Sapiens International NV (Nasdaq: SPNS; TASE: SPNS) CEO Roni Al-Dor's speech at the gathering for toasting the (Jewish) new year revealed quite a bit about what goes on in the company. Between sandwiches and cold drinks in a huge tent set up in the plaza of the Azrieli industrial park in Holon, a large audience of Sapiens employees heard Al-Dor speak about the good news (such as the NIS 40 million deal signed less than a month ago with Menorah Mivtachim Holdings Ltd. (TASE: MORA)), but also about concern that insurance companies, the company's customers, are tightening their belts and sticking to their old software that is updated manually, and that only 10% of them are willing to try something else, in other words, software products like those of Sapiens.
"One of the things deterring insurance companies from replacing their systems is the fact that they have to convert all their policies to the new system, and to understand whether the information has been properly transferred, whether there were problems in the conversion, and so forth," Al-Dor, 56, says in explaining his company's biggest problem in a "Globes" interview: the conservatism of the market in which it operates.
"Globes": What proportion of the insurance market in general is willing to make the shift to new software?
Al-Dor: "According to the current information, 90% of the insurance companies are using old products - what is called legacy, which is another word for outdated technology. It does the job, but it's very old, and obviously there aren't any new versions. An absolute majority of the insurance companies employ hundreds of developers themselves in order to handle and update the information. The insurance companies are perhaps the last ones in the IT industry operating like this: they sit and write their own products. It's also very expensive. I'd say that the deal we've now won with Menorah is the first in elementary insurance with a new modern product in 20 years."
And in other insurance branches?
"We've had a connection with Menorah for many years. We replaced their entire life insurance and pension system. At Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), when current CEO Izzy Cohen came to the company and saw the computer systems there, he was horrified. He put a stop to the internal development process, which was then reaching a climax, and signed an agreement with us. In pensions, at least, in my opinion, we manage over 50% of the market in Israel."
If it is more expensive and more awkward, why are the other insurance companies not moving ahead?
"They look at the short term. The one-time expense is painful. It's a change that costs money now for the sake of a better future, so they are inclined to postpone it."
Why do you think they'll do it at all? How will the proportion of modern products in insurance increase?
"First of all, small new companies are entering the insurance market. In Israel, too, new players are entering the pension field, for example, following the new law of default funds for pensions (funds to which the retirement money of an employee is transferred who has not yet selected a fund , or funds selected by an employee, with low management fees for 10 years. Halman-Aldubi and Meitav DS Holdings Ltd. (TASE:MTDS) won the tender). We have an opportunity to offer our system to all the new players. We also believe that the competition will shake up the existing companies, because when do you decide that you have no choice except to renew things? When there's competition and pressure to be efficient."
How will this help them be more efficient?
"Because by using an advanced system, they can accurately analyze the clients' profiles, and know, for example, to whom they can offer a lower premium without detracting from the insurance company's profit margins. Overshadowing all of this is regulation, which requires rapid adjustment of the system. While this may give the insurance companies a hard time, it's good for the clients, and for us at Sapiens, it's great, because it gives us work.
"The regulator goes to the insurance companies with decrees, and they have to prepare in a very short time span. Otherwise, they'll be punished or have their licenses taken away, and that changes the entire work plan overnight. The regulator in Israel is very active, and I benefit a lot from it, because with our products, it's easy to make changes, and you don't have to start digging up all the old systems to adapt them."
Mutations and a change of hands
Sapiens, a company with 1,800 employees and a NIS 2.4 billion market cap that serves over 200 insurance companies in North America, Europe, Asia, and Israel, is one of Israel's oldest high-tech companies. The company has been through many mutations, skyrocketing upwards and plunging to the brink of collapse and creditors' meetings, but has gotten back on track in a big way, quadrupling its revenue over the past decade, from $44 million in 2006 to almost $180 million in 2015. The company has had to reinvent itself, including several complete changes of direction. Even now, when it is one of the biggest companies on the local high-tech scene, it is still headed in new directions, although these are meanwhile costing it losses and dismay on the part of the company shareholders.
The mutations at Sapiens have included its ownership, which has changed hands a number of times. From its founders (one of whom was Shaul Shani), control passed to Formula Systems Ltd. (Nasdaq: FORTY; TASE: FORT) (controlled at the time by brothers Dan and Gad Goldstein). They in turn, together with their then-partner FIMI Opportunity Funds, sold control of Formula Systems to Eli Reifman's Emblaze. Four years later, in 2010, while under house arrest, Reifman sold control of Formula to Polish company Asseco, then the fifth largest software company in Europe.
Al-Dor, who has headed Sapiens since 2005, and has survived bondholders' meetings and ownership changes while seeing Reifman get mixed up with debts and dubious loans, says that as far as he is concerned, he has felt no difference between the owners. "The only agenda with the controlling shareholders in Formula is the tension between their desire for growth and their desire for value. As a holding company, Formula puts more of an emphasis on profit, but we've learned to get along. Maybe we aren't making the double-digit percentage profits they dreamed of, but we're growing."
Are you conceding a little growth so that they can get bigger dividends?
"That's life. It's not something significant that affects Sapiens, but it's possible that with other owners, there might have been even more growth."
How is Asseco, the Polish company?
"The same. They also like a dividend. I also like a dividend (as a shareholder), but I believe in the growth potential"
With an eye to the future, Al-Dor is looking for acquisitions, but this time for bigger deals, too, not just technological growth engines. "After five years, we think we're ripe for a big substantial deal. We're making intensive searches."
Why is it not happening now?
"We usually balk at the price. The private equity funds are snatching the deals away from us, because they're willing to pay a bigger premium. There's something ridiculous here. A strategic buyer is usually willing to pay more than a fund, but in our industry, it's the other way around, because the market for companies providing financial software is a field that people want to be in. Maybe we should let ourselves go and pay a little more," he laughs.
What is it like being a sub-subsidiary of a Polish company, and do they think it is about time to sell parts of Formula?
"The Poles are very comfortable; they trust us a lot. They have a great respect for the Israeli industry, and specifically for what we've done in the company. Every so often, we get offers from people to buy us, and maybe the Poles also get such offers; I have no way of knowing. It's not that the company wants to be sold, that's not in prospect, but it's an attractive company, and offers come in all the time."
"It was a slightly megalomaniac vision"
Tsvi Misinai, Shai Sole, Ron Zuckerman, and Shani founded Sapiens in the early 1980s, based on technology for generating computer applications, i.e. a development platform that made it possible to do devise applications for end users without programmers. The company was a great success, with 300 customers at its peak, who received tailor-made products based on the technology with great speed and efficiency, and the company share price soared to $100. The software market changed, however, with specialist companies providing solutions for specific markets, such as billing and insurance, and for the first time, but not the last, Sapiens had to reinvent itself and look for greener pastures.
For a while, in the late 1990s until 2000, the company scored a success in dealing with the Y2K bug, but this naturally petered out in 2001. A merger with another Israeli company, NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE), was discussed for a while, but this hot romance cooled off after several months. Sapiens treaded water for a short time, after several of its customers failed to win their tenders, and the merger negotiations fell apart amid disputes about the price.
A search for a new direction ensued, and after one or two unsuccessful attempts, the company realized that it had a new direction right under its nose. An analysis of the profile of its customers showed that 35% of them were insurance companies for whom Sapiens was making tailor-made products. A test of this market also showed that the market was not saturated. There was a great opportunity, because the solutions were essential, but not many companies were providing them. Then-CEO Yitzhak Sharir led the way, raising $18 million in bonds and $25 million more from investors. With this capital, Formula, which had been a small partner up until then, became the controlling shareholder in the company.
The company used the money to pursue customers in the insurance field, bought from them the products that Sapiens itself had developed for them, and used them as a basis to develop a general product for the insurance industry. Three years later, however, Sapiens stood at the brink of bankruptcy, with losses and a bond debt it was unable to cover, and Al-Dor entered the picture as the CEO who came to put the company back on track.
The impression is that the direction and strategy were right, because you are in the insurance market to this day, so what went wrong?
"There were problems in implementing this strategy, and it took a lot more time, because it was hard to get new customers. There was a vision, and it was a good one, but the way it was implemented was a little megalomaniacal. They deployed over too many geographic regions and too many sectors. They entered both life insurance and elementary insurance, and to do that with a limited amount of money was difficult."
Al-Dor was not the natural choice for what is called managing a company in a crisis. He had no experience in turning companies around; he came from a company that he himself had founded, TTI Telecom, which he managed for 16 years and then withdrew, following disagreements with Shlomo Eisenberg from the Malam-Team group, the controlling shareholder. He was unoccupied at just that time, and was thinking about what to do next. "I slimmed down, I traveled, I did a little investing in real estate, and then the Sapiens opportunity came by chance."
What actually happened was that Al-Dor was summoned to a meeting with Formula concerning Babylon, a different company in its portfolio, which was then engaging it its original business of translation software, several years before being sold to Noam Lanir. "I told them I was less interested in Babylon's business model. Then the conversation turned elsewhere. They asked me what I was doing, and I told them, apropos the real estate investments, that I had a liking for rebuilding wrecked things. They said, 'Oh, wrecked things, we have Sapiens for you'."
You came from a completely different sector - telecommunications.
"It's a different industry, but I was very familiar with the business model. TTI was also a company that sold both products and the accompanying services for them, in contrast to companies selling only products."
"We obtained good growth engines"
Al-Dor's father was an immigrant from Hungary, and his mother immigrated from Romania. His father developed cancer when Roni was nine, and the family -his mother, his sister, and he himself - devoted itself to the sick father for four years. Roni liked sports as a child, and was very active in scouts ("I wasn't so studious at school"). He served in a combat unit in the air force (he does not say which), and when he wanted to be released and said that he planned to study computer science, they proposed that he stay in the army, study computer science, and serve in Mamram (the IDF Central Data Processing Unit), because they were looking for people with both operational and technical know-how.
He left at age 26, worked at TEKEM (which later became Ness Technologies), and "after about two years, I decided that working in these big organizations wasn't for me, and I moved over to Team Computers." After 18 months, he proposed together with Gidi Levin to the company owners that a company be founded under Team for supplying telecommunications solutions. Thus was born TTI Telecom. It grew, held an IPO on Nasdaq, and served customers such as Verizon Communications and AT&T. Following disputes with Eisenberg, who became an owner of the Team Group, together with Levin and Al-Dor, he left after 16 years with the company.
Al-Dor became CEO of Sapiens in 2005, slashed management ("there were something like 10 general managers there"), closed the company's German branch, cut back on business in France, focused on the US and UK markets, and reduced the number of products. At the same time, he had to reach a settlement with the bondholders. Accompanied by the controlling shareholders (FIMI and the Goldstein brothers), he came to meetings "with bondholders who shouted."
Was it tumultuous?
"It was unpleasant, but they saw me as a professional CEO. I had a meeting with the bondholders at which I reached an arrangement for postponing (without reducing) the payments, but that happened after I succeeded in giving them confidence, after having been at Sapiens for a while, that I would in any case have enough to pay them back."
How did you give them this confidence?
"I told them, 'Let's go for plan A for growth, but if it doesn't work, there's plan B to greatly downsize the company, and with the large customer base from the past paying for maintenance of the products, we'll be able to slowly repay the bondholders. That wasn't what I wanted, and had I had to fall back on that plan, I wouldn't have remained here afterwards, but the fact that there was an alternative, and also, I assume, my track record, calmed them down, and helped them agree to the settlement."
Sapiens completed its turnaround in 2008, paid its bond debt, and raised more money. They were then free to think about what came next. "I looked for growth engines, because I realized that the existing engines weren't modern enough to make us a $500 million company."
What was lacking in the existing products?
"Sapiens' products were based on solutions devised for customers at the time, and therefore were in effect 20 years old. I realized that it would be difficult for me to win tenders with technology like this, so I decided to modernize all the products, so that they could be worked with on all the platforms (the products previously worked on the IBM platform). In addition, between the two existing ways of growing - building or acquiring - I prefer buying - acquiring companies. Their customer base was less important to me, although it was a nice bonus. The most important thing was to obtain technological growth engines."
After the acquisitions of a relatively small Canadian company (Harcase) with elementary insurance software came the great 2011 triangular merger within the Formula group. Sapiens merged into itself FIS with life insurance management software and IDIT IDI Technologies, another elementary insurance company. For Sapiens, which for a long time had been considered the Formula group's black sheep, this was a declaration of victory, because it had swallowed up the other two. Most of the deal consisted of a share swap.
"In cash," Al-Dor declares, "the deal cost me $7 million, but because we were public companies, I actually diluted my ownership by almost 50%. Although we had a profit and a customer base, and the other companies were just breaking even, the merger was almost on equal terms (even though Sapiens had a higher value)."
So was it worthwhile?
"Certainly. I obtained good growth engines, good products, and good employees."
This year, Sapiens expanded its strategic cooperation with Turkish insurance company Anadolu, signed cooperation agreements with US and UK insurance companies, entered the digital field, and signed a cooperation agreement with Israeli startup Idomoo for launching a solution that will for the first time enable insurance companies to send their clients personalized video clips adapted to their needs.
Sapiens is also in the process of making a massive investment in the technological upgrading of FIS's product, called ALIS; continuing its growth in health insurance; and entering the US market for retirement services. An acquisition in the US market (a company named Maximum Processing specializing in elementary insurance software for small and medium-sized insurance companies) gives it a foothold in the US in this area also, and Al-Dor regards it as a stepping stone that will generally speed up the company's entry into the US market.
Since every Sapiens product requires maintenance teams, the company is constantly expanding its personnel. It now has 1,800 employees. A small proportion of them work in software, in which programmers are cheap. Sapiens has acquired two companies , Indian company IBEXI Solutions and Polish company Insecco, "following market pressure that requires us to provide cheap solutions."
So your employees have reason for concern?
"No, not really. It's just a small proportion, but there was a demand, and we responded to it."
Published by Globes [online], Israel business news - www.globes-online.com - on October 25, 2016
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