For any investor evaluating Sapiens yesterday's Guidewire conference call trascript is worth reading.
"Our constant thesis is that the inflexibility and cost to legacy core systems undermine P&C insurer competitiveness. Increasingly we are finding insurers around the world are also frustrated by the way legacy systems obstruct key strategic initiatives, such as implementing sophisticated market segmentation, enabling customer self-service and applying data driven insights." Marcus Ryu
In a nutshell, the market updraft both Guidewire CEO Marcus Ryu and Sapiens CEO Roni Al Dor have been talking about for the past several years appears to be accelerating.
Guidewire has built a strong next generation platform for the P&C market. They are emergin as a 500 lb. gorilla in the P&C niche. It is not, as evidenced by today's Hiscox win, a "one solution fits all" market. The same risinig ride lifting Guidewire's market demand should lift other leading players in the space, including Sapiens.
While their share price financial ratios are miles apart, Guidewire's YOY quarterly revenue grew 16%, identicle to Sapiens 16% YOY organic growth. Guidewire posted a GAAP loss of $1 million compared to Sapien's $3.4 million GAAP profit.
I was a little leery of SPNS spending the $ to do R & D and building on GSA instead of adding those $ to the eps. But now that you have had me look at GWRE and see they are doing the same building and not making money vs SPNS making money, it puts a whole different spin on the worthiness of the SPNS team.
In the apple industry we routinely plant orchards that for 3+ years generate nothing but extra expense (labor, pruning, fertilizing, watering, etc.). Looking at the 90 day margins many investors would panic.
Done right, however, those trees hit an inflection point where they begin producing solid crops and profits which can continue for 20+ years.
Guidewire and Sapiens are in a highly competitive insurance software market that upfront requires inherently long, slow and expensive sales/implementation cycles. The investment required to develop market leading next generation software in P&C, L&P, Retirement Services and Decision further erodes margins.
Guidewire leaders understand the aggressive investment required to win new customers now will pay off big time once their inherently sticky enterprise software is fully implemented. At that point the upfront loss converts to a long term cash cow. Based on their share price, financial ratios and market cap, GWRE investors understand this to.
A more "conservative" strategy could generate higher immediate margins and more cash which then earns the company and investors 1% interest.
As a pioneer in the Decision niche and emerging leader in the L&P, Retirement and P&C niche, Sapiens can either aggressively invest to cement their leadership position (GWRE illustrates the financial ratios Wall Street assigns to clear leaders) or pile more cash in the bank and allow more aggressive competitors (GWRE, FAST, etc.) to catch up.
Establishing a global leadership position with ALIS, IDIT, Retirement Services and Decision is a once-in-a-lifetime opportunity for Sapiens leaders, staff and investors. Earning 1% interest isn't.
My favorite investing quote is from Wayne Gretzky, "Most players skate to where the puck is. I skate to where the puck is going to be."