Sapiens International Corporation N.V. (SPNS) Q4 2022 Earnings Call Transcript

Sapiens International Corporation N.V. (NASDAQ:SPNS) Q4 2022 Earnings Conference Call February 21, 2023 9:30 AM ET

Company Participants

Yaffa Cohen – Chief Marketing Officer and Head-Investor Relations

Roni Al-Dor – President and Chief Executive Officer

Roni Giladi – Chief Financial Officer

Alex Zukerman – Chief Strategy Officer

Conference Call Participants

Dylan Becker – William Blair

Mayank Tandon – Needham & Company

Kevin Kumar – Goldman Sachs

Surinder Thind – Jefferies

Chris Reimer – Barclays

Alexei Gogolev – JPMorgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sapiens International Corporation's 2022 Fourth Quarter and Full Year Financial Results Conference Call. Sapiens issued a press release before the market opened this morning, and it has been posted on the company's website at www.sapiens.com. All participants are presently in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session.

I would now like to hand the call to Ms. Yaffa Cohen, Sapiens' Chief Marketing Officer and Head of Investor Relations. Yaffa, would you like to begin?

Yaffa Cohen

Thank you, operator. I would like to welcome all of you to Sapiens conference call to review our fourth quarter and full year results for 2022. With me on the call today are Mr. Roni Al-Dor, President and CEO; Mr. Roni Giladi, CFO; and Mr. Alex Zukerman, Chief Strategy Officer. Following the summary of the results, we will 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 provision in the press release issued today also apply to the content of the call. Sapiens expressly 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 of GAAP to non-GAAP 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 turn the call over to Roni Al-Dor, President and CEO of Sapiens. Roni?

Roni Al-Dor

Thank you, Yaffa. Welcome, everyone, to our call today. It is my pleasure to welcome you all to our Q4 and annual investor conference call. In today's call, we will discuss Sapiens' quarterly and annual results and provide insight into our future plans. We appreciate your continued support and looking forward to sharing our progress with you. In 2022, we made significant achievements in our business, including the successful delivery of our 90% of our new deals to the cloud and remarkable increase in the number of multiproduct deals for our Sapiens platform leading to larger deal size.

After several years of dedicated investment and efforts, we successfully resumed growth in North America, a key market for us. Our hard work is paying off with new won deals across the Life, P&C, workers compensation and reinsurance sectors. Together with notable growth in our pipeline across those sectors, we expect a positive impact on our future success and growth in the region. Our growth in North America, particularly in the fourth quarter where we saw growth in Life & P&C deals, was another contributor to our success this year. In Europe, we have taken significant steps to enhance our nearshore integration capabilities in our key regions, which has helped to reinforce our strong presence in this market. Our efforts in Europe resulted in continued growth and have been recognized by industry analysts, who named Sapiens as the leading provider across both Life and Pension and Property and Casualty. Last week, Sapiens P&C solution won an excellent award in the Celent EMEA Policy Administration report. This recognition reinforced our industry leadership and increased our brand awareness in the insurance market.

Overall, during 2022, we signed 18 new logos across all of our products and territories. In 2022, we met our revenue and operating margin guidance, this achievement especially remarkable given the challenging business environment in 2022. In particular, the results reflect consistent progress in EMEA and APAC, which played major role in achieving this success. In addition, our cloud insurance platform offering allow us to focus on closing deals that includes core products plus one or more additional applications, such as digital, data and cloud, resulting in the majority of contracts for multiple products and an increase in the average deal size.

Throughout 2022, we focused on maintaining operating profit and positive cash flow. We sustained a gross margin of 45% and expanded our offshore team to lower operating costs, which enabled us to maintain an operating margin of 17.6%, even in the face of inflation. The insurance industry is undergoing a major transformation and one of the most significant trends in the market is the movement of core system to cloud. Cloud is becoming the de facto choice of most carriers when replacing legacy solutions or implementing new capabilities. In 2022, Sapiens delivered over 90% of new deals on the cloud. We continue with our successful effort to move existing customers from on-prem to Sapiens Cloud this year. In the long run, as we continue to move our customers on to the cloud platform, we can manage numerous customers on the same resource and improve the efficiency of our operation.

The insurance industry is adapting the growing trend of the increasing importance of data. Sapiens provides comprehensive data capabilities as part of its platform, providing several layers of data solutions to carriers from operational reporting and managing dashboard to advanced analytics to ML and AI use cases. Digital engagement and customer experience remained at the forefront of priorities for carriers, both for direct-to-consumer and direct-to-businesses as well as digitally transforming the way they work with agents and brokers and other distribution channel. This trend is driving the increased adoption of Sapiens insurance platform, which offer core solution along with additional offerings in digital data and cloud.

The integration of data digital with our decision solution creates a smart platform layer that automate process promotes data-driven decision making and provide insightful, intelligent decision-making capabilities while delivering significant benefits to our business with a larger deal size. The ecosystem marketplace further enhanced these capabilities. We are leveraging our extensive ecosystem to provide customized and highly relevant solution to meet unique needs of our customers. Sapiens partners reached over 60 insurance technology providers to offer custom solutions for clients.

Let's shift to focus on regional performance, starting with North America. Sapiens made strategic advancement in our North America business during 2022 with successful close Life deal in the third quarter, a major financial services entity select Sapiens CoreSuite along with our digital suite SaaS solution. This combined solution provides them with next-generation customer sales and service experience. Sapiens core administration solution and pre-integrated digital enablement platform will enable them to offer cloud native solution life insurance services that our customers centered and innovative.

In 2022, Sapiens saw growth in our North America core life and business application businesses, acquiring new logo and advancing other deals. With a strong life pipeline, our outlook for 2023 is highly promising. In addition to the strong performance in Life, Sapiens is also experiencing growth in North America P&C businesses. We anticipate several new deals closing in 2023 and have seen a solid reestablishment of our position in workers’ compensation market, including expansion into Canada.

The reinsurance segments continue to be strong with new logos acquiring in 2022 and a solid pipeline for 2023. The North America pipeline is showing stronger emphasize on migration to the cloud for 2023 and beyond.

Sapiens effort and investment in product improvement have been recognized by Celent. In North America, P&C and Workers’ Comp segment, we received recognition for P&C claims pro functionality and added analytical and digital offering and claims solution for workers’ compensation.

These acknowledgments demonstrate Sapiens commitment to delivering innovating and effective solution to our customers. In 2022, Sapiens made major progress with our EMEA and APAC businesses, lending new logos in the region.

Many of these deals include multiple solutions from Sapiens, including core platforms for P&C L&P, reinsurance, digital, data and analytics solutions and cloud services. We are currently in the preferred bidder stage with more logos, demonstrating our strong position in the market. To support our continuous growth, we have a dedicated team to focus on new logo acquisition and account management in EMEA and APAC regions.

This team will further improve our presence in the region. We have made remarkable progress with our P&C and Life and Pension business in the UK and Ireland, successfully securing new logos and advancing more to the final stage. This marks a promising start for the pipeline heading in 2023.

A big focus for Sapiens is driving more cross-sell and upsell business with our extensive portfolio insurance clients, especially with digital, data and analytics and transition to Sapiens cloud services. We have successfully integrated the new acquisition of Tia, sum.cumo and Calculo with rebranding and implementing strategic account management.

This has resulted in successful growth through cross and upselling to these clients, providing them with increased business value and savings. We are investing and pre-integrating Sapiens digital, data and cloud platform to our TiA and sum.cumo products. And this enable us to enhance our proposition to the existing customer base and resulted in several such customers adopting the innovation solution from Sapiens.

In 2022, OMI in South Africa, a Tia customer chose Sapiens data and reinsurance platform. In addition, another Tia customer in Denmark is moving to a full cloud services model. To support our business growth, Sapiens is increasing our nearshore capabilities in Europe, supporting our growth in Nordic, Dar, Sub-Sahara, UK and Iberia. We are investing more in our solution platform to support the new business. We have already secured and to improve our value proposition.

Looking ahead to 2023, we have a several key goals. The top priority is deepening relationship with our existing customers and expanding in every territory we operate, including newly penetrated markets such as Dar and Iberia.

Another top priority is to sustain and grow our presence in North American market. We are committed to capitalizing on the vast opportunity in North America market by executing with precision and determinations. Our goal is ambition to close new deals in Life and P&C, while establishing a solving foundation for our future growth with our robust pipeline.

On the product front, an additional priority is ongoing expansion beyond our core offering into digital, data and analytics. This will allow us to provide our customers with even more comprehensive and innovating solutions and allow us to continue to successfully close larger deals. And lastly, we want to focus and continue with transition to the cloud.

Now I would like to turn the call to Roni Giladi, our CFO. Roni?

Roni Giladi

Thank you, Roni. I will begin my commentary with a review of fourth quarter and full year 2022 non-GAAP results, followed by comments on the balance sheet and cash flow. I will wrap up with our guidance for 2023. Revenue in the fourth quarter of 2022 was $119.5 million, a modest decline compared to $119.9 million in the fourth quarter of 2021, and slightly higher than the previous quarter.

Revenue in North America was $50.8 million, compared to $48.9 million in Q4 of last year, an increase of 3.9% and $1.9 million. Revenue in Q4 increased by $1.3 million or 2.5% compared to Q3 of 2022. The increase in revenue is a result of new deals signed in Q4.

Revenue in Europe was $56.9 million, a year-over-year decline from $62.4 million. On a constant currency basis, revenue in Europe grew by 3%. Revenue in Rest of World, which includes South Africa and APAC increased 37.4% compared to prior year quarter, reaching $11.8 million, mainly due to the fact of growth in South Africa.

Operating profit and margin in the fourth quarter of 2022 was $21.1 million, and 17.6%, slightly lower than Q4 of 2021 and at the same level of Q3 of 2022. The year-over-year decrease in operating profit and margin was primarily due to the impact of the European currency versus the USA dollar.

During the quarter, we had a net financial income of $1.1 million, mainly due to a one-time debt waiver of approximately $1.5 million from one of our acquisitions, offset by the interest expenses on the debenture.

Net income attributed to Sapiens shareholders for the fourth quarter of 2022 was $18 million, up 1.9% from $17.7 million in Q4 of 2021. EPS was $0.32 per diluted share for the fourth quarter of 2022 and at the same level of 2021.

Turning now to the full year results for the 12 months ended December 31, 2022. 2022 revenue increased to $474.8 million, up 2.4% compared with $463.6 million in 2021, and in line with our guidance.

North America revenue represents 41.6% of total revenue, and our European revenue represented 49.1% of total revenue. On a constant currency basis, revenue increased by 7.8% in 2022. Growth in 2022 was derived mainly from growth of 4.3% in North America, growth of 7.4% in Europe and our rest of all geographies that grew 28.9%.

The growth in Europe was reached despite the delay in signing new deals due to macroeconomic factors. In 2022, our P&C represented 68% of our businesses and Life & Annuity represented 25% of our businesses. The rest of our revenue are coming from technology and decision.

We currently serve more than 600 customers globally, including some of the world’s largest global insurance area and financial institutions. With a broad product portfolio, our customer base is diversified across insurance providers of all type in size. Our top 10 customers represented 24.2% of revenue in 2022, with no customer representing more than 5% of our revenue. Gross profit increased in 2022 by $5.2 million, while gross margin remained at the same level of 45% despite the currency headwind. Similarly, our operating expenses increased 2.4% year-over-year to $130 million. We remain committed to investing in research and development. R&D spend increased by $2.8 million. As a result, our R&D investments represent 13.6% of our revenue.

This year, we have focused our R&D effort on cloud and digital technology and we are pleased to see that these investments are generating return for the company. SG&A expenses represented 13.7% of total revenue, which resulted in stable operating margin of 17.6% in both 2022 and 2021 in line with our guidance.

Earnings per diluted share were $1.21 up 2.5% from $1.18 per diluted share in 2021. EBITDA increased by 1.1% to $87.7 million in 2022. Our EBITDA margin for 2022 was 18.5%.

Turning to our balance sheet, as of December 31, 2022, we had cash and cash equivalents and short-term deposits, totaling $180 million and debt of $79 million, which is scheduled to be paid in four equal annual payments. On January 1, 2023, we have made $19.8 million debt payment.

Turning to adjusted free cash flow. During 2022, we generated adjusted free cash flow of $36.1 million, which represent 53.7% of our non-GAAP net income. The low adjusted free cash flow was the result of the delay in signing new deals because of the macroeconomic environment, which translated to reduce upfront payment from new customers.

In addition, a contributing factor was a slowdown in collection in impacting our DSO that increased from 57 days to 66.7 days in 2022. During the year, we paid cash dividends in a total amount of $38.6 million and change our dividend policy to distribute dividend on a semiannual basis to reflect our confidence in the business positive cash flow generation. We plan on announcing our H2 dividend when we publish our 20-F at the end of March.

Today, we are introducing the following guidance for 2023. Revenue. Non-GAAP revenue in the range of $502 million to $507 million, represent midpoint growth of 6.3%. The growth takes into account anticipated organic growth, the macroeconomic backdrop and the extended contract cycle we are experiencing.

Profit. Non-GAAP operating margin from 17.6% to 18%, representing a midpoint improvement of 20 basis points and operating profit growth of 7.6%. This improvement in operating margin is despite the expected increase in labor costs due to inflation pressure. We expect our annual effective tax rate to be in the range of 18% to 19%.

Starting in 2023 to help our investors better understand the visibility and predictability of Sapiens’ revenues will provide an additional view of our revenue and gross margin. We’ll split our revenue into two groups, and we provide period-over-period comparisons as each new period is reported. The two groups are: one, software products in reoccurring post production services, and two, pre-production implementation services.

Software products and reoccurring post-production services include mainly term license, maintenance, cloud solutions, subscription and post-production services, the revenue stream is a mix of recurring and reoccurring in nature. Pre-production implementation services include mainly implementation services before go-live, and which are one-time in nature.

In 2022, revenues from recurring software products and reoccurring post-production services were in the range of 60% to 65% of total revenues. And in any given quarter, with a gross margin ranging from 51% to 55% in any given quarter. While revenues from preproduction implementation services were in the range of 35% to 40% of total revenue, with a gross margin ranging from 28% to 32%.

As you can see, a large majority of our revenue are recurring and reoccurring with a typical commitment of two to five years, providing us tremendous visibility in predictability to our revenues. This recurring and reoccurring revenue have a higher gross margin than our blended reported margin.

To summarize, in 2023, we expect to exceed the $1.5 billion mark in revenue with a strong operating profit above $90 million. Our recurring and reoccurring revenue expected to be about 60% of our total revenue with a higher gross margin. Our position in Europe is strong, and we are working to improve our position in North America and serve both the P&C and life and annuities market.

We remain committed to growing our company while also providing dividends to our shareholders. As we move forward, our company is dedicated to create its sustainable long-term value for our shareholders, customers and other stakeholders. With the opportunity that lie ahead of us, we are confident about the future and excited to capitalize on them in the years to come.

I will now turn the call back to Roni Al-Dor. Roni?

Roni Al-Dor

Thank you, Roni. To summarize our 2023 priorities are deepening relationships with our existing customers and expanding in every territory where we operate, sustaining growth our presence in North America market, while continue our growth in EMEA, ongoing expansion beyond our core offering into digital data and analytics, and lastly, focus on continue the transition to the cloud. We are executing our strategy to drive sustainable, long-term growth, increase profitability and improve shareholder and customer value.

I would like now to close our prepared remarks and open the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Dylan Becker of William Blair. Please go ahead.

Dylan Becker

Hey, gentlemen. Appreciate you guys taking the question and nice job. I appreciate all the incremental disclosure around the revenue mix as well. And given that one hand to shake model as 40% of those kind of pre-production services you’ve talked about. How do you think about the momentum you’re seeing on that side of the business flowing through to the 90% cloud activity that you’re seeing on new project implementation, but that services component serving as a leading indicator for more of that recurring software component in the business down the road.

Roni Giladi

Hi Dylan, this is Roni. We provided this overview to create more visibility and predictability to the investor to show these two revenue stream that we have in the company and the differentiation in the gross margin, obviously. The one-time revenue, which is the implementation period, basically is the prediction of growth of the company because this is where we start to get in the new customer on board. They start with the implementation and later on, follow into the recurring and reoccurring piece. So, we expect both of them to grow as we grow in the company because the first one will fill the other one. In the group of the reoccurring and recurring businesses, as Roni mentioned, we are shifting more and more customers to the cloud and expecting over time to improve also the margin.

Dylan Becker

Got it. That’s super helpful. I guess maybe to – as we think about those kind of cloud implementations and you talked about some of the success you’re seeing in North America, it sounds like light is doing well. But you did call out strength in areas like workers’ comp and reinsurance. So wondering maybe what are some of the nuances in those segments of the market worker’s comp reinsurance that are allowing you to get that initial foot in the door with that customer base? And then how do you think about that as well as serving as a potential wedge

to sell more of that product to those customers in the P&C side in North America? Thanks.

Alex Zukerman

Hey Dylan, this is Alex speaking. So we definitely see the need in the market. If we talk about the U.S. market for workers’ comp solutions, what we’ve seen is quite period over COVID, and now this segment of the market is reviving and start to be much more active. And we have a strong lever into this market. We believe that we’ll close at least one deal on workers’ comp in the first half of the year. We see the similar things around our life insurance. So we have – on our business applications, the illustration and the underwriting. We have a very, very strong pipeline. This is a continuation of last year. And this year is – we have a very strong start, very good prospectus in terms of the pipeline of the components with the core suite on their life, which is we brought back to the U.S. market last year. We also – we expect to close between one deal or two deals in the first half of this year for sure, one in this quarter.

And also on the P&C side, we are seeing the need of the market after our investment in the product in the last 12 months to 15 months. We see the not only strong pipeline, but also very strong progress of this pipeline that we expect to sign the deals in the first quarter of this year. So definitely, what we see here is that our efforts in the North America market, the investment in the product, in the strategy and in bringing the right management team on board is giving very strong foods.

Dylan Becker

Super helpful. Thanks. Great to hear. And appreciate all the incremental color guys.

Operator

The next question is from Mayank Tandon of Needham & Company. Please go ahead.

Mayank Tandon

Appreciate you guys taking questions. Just wanted to dive a little more into kind of the macro. Are you guys kind of seeing just kind of extended sales cycles and things being a little slower across the board? Or are there any kind of notable geographies they’re holding up maybe better or not as well we should be minor [ph]?

Roni Al-Dor

Hi Mayank, this is Roni Al-Dor. According to your question, there is – if you are taking the two main areas that we are playing in U.S. and Europe, I think we need – the American is a little bit much faster in terms of decision-making. In Europe, it takes more time and also because most of our core systems that we are selling in Europe at this moment, it’s coming with all the additional digital data and the cloud. This is not the case all the time in U.S. because in U.S. sometimes people are choosing more core and the others, they are buying from others. So that take more time. So more or less, a little bit much faster in U.S. versus Europe.

Mayank Tandon

Okay. That’s helpful. And then, I guess, just kind of a housekeeping question for the quarter and the outlook. I know you guys kind of called out that 3% FX-neutral growth in Europe for the fourth quarter, but I was wondering if you could give us what the overall FX-neutral growth rate was in the fourth quarter? And what the assumption for 2023 is for constant currency growth?

Roni Giladi

This is Roni. Regarding your question about Q4 constant currency, the company grew at about 6% organically, quarter-over-quarter coming from the state, Europe and rest of world, of course. And regarding the benchmark with the guidance, we took the currency of average of last week, we are growing at the rate constant currency basis of about 6.6%.

Mayank Tandon

All right. That’s helpful. Thanks guys.

Operator

The next question is from Kevin Kumar of Goldman Sachs. Please go ahead.

Kevin Kumar

Thanks for taking my question. Roni, can you talk a bit about the progress thus far with North American P&C? How is the go-to-market activities progressing pipeline? And I think how are you thinking about the level of investment in that segment in 2023?

Roni Al-Dor

As Alex mentioned, I can add a little bit. We have in the P&C, we have three types of solutions. We have the core system generic. We have the P&C for workers’ comp, and we have the reinsurance part. All the – three of them are – we are seeing growth. Let’s start with the P&C, workers’ comp, again, just to repeat, we are – during the coverage was really slowed down. Sapiens has a very good solution for this segment, very unique, relatively large type of deals. Right now, we are – there is four deals on the table, we are waiting few of them already select us. We have some kind of blueprint phase and contract negotiation. And as we believe we can – hopefully, we can turn at least one deal – first half of the year, maybe another deal and hopefully more, that’s about the workers’ comp.

On the P&C part, as again, just to remind quickly, we – in the last few years, we combined the policy administration system with from that we acquire from Adaptik with a claim system. And we – on top of it, we build our billing system. We integrate all together. We build – we put them on the cloud. We invest on digital data and so on.

Right now, after a few quarters that we decide to more put investment on the existing customer before we are going back to the market. Right now, we started the year with at least one we already signed. We are waiting in the next – we hope in this quarter to sign another deal and we have a good pipeline. So that’s another positive thing. Reinsurance, it’s something that we are a market leader in this area competing with episode that just recently does require an SAP, but we have a very strong product. We are the larger in the industry. So we continue to sign deals in this area as well. So overall positive right now.

Kevin Kumar

That’s helpful. Thank you. And then had a question, I guess on cloud progress. It looks like kind of steady progress. A lot of the new deals are cloud. You continue to see the cloud migration activity. Curious how that impacts kind of the software gross margin over the medium term, just given the disclose some additional details on different revenue and the gross margins for those buckets. Curious kind of how the cloud progress going to impact that over the medium term? Thank you.

Roni Giladi

Hi, this is Roni. So the initial step I would say one up to two years, this create some headwind in terms of the gross margin. But as we continue to year number three and many years to come, this will improve the gross margin that we talk. So if we raise the range of 51 to 55, the gross margin of the cloud, we improve our gross margin, meet them going forward.

Kevin Kumar

Thank you.

Operator

The next question is from Surinder Thind of Jefferies. Please go ahead.

Surinder Thind

Thank you. The first question I’d like to ask is a continuation of kind of the discussion from last quarter where, when we were talking about the pipeline of the opportunities, it was generally described as being fairly robust, which is kind of how you described the pipeline currently. But there was also some concern that maybe the front end of the pipeline, the number of discussions that you were having wasn’t quite there, that clients were perhaps holding off and wanting to kind of wait and see what 2023 might look like. Can you talk about what the front end of the pipeline looks like at this point? If there’s been any improvement there? Obviously, that impacts the longer-term numbers given the longer sales cycle.

Roni Al-Dor

Yes, this is Roni Al-Dor. In order to build our pipeline, we did some improvement one in the existing client that we have. Sapiens says more than 600 customer and we put much more investment on the account manager or customer success environment together with sales. So we are coming with a lot of organs and the ideas what we can do more on the existing customer. And also on the North America market, we increase the sales organization including business development and sales. And together with all of this investment, we are also improving and put more effort on the marketing front. We also did a very successful client conference recently with our client in U.S. Right now in May we plan to do a big event in Barcelona and later on in North America. So overall, we have invest for 2024. So that general answer we still see building the pipeline, but it’s take time. So that’s the overall my answer.

Roni Giladi

Yes, just to comment to this, Roni mentioned increasing the customer success team doing more cost saving after reporting from the existing. So we have the business application, all the small component that we’re selling illustration, underwriting, reinsurance. And on top of that, right now we’re able to successful with that time digital as additional incremental revenue for our existing customers. So this is another layer of improvement.

Surinder Thind

Thank you. And then in terms of some of the color around the additional disclosures that you provided. A question about the pre-production revenues here. Can you maybe talk about the average duration of that segmentation. Is that roughly six months, a year, a year’s worth of work? How should we think about the average duration and how distributed the client projects are over the course of that segment?

Roni Giladi

We need to differentiate between two groups. They are the core system solution that the average implementation can run between 18 months to up to three years. And now the business application solution that are much smaller in size in implementation can run from six months to maximum 18 months. We are selling much more revenue on the cost systems. So you can imagine that most of the revenue is running between one to three years.

Surinder Thind

Got it. And then, so if we were to look at your guidance from that perspective, at this point in time what percentage of your revenues are already associated with projects that are currently underway that either fall into the first bucket, plus the pre-production? It sounds like the vast majority of revenues should be there already for which you’re guiding. Is that the right way to think about it or any quantitative number?

Roni Giladi

Both. It’s both. The implementation is basically all the deals that we signed in the last, I would say two years. That will continue in 2023 and eventually we’ll move to the upper bucket which is the big one and more profitable one. And the recurring piece, which is recurring and reoccurring [ph] will continue going forward, overtime will increase as another layer from the implementation one.

Surinder Thind

So apologies, just a point of clarification here. So is it like 5% of your projects still need to start? How should we think about that revenue that’s to get to your guide?

Roni Giladi

No, we are signing between the 20 to 30 new logos every year coming from ecosystem to new logo. The initial revenue that are coming from the new logo are mainly in the first – in the bucket, which is the implementation piece. Only after the implementation piece is ended, they move to the post production recurring and reoccurring revenue.

Surinder Thind

Thank you.

Operator

The next question is from Chris Reimer of Barclays. Please go ahead.

Chris Reimer

Hi, thank you for taking my question. I wanted to touch on the operating margin a little bit. If you could give some color around the moving parts there and what’s contributing to the stability and even expansion, especially given your ongoing investments in R&D and your marketing teams?

Roni Giladi

This is Roni. I think major factor in our operating margin is coming from our offshore activity. This is the assets that we have in the company today, that basically help us doing delivery in R&D across all products and geographies. This contribute every additional 5% in offshore operation creates additional impact of up to 1% on operating margin. So we continue growing the offshore operations. This is critical vehicle to Sapiens and for our customers.

During 2023, the macroeconomic environment creates a lot of uncertainty like inflation, currency, exchange rate and also employment market. We decided to be cautious on there. Therefore, we increased the margin in a moderate way, and we continue to monitor this closely as we going forward.

Chris Reimer

Great. Thanks. Thanks for the color. And just lastly, how are you looking at M&A currently? Do you feel that you’re well positioned after the recent investments in Europe? Or could you perhaps be still looking for other opportunities for growth?

Roni Al-Dor

We are actively looking for M&A. We have a dedicated team that look after. We see more and more opportunity. Still the main challenge is the valuation. This is – what is still stopping us to do deals. But based on the market, we believe that also the – private company can start understand that they need to drop the valuation, and then we can try to do more deals.

Roni Giladi

If I need just to add one more color. I think from a balance sheet position, we are very healthy. We have a very strong cash position, and we are generating cash all the time. So this will support us when we move forward to doing M&A. We’d like to go back to the history when we completed two M&A in every year. Again, as Roni mentioned, the valuation was the issue. And right now, it’s coming to reasonable price currently.

Chris Reimer

Excellent. Excellent. Thanks for that. That’s it for me.

Roni Al-Dor

Thank you.

Operator

The next question is from Alexei Gogolev of JPMorgan. Please go ahead.

Alexei Gogolev

Hello, this is Alexei from JPMorgan. Thank you for allowing me to ask question. I was wondering if you could provide a bit more color on the 2023 constant currency revenue growth and margin guidance. So just following up on what some of my colleagues have already asked. So could you explain or maybe give some trajectory by region, whether you think North America would be able to grow faster than Europe in 2023 or vice versa? And I think in the past, you’ve also given some assumption in terms of what you think in terms of revenue could not materialize in a given year. Could you maybe give some indication of what you expect in terms of headwinds? Thank you.

Roni Al-Dor

Hi Alexi, this is Roni. I think when Roni said in his comment, you feel the good momentum and the opportunity that we have right now ahead of us in the state coming from their core system and also the business application and solution that we have. We will see – we see right now that North America has a potential to grow faster than 2022 that we have, while European territory will continue to grow first of all, potentially at a lower pace because of the slowdown.

And we are right now in macroeconomic environment. So we are very cautious also with the revenue and profitability level. So this is regarding the growth rate. In terms of profitability, as I mentioned, we have a retail of offshore operation and also economy of scale. We will be able to improve our margin. We put a cautious environment because of the inflation, currency that we cannot control. And therefore, we increased a little bit operating margin to 17.6% to 18%.

Alexei Gogolev

Okay, thank you Roni. So just to confirm, do you think that North America will grow faster than Europe and the overall constant currency growth for the year is between 6% and 7%, I think you guys said 6.6%.

Roni Giladi

That’s incorrect. The organic growth for 2023 is expected to be on a constant currency base, 6.6%. And I just want to make – be accurate. I would say that North America can grow faster than what it grew in 2022, while Europe will continue to grow potentially with the slowdown, slightly slower than 2022. Both of them are going to go up.

Alexei Gogolev

Great. Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Before I ask Ms. Yaffa Cohen-Ifrah to go ahead with her closing statement, I would like to remind participants that a replay of this call is scheduled to begin in two hours. In the U.S., please call 1-888-269-0005. In Israel, please call 03-9255-938. And internationally, please call 972-39255-938. Ms. Yaffa Cohen-Ifrah, would you like to begin to make your closing statements.

Yaffa Cohen

Thank you. Thank you for joining the call today. Please note that, Sapiens will participate in the William Blair Tech Innovator Conference on March 14. We look forward to speaking with you soon and are always happy to answer any follow-up calls. Thank you very much for joining the call.

Operator

Thank you. This concludes the Sapiens International Corporation Fourth Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.