Nice Ltd (NICE) 2002 Q2 法說會逐字稿

Ladies and gentlemen, this is the operator. I apologize. There will be a slight delay in today's conference. Please hold. Thank you. Good morning. My name is Amy and I will be your conference facilitator today. At this time I would like to welcome everyone to the acquisition of Thales Contact Solutions and second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question, press number one. If you would like to withdraw press pound key. Ms. Hanover, you may begin the conference.

Good morning and afternoon to everyone. On today's call we're going to discuss the two announcements we made earlier today, the agreement to purchase the assets of Thales Contact Solutions and our second quarter financial results. Copies of both press releases are available on our website at www.nice.com. Please bear in mind that this call and its related presentations contain forward-looking statements as that is defined in the private securities litigation reform act of 1995. Such statements are based on current expectations of the management of NICE Systems and are subject to a number of risk factors and uncertainties, including but not limited to changes in technology and market requirements, decline and demand for the company's products, inability to timely develop and introduce new technology, products and applications, difficulties or delays in absorbing and integrating acquired operations, products, technologies and personnel, part of market share, pressure on pricing resulting from competition and inability to maintain certain marketing and distribution arrangements, which could cause the actual results or performance of the company to differ materially from those described herein. We undertake no obligation to update these forward-looking statements. For more detailed description of the risk factors and uncertainties affecting NICE, please refer to our reports filed from time to time with the securities and exchange commission. I would like to turn the call over now to Haim Shani.

Thank you, Lauri. Good morning, everyone in North America. Good afternoon everyone in other countries and a special welcome to Jim Hawk, CEO of Thales Contact Solutions who is right here together with me in this conference call. We would like to explain the acquisition, we would like to discuss the financial impact of the acquisition. We would like to go over our second quarter results, talk about our long plans and of course answer your questions.

Before we talk about acquisition, I just want to give a brief description of what we do in case any of you are not familiar with NICE. Our products are a combination of the platform with embedded software that interaction such as phone calls, e-mails, faxes, output and software applications that manage the data and turn it into excellent information to accomplish different things depending on the different markets. We basically have two core businesses in different market since, our CEM division consist of solutions for financial trading floors and our security business which includes a FORMAL video, VIM division and the ISS division. It is a combination of digital equipment, security and surveillance, air traffic control applications, global interception and other solutions for governments and intelligence agencies. As you can see on the slide, at NICE we're actually showing business at NICE in the last 12 months through June in these two sectors. More on the markets and the applications. In the environment [inaudible] we store it in central data base with three in case of disputes we can see valuate data to improve performance, we can analyze data to optimize the use of sources and we can automatically detect [inaudible].

In the financial trading [inaudible] the systems ordinarily for compliance and dispute management applications to date and for more analytical applications in the future. In the security area, we are offering solutions for building surveillance, for casinos. In air traffic control we provide people with means of recording the different communication and the airport security we are allowing for unattended luggage and in unsecured areas and in government and allegation agencies we provide solutions for local [inaudible].

The news today is acquisition of Thales Contact Solutions. Thales Contact Solutions is complimentary to NICE in every respect. In respect of geograph, NICE America strengths fits with Thales European strengths. On the product side our high end solutions for the applications complemented by the innovative architecture from PCS and the [inaudible] solutions. We are having a very install base and been aunt to send NICE applications into PCS client base. In terms of channel partners we have [inaudible] in the industry. Each of these partners bring a close relationship with again the larger department. And of course legal overlaps means fewer immigration issues.

If you look at the details of acquisitions, we are acquire PCS business structured as an [inaudible]. we're paying 65 million as a total purchase price. It will be up for 10 million in contingent cash payment in 2003, 7.5 million in 2004 and 2005 and then our provision covering 2003, 2004 performance. We owe the infrastrength of Thales. Thales as you may is a major global electronics company with over $10 billion sales with major in security, air space and defense. The executives at NICE and gold members and we'll talk more about that in a minute.

We'll discuss each point one by one in the next few slides but very important is that Thales Contact Solutions complement NICE in every respect. Again meaning straightforward and immigration forces with minimal exclusion risk. Our decision to make a move, the combination of any two players we know will change the market at NICE. The first move of advantage in order to change things again to our advantage. As you know, there are these days the mission return [inaudible] and as speakers say, you really come up with the structure in a way to greatness. We're dealing in a fragmented market with too many players. Even on the market share base means compliance and [inaudible]. cost cutting can improve profitability but again it is reaching the point of diminishing return. Therefore, we believe that until we demand improvement success can mean a very large install base to settle into and we believe that as a result of this combination we really have the largest install base in this industry. And, of course, customer service is concentrating purchasing among [inaudible]. on these slides you can show the impact of the acquisition, including the securities related business. It shows we've become the Marge jest player in the financial centers and we can increase our security related revenues by earning the public safety business of Thales Contact Solutions. Each segment will connect much different markets at different stages of maturity but the acquisition will position us to gain additional share in both. We will try to look at the market driving plan relating to what I hear from customers today is that the growth in electronic communications actually refuse the need for customers and end users to contact administrations via the phone. The organizations would like to prepare themselves or in the case of outsourcers, for example, to provide proof to their clients that the significant part of their voice communications has been captured. In addition to that, no amount of the core centers are involved in the security market, the need to monitor with the communications needs is a trend. It is extremely high as you all know to extract quickly in whatever will capture form suspect communication.

Demands of other applications is a growth factor but it is true [inaudible] of those growth rates to today has been among more of the apart of the geographies of that technology. We expect that business to grow slightly faster than the market reflecting market share gains as well as a mix of older and newer applications similar to the mix of the market as a whole. Today mostly, most of the applications are being complied [inaudible] it is roughly in line with the market. The long term [inaudible] that could accelerate growth from these areas. The most attributes of this is the compliment rye geography. NICE strengths in North America is complemented by PCS trends in Europe, combined company with excellent capital in each share of the market allows us to spread in the geography. We will include better service coverage and more efficient and effective service capabilities. Both companies have a strong base of [inaudible] important relationship with large companies such as Motorola, IBC, British Telecom, Atari. The advantages of all of this is the opportunity to cross lines, widen product line in the department. The management of PCS will also compliment NICE management team. PCS executives will play important roles in the company. Jim bought with [inaudible] and a successful turn around at PCS. Jim will lead our CN division, the combined CN division at NICE. He is working with tech cron with Spain and Motorola and an excellent track record for PCS North America will lead the North America region for the security operation.

Both companies realize the importance of [inaudible] in a fully integrated solution. Most of [inaudible] to develop the next generation platform that is an open architecture standup. Now, those with the government program can be converged. Both companies seized opportunities to develop more applications based on expensive experience in seven different markets. PCS was ahead in the platform development and NICE was ahead in application development and now we're together ahead of everybody. The view of the market direction [inaudible] in this area. The bottom line is you can't measure or analyze something unless you first capture it. And we see the trend that ultimately recording platforms will dominate in this marketplace. First integrated Thales Contact Solutions is the most of total solutions is the availability to introduce Thales Contact Solutions quickly [inaudible] to more future reach solutions and the ability to have a facility pay load to a specific need. Over the last quarter or so we have started to capture market share from companies that were processing only on application solutions. Their customers realized that there was a much bigger benefit by capturing the total [inaudible], capturing every piece of information and on top of this providing, of course, the related applications and you see this actually happening in the marketplace.

Our plans. Obviously at the beginning and later on we will during the first phase of integration process we will ensure that NICE and PCS products [inaudible] to enable offset opportunities. Until began later with the platforms and the applications. In fact, we're going to combine NICE with CEM applications and PCS Renaissance architecture to replace the most comprehensive offering. That PCS customers in the contact center will now be able to implement NICE [inaudible] of contact center applications. Meanwhile, work will begin on the next generation architecture that we offer several advantages. I will most remain a goal is to converge our product by opening our next generation loading platforms. Platforms will continue to support the existing longing products. We expect these to provide a significant competitive advantage for several reasons. Lower cost, no need to support, musical top indefinitely and complete ability of existing products and thus protecting customer investments and of course, the flexibility of open architecture and the inn operability of the applications and, of course, very important the performance.

Going back several years NICE has been engaged in a strong development export called [inaudible] applications [inaudible] platform. It is to the contact center. As a result NICE has super applications on the market. Although there are differences in features among different vendors products, no other company offer more functionality than we do. Now we'll be bringing the functionality of that to PCS customer base. The combination of owning the platform and having the most expensive [inaudible] of application distinguishes us from the competition. The competition of the acquisition we have the number one market position in the voice loading sector, the [inaudible] offering in solutions and most important they will put integrated products into individual market segments and finally the most extensive part of any services of any organization and we offer all of these equally anywhere in the world.

Turning to the security market. Currently everything about this market is fragmented. That is on the federal activities and the [inaudible] and we're expecting more coordination and cooperation among governments and agencies, more demand for comprehensive integrated solutions and more influence from large companies as budgets go. The acquisition advantages to us is the PCS is store base, PCS has recently completed two major over a million dollar project with a few of the large police organizations in North America where they will provide their communication and control centers with the ability to capture and monitor discussions using digital radio technology and we believe that with this relationship and understanding of this marketplace a lot of opportunities are open for both of us. It is the fact that PCS has recently won and installed two major underground metro installations for monitoring and control and when you think of our future offerings to this very market segment the opportunities are great going forward.

Again PCS has experience with system integrators. They can assist us with the digital penetration and the ability to offer comprehensive solutions with voice and video. Our security business will benefit from PCS by adding PCS public safety business and business as I said a minute ago it will be critical for the security group. It will extend the total of the market by 10%. We're going to gain important distributor relationships and gain managers with strong skill sets in managing large distribution networks. We also intend to explore additional business opportunities in the greatest remains with the Thales group in general.

The next acquisition that makes it positive that we're gaining more than just [inaudible]. Owning 40% of NICE will benefit from the leadership of two very talented executives who will join our board of directors, Joe mules is executive vice-president of the Thales group which he joins us in the year 2000, he has 30 years of experience in information technology and in the product market and that also includes very single management positions. [Inaudible] is senior vice-president. Before joining Thales he had the distinguished career at IBM and silicon graphics in the UK. The secure operations group markets products and systems for electronic transfer and automated secretive applications, excess management solutions and security including Chris calgraphic securities and electronic surveillance products. It is also world leader in current systems for high security identity document production and management.

Of course before this announcement on the key areas of integration. Jim and myself have spent many days and nights and we believe that we have a good integration plans coming together. Some of the issues are under discussion include, of course, integration of information infrastructure using my assistance. We as you all know, have made a major investment in upgrading our VolP, actually implementing that and obviously we can [inaudible] and from this respect we believe it will be a very, very successful investment. We have, of course, identified some [inaudible]. top level management decisions have been made and we plan to use Thales headquarters as NICE European activities. This is the line we've taken of building a major European presence, direction that we have started to take in the middle of last year and this is, of course, going to boost us significantly.

So we will turn to Lauri to talk about financials.

Let's look at how we see the financial impact of this acquisition on NICE. Assuming the transaction closes at the end of Q 4 we'll have little or no direct financial impact in 2002 aside from one-time charges of expenses anticipated to be in the range of four to $6 million. We expect to realize cost synergies of about $7 million on an annual basis in 2003 which may seem low but this relates to the fact that both NICE and PCS have recently restructured as well as a lack of overlap between the two businesses. And longer term we expect synergy from this transaction due to our ability to forgo investments you would otherwise have had to make such as sales and service infrastructure in Europe, technology development, cost of developing distributor relationships, etc. We anticipate that the initial integration period will take about six months and that's most of the synergies will occur in the second half of the year.

The transaction is expected to be included in all of 2003 based on our assumption of stand alone EPS of 80 to 90 cents in 2003, excluding those one-time charges. I will discuss the stand alone numbers in a minute. But first let's go briefly over the Q 2 results. We have solid performance this quarter with strong year over year increases as well as sequential improvements in revenue for both CEM and security. Let me run through the breakouts for revenue. CEM revenue was 29.2 million dollars representing 76.4% of total revenue. Security group revenue increased sequentially from nine million dollars or 23.6% of the total due to higher revenue in digital video products. On a geographic basis the Americas accounted for 21.2 million dollars or 55.5% of total revenue. Europe and East Africa represented 10.1 million dollars of revenue or 26.Of% of the total and the Asian and Pacific region reached a new high of 6.9 million dollars acting for 17.9% of the total. Our gross margin improved 2.6 margin points over 2002 reflecting a turn to normal margins in video products and a more favorable mix and the knew NiceVision Pro and NiceVision harmony. Improved sales of CEM and improvement in the [inaudible] also contributed to growth margin improvement. Operating expenses increased slightly but declined as a percent of revenue to 49.9%. Again this quarter we achieved progress in net operating cash flow. Turning to balance sheet, cash and investments at the end of Q 2 totaled 90.5 million dollars. Let's remember that this is in comparison to Q 1 you should deduct $2 million from the March number which, as I mentioned, was a payment in error but an of our distributors that was subsequently returned. DFL went from 100 to 101 despite a very difficult environment. Now let's turn to outlook for the second half of this year. Q 3 of course is typically seasonally weak but our continued gradual improvements in visibility, particularly for the security group causes us to view Q 3 revenue as similar to Q 3. In Q 4 we would like to see revenue of 40 million dollars plus. We're still determined to be solidly profitability for the year something around a dime per share. In 2003 based on our view of the market today, with blended growth rate across all of our markets will likely be in the 10 to 15% range. We expect our 2003 revenue to keep pace with the market growth both with and without PCS and as I mentioned a minute ago, our assumption for [inaudible] EPS is between 80 and 90 cents per share. On a combined basis we're looking for a dramatic increase from 2003 EPS. With as many variables as there are at this point it is probably not too useful to try to be more statistics than the profile that you see here, somewhere between 5 and 7% net margins.

Longer term, we see the potential for overall market growth in the 20 to 25% range and as we mentioned, our objectives is to at least keep pace with the market growth and gradually gain market share so the 20 to 25% range is probably the appropriate range to think about for our top line growth. As we're able to capitalize on the growth selling opportunities particularly with quality management and management applications and continue to leverage our professional services organization, we see solid growth margin improvements to the high 50s. Obviously post integration we expect to drive operating expenses to a lower percentage of revenue. Given this profile, we we've set ourselves a goal of 12 to 15% at margins. Haim.

Thank you, Lauri. There is some indication of how we expect to improve our operating model over the next two years. We plan to continue to press our advantage and draw our market share. This is one way. We're always going to our customers and using our R and D capabilities to develop new applications for our current customer base. This is another way. We're also taking advantage of our existing technology by adapting it to additional vertical market needs and this is another way and, of course, we extend our reach into adjacent areas by adding nationality to our super products and the potential of benefit is quite clear.

Our mission is to maintain a sustainable, competitive sprang by offering the most complete application tools on top of the most flexible competitive capture platform [inaudible] for the markets. And I would like to thank all of you and I will be more than happy and pleased to answer your questions. 01:02:17

At this time I would like to remind everyone in order to ask a question, please press star, then number one on your telephone key pad. We'll pause for just a moment to compile the Q and A roster. Your fir question comes from Maib Finkelstein of Goldman Sachs.

Congratulations on the acquisition. It looks like you guys obviously had a nice gross margin improvement in the quarter. I know you touched on it a little bit. Maybe you can tell me a little bit more about given the guidance for the stand alone NICE gross margins being 47 to 48, it looks like those improvements aren't going to be pretty much in the next couple of quarters. You have them ramping up in Q 3. Can you talk about where you see that increase coming from?

Well, I would say driving the improvements, if you would like in several directions. One is, of course, the mix. We plan to introduce - we're introducing more and more applications. At the moment I would say of a [inaudible] nature and higher gross margin. This is one area which will obviously take time. But in the strong base that we have, it has the potential and the need for this type of product, there are service revenues but again we have mentioned more than once that the service organizations is improving business. We are increasing our revenue and we believe that we could improve the margin as a result of this direction. Lauri, do you want to add anything?

We would expect to realize the benefit of the outsourcing of our manufacturing in 2003.

I was wondering if you could touch a little bit more on Thales business. It looks like from the numbers that were given in the press release it looks like they did about 71 million in a 12-month basis. Can you give us some thoughts about how that grew sequentially and also their operating model looks like now in terms of gross margin and maybe on the expense funds?

You are right. We looked at trailing twelve-month revenues around 71 million dollars. The company, as we said they are targeting to improve their financial performance and what we show in here is a blending of the two models into 2003 pro forma. And so the other point is that Thales reports their numbers or did up until now on an international GAAP basis which is not necessarily comparable with our basis. I would be a little hesitant to give more specific on that at this time.

Thank you.

Next question comes from Steven Levy of UBS.

Good afternoon. I was just wondering to start with whether you are still going to be giving or whether you can give a breakdown of the nine division revenues in the quarter?

Yes, Steven. Nine division revenues in the quarter were $5 million.

Thanks. Haim, you spoke about a transition period for the products and the impression I got was that later on you would be moving to one platform. You are talking about two phases. Can you give us a sense for when phase one ends and when phase two begins and when the company will be selling one combined platform?

Well, to be more specific here, obviously, as I said, both of us have very successful products that are out there in the market and we plan to maintain the existing products that are out there in the market. We do not intend to discontinue any of these products because they are actually doing quite well with the different applications. However 5 both companies are working like any other company in the high tech business on ensuring or announcing, releasing next generations and this is more for longer term which I would measure in years rather than months, that this effort will combine into one or potentially two platforms that will serve different market segments. The major things that we will do initially is to make sure that there is connectivity and the ability to coordinate between each company and their base and to along CEM applications to work together in the PCS environment.

Lauri, can I ask you just to repeat your comments regarding gross margins going forth. I missed that. You went through it rather quickly.

Sure. What I was talking about with gross margins was on a longer term basis and what I was presently on the ability to capitalize on cross management opportunities and analysis applications, to continue to leverage our professional service organization and both of those factors would be the primary drivers to solid gross margins improvements

Did you give any guidance for the growth margins? I thought you gave some numbers and maybe I just missed it.

Not for the second half of the year I didn't. We gave pro forma for the whole year.

Last question from me. The last published numbers, the IC for the PFC showed margins in the low 20s and it looked like the last economic cycle the growth margins peaked at about 40%. Now you have suggested that the company has gone through a major restructuring. I'm just wondering if you can give us some comfort that gross margins next year aren't going to be hit quite hard despite all of those factors that you mentioned, by the side at least looks to me like old historical basis that they have significant low gross margins in NICE.

First of all, Steven I'm a little bit surprised to hear that comment because PCS was a division of a larger company, and I wouldn't expect that their numbers are readily available. However,

The company does file reports.

I'm adding 21 months. There is some report being filed. However, that is not on the same basis of what we will be looking at, IE that is the international GAAP. They are under different accounting records which are not comparable. We'll be doing all of that for you as we move forward

So to answer the question, so would you be able to give us some comfort that the gross margins of the two businesses stand alone and not too far apart from each other?

Yes, I can do that. As a matter of fact, that's what we indicated in our model for 2003.

Thank you.

You are welcome.

Next question comes from Victor Halbert of Salomon Smith Barney.

Hi, guys. Congratulations. I'm trying to understand what you expect in terms of revenues for 2003 and, you know, what can be the assumption of [inaudible] of numbers is one thing. Second thing is they historically shows very strong in other countries and now it becomes an Israeli company. How are you going to deal with this issue?

I will start with the last issue. We don't think that this is something that we would like to discuss in this conference call in general but all I can say is the Thales group now owns 40% of NICE as a result of this and we would like to see ourselves really as a global company in North America and in the UK. There is an operation, a manufacturing facility in the UK which will serve what will now be the ex PCS. So again this is, I think, all I can say about this issue. Going forward, I think as Lauri has indicated our initial [inaudible] so this business of 2003 which combined the two of us, we expect close of 10 to 15% in terms of the business compared to 2002. And we think that this is going to come from the growth, it is going to come from NICE products, on PCS products and from selling, I would say growth selling our products into the [inaudible] strong base and vice versa.

The other question I have is related to the assets of Thales. What do you get when you acquired them? I mean you are paying 50 million dollars and you have 90 million dollars, you are going to be down to 40 million dollars. Did you get any cash when you acquired this company or anything else?

Victor, first of all let's clarify. The purchase price is expected to be about $5 million and that's based on $30 million in cash and issuance of approximately 2.2 million shares which based on yesterday's price gives you another roughly 25 million. That's how we get to the total purchase price so it is not 55 million dollars in cash. Okay?

Okay.

No. 2, the assets that we are buying from the company are the assets that every company has, which includes all of its working capital assets, property assets, its people, its marketing, intangibles, distribution network, its partners and the list goes on.

I asked specifically about cash.

No, we are not acquiring cash but we are acquiring receivables and inventories.

Thank you, that's it for now.

Your next question comes from Toby Bishbond of Lehman Brothers.

Thank you. Congratulations on the acquisition. What can you tell us about the PCS corporate structure and how different is it from NICE own structure?

I think this is a very, very good question because it takes us maybe from the number of specific gross margin point or revenue point into really what can make acquisitions successful or not. I think what we have found and I also met Jim, I will let him speak about it himself. I think what we have found is a group of individuals that are as great as we are that would like to build a global company, have a very, very open mind and we share, if you would like, the same vision of where we want this to be successful and how we want this to be successful. Jim is going to, as I said, to head our biggest business group and we feel that there is a lot, if you would like, of chemistry between the two organizations, although, of course, we are, you know, coming from different parts of the world but we've all been in global environments and understand what is at stake. Jim, if you would like to comment.

Hi, this is Jim Hawk. That's a really good question actually and the thing I have to say is we've been talking to each other for quite some time now. We've formed a very, very strong bond and relationship basically based on character and belief in the markets that we're in and we both identified each other almost simultaneously as the perfect partners to go forward. And I have to say I've been involved in several acquisitions in my past history and this has been the most ardent experience so far and I'm absolutely rapturous about the opportunity that we have and I see it as a great success as we move forward down to I think the cultures and I have to say the top management cultures and my own, directors, high senior management, we've spent a lot of time really getting to understand each other, our companies, the markets we operate in and the synergies that we really can move into going forward.

Second question for Haim. Can you quantify the overlap between NICE and PCS with the positions of the different segments?

I think what we're seeing is actually more of the compliment rye rather than overlap. This is why I'm of the benefits of this acquisition. As I said before, we are injecting the process of building a large operation in Europe similar like we have in the states for customer service, for sales, for professional services and now we do not need to do this any more and we can complement more benefit from the install base and actually from the infrastructure that PCS has just one hour south of Pietro. This is one area. In public safety [inaudible]. they can complement each other. The market segment in terms of the distribution in this market segment and in the divisional market segments, the distribution is really different. Again they will complement each other. In terms of markets in Europe they are very strong in countries like Spain, Italy, Scandinavia, of course a very large install business in the core center mark in the UK. So I believe that we can really complement each other and go forward with this integration can move quite forward.

When you say that the overlap, I mean 20 or 16 or 10%?

No, but I would like synergies in obviously areas such as facilities, such as some of the infrastructures spending, such as marketing and in some small areas but again, as we said, this is not so much in terms of restructuring move, this is more building a business jointly.

I have a question maybe for Jim what is PCA's break down between the [inaudible] trading and the contact center in percentage time?

It is roughly equal. In the CEM division which is what we're going to fit into with NICE it is about 45 million dollars and that's from the cold call center and wholesale training arena, in public safety it is 25, 26 million dollars on an annualized basis.

Question for Lauri finally. What was the operating capital, how much of it for NICE?

Operating cash flow.

For the quarter was it half a million?

Less than a million. Okay?

But it was greater than in the third quarter?

Slightly greater.

Lastly on the other items on the balance sheet, how much is capitalized software is intangibles?

Okay. Just a second. Capitalized software and intangibles is just under 9 million.

I didn't get the answer. You say 9 million for intangibles?

No. For capitalized software and intangibles, less than nine.

Is there anything else? Anything else substantial?

Yes, there's good will. Good will for the acquisition.

Thank you, good luck.

Your next question comes from Anit Iahy of ING financial market.

Congratulations on second quarter figures. The balance sheet, PCS's balance sheet -

I'm sorry, this is Haim, but we can barely hear you. If you can speak louder, please. Thank you. That's great.

Sure. Regarding can you give details regarding PCS's balance sheet and more specifically, Victor was asking about the net cash. Is there net in the balance sheet? What does that look like?

First of all, we are acquiring receivables, inventories and related liabilities. There is no debt or cash coming along with the assets that we're acquiring.

Regarding break down in geographic regions, can you go over that? I missed that breakdown.

You are talking about our second quarter?

Yes, second quarter NICE results.

Sure. On a geographic basis the Americas were 65.5%. Europe, 26 and-a-half percent and Asia Pacific 17.9%

Thanks a lot. Good luck.

Next question comes from Shiu Iyo of CIBC world market.

Hi, good afternoon, Haim, Lauri, Jim congratulations on the acquisition announcement. Quick questions. Is there any low cut period in terms of PCS, in terms of their 40% stake that they are getting in the company?

Yes, of course. The Thales group is I would say committed for say longer term participation and active [inaudible]. yes.

Can you be a little more specific on that?

It is on a gradual scale but I would say it is approximately on the [inaudible] average.

Jim, where will you be located?

Everywhere. On a plane, I think mainly.

Headquartered in Europe?

I live in UK.

Probably not in Israel.

I've already been in Israel before today. I'm on my way there tonight with Haim.

That's great. Haim, finally two quick questions for you. If you could just share with us how many times did you see the Thales group, this position in your bids, in the competition arena and finally, if you can elaborate about the back drop. I know it was one of your main important goals in the past, how is that coming along?

On the first question I think that we were quite clear, the PCS business is mainly complimentary to our business. There are those areas that we were competing mainly, I would say on the financial side mainly in high end financial centers in the UK and in the US but other than that, not that much. As I said, PCS is a large base in call centers in the UK which they were sending the capture platforms and only now just in the last few months we've started to penetrate this base or this area at all in the UK and in Europe, so it is really at the very, very beginning and all of those numbers in competing that they can complement the PCS solutions. Know this much, on public safety we are not a player, as you know, a little bit, a few installations here and there. Both of us have solutions for the air traffic control market which is not a big market and we compete from time to time over there. In terms of visibility, if I understand that's what you are asking, yes, I know our visibility continues to improve and particularly in the security area where we tend to handle them for longer term projects, but I want to say what I unfortunately am not saying every quarter announcement, we do not enjoy very long-term contracts so our disability is more based on pipeline and [inaudible] facility rather than actual contracts that cover us for many, many months or quarters.

Thank you. Just one last question for Lauri. Would it be fair to assume that the assets of the operation that you are acquiring probably is somewhat losing money at this stage?

Well, as I mentioned before, PCS undermines the restructuring to improve their financial performance and again what we have is that it's on a comparable accounting basis so I would say that probably in the past, but as of this point we're going to be working together with them. They should be on track.

Very fair. Thank you very much. Congratulations again.

Thank you.

Next question comes from -

I have a few questions. How many employees do both companies have?

I think we can have this figure. PCS has 275 and Thales is 830 so a combination of the two is 1,105.

In your organization how many people do you have to service those? How has that number tracked over the last few quarters?

I think we have all of these numbers.

We have at the end of June we had about 235 professional services personnel. That number has over at least the last two, three quarters been in that range running from 220, 230 and 235 and we'll be picking up another roughly 45 special service peoples from PCS.

Great. You mentioned in your numbers for the year I believe you threw out a ten cent number for the quarter and it would look like the professional service margins would have to increase a lot. Your product gross margins are already in the mid-50s, probably trending up, I would imagine. How are you getting your services margins up? Can you sort of elaborate more on that? Are you actually entering more contracts?

We're all entering into more contracts. We are entering into more activities, a combination of maintenance contract is starting to generate some business. It is a combination of one time professional services such as training, installation, special integration and so on.

Just one small correction, the ten cents you mentioned was on an annual basis not for the quarter

Annual basis?

Yes.

It will be a much stronger second half?

Yeah.

So I would imagine gross margins will break 50 at the end of the year for the overall company?

Gross margins have to continue to improve, yes.

Will your services gross margins break even next quarter?

We said that services will break even in the second half.

In the year what due expect them to be, both products and services?

We expect the services to grow in the end and the product margin continues to improve and we look for some continued moderate improvement in product growth margins and of course next year we hope to enjoy some of the benefits of the outsourcing that we've been doing here.

Great quarter. Keep up the good work.

Thanks.

Next question comes from Jonathan Hill of UBS.

Yes, thank you. Hi, Haim. Number one according to our information from data monitor sales had about 20% market share in hardware in about 3% share of software. Should that be a signal of what your direction is going forward in terms of your focus as a company?

I'm not sure that I understand exactly the question.

More the logging kind of secure your positions on logging rather than to focus on the software?

Maybe I will leave - maybe I will have Jim to answer the question.

Jonathan, hi. I don't think the reason that we've been purchased is not because that is the direction that NICE is going on. What it is is an opportunity to implement the software capability that NICE has and complement our particular product line. I have to say one of the problems we've been trying to sell was our ability to get more software into the product. This is just a perfect opportunity to do that. So that will help increase our joint performance. That's really the reason, one of the fundamental reasons for doing this. So what Haim alluded to, the cross selling opportunity.

Makes sense. Another question. Could you discuss a little bit the evaluation that you use to value this acquisition?

Well, the several methodologies and do you want to go into them?

As I said earlier, we were looking at basically the strategic opportunities of the combined companies going forward and we had some information that we could work with which had to deal with revenues and some other financial information. Again bear in mind that it was not on a common basis and we looked at the growth potential, we looked at the combination potential. We looked at discounted cash flow and comparables and came up with what we came up with as a fair price.

And of course the changes [inaudible].

Actually that's it for now. Thank you.

Next question comes from Amira Beebe of Miller Investment.

Hello. I have a question about gross margin. [Inaudible] to change during the quarter, what is the difference?

The what?

What was the influence of the change exchange rate on growth margins, very limited.

Very limited?

Very limited, yes.

Another question. One of your competitors, has NICE services, are you going towards this goal of achieving NICE growth margins on these services?

I think we discussed it quite intensively but bottom line is we plan to increase our service business and obviously the profitability of this business. I would also look at the competition, if you are looking at the competition to see how much of profit sales they are doing, which I think is an area which might be, you know, something one should look at in terms of the relative market share of all the people in this market.

Can you repeat your question?

Is there any activity to the very end? Because -

Yes, of course. We have introduced our product line. We're saying safe with, I would say better margins. We're seeing lots of activity and mainly in North America in this area, we are winning very interesting, I would say, projects in various areas within this market segment and again it is a major focus on North America. So we're actually quite pleased with the progress in this area.

[Inaudible] in 2003?

In the long term we would like to see our offering continue to develop into more of a solution based, basically be taking our multimedia digital platform and having more comprehensive solutions to security organizations and we see this coming. We have received several contacts already, I would say, that are more than just individual logging but more solution for the security problem and since maybe some of our competitors might be listening to this call, I cannot elaborate more than that.

Thank you.

Next question comes from Victor Halbert of Salomon Smith Barney.

A few more questions. First of all, Jim, welcome to the company of my systems. Regarding your business, Thales business, in your last year, year and-a-half, how much of your business is going towards the [inaudible] and what kind of software solutions that you are showing at this point and where is in going at this time?

About 63 to 65% was going into call centers. But we've pretty much operate in the commercial center where it is really just recording. We have been selling at the lower end of the market, the new product loss and it's been out for 18 months now, and a small AQM offering.

And so you basically, I mean what you are bringing to NICE in the course of as many clients, customers?

I'm sorry. I missed the last piece of that.

With as many NICE gaining in accordance from this acquisition?

An opportunity for upsaling. We probably have much stronger distribution roots and ability to get to customers a lot quicker.

How about the rest of Europe, is it stronger than Thales call centers?

Say again.

In rest of Europe do you feel that you are stronger than NICE in call centers?

Yes. I'm trying to get over this basis that really our strength comes from our platform and our architecture which we've released particularly at the high I understand in a vacuum like that. But really NICE product wise are the more superior, higher level application baseline which we can't get our hands on. Jointly that gives us a great opportunity. That was our software sales that we talked about earlier, I think where Jonathan was at.

Okay, good. Lauri, just a simple, it may be -

Just to put on top of it one more thing is if we take, correct me, Jim, if I'm wrong. You have many what I would say more [inaudible] for compliance and dispute management within financial call centers and others in the UK where we were not competing with you and we had little opportunity on top of it. With that success in North America, if you look at a lot of our recent sales it has been a cause for gross margin improvement, the ability to look on the our financial base customers has been implemented quality monitoring and other application on top of our platform in North America. We will just in the beginning of this opportunity here and we're seeing in this combination can be very strong in reaching these goals.

And then just several questions regarding the breakdown of CEM and video. Actually the government. Can you give us the breakdown?

Sure, for second quarter Victor the CEM was 29.9 million dollars, video five, total security nine.

Thank you very much.

Next question comes from Shiu Iyo of CIBC world market.

Hi, just one more quick question. With respect to the transaction terms you were talking about contingent cash payments to 10 million in '03, 7.5 in '04 and 7.5 in '05. What do you have in mind in terms of financial performance, revenue benchmark, the combined entity, should meet, we know that you pay more to Thales?

In our financial performance of the PCS business.

Any specific benchmark that you have in mind?

Of course we have several benchmarks that were agreed upon with Thales organization. We will very much be happy to send this out if you would like.

Thank you.

Your next question comes from Steven Levy of UBS.

Hi. Just a couple of housekeeping questions. Lauri what was D and A, depreciation?

Depreciation and amortization. Why don't you go on to your next question and I will get the answer for you.

Which group of people manages your money and improves the interest, why did it improve and where is it going in the second half of the year?

This quarter's financial income includes a few hundred thousand dollars of exchange needs. So if all remains the same, you won't see that few hundred thousand dollars next quarter. In answer to your other question, depreciation and amortization, were roughly two and-a-half million dollars.

Between D and A?

Not off the top of my head right here.

I know it is not major but for a company that rarely pace any taxes, the tax number is a little bit higher I've seen for awhile. I was wondering if there's any reason to expect the tax rate to pick up a little bit. The company is losing money for a few quarters, generally they haven't paid much taxes in its history. Have taxes averages been changing for you, will the acquisition make any changes to the tax rate?

That is a good question. Let me address the second quarter. As it turns out it we have a minimum tax law so we made the appropriate provision with respect to the first half of the year and that's going to be there no matter whether you have losses or not. In terms of going forward, we're now going to have income that is going to be like income in any other country, that's going to be subject to in this case European tax rates, which are similar to U.S. tax rates both of which exceed the rates we enjoy in Israel. So we'll probably start to see a bit of tax expense as we move forward. Particularly because we're talking about profits.

Can you in the way you are giving revenue breakdown can you give me the breakdown for first nine months? Can you give numbers for CEM and security division

I can do it for first six months.

And your budget for the next three.

I can do the next four years if you would like. Let me he - you want it geographically or division? CEM 56 and-a-half million dollars. Security 17.8 million.

Last question from me. Combined business, what will you expect service revenues next year as a percentage of the total?

We're still talking about overall revenue growth at this point.

How about giving us a sense of the company of the 71 million dollars revenue, is that service revenue similar in terms of percentages to nonservice revenues?

No, they are lower.

Is that one area of the synergies in terms of what you are looking at 2003 or is that a longer term story?

It depends. Some of the products for PCS are really very straightforward and therefore the service would have been in the expenses and the distribution network and I think Jim and I are very happy that this will continue. Owned, of course, if all of the strong base we will continue and start to provide more higher end solutions and using the infrastructure for customer support that exist here in UK we will probably see more of the service business being developed into the PCS install base.

Thank you very much.

At this time there are no further questions. Do you have any closing remarks?

Yes. I would like to thank everyone for participating in this call. This is obviously a very important event in NICE's history. Jim and myself are committed to build a great company together. So thank you, everybody and have a nice day.

Thank you all.

Thank you for participating in the acquisition of Thales Contact Solutions and second quarter earnings conference call. You may now disconnect.