Annual Report for Fiscal Year Ending December 31, 2024 (Form 20-F)
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere herein. Our financial statements have been prepared in accordance with
Overview
We are a leading global provider of software solutions for the insurance industry. Our extensive expertise is reflected in our innovative software platforms, suites, solutions and services for property & casualty (P&C); life, pension & annuity (L&A); reinsurance; financial and compliance (
We derive our revenues principally from the sale, maintenance and support of our software products and from providing implementation and post production consulting services in relation to our solutions. Revenues are comprised primarily from software products which include mainly subscription, term license, maintenance, application maintenance and cloud solutions. We also derive revenue from services, including systems integration and implementation and post production consulting.
Business Performance in Macro-Economic Environment
Our current outlook, as well as our results of operations for the year ended
Our operating profit and operating margin also increased in the year ended
We continue to closely monitor macro-economic conditions, including new and reciprocal tariffs that may be imposed by
We ended 2024 with
A. Operating Results.
Results of Operations
The following tables set forth certain data from our results of operations for the years ended
The below tables provide data for each of the years ended
Statement of Income Data
(
| For the year ended |
||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | $ | 542,379 | $ | 514,584 | $ | 474,736 | ||||||
| Cost of revenues | 304,272 | 294,990 | 274,573 | |||||||||
| Gross profit | 238,107 | 219,594 | 200,163 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development | 66,302 | 63,475 | 58,656 | |||||||||
| Selling, marketing, general and administrative | 85,956 | 77,251 | 75,016 | |||||||||
| Total operating expenses | 152,258 | 140,726 | 133,672 | |||||||||
| Operating income | 85,849 | 78,868 | 66,491 | |||||||||
| Financial expense (income), net | (3,978 | ) | 1,750 | 941 | ||||||||
| Income before taxes on income | 89,827 | 77,118 | 65,550 | |||||||||
| Taxes on income | 17,507 | 14,251 | 12,619 | |||||||||
| Net income | 72,320 | 62,867 | 52,931 | |||||||||
| Attributed to non-controlling interests | 141 | 423 | 336 | |||||||||
| Net income attributable to Sapiens' shareholders | $ | 72,179 | $ | 62,444 | $ | 52,595 | ||||||
Statement of Income Data
(as a Percentage of Revenues)
| For the year ended |
||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Revenues | 100 | % | 100 | % | 100 | % | ||||||
| Cost of revenues | 56.1 | % | 57.3 | % | 57.8 | % | ||||||
| Gross profit | 43.9 | % | 42.7 | % | 42.2 | % | ||||||
| Operating expenses: | ||||||||||||
| Research and development | 12.2 | % | 12.4 | % | 12.4 | % | ||||||
| Selling, marketing, general and administrative | 15.9 | % | 15.0 | % | 15.8 | % | ||||||
| Total operating expenses | 28.1 | % | 27.4 | % | 28.2 | % | ||||||
| Operating income | 15.8 | % | 15.3 | % | 14.0 | % | ||||||
| Financial expense (income), net | (0.7 | )% | 0.3 | % | 0.2 | % | ||||||
| Income before taxes on income | 16.5 | % | 15.0 | % | 13.8 | % | ||||||
| Taxes on income | 3.2 | % | 2.8 | % | 2.7 | % | ||||||
| Net income | 13.3 | % | 12.2 | % | 11.1 | % | ||||||
| Attributed to non-controlling interests | 0.0 | % | 0.1 | % | 0.1 | % | ||||||
| Net income attributable to Sapiens' shareholders | 13.3 | % | 12.1 | % | 11.0 | % | ||||||
Comparison of the years ended
Revenues
Please refer to "Critical Accounting Estimates" below in Item 5.E for a description of our accounting policies related to revenue recognition.
Our overall revenues increased by
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| $ | 542,379 | 5.4 | % | $ | 514,584 | |||||||
Revenues are derived primarily from software products which include mainly, subscription, term license, maintenance, application maintenance and cloud solutions as part of an overall solution that we offer to our customers. We also derive revenue from the implementation of our insurance solutions and from other post-production services.
The net increase in revenues of approximately
Our revenues can fluctuate on a quarterly basis, based on various factors, including (i) the timing at which our customers "go live" (at which point our revenues from a specific client begin to decrease), and (ii) changes in foreign exchange rates. While we anticipate that our total revenues will continue to grow during the year ending
Revenues by geographical region
The dollar amount and percentage of our revenues attributable to each of the geographical regions in which we conducted our operations for the years ended
| Year ended |
Year-over- year |
Year ended |
||||||||||||||||||
| ($ in thousands) | Revenues | Percentage | change | Revenues | Percentage | |||||||||||||||
| Geographical region | ||||||||||||||||||||
| $ | 225,584 | 41.6 | % | 6.3 | % | $ | 212,217 | 41.2 | % | |||||||||||
| 269,704 | 49.7 | % | 4.9 | % | 257,213 | 50.0 | % | |||||||||||||
| Rest of the world | 47,091 | 8.7 | % | 4.3 | % | 45,154 | 8.8 | % | ||||||||||||
| Total | $ | 542,379 | 100 | % | 5.4 | % | 514,584 | 100 | % | |||||||||||
| * | Revenues from |
| ** | Revenues from |
| Revenues from the |
Our revenues in
Our revenues in
Our revenues in the rest of the world increased by
Cost of Revenues
Our cost of revenues for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| Cost of revenues | $ | 304,272 | 3.1 | % | $ | 294,990 | ||||||
| Cost of revenues as a percentage of revenues | 56.1 | % | 57.3 | % | ||||||||
Cost of revenues consist primarily of costs associated with providing services to customers, including compensation expense to employees and subcontractors, amortization of acquired technologies and depreciation, and cloud-related cost. Our cost of revenues increased by
Gross profit
Our gross profit for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| Gross profit | $ | 238,107 | 8.4 | % | $ | 219,594 | ||||||
| Gross profit as a percentage of revenues | 43.9 | % | 42.7 | % | ||||||||
Our gross profit increased by
Operating expenses
The amount of each category of operating expense for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| Research and development, net | $ | 66,302 | 4.5 | % | $ | 63,475 | ||||||
| Selling, marketing, general and administrative | 85,956 | 11.3 | % | 77,251 | ||||||||
| Total operating expenses | $ | 152,258 | 8.2 | % | $ | 140,726 | ||||||
| Percentage of total revenues | 28.1 | % | 27.4 | % | ||||||||
Research and development, or R&D, expenses are primarily comprised of compensation expense to employees and subcontractors, net of capitalization of software development costs. Our gross research and development expenses (before capitalization of eligible software development costs) for the year ended
Selling, marketing, general and administrative, or SG&A, expenses, which are primarily comprised of compensation expenses for employees and subcontractors, were
Operating income
Operating income and operating income as a percentage of total revenues for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| Operating income | $ | 85,849 | 8.9 | % | $ | 78,868 | ||||||
| Percentage of total revenues | 15.8 | % | 15.3 | % | ||||||||
The increase in our operating income for the year ended
Financial expenses, net
The amount of our financial expenses, net, for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| Financial expenses (income), net | $ | (3,978 | ) | (327.3 | )% | $ | 1,750 | |||||
| Percentage of total revenues | (0.7 | )% | 0.3 | % | ||||||||
Financial expenses (income), net, were
Taxes on income
Taxes on income, both as a dollar value and as a percentage of income before taxes on income, for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- year change |
Year ended 2023 |
|||||||||
| Taxes on income | $ | 17,507 | 22.8 | % | $ | 14,251 | ||||||
| As a percentage of income before taxes on income | 19.5 | % | 18.5 | % | ||||||||
In 2024, we recognized a net tax on income of
Our effective income tax rate varies from period to period as a result of the various jurisdictions in which we operate, as each jurisdiction has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. We do not recognize certain of the deferred tax assets relating to the net operating losses of certain of our subsidiaries worldwide due to the uncertainty of the realization of such tax benefits in the foreseeable future.
Net income attributable to Sapiens shareholders
The amount of net income attributable to Sapiens shareholders and such amount as a percentage of revenues for the years ended
| ($ in thousands) | Year ended 2024 |
Year-over- change |
Year ended 2023 |
|||||||||
| Net income attributable to Sapiens shareholders | $ | 72,179 | 15.6 | % | $ | 62,444 | ||||||
| Percentage of total revenues | 13.3 | % | 12.1 | % | ||||||||
As a percentage of total revenues, our net income attributable to Sapiens shareholders increased from 12.1% in the year ended
Impact of Tax Policies and Programs on our Operating Results
Israeli Tax Considerations and Government Programs
Tax regulations have a material impact on our business, particularly in
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on their taxable income. As of 2018 and thereafter, the corporate tax rate is 23%. However, the effective tax rate payable by a company that derives income from an AE, BE, PFE, PTE or an SPTE, in each case, as defined and further discussed below, may be considerably lower. See "Law for the Encouragement of Capital Investments" in this Item 5.A below. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains.
Besides being subject to the general corporate tax rules in
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, provides several tax benefits for an "
An
| ● | Amortization of the cost of purchased patents, or the right to use a patent or know-how or certain other intangible property rights (other than goodwill) that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight year period commencing on the year in which such rights were first exercised |
| ● | The right to elect, under certain conditions, to file a consolidated tax retutogether with Israeli Industrial Companies controlled by it |
| ● | Expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. We cannot assure you that we will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to an Approved Enterprise, or AE, a Beneficiary Enterprise, or BE, a Preferred Enterprise, or PFE, or a Preferred Technological Enterprise, or PTE, or a Special Preferred Technological Enterprise, or SPTE, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of
Tax benefits under the 2011 Amendment that became effective on
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a "
The classification of income generated from the provision of usage rights in know-how or software that were developed in a PFE, as well as royalty income received with respect to such usage, is subject, as PFE income, to the issuance of a pre-ruling from the
We have received a tax ruling from the ITA, which, as extended, is valid until
On
In 2022, the Company filed its application for the Temporary Order and paid the required amount to the ITA. As of
New Tax benefits under the 2017 Amendment that became effective on
The 2017 Amendment provides new tax benefits for two types of
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a PTE and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a PTE located in development zone "A". In addition, a
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as an SPTE (an enterprise for which, among others, total consolidated revenues of its parent company and all subsidiaries is at least
We examined the impact of the 2017 Amendment and the degree to which we will qualify as a PTE or SPTE, and the amount of PTI that we may have, or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company's taxable income in
Tax Benefits and grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred. Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company's business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible in equal amount over a three-year period.
Impact of European Tax Regulations on our Operating Results
Global Minimum Tax Pillar Two
In
The Global Minimum Tax rules (the so-called Pillar Two) impose new tax and reporting obligations on companies which belong to capital groups (Polish and multinational) with revenues of at least
In
B. Liquidity and Capital Resources
Overview
To date, we have substantially satisfied our capital and liquidity needs through cash flows from operations and sales of our equity and debt securities.
Cash flows provided by operations were
We expect that we will continue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. We believe that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations will be sufficient to finance our ongoing operations for the next twelve months. We believe that expected cash flows from operations, which we anticipate will grow over time, together with any supplemental financing that we may decide to obtain (as we did with our
Our primary future cash commitment that is known to us as of the current time consists of the required repayment of the principal and interest on our Series B Debentures, which, as of
Because we do not have any outstanding debt obligations other than the Series B Debentures, which accrue interest at a fixed rate, we have not been materially impacted by the global rises in interest rates that began in 2022 and do not expect to be materially impacted by reductions in interest rates that began in 2024 are expected to continue to a certain extent in 2025.
Israeli Traded Debentures
In
Immediately following the
As of
The outstanding principal amount of the Series B Debentures is linked to the US dollar and bears interest at an annual rate of 3.37%, payable on a semi-annual basis (on
In connection with our offerings of the Series B Debentures, we received from
We have been using, and expect to continue to use, the net proceeds from the Series B Debentures for general corporate purposes, financing our operating and investment activities, and financing our acquisitions.
Lease obligations and additional ordinary-course obligations
We have contractual obligations related to our operating leases in an aggregate amount of
Cash Flows
Comparison of the years ended
The following tables summarize the sources and uses of our cash in the years ended
| Year ended |
||||||||
| 2024 | 2023 | |||||||
| (in thousands US$) | ||||||||
| Net cash provided by operating activities | $ | 82,225 | $ | 79,425 | ||||
| Net cash provided by (used in) investing activities | 13,408 | (72,780 | ) | |||||
| Net cash used in financing activities | (56,282 | ) | (43,339 | ) | ||||
Operating Activities
We derived positive cash flows from operating activities of
Investing Activities
We generated
Financing Activities
We used
C. Research and Development, Patents and Licenses, etc.
See the caption titled "Operating expenses" in part A. "Operating Results- Comparison of the years ended
D. Trend Information
Trends Impacting Our Industry and Our Business
There are various sales and marketing trends that influence our business.
Gartner, a leading global research and advisory company, has stated in its "Insurance CIO Priorities 2024: Insights for Technology and Service Providers' Product Plans", published on
| ● | Insurance respondents continued focus on application modernization, cybersecurity, data science and cloud, as seen in previous years. However, for 2024, respondents have reported increased funding for integration technologies, and APIs and API architecture have risen to the top of the priority list for the first time. |
| ● | Generative AI advancements have the potential to improve and accelerate the accuracy and efficiency of existing AI use cases - such as real-time summarization of customer call issues or extraction of data from complex policy documents - before unlocking value for net new use cases. |
| ● | Insurance CIOs are taking a measured approach to cryptocurrency transactions, metaverse, quantum computing, 5G and blockchain, and may adopt these technologies either slowly or indirectly. |
Other analyst reports, which were published previously, highlighted potential growth opportunities and areas of focus for insurers.
Other Trends
As people accumulate more property and live longer, the insurance industry has become more competitive. The competition for the customers' business requires insurers to improve customer experience, be faster to market with new products and offer innovative channels, such as social media and mobile. Innovative technology infrastructure is necessary to support these business initiatives.
In addition, insurers are faced with the increasing significance of regulatory changes to protect the policyholder in many markets, particularly large insurers that are considered important to the stability of the world economic system. Many insurers are integrating enterprise risk management as standard operating procedure, while spreading ownership of risk throughout the strategic decision-making process.
As customers become more sophisticated, the support of innovative products and distribution channels is mandatory. Insurers are identifying growth opportunities by attracting new customers and retaining current customers by seeking to reinvent the customer experience and provide quote and policy information to their customers upon request. This means strong emphasis on digitalization of processes, rapid configuration and omni-channel distribution needs.
With today's strong trend of shifting attention to the end-customer experience and activities, there is an increasing focus on digital operations to support the increasing usage of the Internet for sales, recommendations and general communication. This affects the carriers' needs to innovate their product proposition through a flexible and modesolution. Another substantial trend is the increasing usage of data for decision-making, risk analysis, and customers' evaluation and rating, which requires streamlined data flow and easy access to information from multiple sources.
Increased global competition, the need to improve distribution channels and provide an enhanced customer experience, and efforts to expand into new countries and markets, have required heavy investments from insurers, resulting in a trend towards consolidation. This has mainly included consolidation of applications, databases, development tools, hardware and data centers.
A very notable trend is the rapidly increasing interest in AI, predictive models, and now also Generative-AI that is expected to bring a significant level of innovation, change, process automation and a growing trend of leveraging the huge amount of data captured by insurance carriers, to provide real-time insights and operational advice on managing the operation.
Also, the transfer to cloud-based systems in a SaaS engagement model with a subscription-type contracts is getting stronger, and we witness a growing and strong preference of customers and carriers to benefit from a cloud-native system.
Property & casualty insurance protects policyholders against a range of losses on items of value. P&C insurance includes the personal segment, which is insurance coverage for individuals, with products such as motor, home, personal property and travel; the commercial segment, covering aspects of commercial activity, such as commercial property, car fleets, cyber and professional liability; and specialty lines, covering unique domains, such as marine, art and credit insurance. This market also includes workers' compensation for market carriers, administrators and state funds, and Medical Professional Liability for health care professionals.
During the past few years, the P&C market has been characterized by a fast rate of digital adoption. New business and technology models are adopted rapidly, to launch innovative business offerings. This requires advanced software solutions, both on the core layer, which needs to be flexible and open, and with the variety of digital tools addressing customer experience needs.
Life, Pension & Annuity Markets
Life, pension & annuity providers offer their customers a wide range of products for long-term savings, protection, pension and insurance. They assist policyholders with financial planning through life insurance, medical and investment products. Their products can be classified into several areas, primarily investment and savings, risk and protection, pension and health-related products. These products can be targeted to individuals, as well as group- and employee-benefit types of products.
The products in this field are long-term in nature. When insurance providers consider purchasing new platforms from Sapiens, the decision is typically slower and involves multiple decision-makers throughout the organization.
Reinsurance Market
Reinsurance is insurance that is purchased by an insurance company (ceded reinsurance) from another insurance company (assumed reinsurance) as a means of risk management. The reinsurer and the insurer enter into a reinsurance agreement, which details the conditions upon which the reinsurer would pay the insurer's losses. The reinsurer is paid a reinsurance premium by the insurer and the insurer issues insurance policies to its own policyholders. The insurer must maintain an accurate system of records to track its reinsurance contracts and treaties, to avoid claims leakage.
Workers' Compensation
Workers' compensation is one of the largest lines of business in the P&C industry in
Financial professionals face overwhelming challenges as they struggle to satisfy ever-changing regulatory requirements, while meeting the demands of managerial reporting. The move towards globalization has introduced new currencies, and CEOs need more performance data for strategic decision-making. Organizations require one partner to optimize efficiencies with solutions that can be implemented quickly.
Decision Management Market
Increasing competition, regulatory burden, customer experience expectations and the proliferation of digital and product innovation requirements have necessitated a shift in thinking and approach among organizations across verticals. By replacing conventional policy and process management with the discipline known as "decision management," financial institutions are bridging the gap between business and IT, by enabling business users to rapidly frame requirements in formal business models that can be easily understood by all stakeholders.
The decision management processes affect overall corporate performance, including its impact on customers and competitors. Decision management systems are a key performance component of every financial services organization, as they help the organization define, avoid and hedge financial risk.
Business Decision Management Market Needs
Many large organizations, particularly in the financial services market, must comply with complex regulations. They operate in highly competitive markets that require quick responses. Business logic drives most of the financial services transactions and is the backbone of an organization's policies and strategies, and its ability to successfully operate.
To achieve efficiency, business owners must assume ownership of the business logic and possess the ability to define, modify, standardize and reuse it across the organization. Business logic is defined today by business owners and compliance officers, but IT departments translate the requirements into code. This process raises several key challenges: 1) the result does not always accurately reflect the business requirements; 2) the new requirements might conflict with, or override, previous requirements; 3) the changes can take a long time and, 4) the entire process is not fully audited. These gaps often create an inefficient and risk-exposed organization.
Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from
E. Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with
We believe that the following critical accounting policies affect the estimates and judgments that we made in preparing our consolidated financial statements:
| ● | Revenue Recognition |
| ● |
| ● | Taxes on Income |
Revenue Recognition
The Company implements the provisions of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). See Note 18 to our consolidated financial statements for further disclosures.
Revenues are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.
The Company generates revenues mainly from sales of software licenses which include significant implementation and customization services, and from post implementation consulting services and maintenance services. Revenues from these contracts are based on either fixed price or time and material.
Revenue from contracts which involve significant implementation, customization, or integration of the Company's software license to customer-specific requirements are considered as one performance obligation satisfied over-time.
The Company recognizes revenue on such contracts over time, using the percentage of completion accounting method. The Company recognizes revenue as the work is performed, based on a ratio between labor effort incurred to date compared to the total estimated labor effort for the contract. Incurred labor effort represents work performed that corresponds with, and thereby best depicts, the transfer of control of the goods and services to the customer. Determining the projected labor costs requires understanding the project-specific circumstances, including the specific terms and conditions of each contract, changes to the project schedule, and complexity of the project. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses become probable, in the amount of the estimated loss on the entire contract.
When post implementation and consulting services do not involve significant customization, the Company accounts for such services as performance obligations satisfied over time and revenues are recognized as the services are provided.
When the Company enters into a contract for the sale of software license which does not require significant implementation services, and the customer receives the rights to use the perpetual or term-based software license, the Company recognizes revenue from the sale of the software license at the time of delivery, when the customer receives control of the software license. The software license is considered a distinct performance obligation recognized at a point-in-time, as the customer can benefit from the software on its own or together with other readily available resources.
In addition to software license fees, contracts with customers may contain a commitment to provide maintenance services. The Company considers the maintenance performance obligation as a distinct performance obligation that is satisfied over time and recognized on a straight-line basis over the contractual period as the services have a consistent continuous patteof transfer to a customer during the contract period. Payment terms between the Company and its payors are typically up to 60 days, and vary by the type of the payer, country of sale and the products or services offered.
The Company allocates the transaction price for each contract to each performance obligation identified in the contract based on the relative standalone selling price (SSP). The Company determines SSP for the purposes of allocating the transaction price to each performance obligation by considering several external and internal factors including, but not limited to, transactions where the specific performance obligation is sold separately, historical actual pricing practices and geographies in which the Company offers its services.
In instances of contracts where revenue recognition differs from the timing of invoicing, we generally determined that those contracts do not include a significant financing component. The primary purpose of the invoicing terms is to provide customers with simplified and predictable ways of purchasing our solutions, not to receive or provide financing. The Company uses the practical expedient and do not assess the existence of a significant financing component when the difference between payment and revenue recognition is a year or less. Revenue is recognized net of any taxes collected from customers which are subsequently remitted to the tax authorities.
If a specific performance obligation, such as the software license, is sold for a broad range of amounts (that is, the selling price is highly variable) or if the Company has not yet established a price for that good or service, and the good or service has not previously been sold on a standalone basis (that is, the selling price is uncertain), the Company applies the residual approach whereby all other performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSPs with any residual amount of transaction price allocated to the remaining specific performance obligation.
The Company pays sales commissions primarily to sales personnel based on their attainment of certain predetermined sales goals. Sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid for initial contracts, which are not commensurate with sales commissions paid for renewal contracts, are capitalized and amortized over an expected period of benefit. Sales commissions on initial contracts, which are commensurate with sales commissions paid for renewal contracts, are capitalized and then amortized correspondingly to the recognized revenue of the related initial contracts. If the expected amortization period is one-year or less, the Company uses the practical expedient and the commission fee is expensed as incurred.
Amortization expense related to these costs are included in sales, marketing, general and administrative expenses.
The P&C unit operates our business related to Property & Casualty solutions, workers compensation and reinsurance worldwide (except for those managed under the IPELS unit). The L&P unit is responsible for our business related to life, pension & annuity solutions worldwide. The IPELS unit handles all of our activities in
Based on our annual impairment test during the fourth quarter of each of 2024, 2023, and 2022, no impairment to our goodwill was required.
Nevertheless, it is possible that our determination that goodwill for a reporting unit is not impaired could change in the future if current economic conditions deteriorate or remain difficult for an extended period of time. We continue to monitor the relationship between our market capitalization and book value, as well as the ability of our reporting units to deliver current and income and cash flows sufficient to support the book values of the net assets of their respective businesses.
As of
In accordance with ASC 360, "Property, Plant and Equipment," or ASC 360, our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our forecast and cash flows and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies used to assess the recoverability of our long-lived assets include estimates of future cash-flows, future short-term and long-term growth rates, market acceptance of products and services, and other judgmental assumptions, which are also affected by factors detailed in our Risk Factors section in this annual report (see "Item 3.D. Key Information - Risk Factors"). If these estimates or the related assumptions change in the future, we may be required to record impairment charges for our long-lived assets.
We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, in accordance with ASC 360 (as described above). In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to whether there:
| ● | Has been a significant adverse change in the business climate that affects the value of an asset. |
| ● | Has been a significant change in the extent or manner in which an asset is used. |
| ● | Is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life. |
If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. These estimates involve significant subjectivity. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.
Our policy for capitalized software costs determines the timing of our recognition of certain development costs. Software development costs incurred from the point of reaching technological feasibility until the time of general product release are capitalized. We define technological feasibility as the completion of a detailed program design. The determination of technological feasibility requires the exercise of judgment by our management. Since we sell our products in a market that is subject to rapid technological changes, new product development and changing customer needs, changes in circumstances and estimations may significantly affect the timing and the amounts of software development costs capitalized and thus our financial condition and results of operations.
Capitalized software development costs are amortized commencing with general product release by the straight-line method over the estimated useful life of the software product (primarily seven years). We assess the recoverability of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold.
Taxes on Income
We account for income taxes in accordance with ASC 740 "Income Taxes," or ASC 740. ASC 740 prescribes the use of the asset and liability method, whereby deferred tax assets and liability account balances are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback years and tax planning strategies. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. Changes in our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowances require significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax retushould be recorded in the financial statements. Under ASC 740, a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We assess our income tax positions and record tax benefits based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. We classify liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. We classify interest as financial expenses and penalties as selling, marketing, general and administration expenses.
As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with our subsidiaries and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex and although our income tax reserves are based on our best knowledge, we may be subject to unexpected audits by tax authorities in the various countries where we have subsidiaries, which may result in material adjustments to the reserves established in our consolidated financial statements and have a material adverse effect on our results of operations. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability for such outcomes.
Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.
Recently Issued Accounting Pronouncements
For a description of our recently adopted, recently issued not yet adopted accounting pronouncements, see Notes 2(x) and 2(y), respectively, to our consolidated financial statements appearing elsewhere in this annual report.
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