highly promising.
Speaker 4: In addition to the strong performance in life, Cepinci is also experiencing growth in North America P&C businesses.
Speaker 4: We anticipate several new deals closing in 2023 and have seen a solid re-establishment of our position in workers' compensation markets, including expansion into Canada.
Speaker 4: The reinsurance segments continue to be strong with new logos acquiring in 2022 and a solid pipeline for 2023.
Speaker 4: The North America pipeline is showing stronger emphasis on migration to the cloud for 2023 and beyond.
Speaker 4: Seppiants effort and investment in product improvement have been recognized by the land.
Speaker 4: In North America, PNC and workers column segment.
Speaker 4: We received recognition for P&C claims pro functionality and added analytical and digital offering and claim solution for workers' compensation.
Speaker 4: These acknowledgements demonstrate Sepin's commitment to delivering innovative and effective solutions to our customers.
Speaker 4: In 2022, Serpents made major progress with our email and APAC businesses lending new logos in the region.
Speaker 4: Many of these deals include multiple solutions from SAPANCE, including core platforms for P&C, L&P, Reinsurance, Digital Data and Analytics Solutions, and Cloud Services.
Speaker 4: We are currently in the preferred bidder stage with small logos demonstrating our strong position in the market.
Speaker 4: To support our continuous goals, we have a dedicated team to focus on new logo acquisition and account management in email and APARC regions.
Speaker 4: This team will further improve our presence in the region. We have made remarkable progress with our P&C and Life Pension business in the UK and Ireland, successfully securing new logos and advancing more to the final stage.
Speaker 4: This marks a promising start for the pipeline heading in 2023.
Speaker 4: A big focus for SAPNs is driving more growth in an up-to-the-business. With our extensive portfolio insurance clients, especially with digital data analytics and tradition to SAPNs cloud services.
Speaker 4: We have successfully integrated the new acquisition of Tia, Sumcomo and Calcolo with three branding and implementing strategic account management.
Speaker 4: This has resulted in successful growth through growth and upselling to these clients, providing them with increased business value and savings.
Speaker 4: We are investing in pre-integrating SAPIN digital data and cloud platform to our tier and some common products. And this enables us to enhance our proposition to the existing customer base and resulted in several such customers adopting the innovation solution from SAPIN.
Speaker 4: In 2022, OMI in South Africa, a tier customer chose sapiens data and range ones platform. In addition, another tier customer in Denmark is moving to a full cloud services model.
Speaker 4: To support our business growth, Sépens is increasing our near-shore capabilities in Europe , supporting our growth in Nordic, Dar, Sabzara, UK and Iberia. We are investing more in our solution platform to support the new business we have already secured and to improve our value proposition.
Speaker 4: Looking ahead to 2023, we have several key goals.
Speaker 4: A top priority is deepening relationships with our existing customers and expanding in every territory we operate, including newly penetrated markets such as Darh and Iberia.
Speaker 4: Another top priority is to sustain and growth our presence in North America markets.
Speaker 4: We are committed to capitalizing on diverse opportunities in North America market by executing with precision and determinations.
Speaker 4: Our goal is ambitions to close new deals in life and PNC while establishing a solving foundation for future growth with our robust pipeline.
Speaker 4: On the product front, an additional priority is ongoing expansion beyond our core offering into digital data and analytics. This will allow us to provide our customers with even more comprehensive and innovative solutions and allow us to continue successfully close larger deals.
Speaker 4: Lastly, we want to focus and continue with transition to the cloud.
Speaker 4: Now I would like to turn the call to Ronny Gilady, our CFO . Ronny.
Speaker 5: Thank you, Oni.
Speaker 5: I will begin my commentary with a review of 4-quarter and full year 2022 non-GAAP results.
Speaker 5: followed by comments on the balance sheet and cash flow. I will wrap up with our guidance for 2023.
Speaker 5: Even in the fourth quarter of 2022 was $119.5 million.
Speaker 5: a modest decline compared to $119.9 million in the fourth quarter of 2021, and slightly higher than the previous quarter.
Speaker 5: Revenue in North America was 50.8 million compared to 48.9 million in Q4 of last year.
Speaker 5: and in case of 3.9% and 1.9 million dollars.
Speaker 5: Revenue in Q4 increased by $1.3 million or 2.5% compared to Q3 of 2022.
Speaker 5: The increasing revenue is a result of new deals signed in Q4.
Speaker 5: Revenue in Europe was 56.9 million, a year-over-year decline from 62.4 million.
Speaker 5: On a constant KNC basis, revenue in Europe grew by 3%.
Speaker 5: Revenue in rest of world, which includes South Africa and APAC, increased 37.4% compared to prior year quarter reaching 11.8 million.
Speaker 5: mainly due to the fact of growth in South Africa.
Speaker 5: Operating profit and margin in the fourth quarter of 2022 was 21.1 million and 17.6 percent.
Speaker 5: slightly lower than Q4 of 2021 and at the same level of Q3 of 2022.
Speaker 5: The year-over-year decrease in operating profit and margin was primarily due to the impact of the European currency versus the USA dollar.
Speaker 5: During the quarter, we had a net financial income of $1.1 million.
Speaker 5: mainly due to a one-time debt waiver of approximately 1.5 million from one of our acquisitions.
Speaker 5: offset by the interest expenses on that adventure.
Speaker 5: Net income attributed to sap and shareholders for the fourth quarter of 2022 was $18 million up 1.9% from 17.7 million in Q4 of 2021.
Speaker 5: EPS was 32 cents per diluted share for the fourth quarter of 2022 and at the same level of 2021.
Speaker 5: Turning now to the full year result for the 12 months ended December 31, 2022.
Speaker 5: 2022 revenue increased to $474.8 million, up 2.4% compared with $463.6 million in 2021 in line with our guidance.
Speaker 5: North America revenue represents 41.6% of total revenue and our European revenue represents at 49.1% of total revenue.
Speaker 5: On a constant currency basis, revenue increased by 7.8% in 2022.
Speaker 5: Roof in 2022 was derived mainly from growth of 4.3% in North America.
Speaker 5: growth of 7.4% in Europe and our rest of world geographies that grew 28.9%.
Speaker 5: The growth in Europe was reached despite the delay in signing new deals due to macroeconomic factors.
Speaker 5: In 2022, our PNC represented 68% of our businesses and Life and Inuit represented 25% of our businesses.
Speaker 5: The rest of our revenue are coming from technology and decision.
Speaker 5: We currently sell more than 600 customers globally, including some of the world's largest global insurance carriers and financial institutions.
Speaker 5: With a broad product portfolio, our customer base is the Versify the cross insurance providers of all type and size.
Speaker 5: Our top 10 customers represented 24.2% of revenue in 2022.
Speaker 5: With no customer representing more than 5% of our revenue.
Speaker 5: Gross profit increased in 2022 by $5.2 million, while gross margin remained at the same level of 45%, despite a currency headwind.
Speaker 5: Similarly, our operating expenses increase 2.4% year-over-year to $130 million.
Speaker 5: who remain committed to investing in research and development.
Speaker 5: R&D spending reached by $2.8 million. As a result, our R&D investment represents 13.6% of our revenue.
Speaker 5: This year we have focused our R&D effort on cloud and digital technology.
Speaker 5: and we are pleased to see that these investments are generating returns for the company.
Speaker 5: SG&A expenses represented 13.7% of total revenue, which resulted in stable operating margin of 17.6% in both 2022 and 2021 in line with our guidance.
Speaker 5: Earning per diluted share were $1.21 up 2.5% from $1.18 per diluted share in 2021. EBITDA increased by 1.1% to $87.7 million in 2022.
Speaker 5: Our EBITDA margin for 2022 was 18.5%.
Speaker 5: Turning to our balance sheet.
Speaker 5: As of December 31, 2022, we had cash-in-cash equivalents and short-term deposits totaling $180 million and debt of $79 million.
Speaker 5: which is scheduled to be paid in four equal annual payments. On January 1, 2023, we have made $19.8 million debt payments.
Speaker 5: Turning to adjusted free cash flow, during 2022 we generated adjusted free cash flow of $36.1 million, which represents 53.7% of our non-GAAP net income.
Speaker 5: The law-adjusted free cash law was a result of the delay in signing new deals because of the macroeconomic environment which is inflated to reduce up-front payment from new customers.
Speaker 5: In addition, a contribution factor was a slowdown in collection in impacting our diesel that increased from 57 days to 66.7 days in 2022.
Speaker 5: During the year, we paid cash dividends in a total amount of $38.6 million and changed our dividend policy to distribute dividends on a semi-annual basis to reflect our confidence.
Speaker 5: in the business positive cash flow generation.
Speaker 5: We plan on announcing our H2 dividend when we publish our 20th at the end of March.
Speaker 5: Today, we are introducing the following guidance for 2023.
Speaker 5: Revenue.
Speaker 5: non-GAAP revenue in a range of $502 to $507 million represents midpoint growth of 6.3%.
Speaker 5: The growth takes into account anticipated organic growth, the macroeconomic backdrop, and the extended contract cycle we are experiencing.
Speaker 5: perfect
Speaker 5: Non-GAP operating margin from 17.6 to 18%, representing a midpoint improvement of 20 basis points and operating profit growth of 7.6%.
Speaker 5: This improvement in operating margin is despite expected increase in labour costs due to inflation pressure.
Speaker 5: We expect our annual effective tax rate to be in the range of 18 to 19%.
Speaker 5: Starting in 2023, to help our investors better understand the visibility and predictability of Stappen's revenues, we will provide an additional view of our revenue and gross margin.
Speaker 5: We'll split our revenue into two groups and we'll provide period-over-period comparisons as each new period is reported.
Speaker 5: The two groups are
Speaker 5: Software product in reoccurring post-production services and 2. Pre-production implementation services
Speaker 5: Software product and RealCare and post-production services include mainly term license, maintenance, cloud solutions, subscription, and post-production services. The revenue stream is a mix of recurring and reoccurring in nature.
Speaker 5: Pre-production implementation services include mainly implementation services before go live.
Speaker 5: and which are one time in nature.
Speaker 5: In 2022, revenues from Recaring Software Products and Reoccurring Post-production Services were in the range of 60 to 65% of total revenue.
Speaker 5: and in any given quarter with a gross margin ranging from 51 to 55 percent in any given quarter.
Speaker 5: While revenues from pre-production implementation services were in the range of 35 to 40% of total revenue, with a gross margin ranging from 28 to 32%.
Speaker 5: As you can see, a large majority of our revenue are recurring and reoccurring with a typical commitment of 2 to 5 years.
Speaker 5: providing us tremendous visibility and predictability to our revenues.
Speaker 5: This recurring and recurring revenue have a higher gross margin than our blended reported margin.
Speaker 5: SAnyway, I'm
Speaker 5: In 2023, we expect to exceed the 0.5 billion mark in revenues, with a strong operating profit above $90 million. Our Karen and Rio Karen revenue is expected to be about 60 of our total revenue with a higher growth margin.
Speaker 5: Our position in Europe is strong and we are working to improve our position in North America and serve both the PNC and life in the newities market.
Speaker 5: We remain committed to growing our company while also providing dividends to our shareholders.
Speaker 5: As we move forward, our company is dedicated to creating sustainable long-term value for our shareholders, customers, and other stakeholders.
Speaker 5: With the opportunities that lie ahead of us, we are confident about the future and excited to capitalize on them in the years to come.
Speaker 5: I will now turn the call back to Ronil Doh. Roni?
Speaker 4: Thank you, Roni. To summarize our 2023 priorities, our deepening relationship with our existing customer and expanding in every territory where we operate.
Speaker 4: Sustaining growth our presence in North America market while continue our growth in EMEA.
Speaker 4: ongoing expansion beyond our core offering into digital data and analytics, and lastly, focus on continuing the transition to the cloud.
Speaker 4: We are executing our strategy to drive sustainable, long-term growth, increase profitability, and improve shareholder and customer value.
Speaker 4: I would like now to close our preparing mass and open the call for questions.
Speaker 1: Thank you. MM
Speaker 2: Thank you. Ladies and gentlemen, at this time we will begin the question and answer session.
Speaker 2: If you have a question, please press star 1. If you wish to cancel your request, please press star 2.
Speaker 2: If you are using speaker equipment kindly lift the handset before pressing the numbers.
Speaker 2: Please ask your question in a loud and clear voice.
Speaker 2: Your questions will be pulled in the order they are received.
Speaker 2: Please stand by while we poll for your questions.
Speaker 6: Thank it, goodbyeyou' looking together.
Speaker 2: The first question is from...
Speaker 2: Dylan Becker of William Blair. Please go ahead.
Speaker 7: Hey gentlemen, appreciate you guys taking the question and nice job. Appreciate all the incremental disclosure around the revenue mix as well. Given that one hand to shake model as 40% of those kind of pre-production services you talked about.
Speaker 7: How do you think about the momentum you're seeing on that side of the business flowing through to the 90% cloud activity that you're seeing on a new project implementations? But that services component, serving as a leading indicator for more of that recurring software component in the business down the road.
Speaker 5: Hi, Dylan. This is Roni. We provided this overview to create more visibility and predictability to the investor to show these two revenue streams that we have in the company and the differentiation in the gross margin, obviously. The one-time revenue, which is the implement revenue.
Speaker 5: because the first one will fill the other one
Speaker 5: We in the group of the real AmriCaren businesses, as Ronnie mentioned, we are shifting more and more customers to the cloud and expecting over time to improve also the margin.
Speaker 7: John , that's super helpful. I guess maybe too, as we think about those kind of cloud implementations and we talked about some of the success you're seeing in North America. It sounds like life's doing well, but you did call out strength in areas like workers in the re-insurance.
Speaker 7: So, wondering maybe what are some of the nuances in those segments of the Marquez Orkis Cop Reinsurance that are allowing you to get that initial put in the door with that customer base and then how do you think about that as well as serving as a potential wedge to sell more of that product to those customers on the PNC side in North America. Thanks.
Speaker 4: Hey Dylan, this is Alex speaking. So we definitely see the need in the market if we talk about the US market for Rooker's Comm solutions. What we've seen is quite period over COVID and now this segment of the market is reviving and start to be much more active.
Speaker 4: life insurance. So we have on our business applications the illustration and the underwriting we have very very strong pipeline. This is continuation of last year and this year we have a very strong start, very good prospectus in terms of the pipeline of the components.
Speaker 4: with the course suite on the life, which is we brought back to the US market last year. We also expect to close between one or two days in the first half of this year for sure one in this quarter. And also on the PNC side.
Speaker 4: We are seeing the need of the market after our investment in the product in the last 12 to 15 months. We see not only strong pipeline but also very strong progress of this pipeline that we expect to sign the deals in the first quarter of this year.
Speaker 4: So definitely what we see here is that our effort in the North America market, the investment in the product, in the strategy and in bringing the right management team on board is giving very strong fruits.
Speaker 7: Super helpful. Great to hear and appreciate all the incremental color guys.
Speaker 2: The next question is from Mayank Tandon of Needham & Company. Please go ahead.
Speaker 8: I appreciate you guys taking the questions. Just wanted to dive a little more into the macro. Are you guys seeing just extended fail cycles and things being a little slower?
Speaker 8: across the board or are there any kind of notable geographies, you know, they're holding up maybe better or not as well, you know, that we should be mindful of.
Speaker 8: notable geographies, they're holding up maybe better or not as well, that we should be mindful of.
Speaker 4: Hi, this is Rony Aldor. According to your question, there is a If you are taking the two main area that we are playing in US and Europe
Speaker 4: I think we need the American is a little bit much faster in terms of decision-making. In Europe it takes more time and also because most of our core systems that we are selling in Europe at this moment it's coming with all the additional digital data and the cloud.
Speaker 4: This is not the case all the time in US because in US sometimes people are choosing more core and the others are going from others, so that takes more time. So more or less a little bit much faster in US versus Europe .
Speaker 8: Okay, that's helpful. I guess just kind of a housekeeping question for the quarter and the outlook. I know you guys kind of called out that 3% FX neutral growth.
Speaker 8: in Europe for the fourth quarter, but I was wondering if you could give us what the overall FX neutral growth rate was in the fourth quarter and what the assumption for 23 is for a lower proportioned range.
Speaker 5: This is Ronny. Regarding your question about Q4, constant currency, the company grew about 6% organically, quarter over quarter, coming from the state, Europe and rest of all, of course.
Speaker 5: And regarding the benchmark with the guidance, we took the currency of average of last week. We are growing at the rate, a constant currency base of about 6.6%.
Speaker 8: All right, that's helpful. Thanks guys.
Speaker 8: All right, that's helpful. Thanks, guys. Thanks.
Speaker 9: Thank you. Welcome.
Speaker 2: The next question is from...
Speaker 2: Kevin Kumar of Goldman Sachs. Please go ahead.
Speaker 2: Please go ahead.
Speaker 8: Thanks for taking my question. Ronny, can you talk a bit about the progress thus far with North American P&C? How is the go-to-market activities progressing, pipeline, and how are you thinking about the level of investment in that segment in 2023?
Speaker 4: Hi, as Alex mentioned, I can add a little bit. We have in the PNC we have three types of solutions. We have the core system generic. We have the PNC for workers com and we have the reinsurance part.
Speaker 4: All the three of them we are seeing grow. Let's start with the PNC workers come. Again, just to repeat, during the COVID it was really slow down. Cepin says a very good solution for this segment, very unique.
Speaker 4: relatively large type of deals. Right now we are there is four deals on the table. We are waiting, a few of them already selected us. We are some kind of blueprint phase and contract negotiation and as we believe we can hopefully we can sign at least
Speaker 4: One deal first half of the year, maybe another another deal and hopefully more that's about the workers come on the PNC part as again, just to remind quickly we in the last few years we a combined the policy administration system with from the three acquired from a down
Speaker 4: quarters that we decide to more put investment on the existing customer before we are going back to the market right now we start the year with at least one we already signed we are waiting in the next we hope in this quarter to sign another deal
Speaker 4: and we have a good pipeline. So that's another positive thing. Reinsurance is something that we are a market leader in this area, competing with Efisod that just recently Ducklink acquired an SAP, but we have a very strong product. We are the largest in the industry, so we continue to sign deals in this area as well.
Speaker 4: So overall a positive positive right now.
Speaker 8: That's helpful. Thank you. And then I had a question, I guess on cloud progress. It looks like kind of steady progress. A lot of the new deals are cloud. You're continuing to see cloud migration activity. I'm curious how that impacts kind of the software gross margin over the medium term, just given that the...
Speaker 5: this creates some headwind in terms of the gross margin, but as we continue to year number three and many years to come, this will improve the gross margin that we took. So if we raise the range of 51 to 55, the gross margin of the cloud will improve our gross margin meet them going forward.
Speaker 10: Thank you.
Speaker 2: The next question is from Surrender Thind of Jefferies. Please go ahead. Yes.
Speaker 11: Thank you.
Speaker 11: The first question I'd like to ask is a continuation of kind of the discussion from last quarter where
Speaker 11: I'd like to ask is a continuation of kind of the discussion from last quarter where when we were talking about the...
Speaker 11: pipeline of the opportunities. It was generally described as being fairly robust, which is kind of how you describe the pipeline currently. But there was also some concern that maybe the front end of the pipeline, the number of discussions that you were having wasn't quite there. The lines were perhaps holding off.
Speaker 11: and wanted to kind of wait and see what 2023 might look like. Can you talk about what the front end of the pipeline looks like at this point and if there's been any improvement there? Obviously that impacts the longer term numbers.
Speaker 11: and wanted to kind of wait and see what 2023 might look like. Can you talk about what the front end of the pipeline looks like at this point and if there's been any improvement there? Obviously, that impacts the longer-term numbers given the longer sales cycle.
Speaker 4: Yes, this is Rony Aldor.
Speaker 4: In order to build our pipeline, we did some improvement, one in the existing client that we have. Sapiens has more than 600 customers, and we put much more investment on the account manager or customer success environment together with sales.
Speaker 4: So we are coming with a lot of programs and ideas what we can do more on the existing customer and also on the North America market we increase the sales organization including business development and sales.
Speaker 4: And together with all of this and West Nantes, we are also Improving and put more effort on the marketing front. We also did the very successful client conference recently with our client in US
Speaker 4: Right now in May we plan to do a big event in Barcelona and later on in North America. So overall we have invested for 2024. So that's the general answer.
Speaker 4: We still see building the pipeline, but it takes time. So that's the overall my answer.
Speaker 5: Just to add a comment to this, Oni mentioned increasing the customer success team, doing more cross-sailing and up-sailing opportunity from the existing. So we have the business application, all the small components that we are selling, illustration, underwriting, reinsurance. And on top of that, right now we are also successful with data in digital.
Speaker 5: as additional incremental revenue for existing customers. So this is another layer of improvement.
Speaker 11: Thank you. And then in terms of some of the color around the additional disclosures that you provided, a question about the pre-production revenues here. Can you maybe talk about the average duration of that?
Speaker 11: you know, segmentation? Is that roughly, you know, six months, a year's worth of work? How should we think about the average duration?
Speaker 11: and how distributed the client projects are over the course of that segment.
Speaker 12: a
Speaker 5: We need to differentiate between two groups. The core system solution that the average implementation can run between 18 months to up to three years and the business application solution that are much smaller in size and implementation can run from six months to maximum 18 months.
Speaker 11: But at this point in time, what percentage of your revenues are already associated with projects that are currently underway that either fall into the first bucket plus the pre-production? It sounds like the vast majority of revenues should be there already for what you're guiding. Is that the right way to think about it or any quantitative aspects?
Speaker 5: and the recurrent piece which is the recurrent and reoccurrent will continue going forward and over time will increase as they have another layer from the implementation work.
Speaker 11: So, I apologize, just a point of clarification here. So is it like 5% of your projects still need to start? How should we think about that revenue?
Speaker 11: That's to get your guide.
Speaker 5: No, we are signing between 20 to 30 new logos every year, coming from CoreSystem to new logo. The initial revenue that are coming from the new logo are mainly in the bucket, which is the implementation piece.
Speaker 5: Only after the implementation pieces ended, they moved to the post-production, recurring and railcannon revenue.
Speaker 10: Thank you.
Speaker 2: The next question is from Chris Reimer of Barclays. Please go ahead.
Speaker 13: Hi, thank you for taking my questions. I wanted to touch on the operating margin a little bit. If you could give some color around the moving parts there, what's contributing to the stability and even expansion, especially given your ongoing investment in R&D and your marketing teams.
Speaker 5: Hi, this is Ronnie. I think the major factor in our operating margin is coming from our offshore activity. This is the assets that we have in the company today that basically help us deliver in R&D across all products and geographies.
Speaker 5: This contributes every additional 5% in offshore operation, creates additional impact of up to 1% on operating margins. So we continue growing the offshore operation. This is critical vehicle to sapience and for our customers.
Speaker 5: During 2023, the macroeconomic environment created a lot of uncertainty, like inflation, currency, exchange rate, and also employment market. We decided to be cautious on there. Therefore, we increased the margin in a moderate way and we continue to monitor this.
closely as we are going forward.
Great, thanks. Thanks for the color. And just lastly, how are you looking at M&A?
Do you feel that you're well positioned after the recent investments in Europe or...
Could you perhaps be still looking for other opportunities for growth?
We are actively looking for M&A. We have a dedicated team that looks after. We see more and more opportunity. Still the main challenge is the evaluation. This is what is still stopping us to do deals.
But based on the market we believe that also the private company can start to understand that they need to drop the valuation and then we can try to do more deals.
If I need just one more color, I think from a balance sheet position, we are very healthy with a very strong cash position and we are generating cash all the time. So this will support us when we move forward to doing M&A. We'd like to go back to the history when we completed the M&A in every year.
Again, as I mentioned, evaluation was the issue and right now it's just coming to a reasonable price currently.
As I mentioned, evaluation was the issue and right now it's just coming to a reasonable price currently. Excellent, excellent. Thanks for that. That's it for me.
Thank you. The next question is from Alexei Gogolev of Chase Morgan. Go ahead.
Hello, this is Alexei from JP Morgan. Thank you for allowing me to ask a question. I was wondering if you could provide a bit more color on the 2023 constant currency revenue growth and margin guidance. Just following up on what some of my colleagues have already asked. Could you explain or maybe give some trajectory by region?
whether you think North America would be able to grow faster than Europe in 2023 or vice versa. And I think in the past you've also given some assumption in terms of what you think in terms of revenue could not materialize in a given year. Could you maybe give some indication what you expect in terms of...
application solution that we have.
We will see right now that North America has the potential to grow faster than 2022 that we have. While European territory will continue to grow, first of all, potentially at a lower pace because of the slowdown.
We are right now in macroeconomic environments, so we are very cautious also with the revenue and profitability level.
So this is regarding the growth rate. In terms of profitability, as I mentioned, we have a vehicle of offshore operation and also economy of scale. We will be able to improve our margin. We put a cautious environment because of the inflation, currency that we cannot control.
and therefore we increase little bit our operating margin to 17.6 to 18%. Okay, thank you, Roniz. Just to confirm, do you think that North America will grow faster than Europe and the overall constant currency growth for the year is?
between 6 and 7 percent. I think you guys said 6.6 percent. Just to be correct, the organic growth for 2023 is expected to be in constant cancer base 6.6 percent.
I just want to be accurate. I would say that North America can go faster than what it grew in 2022, while Europe will continue to grow, potentially with the slowdown slightly slower than 2022. Both of them are going to go.
Great, thank you.
Great, thank you.
If there are any additional questions...
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There are no further questions at this time. Before I ask Ms. Yafa Cohen-Ifrah to go ahead with her 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.
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Ms. Yapakonifra, would you like to begin to make your closing statement?
Thank you. Thank you for joining the call today. Please know that Sapiens will participate in the William Blair Tech Innovator Conference on March 14. We look forward to speaking with you soon and are always happy to answer any follow-up calls. Thank you very much for joining the call.
Thank you. This concludes the SABIANS International Corporation 4th Quarter 2022 Results Conference call. Thank you for your participation. You may go ahead and disconnect.