Sapiens Reports Second Quarter 2023 Financial Results

Sapiens

August 2, 2023

August 2, 2023Sapiens International Corporation, (NASDAQ and TASE: SPNS), a leading global provider of software solutions for the insurance industry, today announced its financial results for the second quarter ended June 30, 2023.

Summary Results for Second Quarter 2023 (USD in millions, except per share data)

GAAP   Non-GAAP  
Q2 2023 Q2 2022 % Change Q2 2023 Q2 2022 % Change
Revenue $128.3 $118.6  8.2% $128.4 $118.6  8.2%
Gross Profit $54.7 $50.2  9.0% $58.0 $53.2  9.0%
Gross Margin 42.6% 42.3%  30 bps  45.2%  44.9%  30 bps
Operating Income $19.6 $16.9 16.0% $23.4 $20.7  12.9%
Operating Margin 15.3% 14.3%  100 bps 18.2% 17.5%  70 bps
Net Income (*) $15.4 $11.9  29.3% $18.6 $15.0  24.2%
Diluted EPS $0.28 $0.21  33.3% $0.33 $0.27  22.2%

 (*) Attributable to Sapiens’ shareholders

“Sapiens achieved a strong second quarter, with 8.2% revenue growth and 18.2% operating margin, driven by significant growth in North American and European markets,” stated Roni Al-Dor, President and CEO of Sapiens. “In the second quarter, our North American revenue growth exceeded 8%, and EMEA revenue increased by over 5%. Our Life business is globally successful, fueled by strategic investments in CoreSuite for Life. Sapiens CoreSuite for Life recently won the 2023 Celent XCelent Award in the EMEA region and was recognized as a “Luminary” Policy Administration Solution in EMEA and North America.   We recently announced that Sapiens will integrate Microsoft Azure OpenAI and Azure Power Virtual Agents to provide generative AI solutions for insurance companies.”

“Today, we are raising our full-year Non-GAAP revenue guidance for 2023 from $507 – $512 to $511 – $516 million. We are also increasing the lower range of our operating margin from 17.8% to 18%. Our full year Non-GAAP operating margin guidance for 2023 is 18.0% – 18.2%,” added Mr. Al-Dor.

“We announced today that the board of directors has approved the distribution of a cash dividend of $0.26 per share, or $14.4 million in total for the first six months of 2023.” concluded Mr. Al-Dor.

The dividend will be paid on August 30, 2023, to Sapiens’ shareholders of record as of August 16, 2023.

The dividend is subject to withholding of Israeli tax at source at the rate of 25% of the dividend amount payable to Israeli individual, and non-Israeli, shareholders of record.”

Quarterly Results Conference Call

Management will host a conference call and webcast on August 2, 2023, 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): 1-888-642-5032

International: 972-3-9180609

UK: 0-800-917-5108

The live webcast of the call can be viewed on Sapiens’ website at: veidan.activetrail.biz/sapiensq2-2023. A replay of the call will be available one business day following the completion of the event at the same link for 90 days.

Non-GAAP Financial Measures

This press release contains the following non-GAAP financial measures: non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, 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, compensation related to acquisition and acquisition-related costs, restructuring and cost reduction costs, and tax adjustments related to non-GAAP adjustments.

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 to eliminate valuation adjustment on acquired deferred revenue, stock-based compensation expense, depreciation and amortization, capitalization 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 as well, in order to help investors understand the operational performance of their business.

The Company uses Adjusted EBITDA as a measurement of its operating performance, 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. The Company adds back 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, which 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 (NASDAQ and TASE: SPNS) empowers the financial sector, with a focus on insurance, to transform and become digital, innovative, and agile. With more than 40 years of industry expertise, Sapiens’ cloud-based SaaS insurance platform offers pre-integrated, low-code capabilities across core, data and digital domains to accelerate our customers’ digital transformation. Serving over 600 customers in more than 30 countries, Sapiens offers insurers across property and casualty, workers’ compensation, and life insurance markets the most comprehensive set of solutions, from core to complementary, including Reinsurance, Financial & Compliance, Data & Analytics, Digital, and Decision Management. For more information visit www.sapiens.com or follow us on LinkedIn.

Investor and Media Contact

 

Yaffa Cohen-Ifrah

Chief Marketing Officer and Head of Investor Relations, Sapiens

Yaffa.cohen-ifrah@sapiens.com

+1 917-533-4782

Investor Contacts

Brett Maas
Managing Partner, Hayden IR
+1 646-536-7331
Brett.Maas@HaydenIR.com

Kimberly Rogers
Managing Director, Hayden IR
+1 541-904-5075
kim@HaydenIR.com

 

Forward Looking Statements

Certain matters discussed in this press release are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, and are based on our beliefs, assumptions and expectations, as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: the degree of our success in our plans to leverage our global footprint to grow our sales; the degree of our success in integrating the companies that we have acquired through the implementation of our M&A growth strategy; the lengthy development cycles for our solutions, which may frustrate our ability to realize revenues and/or profits from our potential new solutions; our lengthy and complex sales cycles, which do not always result in the realization of revenues; the degree of our success in retaining our existing customers or competing effectively for greater market share; difficulties in successfully planning and managing changes in the size of our operations; the frequency of the long-term, large, complex projects that we perform that involve complex estimates of project costs and profit margins, which sometimes change mid-stream; the challenges and potential liability that heightened privacy laws and regulations pose to our business; occasional disputes with clients, which may adversely impact our results of operations and our reputation; various intellectual property issues related to our business; potential unanticipated product vulnerabilities or cybersecurity breaches of our or our customers’ systems; risks related to the insurance industry in which our clients operate; risks associated with our global sales and operations, such as changes in regulatory requirements, wide-spread viruses and epidemics like the recent novel coronavirus pandemic, which adversely affected our results of operations, or fluctuations in currency exchange rates; and risks related to our principal location in Israel and our status as a Cayman Islands company. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please read the risks discussed under the heading “Risk Factors” in our most recent Annual Report on Form 20-F, which we filled with the SEC on March 31, 2022, in order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, to conform these statements to actual results or to changes in our expectations.

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES                

CONDENSED CONSOLIDATED STATEMENT OF INCOME

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

 

  Three months ended   Six months ended
 June 30,  June 30,
2023 2022 2023 2022
 (unaudited)  (unaudited)  (unaudited)  (unaudited)
 Revenue  128,299  118,582  253,020  236,277
 Cost of revenue  73,635  68,416  145,327  136,694
 Gross profit 54,664 50,166 107,693 99,583
 Operating expenses:
 Research and development, net  15,746  14,451  31,363  28,601
 Selling, marketing, general and administrative  19,297  18,805  37,816  37,524
 Total operating expenses 35,043 33,256 69,179 66,125
 Operating income 19,621 16,910 38,514 33,458
 Financial and other expenses, net 562  2,467  1,759  2,119
 Taxes on income 3,587  2,512  6,917  5,450
 Net income 15,472 11,931 29,838 25,889
 Attributable to non-controlling interest 69 21 239 53
 Net income attributable to Sapiens’ shareholders 15,403 11,910 29,599 25,836
 Basic earnings per share 0.28 0.22 0.54 0.47
 Diluted earnings per share 0.28 0.21 0.53 0.46
Weighted average number of shares outstanding used to compute basic earnings per share (in thousands) 55,196 55,110 55,176 55,101
Weighted average number of shares outstanding used to compute diluted earnings per share (in thousands) 55,582 55,572 55,576 55,602

 

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   Six months ended
    June 30,   June 30,
    2023   2022   2023   2022
    (unaudited)   (unaudited)   (unaudited)   (unaudited)
GAAP revenue  128,299 118,582 253,020  236,277
Valuation adjustment on acquired deferred revenue 55 23  110  45
Non-GAAP revenue 128,354 118,605 253,130 236,322
GAAP gross profit  54,664  50,166  107,693  99,583
Revenue adjustment  55  23  110  45
Amortization of capitalized software  1,425  1,410  2,856  2,881
Amortization of other intangible assets  1,848  1,608  3,696  3,640
Non-GAAP gross profit 57,992  53,207 114,355 106,149
GAAP operating income  19,621  16,910 38,514  33,458
Gross profit adjustments 3,328  3,041 6,662  6,566
Capitalization of software development  (1,679)  (1,621)  (3,337)  (3,367)
Amortization of other intangible assets  1,084  1,155  2,160  2,399
Stock-based compensation  1,059  1,129  1,922  2,060
Acquisition-related costs *)  4  133  10  400
Non-GAAP operating income 23,417 20,747 45,931 41,516
  GAAP net income attributable to Sapiens’ shareholders  15,403  11,910  29,599  25,836
  Operating income adjustments 3,796  3,837 7,417  8,058
  Taxes on income (589) (768) (1,153) (1,618)
  Non-GAAP net income attributable to Sapiens’ shareholders 18,610 14,979 35,863 32,276

  (*) 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.

Adjusted EBITDA Calculation

U.S. dollars in thousands

 

  Three months ended   Six months ended
 June 30,  June 30,
2023 2022 2023 2022
GAAP operating profit   19,621   16,910   38,514   33,458
     
Non-GAAP adjustments:            
Valuation adjustment on acquired deferred revenue 55   23   110   45
Amortization of capitalized software 1,425 1,410 2,856 2,881
Amortization of other intangible assets 2,932 2,763 5,856 6,039
Capitalization of software development (1,679)   (1,621)   (3,337)   (3,367)
Stock-based compensation  1,059  1,129  1,922  2,060
Compensation related to acquisition and acquisition-related costs  4  133  10  400
     
Non-GAAP operating profit   23,417   20,747   45,931   41,516
     
Depreciation 976 934 2,031 2,075
     
Adjusted EBITDA   24,393   21,681   47,962   43,591

 

Summary of NON-GAAP Financial Information

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

 

Q2 2023   Q1 2023   Q4 2022   Q3 2022   Q2 2022
             
Revenues 128,354 124,776 119,486 119,019 118,605
Gross profit 57,992 56,363 53,774 53,546 53,207
Operating income 23,417 22,514 21,058 20,902 20,747
Adjusted EBITDA 24,393 23,569 22,092 22,036 21,681
Net income to Sapiens’ shareholders 18,610 17,253 18,022 16,871 14,979
Diluted earnings per share 0.33 0.31 0.32 0.30 0.27

 

Non-GAAP Revenues by Geographic Breakdown

U.S. dollars in thousands

Q2 2023   Q1 2023   Q4 2022   Q3 2022   Q2 2022
North America 52,116 50,371 50,801 49,555 48,154
Europe 62,960 64,572 56,910 56,887 59,868
Rest of the World 13,278 9,833 11,775 12,577 10,583
Total 128,354   124,776   119,486   119,019   118,605

 

Non-GAAP Revenue breakdown

U.S. dollars in thousands

Three months ended   Six months ended
June 30,   June 30,
2023   2022   2023   2022
Software products and re-occurring post-production services (*) 82,559 71,965 164,401 147,589
Pre-production implementation services (**) 45,795 46,640 88,729 88,733
Total Revenues 128,354   118,605   253,130   236,322
           

  

Three months ended   Six months ended
June 30,   June 30,
2023   2022   2023   2022
Software products and re-occurring post-production services (*) 42,437 37,599 87,286 78,045
Pre-production implementation services (**) 15,555 15,608 27,069 28,104
Total Gross profit 57,992   53,207   114,355   106,149

 

 

Three months ended   Six months ended
June 30,   June 30,
2023   2022   2023   2022
Software products and re-occurring post-production services (*) 51.4% 52.2% 53.1% 52.9%
Pre-production implementation services (**) 34.0% 33.5% 30.5% 31.7%
Gross Margin 45.2%   44.9%   45.2%   44.9%

 (*) Software products and re-occurring post-production services include mainly term license, maintenance, cloud solutions, subscription, and post-production services. This revenue stream is a mix of recurring and re-occurring in nature.

(**) Pre-production implementation services include mainly implementation services before go-live, which are one-time in nature.

Adjusted Free Cash-Flow

U.S. dollars in thousands

Q2 2023   Q1 2023   Q4 2022   Q3 2022   Q2 2022
Cash-flow from operating activities 14,603 22,188 14,430 4,405 6,615
Increase in capitalized software development costs (1,679) (1,658) (1,238) (1,492) (1,621)
Capital expenditures (775) (634) (400) (1,047) (803)
Free cash-flow 12,149 19,896 12,792 1,866 4,191
Cash payments attributed to acquisition-related costs(*) (**) 30 1,100
Adjusted free cash-flow 12,149   19,926   13,892   1,866   4,191

(*) 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.

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

U.S. dollars in thousands

 

June 30, December 31,
2023 2022
 (unaudited)  (unaudited)
 ASSETS
 CURRENT ASSETS
Cash and cash equivalents 89,417  160,285
Short-term bank deposit 90,000  20,000
Trade receivables, net and unbilled receivables 89,338  93,382
Other receivables and prepaid expenses 14,539 11,640
Total current assets 283,294 285,307
 LONG-TERM ASSETS
Property and equipment, net  11,453 12,021
Severance pay fund  3,696 3,996
Goodwill and intangible assets, net 312,474 319,661
Operating lease right-of-use assets 25,264 33,688
Other long-term assets 16,864 13,671
Total long-term assets 369,751 383,037
 TOTAL ASSETS 653,045 668,344
   
LIABILITIES AND EQUITY
 CURRENT LIABILITIES
Trade payables  8,475  9,415
Current maturities of Series B Debentures  19,796  19,796
Accrued expenses and other liabilities  68,553  76,962
Current maturities of operating lease liabilities  7,463  9,063
Deferred revenue  36,275  30,720
Total current liabilities 140,562 145,956
 LONG-TERM LIABILITIES
Series B Debentures, net of current maturities  39,511  59,275
Deferred tax liabilities  12,218  11,363
Other long-term liabilities 12,728 13,312
Long-term operating lease liabilities  22,037  28,432
Redeemable non-controlling interest  85  89
Accrued severance pay  7,223  7,063
Total long-term liabilities 93,802 119,534
EQUITY 418,681 402,854
TOTAL LIABILITIES AND EQUITY 653,045   668,344

 

SAPIENS INTERNATIONAL CORPORATION N.V. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

U.S. dollars in thousands

For the six months ended June 30,
2023   2022
(unaudited)   (unaudited)
Cash flows from operating activities:
Net income 29,838 25,889
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization 10,743 10,995
Accretion of discount on Series B Debentures 32 42
Capital (gain) loss from sale of property and equipment 86 36
Stock-based compensation related to options issued to employees 1,922 2,060
Net changes in operating assets and liabilities, net of amount acquired:
Decrease (increase) in trade receivables, net and unbilled receivables 2,351 (10,758)
Increase (decrease) in deferred tax liabilities, net 45 (607)
Decrease (increase) in other operating assets (390) 4,151
Increase (decrease) in trade payables (1,014) 7,035
Increase (decrease) in other operating liabilities  (12,572)  (10,662)
Increase in deferred revenues  5,284  (3,090)
Increase in accrued severance pay, net 466  (146)
Net cash provided by operating activities 36,791 24,945
Cash flows from investing activities:
Purchase of property and equipment  (1,439)  (1,265)
Investment in deposits