Sapiens Intl (SPNS) is trading higher today (+8%) after reporting Q2 results this morning. Since you're probably not familiar, Sapiens is an Israel-based provider of software to the insurance industry with an emerging focus on the broader financial services sector.
Insurance carriers are required to comply with regulations that are frequently changing. A majority of insurance carriers are still using inefficient and outdated systems which tend have high error rates. Sapiens offers core, end-to-end software to the general insurance, property and casualty, life, pension and annuities, and retirement markets, as well as business decision management software.
SPNS believes that it's very well positioned to become one of the dominant players in this market over time. This is a huge market with 11,000 potential carriers (Sapiens focuses mostly on Tier-1 and Tier-2 insurance carriers) and the move from legacy systems to updated platforms is still in the early stages. Also, they said that once you get your foot in the door, you can be at that customer for 15 years or more, so its platform is very sticky. This also has led to a sizeable percentage of revenue being highly recurring in nature.
SPNS has said in the past that it believes its market is very similar to what the ERP market was 10-15 years ago. There, the participants started out small, then in 3-5 years, the market evolved into a smaller amount of larger players. Sapiens thinks it can become one of those larger players in the insurance software market. They say they are among the best in terms of technology and there are simply not a lot of competitors.
The stock has been trending lower since February. A big part of that was an announcement in late April that a software development project with a significant customer had been halted. Sapiens stressed that the disagreement was related to a jointly developed product, which is unrelated to the other software products currently sold by Sapiens. The company said back then that this would result in non-GAAP operating margins falling to 3-4% in 1H17, then increasing to 13.5%-14.5% in 2H17.
Turning to the Q2 results, non-GAAP EPS fell to $0.04 from $0.13 in the prior year period, but that was in-line with market expectations. Revenue rose 30.6% year/year to $69.2 men, which was better than market expectations. Part of that nice revenue growth was from the StoneRiver acquisition.
Non-GAAP operating margin came in at 4.7% which was higher than prior guidance of 3-4% and above the 3.0% result in Q1. Sapiens is reaffirming prior guidance for 2017 with revenue of $265-275 mln and it's reaffirming its non-GAAP operating margin guidance of 13.5-14.5% in 2H17 as well as its expectations for full-year operating margin of 9-10%. In terms of the StoneRiver acquisition, SPNS says it has made solid steps in combining the two organizations. Each StoneRiver division has been fully merged with its peer division at Sapiens, with all of its US P&C activities now in a single group.
In sum, investors seem to be quite pleased that SPNS actually did what it said it would do. The halt of that software project really spooked investors, but the upside margin result in Q2 and the reaffirmation that non-GAAP operating margin will snap back to 13.5-14.5% in 2H17 is being seen as reassuring. That software project had put a cloud over the company but today's report signifies that SPNS is putting it in the rear view mirror and it seems like it will not have an impact on 2H17 results.