Sapiens International Faces Growth Battle In 2023

A Quick Take On Sapiens International

Sapiens International (NASDAQ:SPNS) provides a range of insurance and financial services industry software products worldwide.

The company's growth and operating metrics have largely plateaued in recent quarters.

Given management’s tepid revenue growth expectations, the firm’s flatlining performance in recent quarters and greater potential for slowing economic conditions, I’m on Hold for SPNS in the near term.

Sapiens International Overview

Holon, Israel-based Sapiens was founded in 1982 to provide software solutions to insurance and financial services firms for a variety of functionalities.

The firm is headed by Chief Executive Officer Roni Al-Dor, who was previously President of TTI Telecom.

The company’s primary offerings include:

• CoreSuite

• UnderwritingPro

• ApplicationPro

• IllustrationPro

• ConsolidationMaster

• Others

The firm acquires customers through its in-house sales and marketing efforts as well as through partner referrals and sales.

Sapiens International’s Market & Competition

According to a 2023 market research report by Grand View Research, the global market for Insurtech software and services is expected to grow from $5.5 billion in 2022 to $161 billion in 2030.

This represents a forecast CAGR of 52.7% from 2023 to 2030.

The main drivers for this expected growth are the need to increase efficiencies through automation along with improved technological offerings.

Also, the chart below shows the historical and projected future growth trajectory of the U.S. Insurtech market through 2030:

Major competitive or other industry participants include:

• Lemonade (LMND)

• Guidewire (GWRE)

• Insurity

• Majesco

• BrightCore

• DXC Technology (DXC)

• Insuresoft

• OneShield Software

• Duck Creek Technologies (DCT)

• Others

Sapiens’ Recent Financial Trends

• Total revenue by quarter has essentially plateaued in recent quarters:

• Gross profit margin by quarter has trended slightly higher in recent quarters, as shown below:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended lower more recently:

• Operating income by quarter trended higher but has also flattened recently:

• Earnings per share (Diluted) have produced the following results:

(All data in the above charts is GAAP)

In the past 12 months, SPNS’ stock price has fallen 14.5% vs. that of Guidewire Software’s drop of 14.7%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $180.3 million in cash, equivalents and short-term investments and $59.3 million in total debt, all of which was long-term.

Over the trailing twelve months, free cash flow was $41.0 million, of which capital expenditures accounted for only $2.8 million. The company paid $3.8 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Sapiens

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $16.55 versus the current price of $19.93, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.

As a reference, a relevant partial public comparable would be Guidewire Software; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

SPNS’s most recent Rule of 40 calculation was 20.4% as of Q4 2022’s results, so the firm is in need of improvement in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Sapiens

In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the resumption of revenue growth in North America across a variety of insurance industry sectors.

The insurance industry continues to undergo a transformation to digital processes to increase efficiencies and improve risk management and, ultimately, profitability.

However, inflation has negatively impacted aspects of the industry that should favor technology providers helping insurance market participants during challenging periods.

Management did not disclose any company or customer retention rate metrics, making it difficult to determine the health of the firm’s business in this respect.

Total revenue for Q4 2022 was essentially flat year-over-year yet gross profit rose slightly.

SG&A as a percentage of revenue has fallen while operating income has plateaued.

Looking ahead, management guided 2023’s non-GAAP revenue growth to be 6.3% at the midpoint of the range and non-GAAP operating margin to be 17.8% at the midpoint.

Notably, for 2023 management will start breaking down its revenue reporting between software in post-production services and pre-production implementation services.

The company's financial position is strong, with ample cash and investments against a relatively small amount of long-term debt. The firm produces positive free cash flow.

Regarding valuation, the market is valuing Sapiens at a much lower EV/Sales multiple than Guidewire Software.

Also, my discounted cash flow calculation indicates the stock may be excessively valued given the firm’s current growth rate and other assumptions.

The primary risk to the company’s outlook is a slowing macroeconomic environment leading to reduced customer activity, slowing sales cycles and lack of revenue growth.

In the past twelve months, the firm's EV/EBITDA valuation multiple has dropped 16.4%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include a pause in U.S. Federal Reserve interest rate hikes, leading to reduced negative pressure on its valuation multiples.

Given management’s tepid revenue growth expectations, the firm’s flatlining performance in recent quarters and greater potential for slowing economic conditions, I’m on Hold for SPNS in the near term.

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