SPNS provider of software to the insurance industry with blue chip customer base.
Swing Portfolio: Adding Sapiens Intl (SPNS)
SUMMARY OF KEY POINTS:
SPNS Israel-based provider of software to the insurance industry with blue chip customer base.
A majority of insurance carriers are still using outdated IT systems and insurers are increasingly relying on external IT vendors like Sapiens. SPNS is a play on both trends and this industry transition is still in the early stages. Management often compares its industry to what the ERP market was 10-15 years ago. Sapiens is confident it can be a big player in this market as it develops over the next few years..
Sapiens is profitable and is posting strong top line growth with a good deal of recurring revenue. SPNS also has $1.35/sh in cash which should provide downside protection.
A year ago, no analysts covered the stock. But now, as a result of a recent stock offering, four firms (Barclays, Needham, Roth, Wm Blair) have initiated coverage in the past six weeks. This raises the stock's profile and it seems analysts may have set bar fairly low ahead of the company's first earnings report with consensus estimates (expected to report Q4 results in early March).
Recent stock offering priced well (at $6.25 vs. the stock trading at $6.65 at the time) despite large size (6.5 mln shares, 16% of shares outstanding), shows there is institutional support.
SPNS is trading at just 2.2x sales vs. nearly 10x for its peer GWRE, making it a potential acquisition target. Also, stock has pulled back recently so we like entry point.
Sapiens Intl (SPNS) is an Israel-based provider of software to the insurance industry with an emerging focus on the broader financial services sector. It offers and end-to-end platform for the general insurance, property & casualty, life, pension and annuities markets, and business decision management software. Its software focuses on core functions (selling/managing policies, billing and paying claims). It has a blue chip customer base with a broad geographic footprint (EMEA at 58%[but not emerging mkts, mostly Israel, UK, Europe], North America at 31%, Asia at 11%)
This Market Could Be Another ERP
Sapiens operates in a highly fragmented market, there is not a huge player in these area. For example, Guidewire Software (GWRE) is probably the largest player in this segment, but they are forecast to generate just $340 million in terms of revenue while SPNS is at about $135 million in 2013. SPNS believes its market is very similar to what the ERP market was 10-15 years ago. There, the participants started out small, then in 3-5 years, the market evolved into a smaller amount of larger players. Sapiens thinks it can become of those larger players in the insurance software market. They say they are among the best in terms of technology and there are simply not a lot of competitors.
In sum, Sapiens strikes us a little known software company that has some really good potential. The insurance industry will transform over the next decade. There are two major trends going on: 1) the move from legacy systems to modern IT platforms and 2) the movement from internally developed IT to external IT vendors. Sapiens is a play on both trends. This is a $25 billion addressable market undergoing a transformative modernization.
In every presentation, management always says this market reminds them of what the ERP space was like 10-15 years ago. They seem pretty confident they can be a big player in this highly fragmented market as it evolves over the next few years. The upgrade cycle is still in its early stages and it sounds like their industry does not have a lot of competition. Also, they benefit from having a lot of recurring revenue and their platform seems to have a lot of stickiness to it. Also, the company is expanding into the financial services segment (has won five large contracts in the last two years) and they are expanding pretty rapidly in the US (revs in the US have grown from $4 mln in 2010 to about $30 mln in 2013).
Another thing we like is that the stock finally has decent sell side analyst coverage. A year ago, no analysts covered the stock. But now, as a result of a stock offering in November, four firms (Barclays, Needham, Roth, Wm Blair) have initiated coverage in the past six weeks with Buy (or similar) ratings. We think this is important as it will significantly raise the stock's profile.
On a final note, SPNS trading at just 2.2x sales vs. nearly 10x for its peer GWRE. So the stock looks pretty cheap. We also think this valuation make SPNS a potential acquisition target as a larger software supplier could quickly enter this market by acquiring SPNS. Also, SPNS has about $61 million in cash (including the recent stock offering), or about $1.35 per share, with no LT debt.