Sapiens International Corp NV

Welcome to Sapiens International Corporation's 2021 Fourth Quarter and Fiscal Year Financial Results Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded February 23, 2022. It is now my pleasure to introduce your host, Tali Kaplan-Porat, Director of Corporate Marketing. Thank you, Tali. You may now begin.

Thank you, and good day, everyone. Sapiens' fourth quarter and full year 2021 earnings release was issued before the market opened this morning and has been posted on the company's website at www.sapiens.com. Representing Sapiens on the call today are Rony Aldor, President and CEO, and Rony Gilady, our CFO. Before we start, I'd 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 the call. Sapiens disclaims 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 our call today, we will refer to the non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results have been provided in our press release 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 Sapiens website or via the website link which is available in the earnings release we published today. I will now turn the call over to Rony Aldor, President and CEO of Sapiens. Rony?

Thank you, Tali. I would like to welcome everyone to our call today to review Sapiens' fourth quarter and full year 2021 financial results. I will begin with highlights from our financial performance and give an overview of our progress in 2021, followed by Roni Gelady, who will review the financial results and our outlook for 2022. Before I begin, I would like to congratulate my global team on the outstanding job they did in 2021, often under challenging global market conditions. The team's efforts result in another year of record revenue and delivery excellence for the benefit of our customers. Starting with a brief comment on the financial results, acceptance finished the year on a strong note, with fourth quarter revenue growing 16.4% to $119.9 million, an operating profit of 18% on par with last year's results. We maintain profitability despite the increase in employee costs and higher than normal attrition in the second half of 2021, which our industry and many sectors continue to face. For the full year, revenue increased by 20.2%. 6% to $463.6 million, and we deliver an operating margin of 17.6%. These record results are a direct outcome of our talented team who, together with the quality and diversity of our product lines, validate our strategy. Sapiens' global customer-centric approach delivers consistent long-term growth, profitability, and cash generation. Our strategic priorities are the platform for our success, continuous product innovation and expansion of our offering, our land and expand approach, both geographically and with existing clients, and providing exceptional value to our customers across their life cycles. All of these strategic elements provide us with numerous growth levels. We continue to execute on our one hand to shake business model. Our approach combines cloud-based digital insurance platform with high quality program delivery, professional services, and cloud managed services. This model brings value to our customer as we are committed to a successful delivery. At the same time, this model brings value to us, allowing us to benefit from a robust, sticky revenue model with a significant percentage of recurrent revenue. We have delivered 17% compound annual revenue growth over the past 10 years and more than doubled our annual operating profit from 8.5% in 2017 to 17.6% in 2021. Part of our long-term success is the result of evaluating strategic additions or change to our business model to fuel future growth. Currently, we are exploring ways to leverage our platform with new distribution relationships that can maximize customer acquisition in key markets. As a result, we are initiating partnerships with a few leading global system integrators for specific segments, of our businesses. We are in the early stage of this conversation and we are encouraged by the level of interest. Looking ahead to 2022, we will continue to execute and grow while navigating the challenges that global businesses face in the current environment. Shifting to our regional performance in 2021, starting with Europe. Europe was the leading growth region for Sapiens in 2021, and it's projected to continue this robust growth in 2022. Revenue increased 38.5%, making 2021 of the best year for Sapiens in the region. We signed multiple new logos across various segments, and we saw substantial increase in our average deal size in the region. Important trends we experienced are in the increase in our engagement with the Tier 1 and 2, and a growing interest in life and P&C transactions. In addition, we are seeing traction from global carriers seeking a single solution that can be deployed across multiple territories. These trends that emphasize Sapiens differentiators in the market. We gain industry analyst recognition and won several key product awards. The continuous recognition of our European offering by Celent and Gartners bring further competitive advantage to Sapiens. In fact, we were the only one vendor recognized as a leader in two Gartner Magic Quadrant in Europe for both Life and PNC. We experienced substantial growth in the Life and Annuity and PNC thanks for the differentiation of our technology, functionality, and product excellence, together with our delivery capabilities. Sapience is successfully building long-term relationships with customers across tiers, including Tier 1 companies in European countries, where we have an established presence. We continue to add excellent references in the region, supporting our future growth. Our business in Europe also accelerates thanks to the recent acquisitions in the Iberia, which includes Spain and Portugal, DACH, which include Germany, Austria, and Switzerland, and the Nordics, which include Denmark, Sweden, Norway, and Finland. These acquisitions are examples of our successful land and expense strategy. Our market expansion brings influential customer reference and benefits of our local presence, promoting robust goals and pipeline build. In 2021, we completed the TI integration across products, employees, and customers. We are enjoying tremendous benefits from the acquisition, which enhance our already strong market presence in the Nordics. TS customers showing increasing interest in Sapiens offering, which we anticipate will contribute to our growth in 2022. As with prior acquisitions, we have improved the profit margin contribution for this business. In German speaking region, we have growing PNC pipeline and have successfully closed new businesses. In this strategic market, the combination of organic investments supported by local presence via the Suncumo acquisition has contributed to growth of our businesses and successful customer delivery, building our pipeline for growth in 2022. Our positive momentum in life and annuities in Europe is a mature and advanced pipeline representing significant engagement with Tier 1 and Tier 2 customers. Sales process with higher tiers can be lengthy, and we expect they will mature to full deals in 2022. Also, the APAC in South Africa regions continue to show growth. In these two markets, we enjoy growing traction and market recognition which we expect to continue well in 2022. In APAC, Sapiens was selected by BKI, a Thailand's leading non-life insurance, for one of the largest digital core transformation in APAC. BKI deployed multiple solutions from Sapiens that lowered their operating costs, improved underwriting and claims decision, and accelerated their product innovation for BKI. In South Africa, Sapiens' cloud-native digital solution was selected by APSA, one of South Africa's largest financial institutions, in their transformation from legacy system to launching its full digital insurance products. Now, let me move to update on North America. In the North America region, we have built a strong foundation for growth across people, product, and practices. Under the leadership of Jamie Uder, we have built a team that is scaling up the organization and accelerating our delivery. The pipeline is growing and we are optimistic that we can deliver improved growth in the second half of 2022. Overall, our PNC business in North America is continuously improving with stronger delivery capabilities and higher caliber professionals who have joined the team. We expect to see new wins and growing revenue in our P&C businesses in North America later 2022. The U.S. workers' core market is starting to recover after being impacted by the employment market slowdown. Our team is re-engaged, and we anticipate regaining traction in the second half of 2022. I'm pleased to say that our life and annuity business is gaining momentum again in North America. Our product and platform investments are producing results across both our core solution and component. Guardian Insurance is an excellent example where SAPIEN's life components were implemented with analytic solution to provide cutting-edge underwriting capabilities. Our pipeline for core suite for life and annuity is also growing, and in Q4, 2021, we were selected to perform a blueprint process with the North American carriers, which is the last stage before full deal closure. We are confident that our life and annuity businesses can deliver revenue growth in 2022 and build a solid pipeline toward 2023. Other parts of our North America business, like insurance and decision, continue to grow steadily, building a solid pipeline for 2022. We announced an important win with decision at guard. Berkshire Hathaway companies, a solid validation of our platform value to carriers and one that enhance our brand in the market. In third quarter of 2021, physician insurance select sapiens to transform insurance process and move to the cloud. Physicians deployed Ransurance Pro to replace their legacy process and automate the Ransurance for efficient processing and management. I'm encouraged to see the team achieving wins on this level. On the product front globally, let's look at how product innovation is lending new businesses. I've stated before that one of SAPIEN's top capital allocation priorities is R&D. Again, in 2021, we saw our commitment to innovations in our ongoing platform improve in return. Our cloud and digital offering, along with our decision platform, were goal levels for Sapiens in 2021, reflecting our investment over the past few years. We have consistently enhanced our cloud proposition. Today, our solutions are increasingly cloud-native, offering our customers greater scalability and performance. As a result, 90% of new deals are now delivered on the cloud, which increases recurrent and reoccurring revenue. We went live with Eastcorp Europe on the cloud to deliver on their vision to build special pan-European insurers. The East Coast Europe Gold Life in Germany is the first multi-phase strategy with five additional European countries to follow. East Coast Europe needed solutions to replace legacy platforms and tools that would allow them to adapt to market evolution quickly. This customer is an excellent example of our ability to deliver our multi-platform product line on the cloud in a global solution for large multinational company. In October of 2021, KW Speciality chose an expense-sapiens relationship, moving reinsurance management delivery on the cloud. KWS is benefiting from 24-7 accessibility and agility of the cloud and benefit of access to many services. This was a significant upgrade from their legacy spreadsheet-driven process and expand KWS competitive age. A primary goal for our product innovation is to assure an excellent customer experience for our clients. Therefore, a key focus is our ongoing development and improvement to advance functionality of our digital offering. Our digital suite includes a wide range of advanced digital solutions. Companies can rapidly deploy our digital solution as a pre-integrated model together with our core solution or agnostically as a standalone module across their existing core system. For example, Copic Insurance selected Sapiens Digital Suite to allow agents and staff to manage its pipeline, sell policies, and provide high-quality customer services in real time. Copic values Sapient's ability to improve the customer experience on multiple fronts while increasing employee efficiency and processes. Another business-lead innovation in our digital platform is our low-code, no-code approach that allows customers to move into the new markets rapidly with a fully configurable process automation. Customers can benefit from our advanced analytics, and machine learning capabilities to create predictive analytics and real-time analysis feature that can enable data-driven businesses' processes. As I mentioned earlier, we announced that Guardian Group selected Sapiens to smartly automate their underwriting process. They chose Sapiens Intelligent to accelerate their life and health underwriting and leverage our best practice, various data sources, and AI. The Atidot Predictive Analytics, a long-term insurance partner of Sapiens, was also part of this solution. Sapiens' extensive InsurTech ecosystem enhance the value proposition we provide to Guardian customers, promoting innovation and disruptive technology to open API architecture that delivers seamless customer integration. Our Sapiens decision is used by Tier 1 financial institutions to modernize traditional business rules management and enable quick response to market regulatory change. In the past few years, we have won several decision contracts with T1 carriers and have substantial growth, the penetration into the insurance market. As part of our increased focus on innovation, technology, and cloud services, we recently announced a new Chief Technology and Information Officer, Ilan Boganim. Ilan brings vast technology experience from his numerous leadership position in both solution provider and client side. At Sapiens, Ilan will lead our cloud journey and digital offering, as well as develop a coherent views across our product offering. Looking ahead to 2022, The global trends of accelerating digital transformation and changing customer expectation means that insurance must continue to modernize their system to remain competitive. Sapiens is well positioned to grow in its primary market. We will leverage our strongest year on record in Europe to continue the momentum in 2022 with a growing pipeline and in a few large deals with higher tier customers moving to closing. In North America, we have done the groundwork to return our PINCIP businesses to growth in the second half of 2022 and into 2023. We are pleased with the improvement in life and annuity that should deliver growth in 2022 and with the ongoing success of reinsurance and decision in North America. Ongoing product innovation continues to earn industry analyst awards and gain traction from the market. In most of our recent deals, we have provided customers with multiple software solutions from Sapiens, and the majority of our new wins are delivered on the cloud. And last, the expanding partner ecosystem collaboration helps our customers stay competitive in a rapidly changing market. We cannot ignore the challenge that 2022 brings. Together with our positive momentum with Tier 1 and 2 customers, the process of closing these deals, which are bigger in scope and size, can be longer. That being said, we are confident that we can close these deals. In digital transformation, insurance talent is critical in order to be able to successfully deliver the project. CEPENT is experiencing the same employment challenges that the global market is facing, with the big resignation in one hand and rise of employment costs on the other hand. We are building mitigation plans to address these challenges, leveraging our global presence, our near-shore and offshore location, and growing partners network we are building. Growth, profitability, and high cash generation are hallmarks of Sapiens. our solid footing in the global insurance market and ongoing recognition of our value proposition position us for continued success. We remain committed to execute our strategy to deliver growth and improve shareholder value. Now I would like to turn the call to Rona Giladi, our CFO. Rony?

Thank you, Rony. I will begin my commentary with the review of the fourth quarter and the full year of 2021 non-GAAP results, followed by comments on the balance sheet and cash flow. I will wrap up with our guidance for 2022. Revenue in the fourth quarter of 2021 increased to a record of $119.9 million, up 16.4% from the fourth quarter of 2020. Overall organic growth this quarter increased was 11.6% and the rest was TIA two-month revenue contribution in the quarter. Currency in this quarter versus last year was headwind in the amount of $1 million to our revenue. Our revenue in North America was $48.9 million compared to $47.3 million a year ago. We grew 3.3% organically after a year of stabilization in North America. At the same time, we remain stable at the level of Q3 of 2021. Revenue in Europe reached $62.4 million, up 26.8% compared to a year-ago quarter. This growth continued the strong momentum we have in Europe. Rest of world, which represent APAC and South Africa, grew from $6.4 million to $8.6 million. Moving to gross profit. Gross profit in Q4 of 2021 was $53.9 million, up from $47 million in Q4 of last year, an increase of 14.6%. Our gross margin this quarter was 45%, slightly below 45.7% in the comparable quarter. This result is despite the global increase of labor costs In addition, if we eliminate currency headwinds, our gross margin would have been 1% higher and at 46%. Moving to operating profit. Operating profit this quarter was $21.6 million, up 15.7% from $18.7 million in Q4 of 2020. Operating margin was 18% this quarter, mostly unchanged. from 18.1% in the fourth quarter of 2020. Again, we reached operating margin despite facing challenge from global increase of labor costs and currency headwinds. Net income attributed to SAP and shareholders for the quarter was $17.7 million, up 22.3% from $14.5 million in Q4 of 2020. EPS for the quarter was $33. 2 cents per diluted share compared to 27 cents per diluted share in the fourth quarter of last year, reflecting EPS growth at 18.5% on a higher share count. Turning now to our full year result for the 12 months ended December 31, 2021. 2021 revenue increased to $463.6 million, reflecting strong growth of 20.6%, and in line with our guidance at the midpoint. This revenue level was achieved despite the challenge of higher than normal employee attrition rate, generating a revenue challenge. Growth this year came mainly from strong momentum in Europe and rest of the world. Europe is representing 51.7% of our total revenue, while North America 40.8% and rest of the world 7.5%. Our P&C in life and annuities are significantly the largest product lines and represent 92.5% of our business. Revenue from our P&C product line grew by 21.9% and life and annuity by 22.1%, while decision and technology product line grew together by 5.7%. Our revenue diversity is also represented by the spread of revenue among our customers. Our top 10 customers represent 21.3% of Sapiens revenue, and the largest customer represents 4.6%. Organic revenue growth in 2021 was 10.8%, while M&E contribution was 9.8%, which totaled 20.6% of overall growth. In the full year of 2021, we had currency tailwinds which supported our revenue growth by 2%. M&A contribution was $37 million, which includes revenue from Sumcumo, Delphi, and TIA. In 2021, we did not close any new M&A transaction as the valuation of deals under consideration were relatively higher compared to previous transactions we completed. Operating margin. reached 17.6% compared to 17.7% in the previous year. Operating margin this year was affected by cost increase in onboarding and training of new employees, as well as increase in IT global salaries. In addition, we see lower profitability in CoreSuite North America due to additional investment in product and delivery in order to return back to growth. Currency tailwinds was minimal at 0.1%. Solid revenue growth and diligent management of our operating expenses resulted in operating profit in 2021 of $81.4 million, a 19.9% increase from $67.9 million in the previous year. EBITDA increased by 19.5% to $86.8 million in 2021. Our adjusted EBITDA margin for 2021 reached 18.7%. EPS per diluted share reached $1.18, up 18% from $1 per diluted share in 2020. Turning to our balance sheet, as of December 31, 2021, we had cash and cash equivalent and short-term deposit totaling $210 million and total debt of $100 million. which will mature in the next five yearly equal installments. Touching upon adjusted free cash flow. During 2021, we generated free cash flow of $68.8 million, which represents 105% of our non-GAAP net profit. The solid and strong performance reflects our proven ability to convert net profit into cash generation and emphasize SAPAM's strength and ability to generate free cash flow. During 2021, Sapiens Free Cash Flow grew by 38% compared to 2020. I would like to turn now to our guidance for 2022. In guiding our 2022 revenue, we are taking the following into consideration. One, foreign exchange rate may also be unfavorable headwind in 2022, which could impact growth. Today, 60% of our business is in Europe and the rest of the world. The current currency, compared to the average of 2021, creates headwinds to our revenue of about 1.8% of growth. The great resignation phenomenon is reflected in the IT sector and our business and is seen by increased attrition rate and recruitment difficulties. On a positive note, Despite the higher attrition rate, we have been able to recruit new employees to support our growth. Following those reasons, in 2022, we expect revenue in the range of $495 to $500 million, which translates to year-over-year growth of approximately 7.3% at the midpoint. If we eliminate currency impact, which today are headwinds to our numbers, our revenue at the midpoint would have been $8 million higher with organic growth of 9.1%. While guiding the full-year revenue, we anticipate Q1-22 to be lower than Q4-21 and at the level of $116 to $118 million. The main reason is go-live of several customers by end of 2021, and a few prospective customers with significant deal size have advanced to a blueprint phase We expect this will contribute to our growth in H2-22 and have major impact into H2-23. On the profitability side, we are guiding our profit margin to be at the level of 17% to 17.3%. When analyzing our yearly profit margin, we have been affected by currency headwinds at the level of 1% of operating margin. Without currency headwinds, our margin would expand approximately by 60 basis points and reach a midpoint level of 18.2% of operating margin. We anticipate that our annual effective tax rate will be in the range of 17.5% to 18.5%, representing approximately a 1% improvement versus 2021. On the M&A side, we continuously evaluate M&A opportunities We see valuation change in the public market, which we assume will also lead to a change in the private company's valuation. We continue to explore opportunities that we find a good fit to our strategy to deploy our current cash position. I will now turn the call back to Roni Eldor. Roni?

Thank you, Roni. Sapiens is well positioned for future growth, performance improvement, and expansion. We are excited to see the growth opportunity and the increasing demand in the traction for our products and services in Europe and APAC. We are steadily improving our North America business toward growth later in the year, and we are walking through the market challenges that we and our peers are experiencing. Our plans for 2022 will build based on cautious approach that takes into consideration these global challenges. Sapiens' excellent track record in delivering growth and managing costs to protect and improve profitability will continue to lead us in 2022. We have a solid customer base, a world-class global team, an industry leading in diversified product offering, and an outstanding balance sheet that provides the resource to grow our businesses. I'm confident that we will achieve our objective and enjoy ongoing success. Looking ahead into 2023. First, 2022 will be affected by high investment in North America in order to improve our growth in North America, which will affect 2023 Sapiens total overall growth. Second, several global large deals will start in 2022 and will have significant impact in 2023 revenues. Overall, we expect improvement to our growth rate in 2023. I would like now to close our prepared remarks and open the call for questions. Please.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Please ask your questions in a loud and clear voice. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Mayank Pandhan of Needham and Company. Please go ahead.

Hey, good morning, guys. This is actually Kyle Peterson. I'm from Mayank. Thanks for taking the questions. I just wanted to touch a little bit on the puts and takes for the margin outlook. It seems like at least on a reported basis, there's kind of 30 to 60 bips of Love year-over-year pressure in the guide. Sounds like at least a decent chunk of that is FX-related. But just wondered if you could walk us through some of the changes, the impact of the investments in North America, as well as kind of wage pressure and how we should think about some of the puts and takes on margin, especially as the year unfolds.

Hi, this is Roni Giladi. With regard to guidance, you asked about the margin expansion or margin decline this year at the guidance. We closed the year at 17.6% and we are focusing to have a margin between 17 to 17.3. Several elements have affected this margin. The first one is the currency headwind. we estimate the current currency to have impact of about 1% on our margin. If we add this, we are already above what we closed in 2021. The second thing is the phenomena about the greater resignation. We are experienced in other software companies, higher attrition rate and onboarding, which cost us more money in order to train the employee. This also has an effect on cost. In addition, labor cost was increased dramatically or significantly versus last year. So all in all, these three reasons impact our margin, but at the same time, we've been able to increase our offshore. Offshore sapiens grow and offset some of the impact that I mentioned earlier. So if I need to summarize, we are expecting to be without currency impact at the level of 18.2%, but with the currency headwind, we are between 17 to 17.3%.

Okay. That's a really helpful color. Maybe just a follow-up on some of the trends you guys are seeing in the RRW regions, just like APAC and South Africa and And those regions seem to be growing really, really strong. Just wondered, what do you think is the biggest driver behind some of the growth in those regions? And how should we think about kind of that business in 22 and the growth outlook as well?

Hi, this is Rony Aldor. As I mentioned in my discussion, we are seeing growth in all what we call the rest of the world, including Europe, Asia-Pacific, and South Africa. I think there are several reasons for that. One is our product offering, the recognition that we got from Gartner and Celent, the reference, Our business model as an SI, all in all together, including the digital offering, the managed service, the cloud services, and so on. And also in terms of the competitor landscape is also helping us. We still have a huge advantage against the competition at this moment. So this is the reason that we continue to see the growth. And in Europe, we really become a market leader in so many products. So this is why we feel comfortable on the growth.

One comment from my side. When we are analyzing the growth in APAC in South Africa, there is some part of M&A impact into this. Although the growth is still high, about 20%, Some of the additional revenue came from the acquisition of TIA and Delphi at this region. So all in all, we are growing double digits very nicely, but there is also flavor of M&A.

All right. That's helpful. Thanks, guys.

The next question is from Jackson Ader of J.P. Morgan. Please go ahead.

Great. Thanks for taking my questions, guys. On North America, I'm just curious, you know, for either looking into 22 or 23, what do you guys think needs to happen? Is it execution, like literally just getting pen on paper? Is the product not there yet in P&C? Is it a go-to-market initiative that really needs to hit, you know, What are the reasons why the second half of 22, the booking should be better, and then heading into 23, growth should be better on the regular side?

Hello, Jackson. This is Alex Zuckerman. Looking at our operation in the North America market, we can look at several aspects of this business. Looking at our life operation, we do already see an increase in revenue, an increase in pipeline, and a strong traction in the market. And when we look at our life components, we see not only an increase in the pipeline, already this year we expect a growth in the revenue. And in 2023, we hope to see even a larger growth based on the success of 2022. When you look at our course with life, life and annuity, our policy administration system for the North America market, We have penetrated during 2021 to the market, started to do more activities. We secured two blueprints, which for us a blueprint is the last stage in the process before the concrete deal and the start of the implementation. So we have secured two during 2021, and we will see the revenue and the business grow in 2022. And based on that, also, we expect substantial growth in 2023. So that's on the life business. Similarly, in decision and reinsurance, we see a steady growth year on year in both those businesses, very steady market leaders, and we foresee the continuation of this trend. Looking at our P&C business, as we also talked before, during 2022, 2020 we had a significant growth in terms of new business and new projects which eventually in 2021 we had a lot of delivery challenges to be able actually to comply with all those new customers and the business of delivery went into some difficulty and this is what we did during 2021 is a lot of effort in structuring and taking this business back to to proper delivery. This also includes bringing new people like Jamie Yoder that also brought additional management members to enhance our capabilities around delivery, strengthen the operation, and we do foresee some growth already in the later part of 2022.

Jackson, if I may add, also regarding North America and the margin, If I look at all the business of Sapiens, all of them are profitable. We at the management have decided to invest more on P&C course with North America on the product and delivery. So this is the one area that is not profitable, obviously affect the margin, but we intention to improve growth later end of this year in 2023. So also combination with the margin about the situation P&C North America.

All right, great. And then a follow-up on the cloud. So, Ronnie, you mentioned the majority, I think, of your new business was signed to the cloud. I'm just curious, when the decision is made around a cloud deployment, does the architecture or the technology infrastructure change? you know mattering more than your kind of one hand to shake bundling of products and services that you that has been the sapiens calling card maybe in an on-premise world we don't see a direct linkage between between the two the two trends so a cloud deployment

is required by our customers due to the technology and the benefits they get from a cloud deployment, while the system integration part, we have chosen for that typically because the customers believe in the efficiency of this model and in the one and two shape. However, there is kind of a potential linkage there because once these customers provide us with the trust of doing the full delivery, it's also easier for them to give us the full trust in not only installing it in the cloud, but also providing full cloud-managed services around that. And there is a kind of a trust from those customers also connected to the fact they give us the trust on the implementation.

Okay. All right. Makes a lot of sense. Thank you.

Thank you.

The next question is from Bhavansuri of William Blair. Please go ahead.

Hey, team. Thanks for taking my question. I guess let's just start at a high level, maybe for both Ronis. When you look at the next 12-month guide, you sort of said we're going to be conservative. We're going to be back half-laden. We've seen Projects sort of go live in Q4 21, and so the services business, that obviously ramps down once they're in production. But you have some big deals. I guess help us think through how conservative you're being with the big deals. If you've got 10, are you thinking 5 will close? If you've got 20, do you think 10 will close? How should we think about that? Even if you've got the blueprint, some of those don't play out. Sometimes today's labor market, it's hard to find people, so they get delayed. Help us think through how conservative you are.

Hi, Baban. We are not talking about several big deals. We are talking about a handful of big deals that can have an impact on the revenue. And obviously, they are larger than, not mega, but larger than the typical. We are in a blueprint phase with these customers. So obviously, in the doing due diligence both sides, scoping, timing, and also pricing on that. Traditionally, this takes longer. We thought it would come earlier this year, but it takes an additional few months, and therefore the delay in the year, and therefore the growth that we emphasized. We feel comfortable about the deal. We feel we will sign them close to the end of the first half of this year and have impact on the second half of 2022.

Yeah, I guess just to be very clear, so you're assuming the deals that you have blueprints for, they will all close in the first half, or do you think you've given yourself a little room in case they get pushed out?

We plan the revenue, by the way, not for all the deals. but most of them, again, handful, not a lot, that will come second half of the year in terms of revenue. So we'll close by end of H1, the revenue will be in Q3. Got it.

So then let's talk about labor, right? So that's a problem because we know people are hopping. There's a lot of wage inflation everywhere. Life in Israel has become very expensive, but in many other places. Help us think through what you're doing specifically to offset some of the attrition challenges because you need people to deliver, you need people to implement, you need people to do all the work. What are you doing to sort of address attrition, manage attrition? Can you buy another business in India like you have in the past to do that? Help us think through what you're doing to address the attrition issue.

I will... No, no, go ahead. Okay, so overall the attrition was in 2021 and obviously we've seen... higher than normal attrition rate, but I can say that the total number net employee in 2021 grew by almost 500 employees. This allows us to continue to grow. I call SAPIEN like we have a firm inside the company of recruitment. We are recruiting. We have a dashboard on a monthly basis on attrition and recruitment from all positions. We are focusing on positions that surround a team around them that can deliver people. And for those ones, we are basically making sure that the salary that they have, the one that we have in the company today, matches the market. Obviously, there is an increase in salary, sometimes even very high. But these guys, around them are about 20, 30, 50 employees sometimes in order to lead the project. We are focusing on promoting employee insight. This gives them motivation, higher salary, and by doing that, we are also managing the attrition in promotion. So several things that we are doing. Overall, we are monitoring this very closely, all the division. Each one of them have a target on a monthly basis in order to make sure that they can generate revenue.

Gotcha, gotcha, gotcha. One last one for me. maybe for Alex and for Yoder if he's on. But PNC North America, you said you're going to invest in the product and R&D and things like that and delivery. But I guess my question to you is, do you think it's product or do you think it's go-to-market? It's been a couple of years now, PNC North America has kind of not done well. You brought in Yoder in April of last year, I think, to sort of help drive some improvement. I think Alex said you're seeing some early signs But do you think it's a product issue, or do you think it is more R&D in the product, which you mentioned? Or do you think it's a go-to-market awareness brand perception, which is a slightly different investment? Or is it both? I'd love to talk through those two things.

Very well. I'll try to answer you, Baban. I think, actually, you touched base on the three main factors that we see as a combination. In terms of, first of all, our brand recognition around P&T in North America. So this product is an... basically came to Sapiens through acquisitions of Stone River and then adapting and then creating this new product. And it takes time to push it stronger to the market and to have brand recognition and market recognition around the product being relatively new in the market as the combined suite. So this is one factor. And we are taking some steps this year in specifically for North America marketing to improve our operations around it. The other point, as we mentioned before, it's around the organization. We felt the organization had the difficulty to cope with the level of the business that they had to deliver and maintain during 2022, hence the joining of Jamie and then joining of additional executive team specifically around the PNC business. to help drive customer engagement, scoping, doing better the scoping, and the delivery part. And the third point is definitely we invest and put substantial investment in the product level in order to ensure, first it's that we are constantly upgrading the technology capabilities, but not less important, big part of our investment in the product is to assist in the delivery of the upcoming project and all the delivery challenges. So around operability and around the ability to grow in terms of new resources, the recruitment, and to make their onboarding faster and more template in order also to go to market faster and to help with the delivery challenges.

Gotcha. Gotcha. That was really helpful. Thanks for the detail there. I appreciate it, gentlemen. Thanks. Thank you.

The next question is from Tavi Rosner of Barclays. Please go ahead.

Hi, this is Chris Reimer on for Tavi. Thank you for taking my questions. Actually, everything has been asked mostly that I was interested in, but on a technical issue, You've reported financial income as opposed to financial expense over the last two quarters. Is that something you expect to continue, or was that just a temporary impact?

Hi, this is Rony Giladi. We had some currency hedging that we did, which obviously created income to us. I assume that we need to plan going forward about $3 million expenses of our debenture.

Expense?

Yes, correct.

On a yearly basis?

Correct.

Sorry, you said $300 million on a yearly basis expense.

Hi, again...

this quarter we had income because of the hedging going forward into 2022 we should plan on a yearly basis expense of three million dollars three sorry yeah gotcha and uh just touching on the operating margins again uh given what you mentioned already before will we be still seeing the the higher levels of r d throughout this year

As Ronnie and Alex mentioned earlier, we are focusing on improving our product. We've seen the report slightly increase in R&D percentage. We would like to continue. Ronnie mentioned the joining of Ilan Buganim to the company to move most of the growth engine of the company to the cloud, so we'll see slightly increase in R&D. Correct.

Gotcha. Okay. Thank you. Thank you very much.

The next question is from Omri Lapidot of Lumi Partners. Please go ahead.

Hey, guys. Thanks for taking my question. You're describing a lot of improvements, strong team in the U.S., strong momentum in Europe, yet 2022 guidance presents slowdowns of growth. Can you shed some light regarding this trend? How confident are you about regaining double-digit yearly growth in the future? What is the growth potential you see for the U.S. in 2023? Any light could help.

Hi, Omri. This is Roni. When we analyzed 2021, we see clearly one area which is flat, North America, and two areas that are growing very nicely, Europe and APAC, or rest of old. If we are looking also into 2022, we will see some improvement, let's say low single digits in North America and continuation of Europe and the rest of the world. We are investing this year in order to see improvement into 2023, more in North America in order to take the entire growth rate up for the overall company. If I analyze 2022 growth rate, we reported about 7.3% organic growth. But this includes the currency impact. If we eliminate this, we are at 9.1%. At the range or the level that we mentioned, between 8 to 11, this is what we are shooting. So if we are looking at something more than that, potentially in 2023.

So you feel you can go back to double-digit growth in 2023? Yes. and it mainly depends on the improvement you're doing in the U.S.

Correct. U.S. is 40% of the business, and in order to increase the growth on the overall basis, we need to do a step there that Ron and Alex mentioned earlier. The answer is yes, correct.

Okay. Thank you.

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Aldor to go ahead with his closing statement, there is an additional question from Surrender Thind of Jeffries. Please go ahead.

Hi, this is Benjamin Huang, down here for Surrender. I was just wondering like in regards to sort of wage inflation pricing, how has the conversation been with both existing and new clients? And are you able to pass some of the pricing over to the clients by any chance?

Hi, this is Ronnie. So far, we did slightly been able to do this, not in a significant level. If this will continue, I'm sure the trend will also be to push this to the customer to some degree, but as of today, very slightly. Got it. Thank you so much.

There are no further questions at this time. Before I ask Mr. Aldor to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin In the U.S., please call 1-877-456-0009. In Israel, please call 03-9255-900. And internationally, please call 972-39255-900. Mr. Aldor, would you like to make your concluding statement?

Yes. Thank you for taking the time to join us today and your interest in Sapiens. Thanks again and have a good day.

Thank you. This concludes the Sapiens International Corporation fourth quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.