Merged and Purged, Sapiens Readies Next Growth Spurt

The maker of software for insurers has boosted its sales fivefold in four years. Armed with cash from a planned share offering, it aims to grow more.

If you ask anyone in the global capital market to identify the most disturbing trend of recent years, the answer would surely be: excess government regulation. But there are those who are enjoying the ever-tightening web of red tape. One of them is Sapiens International, the Israeli company that provides software solutions for insurance companies to cope with constantly changing rules and requirements.

The company's stock, which is trading on the Tel Aviv Stock Exchange and the Nasdaq at a market valuation of $200 million, provides a good barometer of that. Sapiens shares have risen 60% in the past year, capping a 330% increase over the past five years.

The company has benefited from the transition of insurance companies both in Israel and abroad from legacy computer systems to new ones. That enabled Sapiens to grow its customer base and revenue fourfold to $160 million in 2012.
Sapiens (the Latin word meaning "wise") is controlled by the Formula Group, which in turn is controlled by Poland's Asseco Group. Its 750 employees work with some 100 financial services organizations in North America, Europe and Israel. Its addressable market is the approximately 11,000 insurance companies around the world, which invest a whopping $53 billion every year in information technology.

Sapiens operates in three principal areas. The biggest, accounting for nearly half of revenues, is software for the life and general insurance industries. Software for re-insurers – insurance companies that insure other insurance companies – accounts for another third of sales. The remainder comes from general software solutions for customers on demand – Sapiens' original market that today accounts for only about a fifth of sales.

Sapiens' software provides insurers with policy-management solutions, everything from price quotes to assessing the risk level of individual clients. In Israel, its customers include Menorah, Eliahu and Clal Insurance. But the Israeli market accounts for just 20% of sales, with the rest evenly divided between North America and Europe.

One of the biggest drivers of Sapiens' growth in recent years was the August 2011 merger with its biggest rivals – the Israeli companies FIS Software and IDIT IDI Technologies. Now, Sapiens is exploring whether to conduct a $40 million secondary share offering. The aim is to increase its cash pool, which today is about $30 million, to help it finance new acquisitions. Two of its biggest shareholders, Formula (with 57%) and the KCPS investment fund (10%), plan to sell some six million of their shares for another $30 million.

This all marks a sea change for the company that as recently as seven years ago was struggling in its business of providing general IT solutions to big organizations. Sapiens was having trouble meeting the repayment schedule on bonds it sold in the Israeli market and was posting losses.

Ishay Davidi, the private equity investor who was the controlling shareholder in Formula at the time, decided the time had come to recruit a new CEO for Sapiens. Roni Al-Dor, co-founder of TTI Telecom Solutions which had traded on the Nasdaq, was brought in in November 2005 and since then the company has tripled in value.

The turnaround really got underway in 2007, when Al-Dor reached a settlement with bondholders that enabled Sapiens to delay repayments for a year. At the same time, he led Sapiens to an annual profit of $6 million.

Sapiens' future looks good. The insurance industry is huge and still reliant on core legacy systems, and is expected to move to more advanced systems over the next decade. "We believe Sapiens is well positioned to become the dominant player in this market for the long term, among other things because we have recruited some 100 new staff, investment in research and development and offerings of core systems appropriate for all segments of the insurance industry," Al-Dor said with the release of the company's 2012 annual report.

Sapiens' guidance for this year backs this view. The company is looking for revenue of $135 million, an increase of 19% over 2012. Its shareholders' equity stood at $118 million at the end of 2012, equal to 73% of its balance sheet.
In an interview with TheMarker, Al-Dor recalls the turnaround he oversaw and talks about what his company is doing to become the leader in its market.

What changes did you lead at the company?

"I undertook a process of centralizing and streamlining the company. I concentrated all the management under my authority and let go scores of employees. Later I started to address each segment of the company personally – areas that were unprofitable were jettisoned and we entered profitable segments instead. We felt that the company didn't have enough products that would turn it into a leader in any segment. So, after we had addressed the company's financial problems, we decided to focus on acquisitions in order to boost our portfolio of products. We looked for companies with good products that could be sold, and we began courting Idit and FIS. That transaction proved to be very complicated because it involved merging three companies.

"The results of the merger with Idit and FIS came to fruition in our 2102 results. Net profit doubled to $11.7 million, with operating profit of $12.1 million, which also doubled itself from the year before."

What did the merger do for Sapiens?

"New prodcuts and new customers. Idit developed for us markets in Britain and brought new products in the area of general insurance. FIS brought new software for the life insurance field. In addition, we were able to reduce manpower, merged offices and cut operating costs."

What's your growth engine now?

"We have a new product that we've developed over the past two years called Decision. A small company by the name of Knowledge Partners International came to us with an idea of how to smartly manage the business rules involved in a decision-making process. That is to say, if you [as a policy holder] don't smoke and you are a such-and-such an age, then the premium you should be paying is X. Now we are building this basic layer, which in essence took KPI's methodology and is applying the concept to managing mortgages. But it's important to understand that the technology is a generic method for managing business rules and can be used anywhere.

"Our product enables a company to enter 800 business rules to the software in just three weeks. It usually takes a month to enter just 500 rules to a new program. Now we are working on this as if we were a startup. We recruited experts in finance in the United States and have begun consulting with the banks.

"In the next few months we'll sign five contracts – the biggest with an American bank for something like $7 million and another four banks are on the way. We are forecasting to excess $10 million in revenue in this area in 2013. I estimate that this one product will amount to about 7% of our sales."


You have $30 million in cash and are generating $15 million a year. Why raise capital?


"We're looking for acquisitions. We want to become the leading player in our industry, and we want to do this by increasing our portfolio of products and our customer base."


You recently announced a divided payment of $6 million. How do you square that with raising fresh capital?


"I don't see any problem with a dividend distribution. We have no immediate plans to raise new debt and we have no existing debt, so we carry no risk. We have shareholders who supported the company greatly over the years and we need to compensate them. In addition, it [the share offering] will improve our liquidity, which has suffered from low turnover."

Ofer Vaknin