Sapiens International Corporation N.V. (SPNS) Earnings Call Transcript & Summary

Welcome to Sapiens International Corporation's 2025 First Quarter Financial Results Call. [Operator Instructions] It is now my pleasure to introduce your host, Yaffa Cohen-Ifrah, Chief Marketing Officer and Head of Investor Relations. Thank you. Yaffa, you may now begin.

Thank you, operator. I want to welcome you to the Sapiens conference call to review our first quarter of 2025 results. With me on the call today are Mr. Roni Al-Dor, President and CEO; Mr. Roni Giladi, CFO; and Mr. Alex Zukerman, 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 provision in the press release issued today also apply to the content of the call. Sapiens expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its view or expectations or otherwise. On today's call, we will refer to the non-GAAP financial measures. The reconciliation of GAAP to non-GAAP results has been provided in our press release, which was 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 we published today. I will now turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?

Good morning, everyone, and thank you for joining us today for Sapiens' First Quarter 2025 Earnings Call. This quarter showcased solid operational execution across our key regions, led by continued momentum in our Life business with notable strength in North America. Demand is building for our solution, and we believe we are well positioned with robust portfolio to meet the evolving needs of our clients and capture new opportunity in the market. I would like to begin by discussing 2 exciting strategic M&A transaction that Sapiens recently announced. Sapiens has implemented a growth strategy that includes several levers to accelerate our businesses, an important one of which is acquisitions. Our approach is to explore strategic M&A opportunity and target that would assist Sapiens to reach its strategic objectives, typically around the following areas: adding complementary solution to our portfolio that strengthen our value proposition and adding new capabilities to our platform offering. Accelerate customer acquisition, attract top insurance talent and drive scalable geographic expansion. On April 22, we announced the acquisition of Candela, a leading intelligent automation company serving blue-chip life insurance client in APAC market. This acquisition enhances the capabilities of our life platform and expands our footprint in APAC. Candela offers an end-to-end smart insurance automation platform along with digital services and solutions. The company brings 23 customers to Sapiens, primarily in the rapidly growing markets of Singapore, Malaysia, Thailand and Hong Kong and South Africa. With an expanded physical presence in the region, we are better positioned to accelerate penetration gains in the APAC market. With nearly 30 years of deep industry expertise and teams of over 100 employees, Candela's strong track record will serve as an important catalyst to support Sapiens strategy in APAC, while providing innovating new capabilities to Sapiens' global customer base. Candela solution are complementary to Sapiens Life Insurance platform which we intend to leverage to enhance our life offering globally. In addition to Candela, on April 28, we announced the acquisition of AdvantageGo, a leading commercial insurance software provider, specializing in underwriting workbench solutions for both London market and broader global specialty and commercial markets. This strategic acquisition significantly enhanced Sapiens global P&C proposition, adding cutting-edge underwriting workbench capabilities that address one of the most critical challenges in the P&C industry today, managing, assessing and writing risk more effectively. Our analysis shows that this market segment is rapidly growing across both North America and EMEA in correlation with insurers need to improve their risk management. With AdvantageGo, Sapiens will expand across the London specialty market and other specialty hubs such as Bermuda and Singapore and in the specialty and commercial market across EMEA, APAC and North America. Our vision is to integrate AdvantageGo solution into Sapiens insurance platform for P&C while also offering them as a stand-alone product. This approach enables us to address both new prospects and existing customers, enhancing our value proposition across multiple markets. This acquisition aligned with Sapiens strategy to accelerate penetration to the London specialty market enhance its value proposition to the P&C insurers and strengthen its support for the reinsurance market. The London specialty market is a global hub for complex and high-risk insurance and reinsurers, where brokers and underwriters negotiate bespoke coverage primarily through Lloyd's London and London company market. The London specialty market is one of the largest in the world and represent a significant opportunity for Sapiens to expand its footprint. The underwriting growth segment is growing significantly as insurers recognize the value of sophisticated decision support tools. The demand for underwriting growth bench is growing. And according to the research firm, [indiscernible], the number of workbench deals is expected to rise in 2025 and 2026. AdvantageGo will also strengthen Sapiens' value proposition in North America P&C market by enhancing its capability for insurers operating in the complex specialty and commercial lines. Now moving to discuss the first quarter of 2025. Revenue in the first quarter of 2025 totaled $136 million compared to $134 million in the first quarter of 2024. In quarter 1 2025, we had a negative currency impact compared to quarter 1 2024. On a constant currency basis, our revenue would have been $2 million higher. In Q1, we continue to sign new deals and expand relationships with existing customers across both Life and P&C segments. Less than 1 year since the launch of our insurance platform, we are already seeing promising customer adoption, a clear indication that our strategic investments are resonating with the market and delivering results. We are continuing with transition of existing customers to the cloud while also onboarding all new customers to Sapiens Cloud. Let's drill down into our regional performance. First, our North America businesses continue its growth trajectory this quarter with accelerating demand for Life & Annuities solutions. Our Life & Annuity business has benefited from strategic investments we have made to drive growth and our new business wins reflect the success of these initiatives. In the first quarter, we have multiple wins with new and existing customers, which underscore insurers confidence in Sapiens to innovate, support businesses transformation and help solidify their competitive position. During the first quarter, we signed a new life platform deals in North America, which incremental to the 2 life platform deals signed in North America last year. As we reported this quarter, a major U.S. multiline insurer expanded its partnership with us by selecting Sapiens insurance platform for Life & Annuities, which includes Sapiens CoreSuite for Life & Annuities, Sapiens DataSuite and Sapiens Cloud Services. For nearly a decade, this existing customer has successfully utilized Sapiens UnderwritingPro and the implementation of Sapiens insurance platform will further accelerate its digital transformation. In addition, this quarter, we had several go-lives across our Life solution, CoreSuite, IllustrationPro and UnderwritingPro, while also making innovative progress with several important product upgrades. During the first quarter of 2025, we announced the release of Sapiens UnderwritingPro version 14, which is our award-winning, most advanced, automated underwriting and new business case management system for Life & Annuities insurer. The release delivers significant technical enhancement, accelerates greater operational efficiency, seamless communication and advanced AI-driven capabilities. Also during this quarter, we announced the latest release of Sapiens IllustrationPro and Sapiens ApplicationPro, featuring enhanced automation, risk intelligence and operational efficiency, empowering agents and advisers to illustrate policies, manage users and integrate seamlessly with underwriting and sales platform. Turning to worker compensation. This market continued to hold strong potential for Sapiens throughout the U.S. and Canada over the coming years. Over the course of the first quarter, our workers' compensation team has demonstrated the progress in the implementation of several key projects as evidenced by the completion of 2 go-lives within CoreSuite for critical worker compensation upgrades. Let me switch to discussing the performance of our CoreSuite P&C in North America. Sapiens continues to invest in North America P&C platform with data suite integration set for 2025, which enables AI automation and advanced analytics. I'm happy to share that we signed a new P&C deal for claims processing with North America-based customer in this quarter. With continued diligent investment in our platform, we are seeing initial positive trend in 2025. And as I mentioned before, the acquisition of AdvantageGo will enhance our P&C platform for North America market. Moving to Europe and the rest of the world. In European market and Rest-of-the-World, which includes APAC and South Africa, demand for Sapiens solution remains solid. In quarter 1, we secured multiple deals across Life and P&C with new logos as well as existing customers in the region. We had numerous successful go-live project for customers with our IDITSuite, CoreSuite for Life, Tia Suite and ReinsuranceMaster upgrades. A significant highlight in the quarter is the go-live with our existing P&C customer, Hiscox, as a leading insurer in the U.K. and Sapiens partner for over a decade. Hiscox provides tailored solutions for businesses and high net worth private clients. This important step forward indicative of Hiscox's commitment to enhancing business performance, resilience and customer satisfaction. I want to highlight that Hiscox U.K. migration to Sapiens' latest cloud-native architecture delivered an immediate average improvement of 30% in application spend along with improved operational productivity and more consistent services delivery. P&C expansion is a top priority for Sapiens and the recent acquisition of AdvantageGo strengthened our value proposition in specialty and commercial P&C market, while providing immediate access to the London specialty market. Moving to the Life and Pension segments. This quarter, we signed a new deal with Universal Life, a leading life and health insurance based in Cyprus. As part of the conditional agreement, Unilife will leverage Sapiens CoreSuite for Life and Pension to modernize its core insurance process and drive strategic growth initiatives. Following an extensive evaluation process, Unilife chose Sapiens, which validate our superior digital SaaS solution for both individual and group life pension projects. Also this quarter, one of the largest global life insurers has selected Sapiens insurance platform for Life and Pension to drive digital transformation for its Czech Republic business, modernize its core insurance process and accelerate its growth strategy. The insurer was looking to replace its legacy platform with innovating core system that would empower the company to integrate new technologies and expand functionalities as it scales. Sapiens' robust cloud-based digital platform will optimize efficiency, simplify policy and claims management and improve digital engagement for both customers and brokers. This collaboration expands Sapiens' presence in Central and Eastern Europe, reinforcing our commitment to delivering innovative insurance solutions worldwide. Moving to reinsurance. We are seeing growing demand for insurers across all tiers, high, medium and low as they look to modernize and streamline their insurance operation. We continue to expand across North America, Europe and APAC with our ReinsuranceMaster and ReinsurancePro solutions. Moving to APAC region. The momentum at the end of last year has continued into the first quarter of 2025. The region remains a priority for us, and we continue to focus on accelerating growth, which the Candela acquisition supports. In the quarter, we secured a new APAC win for P&C with Pioneer Insurance and Surety Corporation. The leading insurance provider in Philippines, Pioneer chose Sapiens insurance platform to drive its digital transformation and new X enhancement. This is an important new win in the region that reinforce our strategy to improving core processing throughout our advanced technology, enabling our customers to navigate evolving market trends with precision. Innovation remain a cornerstone of our playbook. Our AI-based Sapiens insurance platform continued to evolve with specializations in addressing the unique requirements of each business vertical or domain. We are integrating AI across our core data digital solution to enhance automation, improve decision-making and drive greater efficiencies for insurers. By embedding AI-driven capability into our core system, we enable smarter underwriting, more accurate risk assessments and streamline claims processing. Our road map is robust as we continue to develop a holistic GenAI-based Copilot experience across the entire platform, further enhancing the value we deliver to our customers. Before I wrap up, I would like to reiterate our focus for 2025. We are committed to building a robust pipeline and expanding our client base across all key markets. To support this commitment and achieve our goals, we are focusing our teams and resource on first, platform innovation and advanced AI capabilities. We will continue investing in Sapiens' Intelligent insurance platform to drive sustainable growth globally and improving our competitive position. Second, increased cross-sell to expand relationship with existing customers, cross-selling to existing customers represent a significant opportunity for growth. Third, accelerating cloud adoption for our existing customers through a scalable, efficient SaaS model. Our advanced solutions are experiencing strong momentum in customer utilization, and we remain on pace to achieve our target penetration rate over 60% within the next 5 years. Four, enhanced growth in our Life businesses globally. The demand for Life system transformation is strong as insurers seek to modernize legacy infrastructure, the market shift presents a significant opportunity for our life offerings. Fifth, we will continue building out our system integration partnership globally. Our pipeline is strong standing, and we are enthusiastic about the new opportunity resulting from our collaboration with system integrators throughout the global markets we are operating in. And lastly, following AdvantageGo acquisition, we see an opportunity to expand our global P&C platform with underwriting workbench and risk management capability and strengthen Sapiens value proposition across global commercial specialty and London market segments. I will turn the call over to our CFO to provide more detail on our financial performance. Roni?

Thank you, Roni. I will begin my commentary by reviewing the first quarter 2025 non-GAAP results, followed by comments on the balance sheet and cash flow. I will wrap up with our updated guidance for 2025. Revenue in the first quarter of 2025 totaled $136 million, an increase of 1.4% compared to $134 million in the first quarter of 2024. In Q1 2025, we had a negative currency impact compared to Q1 of 2024. On a constant currency basis, our revenue would have been $2 million higher. Looking at our revenue by geography. Revenue in North America totaled $57 million, an increase of 3.1% compared to last year. Revenue in Europe totaled $67 million, a decrease of 1.8% compared to last year. On a constant currency basis, our revenue in Europe would have been 0.6% higher. Revenue in Rest of World that includes South Africa and APAC totaled $12 million, a 13.4% increase compared to last year. For Q1 2025, our annualized recurring revenue, ARR totaled $187 million, reflecting 11.8% increase from Q1 of 2024, coming mainly due to new logo we signed last quarter. Our revenue mix showed that revenue from recurring software product and reoccurring postproduction services increased year-over-year by 14.7% to $108 million compared to $94 million in Q1 of 2024. Recurring and reoccurring revenue in Q1 2025 represent 79% of total revenue. Revenue from implementation totaled $28 million compared to $40 million in Q1 of 2024. This reflects the completion of several go-live projects and the extension of existing implementation projects over a longer time frame. Additionally, revenue from deal we signed in Q4 of last year is expected to materialize and ramp up starting Q2 of this year. Moving on to profitability. Gross profit in the quarter was $63 million compared to $61 million in Q1 of 2024. The gross margin in the quarter was 46.3% compared to 45.4% in Q1 of 2024, representing an increase of 90 basis points. The increase in gross margin was primarily due to higher recurring and reoccurring revenue ratio. Operating profit in the first quarter of 2025 was $25 million compared to $24 million in Q1 of 2024. Operating margin was 18%, slightly lower than the 18.1% margin in Q1 2024 and in line with our target. Net income attributable to Sapiens shareholders for the first quarter of 2025 was $21 million, an increase of 1.3% compared to Q1 of 2024. Earnings per diluted share was $0.37 for the first quarter of 2025 compared to $0.36 for the comparable period. Turning to our balance sheet. As of March 31, 2025, we had cash and cash equivalents and short-term deposits totaling $206 million and debt of $20 million. In April 2025, we paid a cash dividend of $16.8 million or $0.30 per share for the second half of 2024. The dividend is in line with the company policy of distributing on a semiannual basis up to 40% of its annual non-GAAP net income. In addition, the Board of Directors has approved distribution of a special cash dividend of $0.36 per share or $20.1 million in total. In declaring the special dividend, the Board of Directors evaluated Sapiens financial stability and determined that issuing the special dividend was both prudent and an appropriate way to reward our long-standing shareholders. Adjusted free cash flow for the first quarter of 2025 was $23 million compared to $17 million in Q1 of 2024. Let me now review our revised guidance for 2025. Revenues. Today, we are raising our non-GAAP revenue guidance to a range of $574 million to $578 million from previous range of $553 million to $558 million, representing growth of 6% at the midpoint. Profit. We are also revising our non-GAAP operating profit to a range of $94 million to $96 million with operating margin of 16.5% at the midpoint from a range of $98 million to $102 million with operating margin of 18% at the midpoint. We expect Q2 2025 operating profit to be in the range of $20 million to $21 million. The revised revenue and operating profit guidance assume the following: Revenues. Currency fluctuations are expected to impact our revenue going forward, primarily driven by the strengthening of euro and British pound against the U.S. dollar. In addition, in April, we signed agreement to acquire Candela in APAC and AdvantageGo in the U.K., and we expect both transactions to close towards the end of the second quarter. We currently anticipate the aggregate impact on revenue to be approximately $21 million at the midpoint. Profit. [indiscernible] exchange movements are expected to have positive effect on our profitability, offset by the impact of recent acquisition. While Candela is expected to contribute positively to profit in Q4, AdvantageGo will remain loss-making throughout the year. Please also note that Candela and AdvantageGo were a subsidiary of a larger organization and not all their assets and functions were consolidated under single legal entity. This adds complexity to the integration process, including areas such as cloud migration, legal entity closure and employee transfer. We anticipate that the aggregate impact on profit to be approximately negative of $5 million at the midpoint. In summary, while we see a short-term dip in our profit and margin due to acquisition, the strategic value and recurring revenue stream from this acquisition position us for robust growth and enhanced profitability in the future. Looking ahead to 2026, we expect our revenue growth to be in the mid- to high single-digit range. And we are also looking to improve profitability as we have proven successfully in past years. Please note that the recent proposed tariff changes currently do not have direct impact on Sapiens. However, they may pose a risk if they affect our customer, which could in turn impact our results. We did not include tariff impact on our current guidance. Before I turn the call back to Roni Al-Dor, I would like to reiterate that we remain fully committed to disciplined execution of our strategy, driven growth and long-term profitability. Thank you. I will now turn the call back to Roni Al-Dor. Roni?

Thank you, Roni. We delivered a solid first quarter, reflecting the progress across our key markets. Our continued investment in our insurance platform remains a critical driver of growth. In summary, Q1 2025 marked another quarter of operational progress. We remain committed to deliver long-term growth across all our key territories, we are continuously exploring M&A opportunity and our most recent acquisition of AdvantageGo and Candela will serve as a channel to enhance our go-to-market strategy in key region we are targeting in order to accelerate our growth trajectory. I will now ask the operator to please open the call for questions.

[Operator Instructions] The first question is from Dylan Becker of William Blair.

Maybe Roni Al or Alex, starting with you. On the underwriting workbench side, this is an area we continue to hear kind of positive momentum around in the P&C space. You kind of touched on it in the prepared remarks, but wondering how you think about that acquisition, in particular, the opportunity to kind of accelerate some of the traction and momentum you're pushing forward on in North America as well as globally. And then for Roni Giladi, how you think about the benefits to the model from that transaction as well, too, as it relates to kind of the growth profile of that business, the gross margin component, the recurring mix as a part of this kind of ongoing model evolution?

Dylan, this is Alex speaking. So first, spot on, on the market acceleration point. We've seen the underwriting space rising very substantially over the past year, a lot of traction in the market, the need of the P&C industry to run better risk assessment and to connect to its processes. We saw a great traction on this. And this is very much in line with our strategic approach to the market and with our platform offering. We see the AdvantageGo acquisition serve us across multiple aspects of our business. When we look -- we can speak about the support that it's going to bring us in the U.S. market. We see many, many deals of underwriting in the U.S. market and connecting it to our platform is definitely answering the market needs. Similar approach in Europe, on the P&C side. I'd like to uniquely add also the London market, which is close to $60 billion GWP market that we today are not active in and AdvantageGo allows us to go straight into this market with a strong product. And this is also helping us, we expect it to help us on the cross-sell because we can take it back to all our existing customer base on the P&C side globally, both U.S. and Europe and enhance our offering to them.

Dylan, regarding the metrics or the model implication of this acquisition. So obviously, as we mentioned, we expect with this transaction that overall Sapiens grow next year from mid-single digit to mid- to high single digits. Specifically, if I'm going to AdvantageGo, they are expecting to grow next year, double-digit growth. And in terms of metrics, their gross margin is higher than Sapiens today, about 60%. If we look at Sapiens overall, we have about 33% of our revenues coming from ARR, and they are slightly above 50%. Obviously, from a profit perspective, they are today losing money. But as we mentioned, we expect to move gradually over this year and 2026 and be profitable in 2027. So a lot of upside in terms of growth, gross margin and ARR. And as we've been able to successfully do transition of other companies to profit, we expect to do this also with AdvantageGo.

Also, it seems like the life side is continuing to see healthy kind of broad-based momentum. We've talked about kind of the competitive dynamics there in the past. But how should we think about that kind of step-up in the L&A business today, kind of the share of the mix that it currently represents, maybe its growth profile and how you think about kind of the evolution on the L&A side of the house as well?

It's Alex again. From the business perspective, definitely, we see continuation of the trend that we reported over the last couple of quarters, strong demand on the life side across, again, North America and Europe. In North America, we see the platform proposition combining our CoreSuite together with the Underwriting, Illustration and Application connected to digital and data as a whole, it makes a huge market differentiation. It brings a lot of traction in the market. The pipeline keeps on growing and the business keeps on growing. We expect to continue this trend. Similar trend in Europe and U.K., where we also start to enter into sales processes on pension and retirement that if we focus most of our business in Europe on protection and risk, we are also stepping into the wealth and the investment management and the pension. So both sides, we see and expect to continue the growth.

This is Roni G. Also from a metrics perspective, we see a gradual increase of overall life on overall revenue of Sapiens. So if we ended the -- usually, we are providing this metric by the end of the year, life was 25%. This quarter, already at 26%. And if we compare to Q1 of 2024, we are almost 300 basis points more. So from 33% to 26%.

The next question is from Chris Reimer of Barclays.

Congratulations on a strong quarter. I was wondering if you could talk about how you see the revenues progressing playing out through the rest of the year, if there'll be any kind of heaviness towards the end of the year or if it will be evenly dispersed? And then if you could just talk about some of the drivers contributing to your outlook?

Yes, I will answer. I think I heard the first section. So if we look at the revenue stream going forward this year 2025, we didn't close the 2 acquisitions that we mentioned, neither the AdvantageGo or Candela, but we expect them to close during the end of this quarter. So we see gradual increase in Q2 but then jumped into Q3 and Q4 between them slightly higher in Q4 versus Q3. So gradual increase in Q2 depending on the closing date and then higher in Q3 and Q4 higher than Q3.

And then could you just mention any of the drivers you are seeing behind the outlook?

In terms of overall growth of the company, nothing has changed from the previous outlook that we gave. The growth is the continuation of the organic growth that we mentioned, plus some currency tailwind that affect our revenue and of course, the acquisition. We are not sure about the exact consolidation date. So this is the reason that this number that we provided, but mainly continue the organic growth, currency tailwind and the M&A.

The next question is from Alexei Gogolev of JPMorgan.

This is Elyse Kanner on for Alexei Gogolev. Thank you for clarifying the guide. Is there any further detail you can provide on how much exactly is a currency tailwind versus how much you contribute to inorganic growth?

This is Roni G. As we mentioned, we do not know the closing date. And therefore, we are not providing the split of the currency and versus the M&A impact. We will provide this by the end of the year, the exact amount as we are doing all the time in terms of currency and M&A. Currently, the blended is the amount that we are providing, $21 million incremental. What I can say, the vast majority is coming from the M&A and slightly on the currency tailwind.

And then in terms of getting the 60% of customers to the cloud, should we expect that to look like a bell curve? And are we still kind of on the left side, maybe approaching the peak where you'll see the most transition to cloud?

We are seeing the trend that we mentioned last quarter and prior to that, we are continuing moving to the cloud, existing and new. As we mentioned all the time, almost 100% of the deals, if not 100% are on the cloud, the new logo. And every quarter, we are shifting some existing customer to the cloud. We'll provide the exact percentage by the end of this year.

[Operator Instructions] There are no further questions at this time. Before I ask Ms. 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 2 hours. In the U.S., please call 1 (888)-269-005. In Israel, please call (03) 9255-938 and internationally, please call (9723)-9255-938. Ms. Cohen-Ifrah, please go ahead.

Thank you, Joni, and thank you, everyone, for joining our call today. We really look forward to discussing our second quarter results on our next earnings call. And of course, as usual, we welcome you to contact us if you have any further questions. Thank you all for joining.

Thank you. This concludes the Sapiens International Corporation First Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.