Sapiens Reports Third Quarter 2019 Financial Results

 

Holon, Israel, November 4, 2019Sapiens International Corporation, (NASDAQ and TASE: SPNS), a leading global provider of software solutions for the insurance industry, and a member of the Formula Group (NASDAQ: FORTY and TASE: FORT), today announced its financial results for the third quarter ended September 30, 2019.

 

Summary Results for Third Quarter 2019 (USD in millions, except per share data)

 

GAAP % Change Non-GAAP % Change
Q3-2019 Q3-2018   Q3-2019 Q3-2018  
Revenue $82.6 $73.2 12.8% $82.6 $73.2 12.8%
Gross Profit $33.3 $27.8 19.9% $36.7 $30.9 18.8%
Gross Margin 40.3% 38.0% 230 bps 44.4% 42.2% 220 bps
Operating Income $10.1 $6.8 48.4% $13.5 $10.3 31.7%
Operating Margin 12.2% 9.3% 290 bps 16.4% 14.0% 240 bps
Net income (*) $7.4 $5.2 43.1% $10.4 $7.5 37.9%
Diluted EPS $0.15 $0.10 50% $0.21 $0.15 40%

 

(*) Attributable to Sapiens’ shareholders

 

“The third quarter demonstrated continued execution of Sapiens’ 2019 priorities: top-line growth and margin expansion. Non-GAAP revenue increased 12.8%, primarily due to continued expansion in our property & casualty (P&C) divisions, and initial growth in our life & annuity (L&A) division,” said Roni Al-Dor, president and CEO, Sapiens.

 

“A global focus on Sapiens’ key objectives to leverage our offshore capabilities, along with improved economies of scale, drove a non-GAAP operating margin improvement of 240 basis points. The increase in operating income has fueled continued expansion of Sapiens’ product, sales and delivery teams, all of which are key to building next year’s pipeline and supporting our capacity to deliver current projects. Sapiens is confident we have built a platform that can support long term top-line growth, with the infrastructure to cost-effectively support our long-term profitability.”

 

Continued Al-Dor: “I’m encouraged by our pipeline of business and anticipated growth for the remainder of 2019. Following the acquisition of Calculo, we are increasing our full-year, non-GAAP revenue to a range of $323 – $325 million, from a previous guidance of revenues on the higher end of $318-$323 million. The increase in revenue and the leverage from improved economies of scale allow Sapiens to increase the guidance for full-year, non-GAAP operating margin in the range of 15.8%-16.0%, compared to our previous guidance of 15.6%-15.8%.”

 

Quarterly Results Conference Call

Management will host a conference call and webcast on November 4, 2019 at 9:30 a.m. Eastern Time (4:30 p.m. in Israel) to review and discuss Sapiens’ results. Please call the following numbers (at least 10 minutes before the scheduled time) to participate: North America (toll-free): + 1-888-407-2553; International: +972-3- 9180644; UK: 0-800-917-9141

 

The live webcast of the call can be viewed on Sapiens’ website at: https://www.sapiens.com/investor-relations/ir-events-presentations/

 

If you are unable to join live, a replay of the call will be accessible until November 14, 2019, as follows: North America: 1-888-295-2634; International: +972-3-925-5901

A recorded version of the webcast will also be available via the Sapiens website, for three months at the same location.

 

Non-GAAP Financial Measures

This press release contains the following non-GAAP financial measures: non-GAAP revenue, non-GAAP gross profit, non-GAAP operating income, non-GAAP net income attributed to Sapiens shareholders, non-GAAP basic and diluted earnings per share, Adjusted EBITDA and Adjusted Free Cash-Flow.

 

Sapiens believes that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Sapiens’ financial condition and results of operations. The Company’s management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining executive and senior management incentive compensation and for budgeting and planning purposes. These measures are used in financial reports prepared for management and in quarterly financial reports presented to the Company’s board of directors. The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends, and in comparing the Company’s financial measures with other software companies, many of which present similar non-GAAP financial measures to investors.

 

Non-GAAP financial measures consist of GAAP financial measures adjusted to exclude: Valuation adjustment on acquired deferred revenue, amortization of capitalized software development and other intangible assets, capitalization of software development, stock-based compensation,  restructuring and cost reduction costs, tax adjustments related to non-GAAP adjustments, and acquisition-related costs, which pertain to charges on behalf of M&A agreements related to future performance targets and retention criteria as determined upon acquisition date of the respective acquired company, as well as third-party services, such as, tax, accounting and legal rendered until the acquisition date.

 

Management of the Company does not consider these non-GAAP measures in isolation, or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements. In addition, they are subject to inherent limitations, as they reflect the exercise of judgment by management about which expenses and income are excluded or included in determining these non-GAAP financial measures.

 

To compensate for these limitations, management presents non-GAAP financial measures in connection with GAAP results. Sapiens urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing quarterly financial results, including this press release, and not to rely on any single financial measure to evaluate the Company’s business.

 

Reconciliation tables of the most comparable GAAP financial measures to the non-GAAP financial measures used in this press release are included with the financial tables of this release.

The Company defines Adjusted EBITDA as net profit, adjusted for valuation adjustment on acquired deferred revenue, stock-based compensation expense, depreciation and amortization, capitalized of software development costs, compensation expenses related to acquisition and acquisition-related costs, restructuring and cost reduction costs, financial expense (income), provision for income taxes and other income (expenses). These amounts are often excluded by other companies to help investors understand the operational performance of their business.

 

The Company uses Adjusted EBITDA as a measurement of its operating performance, and reconciles Non-GAAP Operating Income to Adjusted EBITDA, adjusted for amortization and capitalization of capitalized software and amortization other intangible assets, stock-based compensation and acquisition-related costs, and valuation adjustment on acquired deferred revenues. The Company uses Adjusted EBITDA, because it assists in comparing the operating performance on a consistent basis by removing the impact of certain non-cash and non-operating items. Adjusted EBITDA reflects an additional way of viewing aspects of the operations that the Company believes, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting its business.

 

The Company uses Adjusted Free Cash-Flow as a measurement of its operating performance, and reconciles cash-flow from operating activities to Adjusted Free Cash-Flow while reducing the amounts for capitalization of software development costs and capital expenditures, and adds back payments related to investment in new campus in India, cash payments made for former acquisitions in respect of  future performance targets and retention criteria as determined upon acquisition date of the respective acquired company, and were included in the cash-flow from operating activities. We believe that Adjusted Free Cash-Flow is useful in evaluating our business, because Adjusted Free Cash-Flow reflects the cash surplus available to fund the expansion of our business.

 

About Sapiens

Sapiens International Corporation empowers insurers to succeed in an evolving industry. The company offers digital software platforms, solutions and services for the property and casualty, life, pension and annuity, reinsurance, financial and compliance, workers’ compensation and financial markets. With more than 35 years of experience delivering to over 450 organizations globally, Sapiens has a proven ability to satisfy customers’ core, data and digital requirements. For more information: www.sapiens.com

 

Forward Looking Statement

Some of the statements in this press release may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934 and the United States Private Securities Litigation Reform Act of 1995. Words such as “will,” “expects,” “believes” and similar expressions are used to identify these forward-looking statements (although not all forward-looking statements include such words). These forward-looking statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management’s current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement.

 

These statements speak only as of the date they were made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We operate in a changing environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. For more information regarding these risks and uncertainties, as well as certain additional risks that we face, please refer to the Risk Factors detailed in Item 3 of Part III of our Annual Report on Form 20-F for the year ended December 31, 2018, and subsequent reports and registration statements filed from time to time with the Securities and Exchange Commission.

 

Investors and Media Contact
Yaffa Cohen-Ifrah

Chief Marketing Officer and Head of Corporate Communications

Sapiens International

U.S. Mobile: +1 201-250-9414

Mobile: +972 54-9099039

Email: yaffa.cohen-ifrah@sapiens.com

 

 

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES                

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

U.S. dollars in thousands (except per share amounts)

 

  Three months ended   Nine months ended
September 30  September 30
2019 2018 2019 2018
 (unaudited)  (unaudited)  (unaudited)  (unaudited)
 Revenue 82,643 73,237 238,959 216,396
 Cost of revenue 49,316 45,438 144,371 134,710
 Gross profit 33,327 27,799 94,588 81,686
 Operating expenses:
 Research and development, net 9,445 8,350 27,145 26,130
 Selling, marketing, general and administrative 13,767 12,635 39,797 39,117
 Total operating expenses 23,212 20,985 66,942 65,247
 Operating income 10,115 6,814 27,646 16,439
 Financial expense, net 261 974 1,749 3,128
 Taxes and other expenses, net 2,349 629 6,350 3,143
 Net income 7,505 5,211 19,547 10,168
 Attributable to non-controlling interest 87 28 134 135
 Net income attributable to Sapiens’ shareholders 7,418 5,183 19,413 10,033
 Basic earnings per share 0.15 0.10 0.39 0.20
 Diluted earnings per share 0.15 0.10 0.38 0.20
Weighted average number of shares outstanding used to compute basic earnings per share (in thousands) 50,027 49,826 50,005 49,795
Weighted average number of shares outstanding used to compute diluted earnings per share (in thousands) 50,742 50,143 50,534 50,070

 

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES                

CONDENSED CONSOLIDATED NON-GAAP STATEMENTS OF INCOME

U.S. dollars in thousands (except per share amounts)

 

  Three months ended   Nine months ended
September 30  September 30
2019 2018 2019 2018
 (unaudited)  (unaudited)  (unaudited)  (unaudited)
 Revenue 82,643 73,237 238,959 216,864
 Cost of revenue 45,931 42,334 134,349 125,240
 Gross profit 36,712 30,903 104,610 91,624
 Operating expenses:
 Research and development, net 10,986 9,658 31,648 29,908
 Selling, marketing, general and administrative 12,196 10,972 35,101 33,005
 Total operating expenses 23,182 20,630 66,749 62,913
 Operating income 13,530 10,273 37,861 28,711
 Financial expense, net 261 974 1,749 3,128
 Taxes and other expenses 2,770 1,723 7,635 5,211
 Net income 10,499 7,576 28,477 20,372
 Attributable to non-controlling interest 87 28 134 135
 Net income attributable to Sapiens’ shareholders 10,412 7,548 28,343 20,237
 Basic earnings per share 0.21 0.15 0.57 0.41
 Diluted earnings per share 0.21 0.15 0.56 0.40
Weighted average number of shares outstanding used to compute basic earnings per share (in thousands) 50,027 49,826 50,005 49,795
Weighted average number of shares outstanding used to compute diluted earnings per share (in thousands) 50,742 50,143 50,534 50,070

 

 

SAPIENS INTERNATIONAL CORPORATION N.V. AND SUBSIDIARIES           

RECONCILIATION OF GAAP TO NON-GAAP RESULTS

U.S. dollars in thousands (except per share amounts)

 

      Three months ended     Nine months ended
    September 30    September 30
    2019   2018   2019   2018
    (unaudited)   (unaudited)   (unaudited)   (unaudited)
                 
GAAP revenue 82,643 73,237 238,959 216,396
Valuation adjustment on acquired deferred revenue 468
Non-GAAP revenue 82,643 73,237 238,959 216,864
GAAP gross profit 33,327 27,799 94,588 81,686
Valuation adjustment on acquired deferred revenue 468
Amortization of capitalized software 1,438 1,205 4,169 3,612
Amortization of other intangible assets 1,947 1,899 5,853 5,858
Non-GAAP gross profit 36,712 30,903 104,610 91,624
GAAP operating income 10,115 6,814 27,646 16,439
Gross profit adjustments 3,385 3,104 10,022 9,938
Capitalization of software development (1,541) (1,308) (4,503) (3,778)
Amortization of other intangible assets 539 739 1,614 2,367
Stock-based compensation 382 384 1,123 1,470
Acquisition-related costs *) 650 540 1,959 2,275
Non-GAAP operating income 13,530 10,273 37,861 28,711
  GAAP net income attributable to Sapiens’ shareholders 7,418 5,183 19,413 10,033
  Operating income adjustments 3,415 3,459 10,215 12,272
  Tax and other (421) (1,094) (1,285) (2,068)
  Non-GAAP net income attributable to Sapiens’ shareholders 10,412 7,548 28,343 20,237

 

(*) Acquisition-related costs pertain to charges on behalf of M&A agreements related to future performance targets and retention criteria, as well as third-party services, such as, tax, accounting and legal rendered until the acquisition date.

 

 

 

 

Summary of NON-GAAP Financial Information
U.S. dollars in thousands (except per share amounts)

 

Q3 2019   Q2 2019   Q1 2019   Q4 2018   Q3 2018
Revenues 82,643 79,529 76,787 73,433 73,237
Gross profit 36,712 34,794 33,104 31,320 30,903
Operating income 13,530 12,581 11,750 10,849 10,273
Net income to Sapiens’ shareholders 10,412 9,541 8,390 7,826 7,548
Adjusted EBITDA 14,523 13,358 12,524 11,797 11,236
Basic earnings per share 0.21 0.19 0.17 0.16 0.15
Diluted earnings per share 0.21 0.19 0.17 0.16 0.15

 

Non-GAAP Revenues by Geographic Breakdown
U.S. dollars in thousands

Q3 2019   Q2 2019   Q1 2019   Q4 2018   Q3 2018
North America 44,413 39,216 38,149 34,974 36,734
Europe 30,273 33,881 32,193 30,850 30,611
Asia Pacific 4,087 3,515 3,670 3,140 3,480
South Africa 3,870 2,917 2,775 4,469 2,412
Total 82,643   79,529   76,787   73,433   73,237

 

Adjusted Free Cash-Flow
U.S. dollars in thousands

Q3 2019   Q2 2019   Q1 2019   Q4 2018   Q3 2018
Cash-flow from operating activities 18,671 15,507 10,550 11,509 6,370
Increase in capitalized software development costs (1,541) (1,570) (1,392) (1,382) (1,308)
Capital expenditures (973) (1,079) (641) (204) (831)
Capital expenditures related to new campus in India (6,325)
Free cash-flow 9,832 12,858 8,517 9,923 4,231
Capital expenditures related to new campus in India 6,325
Cash payments attributed to acquisition-related costs(*) (**) 100 1,692 1,608 790
Adjusted free cash-flow 16,257   14,550   10,125   10,713   4,231

 

(*) Included in cash-flow from operating activities

(**) Acquisition-related payments pertain to payments on behalf of M&A agreements related to future performance targets and retention criteria, as well as third-party services, such as, tax, accounting and legal rendered until the acquisition date.

 

 

 

Adjusted EBITDA Calculation
U.S. dollars in thousands

 

    Three months ended     Nine months ended
September 30  September 30
2019 2018 2019 2018
GAAP operating profit   10,115   6,814   27,646   16,439
   
Non-GAAP adjustments:          
Amortization of capitalized software 1,438 1,205 4,169 3,612
Amortization of other intangible assets 2,486 2,638 7,467 8,225
Capitalization of software development (1,541)   (1,308)   (4,503)   (3,778)
Stock-based compensation 382 384 1,123 1,470
Acquisition-related costs 650 540 1,959 2,275
Valuation adjustment on acquired deferred revenue 468
   
Non-GAAP operating profit   13,530   10,273   37,861   28,711
   
Depreciation 993 963 2,544 2,855
   
Adjusted EBITDA   14,523   11,236   40,405   31,566

 

 

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

 

September 30, December 31,
2019 2018
 (unaudited)  (unaudited)
 ASSETS
 CURRENT ASSETS
Cash and cash equivalents 73,138                 64,628
Trade receivables, net and unbilled receivables 57,237                 59,159
Other receivables and prepaid expenses 7,567 6,224
Total current assets 137,942 130,011
 LONG-TERM ASSETS
Property and equipment, net 15,446                 8,515
Severance pay fund 5,052 4,699
Goodwill and intangible assets, net 230,935 231,348
Operating lease right-of-use assets 52,747
Other long-term assets 5,445 4,292
Total long-term assets 309,625 248,854
 TOTAL ASSETS 447,567               378,865
 
LIABILITIES AND EQUITY
 CURRENT LIABILITIES
Trade payables 5,506 6,149
Current maturities of Series B Debentures 9,898 9,898
Accrued expenses and other liabilities 54,848                 46,999
Current maturities of operating lease liabilities 8,155
Deferred revenue 22,691                 18,057
Total current liabilities 101,098 81,103
 LONG-TERM LIABILITIES
Series B Debentures, net of current maturities 58,803 68,577
Deferred tax liabilities 9,040 11,681
Other long-term liabilities 8,228                9,398
Long-term operating lease liabilities 47,663
Accrued severance pay 6,082                  5,622
Total long-term liabilities 129,816 95,278
EQUITY 216,653 202,484
TOTAL LIABILITIES AND EQUITY 447,567   378,865

 

 

 

 

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW
U.S. dollars in thousands

 

For the nine months ended September 30,
2019 2018
(unaudited) (unaudited)
 

Cash flows from operating activities:

Net income 19,547 10,168
Reconciliation of net income (loss) to net cash provided by operating activities:
Depreciation and amortization 14,180 14,694
Accretion of discount on Series B Debentures 124 140
Capital gain from sale of property and equipment (129)
Stock-based compensation related to options issued to employees 1,123 1,462
Net changes in operating assets and liabilities, net of amount acquired:
Trade receivables, net and unbilled receivables 3,642 (10,654)
Deferred tax assets (2,664) (2,448)
Other operating assets 1,425 (1,233)
Trade payables (1,534) 1,657
Other operating liabilities 4,562 416
Deferred revenues 4,419 1,937
Severance pay 33 52
Net cash provided by operating activities 44,728 16,191
Cash flows from investing activities:
Purchase of property and equipment (9,018) (1,710)
Investment in deposit (1,119)
Payments for business acquisition, net of cash acquired (1,572) (18,203)
Proceeds from sale of property and equipment 821
Capitalized software development costs (4,503) (3,778)
Net cash used in investing activities (15,391) (23,691)
Cash flows from financing activities:
Proceeds from employee stock options exercised 435 532
Distribution of dividend (10,362)
Repayment of Series B Debentures (9,898)
Repayment of loan (4) (41)
Payment of contingent considerations (120) (61)
Dividend to non-controlling interest (66) (47)
Net cash provided by financing activities (20,015) 383
Effect of exchange rate changes on cash and cash equivalents (812) (271)
Increase (decrease) in cash and cash equivalents 8,510 (7,388)
Cash and cash equivalents at the beginning of period 64,628 71,467
Cash and cash equivalents at the end of period 73,138 64,079

 

 

 

Debentures Covenants

As of September 30, 2019, Sapiens was in compliance with all of its financial covenants under the indenture for the Series B Debentures that it issued in September 2017, based on having achieved the following in its consolidated financial results:

Covenant 1

  • Target shareholders’ equity (excluding minority interest): above $120 million.
  • Actual shareholders’ equity equal to $215 million.

Covenant 2

  • Target ratio of net financial indebtedness to net capitalization (in each case, as defined under the indenture for the Company’s Series B Debentures) bellow 65%.
  • Actual ratio of net financial indebtedness to net capitalization equal to -1.81%.

Covenant 3

  • Target ratio of net financial indebtedness to EBITDA (accumulated calculation for the four last quarters) is below 5.5.
  • Actual ratio of net financial indebtedness to EBITDA (accumulated calculation for the four last quarters) is equal to -0.07.

 

 

 

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