Earnings Transcript for SPNS - Q4 Fiscal Year 2024

Operator: Ladies and gentlemen, thank you for standing by. The conference will begin shortly. Welcome to Sapiens International Corporation's 2024 fourth quarter financial results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. It is now my pleasure to introduce your host, Yaffa Cohen-Ifrah, Chief Marketing Officer and Head of Investor Relations. You may now begin.

Yaffa Cohen-Ifrah: Thank you, operator. I want to welcome you to the Sapiens International Corporation N.V. conference call to review our fourth quarter and full-year 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 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 of this call. Statements expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations, or otherwise. On today's call, we will refer to non-GAAP financial measures. A 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 Al-Dor: Good morning, everyone, and thank you for joining us today for Sapiens International Corporation N.V.'s fourth quarter 2024 earnings call. Our revenue in Q4 was $134 million, a 2.6% increase compared to last year. This quarter showcased solid execution across our key regions and continued expansion of our COVID-19 businesses. In Q4, we signed over fifteen deals with new and existing customers across life and P&C. Since the launch of our insurance platform in June 2024, we have successfully closed three platform deals globally, reflecting the positive impact of our insurance platform. Overall, in 2024, we signed thirty-six deals with new and existing customers. We continue to transition existing customers to the cloud, ending the year with a total of one hundred sixty-nine customers on the cloud, and we see a great potential to accelerate the cloud foundation. Our North America businesses delivered robust growth in 2024. During Q4, we closed five wins with new and existing customers. These wins reinforce insurance trust in Sapiens to innovate and drive business transformation, enabling them to remain competitive. Our life and annuity businesses continue to expand in Q4 with our business application. We continue to grow with new logos. The pipeline for North America Life businesses is robust, reaching historical levels. Recognizing our commitment to product innovation, one of our key investment areas and growth drivers, Sapiens has been honored for the third consecutive time by Celent. We received the 2024 excellent award for customer base and support for our underwriting pool for life and annuities in North America, reinforcing our leadership in life underwriting solutions. These awards recognize Sapiens' exceptional solution that empowers insurers to streamline their processes and achieve superior customer outcomes. Let me switch to discuss our CoSuite P&C in North America for 2024. In Q4 of 2024, a leading operating casualty underwriting agency, a provider of solutions for specialty insurance needs, including flood and fine art, went live on BillingPort, complementing their core solution of PolyCPO and Claims4. Already in production, these go-live additional applications are an example of how our insurance platform enables customer upselling. Overall, the P&C team in North America completed over ten upgrade projects this year, seeing customers upgrading the entire policy suite, billing, and claims. Additionally, we executed a cloud transformation for tier 2 insurance carriers that provide specialty risk solutions across North America. This project includes upgrading our latest PolicyPort release, which will be completed in early 2025. In Q4, we released version 12.1 of CoSuite P&C, which includes a technology upgrade, significant improvements to operational monitoring, functional enhancement, and integration to Sapiens' digital suite for both the agent and the consumer and several insured partners. This enables business growth and enhances platform efficiency, easy-to-use distribution, and automation. Sapiens continued to invest in North America P&C platform with DataSuite integration set for 2025, which enables AI automation and advanced analytics. The launch of our P&C platform with the product upgrades will help to enhance our competitive position in the North America market in alliance with our go-to-market strategy of driving increased connection to our data and digital platform offering. Moving to Europe and to the rest of the world, in Q4, we signed ten deals across life and P&C with new logos as well as existing customers in Europe and the rest of the world. We have had several successful go-live projects for customers. We saw our CoSuite Live solution, EDI Suite, T-Suite, and ReinsuranceMaster. In the European market and the rest of the world, which includes APAC and South Africa, demand for Sapiens' solutions remains robust, as evidenced by our growing pipeline. There is a continued demand for SaaS plus tiers. We are also experiencing increasing demand for AI-driven solutions as clients increasingly want to leverage AI to enhance operational efficiency and elevate customer experience. In the fourth quarter, we signed new P&C deals with both new and existing customers in Europe and the rest of the world. I want to highlight a few new wins this quarter, including a leading second customer in the Nordic region that migrated to the Sapiens cloud with a significant SaaS agreement, leveraging our Microsoft Cloud strategy and investments. In APAC, we continue our market expansion and strong momentum and closed an important P&C platform deal with a leading insurer in the Philippines. This is our first win in this country. Another highlight is GoLive Reinsurance's DataSuite for a long-standing customer based in Africa. Having been with Sapiens for nearly two decades, this tier-one customer migrated its data platform to the cloud in a consolidated enterprise-wide view to improve performance and productivity while enhancing security and the overall user experience. A few comments on life and pension. This quarter, we signed a new platform deal in Europe and also completed several go-live projects in the region. The demand for Sapiens' life platform remains strong, as demonstrated by our growing pipeline. Although the sales cycle in life tends to be more extended than P&C, the offset deal size is much larger. Moving to reinsurance. We continue to expand in North America, Europe, and APAC with our ReinsuranceMaster and ReinsurancePro solutions. In this quarter, we closed new deals with new and existing customers. Let me highlight a couple

Roni Giladi: Thank you, Roni. I will begin my commentary by reviewing the fourth quarter and full-year 2024 non-GAAP results, followed by comments on the balance sheet and cash flow. I will wrap up with our guidance for 2025. Revenue in the fourth quarter of 2024 totaled $134 million, an increase of 2.6% compared to $131 million in the fourth quarter of 2023. In Q4 2024, we faced currency headwinds compared to Q3 2024. On a constant currency basis, our Q4 revenue was $2 million higher than the reported Q4 revenue. Reported revenues for Q4 and the full year were in line with the updated guidance we provided last quarter despite the currency headwind. For Q4 2024, our annual recurring revenue reached $175 million, reflecting a 6.5% increase from Q4 of last year, higher than the total reported revenue growth during the same period. Our revenue mix shows that revenue from recurrent software products and reoccurring post-production services increased year-over-year by 7.7% to $97 million compared to $90 million in Q4 2023. Growth of this segment was higher than the overall reported growth, in line with our strategy to increase recurring and reoccurring revenues. I want to emphasize that recurring and reoccurring revenues in Q4 2024 represented 72.5% of total revenue, reflecting a 3.4% increase compared to Q4 of last year. Moving on to profitability. Gross profit in the quarter was $63 million compared to $59 million in Q4 2023. The gross margin in the quarter was 46.7% compared to 45.4% in Q4 2023, representing an increase of one hundred and thirty basis points. This increase in gross margin was primarily due to higher recurring and reoccurring revenue, with high gross margin than gross margin from one-time implementation. Operating profit in the fourth quarter of 2024 was $24 million, similar to Q4 2023. Net income attributable to Sapiens shareholders for the fourth quarter of 2024 was $21 million, up 3.1% from $20 million in Q4 2023. Earnings per share were $0.37 for the fourth quarter of 2024, up from $0.36 in the fourth quarter of last year. Turning now to full-year results. For the twelve months ended December 31, 2024, 2024 revenues totaled $542 million, a 5.4% increase compared to 2023. We met our full-year updated revenue guidance, which we provided in Q3, despite the currency headwind that happened in Q4. Turning to revenue mix

Moving to geographic breakdown: Revenue in North America represents 42% of total revenue. Our European revenue represents 50%, and the rest of the world represents 8% of total revenue. In 2024, we drove growth of 6.3% in North America, 4.9% in Europe, and 3.7% in other regions. We do not have customer concentration, as evidenced by the fact that our top ten customers represent 21.5% of revenue, with no customer representing more than 5% of total revenue. Gross profit increased by $16 million in 2024, while the gross profit margin increased by sixty basis points to 45.9%. The main reasons for the gross margin improvement are a better ratio of recurring and reoccurring revenue than last year and improvements in our services ratio. Our operating profit increased by $5 million or 4.8%. The operating margin was 18.2%, which is in line with our guidance. Despite the increase in gross margin of sixty basis points, our operating margin declined by ten basis points versus 2023 due to our strategic decision at the beginning of the year to increase investment in sales and marketing in absolute dollars and as a percentage of total revenue. Net income attributable to Sapiens shareholders for 2024 was $83 million, up 10.5% from $75 million in 2023. Earnings per diluted share were $1.48, a 9.6% increase from $1.35 in 2023.

Turning now to our balance sheet: As of December 31, 2024, we had cash and cash equivalents and short-term deposits totaling $216 million, with net debt of $40 million. In January 2025, we paid the annual debenture coupon of $20 million. The last and final payment of $20 million is scheduled for January 2026.

Turning to adjusted free cash flow: In Q4 2024, we generated adjusted free cash flow of $41 million compared to $37 million in Q4 2023. In 2024, we generated adjusted free cash flow of $75 million, compared to $71 million in 2023. Our adjusted free cash flow represents 89.5% of our non-GAAP net income, proving our business model of converting net profit to free cash flow. Let me now introduce our guidance for 2025. Non-GAAP revenue in the range of $553 million to $558 million represents a growth of 2.4% at the midpoint. This growth assumes a currency headwind mainly to the euro and pound, which have weakened by 4% and 2%, respectively, versus the US dollar. On a constant currency basis, our growth rate would be 3.4%. Non-GAAP operating profit is in the range of $98 million to $102 million, with an operating margin of 18% at the midpoint. On a constant exchange rate, our operating profit would be higher, implying an operating margin of 18.7%. The negative currency impact on operating profit is mainly due to the euro and pound weakening versus the US dollar and the strengthening of the Israeli shekel versus the US dollar. Let me elaborate on the factors impacting our 2025 guidance. In the Q3 2024 earnings call, we discussed the factors impacting 2024 and 2025 growth, including the transition to SaaS, core P&C North America, and macroeconomic uncertainty. We will now provide an update on this as they relate to our growth outlook. The transition to SaaS

Core P&C North America: As Roni Al-Dor mentioned in his remarks, we are making strategic investments in our North America P&C platform and are already seeing early positive indicators. We expect this effort to provide contributions starting in 2026 and beyond. Macroeconomic uncertainty continues to persist across global markets, including North America, the Middle East, and other regions. We do not control these factors and cannot predict when they will stabilize. Those macroeconomic factors can lead to delays in signing new deals, which can in turn impact our revenue growth. As mentioned, those three factors that emerged in 2024 will impact our growth in 2025. In late Q4 2024, we had a strong deal-closing momentum. Even with this strong deal-closing momentum, the timing of these closings affects the pace of revenue realization in 2025, impacting our overall growth. I want to reiterate that we remain focused on accelerating the growth trajectory. To accelerate our growth beyond 2025, we are taking the following steps

Roni Al-Dor: Thank you, Roni. We delivered a solid fourth quarter, reflecting the progress across our key markets. Our continued investment in our insurance platform remains a critical driver for growth. Most importantly, we are committed to delivering long-term growth across all of our key territories and reinforcing our position as a trusted provider of intelligent insurance solutions. I want to thank our global team for their commitment to excellence and growth, and our investors for their ongoing support of Sapiens.