Sapiens International Corporation N.V. (SPNS)

[midastouch017]

I was wrong, admits Sapiens' CEO
14.8.2005 / 12:59
Shirley Yom Tov

If you've been keeping track of Sapiens International (Nasdaq:SPNS) manager Yitzhak Sharir, you've been hearing a lot of promises over the last two years.

Under his leadership the company aimed itself at creating billing software for the insurance industry, and Sharir, 55, disseminated optimistic forecasts from - almost - every dais. But he had little to say on the subject when discussing the company's financial statements, most of which have been disappointing. Nor did he go there, much, when the company raised $17 million through convertible bonds in September 2003, which was an occasion to dwell on sustainable growth, but he did mention successful penetration of the insurance business.

But it didn't happen and at present Sapiens is very far from the place Sharir had expected it to reach. Last week the company reported $9.6 million revenues for the second quarter of 2005 and a net loss of $1.7 million. From 2000, in fact, Sapiens has lost $72 million. Penetration of the famously conservative insurance business is slow and painful, and income from traditional areas of business has been declining.

When reality falls short of expectations, managers usually find plenty of things to blame. Not Sharir: "I was wrong," he baldly admitted to TheMarker. "I firmly believed in what I said, but today I say I was wrong and I bear that responsibility. I believed Sapiens could benefit within three years of entering the insurance business in 2001."

His message was optimism, says Sharir: "In retrospect I can say my enthusiasm should have been more modest. I bear the responsibility for the fact that the capital market and workers are disappointed, because I created the expectations. Now I have to explain to everybody why it didn't happen."

In 2000, Sapiens crashed

In the early 1990s, Sapiens was selling at a pace of $30-40 million a year, from consulting and selling development platforms. In the mid-1990s Sapiens was euphoric; the feeling was new economy, when a good story could command a billion-dollar company valuation, Sharir describes. Sapiens itself went public in 1992 and started looking for opportunities, instead of focusing on its core business.

"It did well from converting computer systems to overcome the Year 2000 Bug, achieving $70 million revenues a year and profit. That was the start of the problem, though, because the company thought the good times would roll on."

January 2000 came and went and no bug appeared, so the company started to look for other opportunities. Sapiens turned its attention from converting for the 2000 bug to converting currency systems to handle the euro, but it didn't really know how to do it. It also made the mistake of buying non-core businesses, in ill-advised short-term strategy. Sapiens even considered a merger with Ness Technologies (Nasdaq:NSTC) but it didn't come off.

"In November 2000, Sapiens crashed," he relates. "It was a company with 1,000 workers, projects in trouble and long delays. Its money was running out."

Sharir came to Sapiens at that sorry point, in November 2000, together with his partners in the investment firm Magnum. He was appointed CEO of Sapiens and held 6% of its stock, which has lost only 2.5% in value since then.

For the year 2000 Sapiens admitted to a $40 million loss, and goodwill assets worth tens of millions of dollars that it had to write off.

First off it fired hundreds of people within a few months. It managed to save some of its euro-conversion projects, increased revenues and reduced its negative cash flow from operations.

Glacial processes in insurance

"In the fourth quarter of 2001 the company was balanced," he says. Sapiens underwent a strategic analysis with an external company and decided to focus on financial services, including insurance, a giant industry that invests $70 billion a year, of which $7-10 billion are for systems of Sapiens' type.

Its systems make the myriad processes of financial companies more efficient. At the end of 2003, two years after it started breaking into the insurance business, Sharir projected that revenues from insurance would grow by 50% a year.

They did not.

Penetrating the insurance takes ages, Sharir admits today: insurance companies are glacial in their decision-making processes. In the long run he remains confident that Sapiens' income from the industry will grow and when it happens, it could be huge, but patience is the word. "We're starting to see highly significant deals," he added.

Meanwhile, the company's core development platforms continue to provide 65% its revenues. Though the income they generate is declining, Sapiens has no choice but to continue investing in their development, to remain relevant. "These deals are the company's bread and butter," says Sharir, "but insurance is our future."

He says Sapiens needs $11.5 million per quarter to break even, at the net profit level: "The company is undergoing a painful, slow business process, which is what is generating the losses," Sharir explains. "We have $20 million cash and our burn rate is $1.5 million per quarter. Cash flow from operations is negative, at a pace of $3 million to $5 million a year."

The company is making every effort to reach break-even point: he himself flies coach, Sharir says. "I hope we can achieve operating break-even point in a year, but I can't say it for sure."

In short, four years after Sapiens leaped at the insurance sector, it has nothing to report for its pains. It did rope in a few clients, including Israel's Menorah Holdings (TASE: MORA1 ) and OneBeacon of the U.S. Sharir thinks the Bachar reform of the capital market and banks, which may lead the insurance companies to buy some of the banks' provident and mutual funds, will do nothing but good for Sapiens, but meanwhile the morrow remains murky.

At least the company has backing. It is controlled by Formula Systems (TASE: FORT, NASDAQ:FORTY) and First Israel Mezzanine Investors, which cannot however boast of having done well by their investment. Sapiens stock has lost 45% of its value this year, and from the start of 2004, Sapiens stock has lost 60% of its value. Its market cap is a lowly $19 million.

http://tinyurl.com/9wyrd

Dubi