Sapiens International Corp NV

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's 2022 Second Quarter Financial Results Conference Call. Sapiens' second quarter 2022 earnings release was issued before the market opened this morning, and it has been posted on the company's website at www.sapiens.com. All participants are present in listen-only mode. Following management's formal presentations, instructions will be given for the question and answer session. I would now like to hand the call to Ms. Dina Vinci, Sapien's Head of Investor Relations. Dina, would you like to begin?

Thank you, Operator. I would like to welcome all of you to Sapien's conference call to review our second quarter of 2022 results. With me on the call today are Mr. Rony Aldor, President and CEO, Mr. Rony Givadis, CFO, and Mr. Alex Zuckerman, Chief Strategy Officer. Following the summary of the results, we will all be available to answer any questions. Before we start, I would like to remind everyone that this conference call may contain projections or other forward-looking statements. The safe harbor provisions in the press release issued today also apply to the content of the call. PRECI 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 today's call, we will refer to the non-GAAP financial measures. A reconciliation schedule showing GAF versus non-GAF results has 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 company website or via the website link which is available in the earnings release we published today. I will now turn the call over to Mr. Ronnie Aldor, President and CEO of Sapiens.

Thank you, Dina. I would like to welcome everyone to our call today. This quarter marks for us a steady and a confident step forward. Our revenue in the second quarter revenue grew 3.1% year over year to $118.6 million, or 8.9% on the constant currency basis. This reflects our ongoing growth from existing and new customers. In line with our strategy, we continue to grow our employee base offshore to support this growth while improving our profits. We now have over 2,000 employees in India to support our future growth and scale. These prudent actions increase our second quarter operating profit and lifted operating margin to 17.5%, an improvement of 30 basis points year over year. Let's dive into the business. The market sentiment in the insurance software market continues to be solid. While there is a sense of longer decision process, the market is need for digital transformation and this cannot be held back too long. Sapiens is well positioned with our broad product offering and global presence to be the vendor of choice for these large transformations. In addition, our large base of existing customers give us a solid ground for upselling and expanding our revenue and help us gain revenue visibility and confidence. We continue our R&D investment to maintain our leadership position, and we have increased our investment in sales and marketing, which results in our growing pipeline. The positive feedback from both our existing and new customers confirm that our strategy is delivering rewarding outcomes. We continue to see new opportunities and win new businesses. We currently have multiple blueprints as well as contract negotiations underway. Let's switch now to our regional performance. In Europe, our market recognition is growing, as is our pipeline. We are seeing bigger deals that include more products and regions than in the past. We are gaining more traction with higher-tier carriers. As we mentioned on previous calls, we have a potential European Tier 1 customer currently working with us on a large multi-company, multi-product deal. This has moved through the blueprint phase and recently added another country to the blueprint. However, a recent change in the customer management has impacted the closing of this deal. As a result, in 2022, we do not expect to recognize substantial revenues from this customer. We continue our deep engagement with C-level managers of this customer, and the tone is positive and productive. In the UK, our PNC pipeline in this market is expected to contribute already in the second half of 2022. One opportunity has completed the blueprint and has moved into the contracting. In life and pension in the UK, we have a growing pipeline that will generate new businesses in 2022 and onwards. We have a solid PNC pipeline in the DACH region where we see demand in all areas. Right now, there are a few important opportunities that are moving into the post-blueprint stage and contractual discussion. In addition, we start building pipeline in life and pension. The local presence we have built in this large German-speaking market and the local references we have are proving to be the great baselines for future growth. In the Nordic region, where we have become the dominant player, we have some significant opportunities in life and pension that are in contractual discussion. These deals where we originally planned to close in the second quarter, but now have shifted to the second half of 2022. In the meantime, we are working together based on the statement of work which we have signed with this prospect. This gives us confidence in our ability to close these new logos. There are also several attractive P&C opportunities in this region that are also progressing well. In the area region, we are advancing with new opportunities in all stages and expanding on our pipeline. In other European countries, we are working on new opportunities in various maturity levels. Overall, in Europe, we have a strong and growing pipeline, and the deal sizes are increasing as a function of our larger product offering. Our core digital and managed services offering with our global footprint is appealing to both mid-tier and high-tier regional and multinational carriers. As I mentioned, some of the deals that are currently in the process are likely to take longer to close than initially expected, especially where the scope of the deal has increased and requires more time and additional approvals. The most significant impact on European revenue was FX. mainly to the strong dollar. We remain very confident based on our product position, European leadership, and strong pipeline that Europe will continue to be strong growth region going forward. In North America, we continue to reap the benefits of our investments. In our life and annuity business, we have growing demand for our product offerings, components, and core solution. In the component, based on our investment and market recognition, we have close deals and we have a very strong pipeline in late stages. This quarter, we announced Equitrust, a new logo for our North America life business application. Equitrust is partnering with Sapiens on our next generation digital agent experience. Our end-to-end solution empowers Equitrust's team to increase sales, with more intuitive and engaging experience. Our award-winning suite of e-app, illustration, and digital solutions will provide Equitrust agents with smaller customer acquisition and service capabilities. In Core Suite, we have invested heavily to re-enter the U.S. market, and we are achieving notable progress. We are post-blueprint and are working together based on the statement of works towards signing the contract. Also, we have made significant progress with an additional prospect. Currently, we are in a contract finalization process. This gives us confidence in our ability to close these new logos. In reinsurance, we are a dominant global player. We have been expanding in our existing businesses as well as closing new businesses during the first half of 2022. we have a strong pipeline ahead of us of high and mid-tier customers. The workers' compensation market is showing signs of improving following the downturn during COVID. We now have a growing pipeline for our workers' compensation platform and expect to sign new businesses in 2023. In the second quarter, in COVID insurance, a Sapiens customer upgraded its offering with our core suite for the workers' compensation platform. Our North America PNC pipeline has grown and is maturing across several opportunities. We anticipate closing some new deals within the next six months. Thanks to the investment in the product, the team, and the partners in our ecosystem, we are turning the corner in PNC in this key market. In the second quarter, we announced a partnership with Mindtree to support insurance system implementations and help drive digital transformation. Mindtree brings extensive domain, technology, and consulting expertise and will focus initially on enhancing our delivery capabilities in our PNC business. South Africa continues to contribute to our growth. In the region, we have stepped up with a significant traction in both cross-sells and new businesses. With two of our substantial existing accounts, over the last six months, we have made significant cross-sell deals, expanding into digital, additional core systems, and et cetera. Another great example of our land and expense strategy is the deal with our existing customer, AllMutual, a leading insurance company in the region, combining two offerings, our analytics solution, and the reinsurance solution. This customer originally joined Sapiens through the TI acquisition. In APAC, we continue to see growing interest in the P&C offerings. We have completed the blueprint with the prospect in the region, and we are progressing with several other opportunities. Product remains a key competitive differentiator for Sapiens. Our ongoing investment in product development has continuously improved our competitive position in the insurance software market and gained the recognition of industry analysts. This quarter, CELENT recognized Sapiens' claims solution for P&C and workers' compensation on its 2022 reports for North America for standing out in functionality. We keep investing and progressing in our insurance platform proposition combining our core data, digital, and cloud offering into a complete platform solution. We see a strong acceptance and high interest from the market from the proposition. This has been reflected in selling multiple products per deal and our ability to cross-sell our digital and data solutions for existing customers. This includes deploying Sapiens Digital Suite as a standalone offering, and over non-Sapiens core product. We keep investing heavily in advancing our native cloud capabilities of our leading product and constantly maturing and enhancing the benefit of our cloud proposition. The vast majority of all of our recent deals are fully deployed in a public cloud, AWS and Azure, and we are taking advantage of our cloud services. Our marketing activities gave us helpful feedback and confidence in our strategy. In May, we hosted an executive council in Nashville where we met 30 C-level executives from our North America customer base and engaged in productive discussion. The feedback from this event was positive and confirmed that we are overcoming the challenges we face in the market. In June, we had an executive session in Spain with 70 C-level executives from prospective and existing customers to discuss our product and roadmap. We returned to participate in multiple industry events face-to-face both in North America and Europe. In addition, we are back to our Mega Clients Conference in North America, which will be taking place in November this year in Washington, D.C., Our M&A practice helped us accelerate our growth. Now that we have completed integration of recent strategic acquisition in DACH, Iberia, and the Nordics, as well as the market valuation are starting to come back to reasonable levels, we are carefully reviewing a few prospects, but not yet ready to pull the trigger on the deal. Looking ahead to the remainder of 2022, In this environment, we benefit from our product leadership, our large customer base, and our ability to balance growth and expenses with our offshore capabilities. Our pipeline is materializing, and our diversity gives us a solid spread of opportunities. Those deals that are delayed are not canceled and will close. We maintain deep discussion at the most senior levels with all potential prospects. I will conclude with a general comment on the market. We operate in a market in which digital transformation is essential. Now more than ever, carriers must have the agility and efficiency while keeping customer satisfaction level high in a very competitive industry. Underlining demand is not disappearing. Transformation projects are a must-have, not a nice-to-have. Customers might be more cautious in their decision process but the deal remained essential. Sapien's business model enabled us to navigate the current macroeconomic environment with added stability. Today, 85% of our revenue comes from existing clients, giving us steady and high-visible source of cash from operation. Our confidence in the insurance market and in our ability to address the market needs and maintain our leadership position remains high. We can confidently continue to execute our strategy to deliver growth and generate cash. Now I would like to turn the call to Roni Giladi, our CFO.

Thank you, Roni. I will begin with the review of the second quarter of 2022 non-GAAP results. All comparison are year-over-year versus Q2 of 2021, unless otherwise stated. I will follow up with comments on the balance sheet and cash flow and wrap up with our guidance for 2022. As there is a significant change in the quarterly result due to the currency headwind, a significant part of the review will be dedicated to that. Just to note, the European currencies weakened versus USA dollar gradually quarter over quarter since Q4 of 2021 to date. Revenue in the second quarter of 2022 increased to $118.6 million, up 3.1% from the second quarter of 2021. The currency headwind on revenue is significant compared to the second quarter of last year. On a constant currency base, our organic growth rate compared to Q2 of 2021 was 8.9%. In addition, even when compared to the previous quarter of this year, On a constant currency base, our revenue in Q2 would have been $3.3 million higher than the reported one, reaching $121.9 million. Our revenue in North America amounted to $48.2 million, 3% higher than Q2 of 2021 and $0.8 million lower compared to Q1 of 2022. mainly due to time to close new logos. Our European revenue amounted to $59.9 million at the same level of Q2 of last year. The impact of the weaknesses in European currencies versus USA dollar was material to our European revenues. On a constant currency base, compared to Q2, revenue was higher by $6.7 million, reaching $66.6 million, reflecting growth rates of 11.5%. This demonstrates our strong performance in the region. Revenue from rest of world, which includes South Africa and APAC, grew 23.8% to $10.6 million in Q2 of 2022, compared to the same quarter of last year, mainly from PNC deals in South Africa. Gross profit in Q2 of 2022 was $53.2 million, up from $51.7 million in Q2 of last year, an increase of 2.9%. Our gross margin this quarter was 44.9% at the same level of Q2 of 2021. We were able to maintain our gross margin percentage despite the currency headwind and the increase of labor costs. Operating profit this quarter increased to $20.7 million, up 4.8% from $19.8 million in Q2 of 2021. Operating margin amounted to 17.5% this quarter, 30 basis points higher compared to 17.2% in the second quarter of last year. On a constant currency basis, compared to Q1 of this year, our operating profit margin amounted to 17.8%, showing continued improvement quarter over quarter. This quarter, we celebrated our India operation, passing the milestone of 2,000 employees, and we continue our investment to grow it even further. We experienced a low attrition rate, and even been able to increase our staff at an accelerated pace in the region compared to the last few months. This factor is a crucial element to continuously improving our profit margin. Interest expenses in Q2 of 2022 amounted to $2.5 million, a result of $0.7 million of debenture interest expenses and the remaining of $1.8 million expenses which were mainly due to hedging transaction expenses, compared to hedging income of an average of about $1 million on each of the last three quarters. Net income attributable to SAP and shareholders for the quarter amounted to $15 million, compared to $16 million in Q2 of 2021. EPS for the quarter amounted to $0.27 per diluted share compared to $0.29 per diluted share in the second quarter of last year. As I just discussed, the low net income and EPS is due to higher interest expenses in the quarter. EBITDA increased by 3.6% to $21.7 million in the second quarter of 2022. An adjusted EBITDA margin amounted to 18.3%. Turning to our balance sheet, as of June 30th, 2022, we had cash and cash equivalents and short-term deposits totaling $176 million and total debt of $80 million, which will mature in four equal annual trenches until January 2026. During the second quarter of 2022, we generated adjusted free cash flow of $4.2 million, which The low free cash flow in the quarter is mainly due to the following reasons. Low net operating profit, bonus payment with regards to 2021 results, and timing of contractual payment milestone, as well as deferred payment paid by our customer in previous quarter, which were recognized as the revenue this quarter. In June, S&P Global Rating, Maalot, upgraded Sapiens Series B debenture rating from Israel A+, which is stable outlook, to Israel AA-, which is stable outlook on a local scale. The rating upgrade represents another vote of confidence in Sapiens' business model and strategy. Following a recently introduced dividend policy to distribute dividends On semi-annual basis, our board of directors declare a dividend of 23 cents per share, reflecting a total dividend of $12.7 million for the first six months of 2022. The ex-dividend date is August 16, 2022, and the dividend will be paid on August 30, 2022. I would like to turn now to our guidance for 2022. Our revenue guidance considers the two main items. One, the impact of foreign exchange headwinds, and two, the timing of the significant deal in Europe, which we have previously discussed. With regard to FX turbulence, we are witnessing a significant weakness of all European currencies versus the USA dollar, which begin at the end of last year and has been continuously deteriorating ever since. The impact on our yearly revenue guidance from the previous guidance in May of this year amounts to $8 million. With regards to the anticipated European significant transaction, which is still underway as we actively continue deep discussion based on RONI update, we decided to reduce the forecasted revenue level until the end of the year. The impact on our guidance amounts to $7 million. As a result, We are updating our revenue guidance from a range of $495 to $500 million to a new range of $480 to $485 million. We anticipate that Q3 will be the same level of Q2 of this year. We still have an additional $10 million of go-get revenue from new logos that will need to materialize in H2. We are confident that we can achieve this revenue due to the advanced stage with multiplied prospects where the commercial terms have been agreed upon and we are in the contracting phase and additional opportunities where customers are paying us prior to contract finalization to start the work. In addition, because of our business model, we can offset new logos opportunity with additional revenue from existing customers. There is a still risk that the global macroeconomic condition will deteriorate from today, which will impact our revenue guidance accordingly. Moving to operational margin guidance. We are revising our profit margin guidance uproutes from a range of 17.4% to 17.6% to a range of 17.5% to 17.7%. The main reason of improving profitability despite the currency headwind and the higher labor cost is mainly our offshore strategic operation, which supports sapiens across the board, including delivery, R&D, and corporate expenses. To emphasize, during the last year, we have made tremendous progress in India. In Q2 of 2021, we had 1,533 employees, and today we have 2,153 employees. going from a total offshore ratio of 45.3% to 49.7%. As mentioned earlier, the currency headwind is significant. I would like to update you on a constant currency basis for the full year of 2022. The Euro, British Pound, Danish Kron, Swedish Korona and Israeli Shekel have all weakened versus the USA dollar between 10% to 13% since the fourth quarter of 2021. 50% of Sapiens revenues are derived from European countries, and therefore the impact on revenue level was significant. Our yearly revenue from the European region is expected to be around $240 million. Therefore, on a constant currency basis, we would have had an additional $27 million from the European region contributing to our mid-range revenue. As a result, the total revenue for the year would have amounted to a mid-range of $507.5 million. This represents a 9.5% growth rate on a constant currency basis, in line with our long-term business model. On the profit margin, the Indian rupee, Polizloti, which are main offshore region, as well as the Israeli shekel, which also support our global operation, have more cost than revenue in their local currency markets. Therefore, when all currency weakened versus the USA dollar, we had natural partial hedge, resulting in an impact of 1.1% on our margin. To summarize, on a constant currency basis, we are guiding 9.5% revenue growth with operational profit margin of 18.7%. This emphasizes one of our biggest strengths, continuing to grow while improving our profits. With that, I am turning it over to Rony. Thank you, Rony.

We have a strong pipeline, large customer base that is mature for expansion and vast geographic presence. I would like to emphasize our strengths in our business model. One, balancing between gross and profit. Two, risk mitigation due to numerous geographic operations across the world. Three, wide core offering and many business application. Four, we have a direct and long lasting relationship with our customer. Five, more than 85% of our business is driven by existing customer. And six, solid and strong balance sheets. As the entire market is facing microeconomic challenges, we at Sapiens view this as an opportunity in several areas. Improvement in the field of recruitment and retention of talent, lower M&A valuations, and more. I'm proud of our global team and their ongoing commitment to achieving our goals. We remain committed to executing our strategy to deliver growth and improve shareholder value. Operator, we are ready to open the call for Q&A.

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 question 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 Surinder Sindh of Jefferies. Please go ahead.

Thank you. I'd like to start with a conversation around the conversations that you're actually having with clients in terms of, can you talk a little bit about the impact in terms of the deals being pushed out? How should we really think about where clients are in that part of their journey versus where they were three months ago and where they're sort of trending? How much risk is there that we should think about this? I understand the long-term demand is still going to be there, but How should we think about the nearer term?

Hi, this is Rony Aldor. As just to share with you, with all of you, we worked with this client for a long journey, starting the blueprint, as I mentioned, entering to a new country with another blueprint. And Shappens was very, very, very close to close the deal. And then there was a reorganization in this client. And right now, we believe it is just a matter of time in Europe, everybody in holiday in this time. So we believe in September, the new people can start to talk with us and only then it will be more clear when we will continue and what will be the size of the deal.

Just would like to update that in terms of the guidance, we took out the revenue from this customer until the end of the year.

Understood. And then more broadly in terms of the client, what is the source of the what I would call pushing out of the contract negotiations? I understand that the macro concerns, but If they need these solutions, is it a matter of being comfortable with their budgets? Do they need better visibility into the macro environment, meaning we're thinking they want to wait six months to be more comfortable about where the environment is going? How should we think about the big picture in the broader conversations with the remainder of your clients?

I don't think the issue is the budget and the microeconomic. I think this client is big enough and made a decision. The only question is, you know, when things change, people want to understand before they are signing these types of deals. and maybe change of the priority this is we call it multi-product it includes our life pnc range and decision digital not decision by the way digital data and so on so it's more about priority also priority between their different area and so on so i don't think the challenge is the budget

Understood. So I apologize. I'll clarify my question. The second question that I asked was more about other clients. There's commentary that deals are being pushed out. And so it's a question of what will get the clients to sign those deals. Do they need better visibility? And so does that mean we're waiting three months? We're waiting six months? How does that work?

In the pipeline that we have today, let's call it the deal that we plan to sign in this year, I think there is two areas of challenges. Besides the microeconomic, the challenge that we as Sapiens is growing and have more product and more solution, and we are going towards the higher tiers. Each contract has become more complicated because it includes the suite of products, includes the cloud services for sometimes three, five, six, seven years. So the complex of the deals They become bigger and bigger. It's also take time. That's one. Second, as I share with, I think, all of you, we share with you that the way that we are going to all of these deals after they select us, before we are signing the entire contract, we enter to a blueprint phase. The blueprint is the time that we are doing design, getting all the requirements and making sure that both sides understand the commitment and And this is also take time. And then we have all the contract negotiation. So I think, again, in my view, the majority, maybe 80% of the delay is coming not just because microeconomic, it's because the situation about the deal size and what I explained. The rest is the 20%, I believe, still microeconomic. People are thinking this is sometimes they are not afforded. based on their situation, but in our case, at this moment, I think it's more the 80% that they share.

Render, if I need to add additional comment, I think Roni mentioned, we are talking about this is a post-system solution after a very long sales cycle. The prospects are very engaged with us, and even recently, paying us in the meantime, we call it mobilization, before the contract signs. So this is another evidence that they would like to continue with us. Yes, there is still a risk that you mentioned about macroeconomic that can change or change in decision. I think we mentioned this earlier about $10 million, which is right now in the plan.

Understood. And then one final quick question about just acquisitions. It sounds like the private markets are starting to reset expectations. Any color there, you talked about your deal pipeline, you're looking at potentially deals now, but valuations aren't quite at the level you would like them to be. How much of a gap is there at this point?

Hi, this is Roni. So, yes, we start to see, and not to the full degree, valuation squeezing down. We are building our pipeline right now. We are talking with potential prospects, by the way, globally. But I must say that in the public market, the people who decide about valuation is the public, and if we're talking about private ones, usually it's the owner. and there is more difficulty to downgrade the valuation from itself. So we see a start of a decrease in valuation, not significantly. We are building the pipeline. Thank you.

The next question is from Dylan Becker of William... The next question is from Mayank Tandon of Needham. Please go ahead.

Thank you, Ronnie and Ronnie, congrats on the strength, at least on a constant currency basis, totally understand the FX issues. My question really is more on the supply side, given that you do have such a strong services segment. How are you coping with the wage inflation pressures that many companies are dealing with and how are you able to manage the impact on margins?

Hi Mayank, this is Roni. So obviously we have a compensation review every year. We did this year something which we are different from previous year. We did it twice already, focusing on the key people that is most to us to preserve. making sure that the one that we cannot do the salary increase is promoting them to another level, giving them another opportunity avenue of growth in the company and being able to maintain in the company. The pressure is still there. I think if it will continue, there also will be shift to customer. We have been able to shift this slightly to our customer, but not to full degree. So this is the way that we are handling this right now internally.

Understood. And then just staying on the same theme, if let's say the economic climate does worsen and there is an impact on the pipeline and the pace of deal conversions, what levers do you have to manage the profitability and ensure that your margins and earnings are still well-protected?

So obviously we in the company only basically started this process. We are carefully monitoring the potential deal that we need to sign until the end of the year and how we build a team to support this. We have several opportunities, support is from R&D, support is from monitoring the recruitment more carefully to making sure that we have the deal and then recruitment. a focusing on area on corporate that are flexible expenses that we can monitor a so obviously we are looking at this got it thanks so much thank you I am the next question is from Dylan Becker of William Blair a blue William Blair please go ahead hey guys good morning thanks for taking a question

Maybe wanted to start off a different way of kind of asking the macro dynamic too here. So you guys emphasize a lot on recurring projects with the existing customer base. As you think about your current pipeline activity and what you're seeing, have you noticed any change in cadence or pace of discussions relative to the net new customer acquisition versus the ongoing projects with the existing customer base, whether that's blueprinting or starting that actual implementation process? Because effectively, are the existing more willing to continue to progress and you're seeing a little bit more hesitation from the net new? Is it hesitation from both sides? I guess any sense of the dynamic between the customer segments would be helpful.

Hi, Dylan. This is Ronnie. Our business model is basically built strongly on our existing customer. We have about 85% to 88% of our customers. Revenue coming from customers that have been with us. We have a relationship with them. We know what they need, and we are supporting their core system and lifecycle of the business. We do not see any change today from those customers. We are continuing to engage, and as we mentioned earlier, potentially, this is also ability to compensate for delay in new deal to come.

Okay, very helpful. And then I guess maybe, too, as we talked about, it sounds like a lot of strength on the life side and then obviously in Europe with P&C as well. Can you talk about the benefit maybe of the conversations with the customers? You guys have talked about growing full suite emphasis in the past, but how much does that globalization or the cross-line of business kind of capability play in here? Effectively, are companies maybe looking to standardize systems if they have both life and P&C businesses? Does it come up as a driver of adoption, especially maybe in some of your newer markets where you have an existing life relationship that can serve as a wedge to sell more P&C, vice versa? I guess, does that come into play to any extent in the cross-sell dynamics you guys are seeing? Thanks.

Yes, Ronnie Aldor, and then Alex can continue. First of all, about your previous question about the existing, Ronnie gave the answer, but I would like to, again, to talk again about the new deals. We in Sapiens, we believe that in order to grow, we can continue and do a lot of work with our existing customer, generating cross-sell, up-sell, additional services, additional product. The huge investment that we are doing in our product also, we are coming with new release, generate more demand for upgrades and so on. But we have a relatively big organization that wake up in the morning and looking after new deals. I think I mentioned that a lot of marketing activity, a lot of sales, pre-sales, sales support, all of this. And all the help that we are getting from the analysts. There is many analysts, they are just the customers and calling them and asking them who is the best vendor in this area. And they are sending the client to us. So the new type of business is part of Sapiens and we see it and it's growing. Definitely in the area that we have a very good brand. So that's one answer. About the live PNC that you asked, we have more and more customers. see advantage of Sapiens, and this is something unique in Sapiens versus our competitors, that we have these two main core systems, Life and PNC, and we have all the other components, digital and so on, so we We have at least every one or two, hopefully more, clients that we have cross-sell between two of them. And we also have new clients that see the advantage that we have the two products. So, again, but it depends on the territory. It depends on the area.

Got it. Super. One last one, if I may, too. We've talked about, I think, a little bit of the offshoring dynamics. as well as kind of a little bit of potential margin insulation. But how do you think about that gradual mix shift? Sounds like a lot more of the new deals are kind of moving to the cloud. I think we've talked about, and you mentioned as well, adding some new partnerships to focus on the implementation side going forward in some instances as well. But how do you think about the gradual kind of mix shift in the business as well, potentially providing an uplift on the margin front over time as well, and maybe when when that can start to play into the model as well. Thank you.

I will start with the uplift on the revenue and the margin, and maybe Alex will also talk about this on the cloud solution. So obviously, I would say in the last two years right now, we are most of the deal, or pretty much all of them, more than 90% today, are being on the cloud. This provides us additional revenue lever that we didn't have in the past, for example, the infrastructure, Tier 1, AWS, Microsoft Azure, and to support this with Tier 2. The margin level on the Tier 1 is very small because basically this is infrastructure from a third party, but the margin on the second tier is significant and relative, very similar to our ongoing business. So a mix of them. Obviously, it supports the revenue, and I'm sure it can continue further. Alex?

Thanks, Ronnie. So this is Alex. Just to complete what Ronnie has mentioned, the majority of our deals are done in the cloud with full managed services, cloud services accompany them. That increases not only the revenue, but also the stickiness and the closeness with the customers. Now, on top of what Ronnie said about providing the first two layers of the cloud services, which are the technical hosting and the technical services around the cloud that this will provide today as part of our cloud services. And we are in the process of building also the application support into the cloud services and thus providing 100% of full cloud services, full outsource to us, to our customers. And this would be definitely another level of revenue the type of it is long-term, sticky, and fixed across the long-term. That's in our plans to add to our cloud services.

Got it. Thank you guys for answering the questions.

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

Hi, this is Chris Reimer on Protavi. Thank you for taking my questions. Actually, most of my questions have been asked already. I just wanted to clarify regarding the year-end guidance. You mentioned $7 million taken out due to the one European deal, correct? Just the one deal?

Yes, we are talking about this opportunity in the European market, tier one customer, multi-country, multi-product, that currently in our guidance, although we are continuing discussion with the customer, deep engagement, we took out the revenue in the guidance.

But that doesn't include any other deals that might have also been delayed previously?

We have, as Roni mentioned earlier, we have the existing and on top of that we have significant pipeline. All of that is supporting the rest of the revenue.

And because you've mentioned the longer deal cycles because of the macro and also the deal sizes, should we be assuming that sales cycles will be longer for the near term?

I think Roni mentioned that right now on the deals that we are doing, we are adding additional services, managed services components that are making the deal volume bigger and therefore the sales cycle longer. This is something that we are hoping to continue because it will provide significant value to the company.

Good. Got it. That's it for me. Thank you. Thank you.

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. Aldo 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 1-888-269-0005. In Israel, please call 03-925-5938. And internationally, please call 972-3925-5938. Mr. Aldor, would you like to make your concluding statement? Yes, for sure.

Thank you for all of you that are joining us today. We welcome any follow-up questions. Feel free to reach out to Dina and Ronnie. Thank you for today.

Thank you. This concludes the Sapiens International Corporation's second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.