Why Shares of Sapiens International Plunged Today

By Timothy Green Markets Fool.com

What happened

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Shares of Sapiens International (NASDAQ: SPNS), a provider of software solutions for the insurance industry, slumped on Thursday after the company announced that work had halted on a software-development project with a significant customer. The company lowered its guidance for the year due to this issue, leading the stock to drop 13% by 2:40 p.m. EDT.

So what

In a letter, a customer accused Sapiens of breaching a software-development project agreement that was reached several years ago. Sapiens claims that it was, in fact, the customer that had breached the agreement. The two parties are now engaged in discussions over the disagreement.

Image source: Sapiens International.

As this issue is being resolved, the project has been halted, and Sapiens no longer expects to generate any additional revenue from the customer in 2017. Sapiens CEO Roni Al-Dor assured investors that this doesn't affect the rest of Sapiens' product portfolio: "To be clear, the disagreement is related to a jointly developed product, which isunrelated to the other solutions currently sold by Sapiens."

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Adjusting for this lost revenue, Sapiens now expects to produce non-GAAP revenue between $265 million and $275 million during 2017. This is down slightly from the company's previous guidance range of $270 million to $280 million.

Operating margin is now expected to be between 3% and 4% during the first half and between 9% and 10% for the full year. Sapiens had previously expected to produce a full-year operating margin of 13%.

Now what

While revenue won't take much of a hit due to the dispute, the bottom line will take a beating during the first half. The company expects to take restructuring steps related to the project in the first half, with profitability expected to rebound in the second half.

While the halted project seems like a short-term issue, investors still punished the stock in response. This decline could be reversed if the disagreement is ultimately resolved, but it's unclear how likely that is.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.