Nice Ltd (NICE) 2002 Q4 法說會逐字稿

All sites are now on the conference line. At this time I would like to turn the program over to your host Rachela Kassif. Go ahead please.

Thank you. Good morning, good afternoon to every one. This call may contain forward-looking statements as determined and defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on the current expectations of the management of NICE Systems only and are subject to a number of risk factors and uncertainties, including but not limited to changes in technology, in market requirement, declining demand for the company's product, inability to timely develop and introduce new technologies, product and applications, difficulties or delay in absorbing and integrating required operations, product, technologies, and personnel,loss of market share, pressure on pricing resulting from competition, 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 obligations to update these forward-looking statements. For a more detailed description of the risk factors and uncertainties affecting the company, refer to the company's report filed from time to time with the Securities and Exchange Commission. Now, I would like to turn over the call to Haim Shani, President and CEO.

Thank you Rachela. Good day every one. As you know, we closed on the Thales Contact Solutions acquisition on November 2nd, 2002, which meant that just under two months of the results were included in our fourth quarter. To help you understand the fourth quarter results, I am going to let Lauri start with the financials today and then I will make concluding remarks focused primarily on our business priority and future direction. Lauri.

Thank you Haim. I will begin with usual break up both with and with out TCS's contribution. On a stand-alone basis, CEM revenues rose 13% to $31.4b or 76% of total standalone revenues. Security revenues declined 9% to $9.8m or 24% of the total standalone revenue, due to order timing in the government military sector.

This masks the outstanding performance in digital video where revenue increased 35% to $8m in Q4. Two months of TCS revenues increased CEM revenue by $6.2m to $37.6m or 76% of the consolidated total. TCS' public safety business increased the Security Groups revenue by $2.3m to $12.1m or 24% of consolidated revenues. The geographic breakdown in Q4 was as follows.

The Americas increased 13% to $25.4m or 62% of revenue on a standalone basis. EMEA decreased 9% to $10.4m or 25% of revenue. And Asia-Pacific increased 15% to $5.3m or 13%. Including TCS revenue, the Americas accounted for 54% of revenue, EMEA was 34% and APAC was 12% of consolidated revenues.

Product gross margin improved to 60% from 57.7% on a standalone basis due to gross margin improvement in the video business and a higher proportion of video sales in the overall mix. With the TCS results included consolidated product gross margin was 57%. TCS's standard product gross margin was over 50%, but it was reduced by various adjustments.

Service margin declined from 15.6% to 14.7% on a standalone basis, but increased to 15.2% with TCS services included. On a standalone basis an excluding special charges with a decline in operating expenses as a percent of revenue to 48.3% from 50.5% in Q3 we return to operating profitability in Q4 with operating income of $1.3m or 3.1% of revenue. TCS' operating expenses for the two months were $5.4m resulting in a consolidated operating loss of $0.9m before special charges.

It's important to point out that this is not indicative of future expense level, as during the last couple of months we have reduced TCS headcount by some 20%. TCS operations have been completely integrated into NICE and therefore, we will not be giving any separate financial or performance information about them going forward.

We broke out these figures only to aid investors in understanding the transition period. Speaking of the transition period, I just want to commend the TCS financial teams for their tireless efforts in meeting every deadline in the transition period.

Now, I would like to go over to special charges that impacted Q4.

$28.3m was the charge related to the recognition of the impairment of NICE goodwill associated with acquisition made prior to the TCS acquisition. As you will recall, we mentioned the annual evaluation of impairment of goodwill during the last conference call and indicated that given our market cap, we expected to take an impairment charge.

Another $1.3m related to the write-off of the in-process R&D associated with the TCS acquisition. Also, as we announced several weeks ago, we settled the security suite for $3m and 50,000 shares of stock. This shows up as a $3.5m charge under other expense on the P&L. We elected to adopt the new accounting rule, SFAS 146 ahead of its required implementation date.

According to the new rule, charges for involuntary termination benefits are reported only when the liability is actually incurred, namely, when the employee is actually terminated, as opposed when the reorganization plan is first approved, as it was before. As a result, only a portion of the former TCS employees left in Q4 with an associated charge of $300,000. Remaining were terminated in January, which will result in a charge of approximately $0.5m in Q1.

More than offsetting the $300m restructuring charge in Q4, was an adjustment to the provision related to the 2001 restructuring. We had more success than expected in mitigating the impact of ongoing rent obligation on vacated facilities, and based on our review of the provision in Q4, we determined that 400,000 of the provision was no longer required.

Net operating cash flow in the fourth quarter was a record $11.5m reflecting an aggressive collection effort, particularly of older receivables. Day sales outstanding on a standalone or comparative basis at the end of December, fell to 94 days from 96 days at the end of Q3.

Total cash and cash equivalents at year-end stood at $68.6m, primarily reflecting the $13m of cash paid in accordance with the original TCS acquisition agreement. However, you will notice that the balance sheet contains a $12.8m related party receivable.

This relates to cash we will be receiving from Thales as a result of the download adjustments to the cash portion of the initial purchase price as provided in the original agreement based on the actual net value of the assets acquired in 2002 TCS sale.

We had approximately $4.6m acquisition related expenses to the final adjusted purchase prize to be allocated is $47.2m. Revised purchase prize was allocated as follows; $18.8m to net tangible assets, mainly $16m in receivables and $7m in inventory.

$9.3m was allocated to intangible assets after writing off $1.3m of in-process R&D. These intangibles reflects the value of TCS's core technology, distribution networks, and trademarks. In addition, a $16.3m obligation under a long-term contract assumed by NICE was split between current liabilities 2.8m and long-term liabilities, the remaining $13.5m. By taking this as an opening balance sheet adjustment, this obligation will not affect future performance. As a result of the above, the remaining $34.1m was allocated to goodwill.

Next, I would like to briefly review our year-over-year performance. In order to make an apples-to-apples comparison, I will be excluding the two months of TCS activities and the special charges I've just mentioned as well as those included in 2001.

For the total year, our total revenues were up 21%. This reflects the 14% increase in product sales and an 80% increase in services and maintenance revenues. CEM revenues rose 29% to $116m from $19m in 2001. Digital video sales rose 63% to $23m and government military sales declined from $23m to $15m. On a geographic basis, sales in the Americas were $87m, a 31% increase from the prior year.

Sales in EMEA rose to $45m from $40m and sales in Asia-Pacific increased to $22m from $21m in 2001. Total gross margins rose from 45.1% in Q1 to 51.4% in Q4 and was 48.4% for the year compared to 42% in 2001. Gross margin on products rose to 57.2% in 2002 compared with 51.8% in 2001.

Services and maintenance moved to a 5.3% profit margin from a 34% loss. Operating expenses in 2002 of $76.8m was 6% below 2001 mainly lower G&A cost. After adding financial income and other expenses we're pleased to report a net profit for all of 2002 of $800,000 or $0.06 per share compared with the $24m loss reported in 2001. Now I will turn the call back to Haim. Haim?

Thank you Lauri. We are very pleased with the excellent progress in our digital video business, particularly in South America. Revenue was up 35% sequentially in Q4 and we have tremendous confidence in the future of this business.

We also have sequential growth in [Inaudible] and in all geographies and we continue to take market share from our competitor. We smoothly integrated TCS operation into NICE, retaining all the channel partners and we sold NICE products through these channels already in Q4. We're excited about heading the public safety business.

We think it has the potential to play an important part in our security business in the future. During 2002, while we kept the top line growing, we also put our gross margin on an upward trend by cost reducing our video product, outsourcing our manufacturing, and branding our professional services organization to profitability.

These initiatives, together with TCS acquisition, laid a strong foundation for our next phase of growth, with improving profits. For Q1, we're expecting revenue to be between $51m and $54m on an average basis this will represent a slight decline, which is consistent with the typical seasonal revenue pattern. We're expecting small profit in Q1.

For the full year, we continue to expect the TCS acquisition to be accretive and we are reassuring our earlier guidelines of $240m to $255m in revenue with 0.8 to 0.9 EPS, excluding any special charges. Longer term, we see major new growth opportunities in both core business. As a result of the work we've done in the past two years, we are positioned extremely well to participate in several important technology trend we see developing.

One is the convergence of the voice and data networks.

Voice-over IP is beginning to happen in both call centers and trading floors. We already completed several Voice Over IP installations around the world, and this will be an area of focus for us over the next several years. We will be cultivating partnerships with infrastructure players and doing the development work necessary to occupy the same leadership position in Voice over IP, we now head into additional Voice code.

The second area of focus will be on value-added applications.

For several years now, we have been developing applications that stays below data we capture and with the media interaction and analyze it, so it can be used to operate the contact center more efficiently, improve agent performance and increase customer satisfaction.

In other words, these applications are used to improve business performance in contact centers and training floor. In parallel to the enterprise wide analytic application has been developing, evolving from basic reporting tools to sophisticated system that collects data from various transaction based applications, such as ERP or CRM systems and transform it into useful information for a variety of department and users.

This sector from enterprise software industry is often called business performance management. In the future, we see a very important role, we can play in enterprise-wide business performance management by supplementing the transaction based data with unstructured data of this type, we already handle in our contact center applications for nearly every type of business all around the globe. This is focused on the utopian dream.

The development work we are currently doing on conference analysis application provides the means for stepping into the variable repository of interactions and converting these unstructured data into excellent value knowledge, this value will not only to the contact center manager for improving the performance of the contact center, but also to other executives who are in the enterprise for such activities, such as marketing, product business planning, risk management, compliance management and so on. Thus as these trends come together, we see are our position evolving for our patrol in the voice mix with telecom area to a position in the enterprise software world.

We believe, we have a definite role to play in enterprise-wide performance management system for using our unique capabilities to capture and analyze unstructured data from interaction that integrated, reach the transaction base data to form a more complete picture. Because this vision is much global than just the contact center solution. We will be probably be replacing the name of the CNB vision with something that's more accurately capture the scope of our forward direction.

The customer experience management concept is just expanding as it has always been. But as we move towards operating in a bolder market outside the contact center, we want the name of this core business to reflect the change.

The third major area of focus in the future is in the security area. Several of the trends I have been talking about apply equally for the security area. Though expensive the advantages of high-speed networks will be an important factor here too. The importance of being able to capture, store and analyze every form of interaction also applies in the security space.

For example, in the deal we recently announced, which the Indiana State Police, we supplied a system to record all inbound and outbound telephone and radio conversations for multiple channels with the ability to search and retrieve them using a browser interface and distributed in an attachment as required to aid in investigation or use for training purposes.

We believe that our unique ability, as the only company that capture every form of media, will give us a strong competitive advantage as the requirement for a new Homeland Security solution evolve.

Our development work aims to provide contemplarities in real time in order with aided proactive steps either to cause something to happen or prevent it from happening.

A good example of this would be our abundant language capability for [Inaudible] with an immense capability that the aided proactive management of the situation. Similar to our vision, on the enterprise side, we see an important role for NICE to play in the ultimate Homeland Security Systems. This will connect government and local authorities first with Homeland(ph) and other formally discrete operations, together in an integrated information system.

Strategic partnership will play an important part in realizing this portion of our vision and we'll be placing considerable emphasis in this area. So, to summarize we see our future direction as performance management software both for enterprise and security related applications that leverage of our core competency enhancing unstructured multi-media interactions.

We hope that taking a little bit longer range view has helped you understand some of our current initiatives and we would be happy to answer any questions you have.

Very good. At this time, we will begin the question and answer session. If you are calling from the United States, please press the star and one to register for a question. To remove yourself from the question queue, please press the pound key.

If you are calling to Israel, please press the star and one to register your line for any question and the star and two to remove yourself from the queue. Again for both sides, to register your line for any question, please press the star and one at this time. We will go first to the line of Nitiena (ph) with IMG. Go ahead please.

Hi guys, great quarter and great financial results for the year. Could you elaborate a little bit regarding the goodwill write-down and what should we expect going forward regarding that? You still have a lot of goodwill on the balance sheet. Any worries there?

Hi, how are you? As you know, there is another one of these accounting rules 142, which requires companies that have intangibles assets including goodwill to evaluate them on an annual basis. So, we like every other company will continue to evaluate on an annual basis. The initial trigger to causing a very weak look at the various assets of the company has to do with relationship between company's market cap and its equity. So let me get to that point next year that is the first step. As we pass that test we will be looking further.

Okay, now regarding the related party receivables you have on the balance sheet, when should that actually turn into cash? When do you expect that to come back into the cash part of the balance sheet?

[Inaudible] of the current receivables that means they are expected within the current year.

Right. I know that. I wanted a more specific answer for that. Would you expect in the first quarter?

No.

Okay. Also regarding the run rate of TCS during the last two months of year, it's about $50m and we knew from before that the company sold about $70m a year. What is the reason for that and what do you expect going forward into 2003?

Well TCS evaluates for 2002 on a non-GAAP basis was approximately $70m Euro. So in 2002, the company kept its [Inaudible] as a whole. Obviously, once we recognize the relevant demand and the company being in a condition and integration, this can effect also on the revenue side, but it is not indicative as I said of any future performance.

Over all, as Lauri said, we will not been looking at TCS as a company, but rather on the various businesses, the security side, the CEM side and the guidance that we have given includes the estimation of significant business in the public safety sector that we are very excited about the opportunities there and also the sale of whether it's Ex-TCS product or primarily it will be by now NICE product with the TCS channels into the call center market.

Okay. Lauri, back to you again regarding the DSO's, I mean, you guys worked them down to about 94-95 days. But, on a consolidated basis, it's about 118 days. What do you expect going forward, do you expect to work that back down to about the 100 day level and by when?

We -- we certainly expect to drive that number back down, and hopefully by the end of next year we can do better than 94 days.

So, it's going to be gradually declining basically, is that correct?

Yes.

Okay. Thanks a lot guys.

Our next question is from the line of Toby Fishbone with Lehman Brothers. Go ahead please.

Thank you, good afternoon. I want to discuss shortly the acquisition costs. If I remember correctly, the original terms were $430m in cash plus 2.2m in NICE shares and additional cash payments up until 2005. Of course dependent on results. Now how do these terms look now and what were the reasons for the adjustments?

That maybe I was stopped from the price pull side they are very unlikely to hit them. The targets we have put forward, in terms of the addition of Thales now was extremely aggressive and at this point of time I would say that the possibility of them happening did increase what we think extremely unlikely. This is on the going forward but on the acquisition adjustment that we left away for bank.

Toby, there were two more adjustments billed into the original agreement. One related to the net asset value of the

assets acquired on the acquisition date. There was a target number and the actual number came in below that until there is cash adjustment for the lower net asset value. There is also a downward adjustment for sales of TCS products during the year, either leading, exceeding or being below with certain target level, the actual results were below target and therefore there is an additional downward adjustment. The combination of those adjustment is the $12.8m that reduces the purchase price.

So what would be the amount of shares to be paid to Thales?

Thales was issued 2,287,500 shares upon closing. That doesn't change. This was being affected with the cash portion.

Okay. Then regarding the merged company, how do you expect to implement the margins improvement, on the cost reduction you have realized within NICE and during the last year at TCS? I am asking about outsourcing prophecies and similar prophecies?

Okay. I think the main point; the federal activities obviously being the larger company now that is a major player in the voice-recording sector. We hope to benefit from federal common components it is relevant which improves our volume of gain not all products are expectedly equal but whenever as we can, we will be able to do it.

Both on the TCS side and on the NICE side, we are seeing a drive to have more and more software application and overall we believe that through the TCS channels, when I say we believe it already started, we actually got the first order if you like into the call center market into pricing business and I would say more complete sweep of NICE end products which are software based and has a higher gross margin will probably be the leading solution into this market benefiting from a very large, very very large installed base of ex-TCS which was primarily a recording and now we will be able to bring whatever the customer wants for recording or wants a good solution, we will be able to provide one, which is more complete and obviously has been higher gross margin. These phenomena or this planned drive is already done.

Okay and what do you expect? Sorry.

Maybe Toby one more point that I would like to add. We, regarding the TCS [Inaudible] any more, I am more focused on the business in Europe where it was the primary operation of TCS. We think that the combined entity in Europe will be able to develop a much more I would say comprehensive sales level of service organization similar to the one that we had in state and similar to the one that NICE on the standalone basis has started to develop on the international side, with the infrastructure that we have inherited from TCS with the knowledge of the team here and the need of the customers, I think we will be very quickly developing much better on the gross margin from a utilization point of view, customer support operation on the European front.

Okay. Thank you for that answer. What do you expect to be the products to services mix in '03?

Lauri.

Probably similar to what we saw in Q4, which is 80 plus, or 80%-82% products and 18% to 20% service and maintenance.

Right. And then, are you staking a major shift in the mix between the business lines or what you described previously the front core businesses as they look in 2002, if you want pro forma including the contribution from TCS, how would you expect it to shift in 2003?

We will probably see due to the, we believe that the trend that we've seen on the business side and the business in upgrading Homeland Security and infrastructure for the military services and so on, continues. We will probably see the security beats of the business taking a larger portion.

Okay. And last question for me is what you expect to be the share count at the end of this year?

Well, right now on the base line, we are about 16.2m. So, I would assume that we probably be roughly about 16.4 or 16.5.

Okay. Thank you very much.

That's not the basic level. Toby, that's basic, not fully diluted.

Right. Fully diluted should be around 16.5?

That depends on the share prices, but that's a good range.

Okay. Thanks a lot.

Our next question comes from the line of Mosha Mice (ph) with I Pax (ph) . Go ahead please.

Hi Haim. Hi Lauri. Good numbers. Most of my questions have been answered, so can you just repeat the guidance for Q1 and for the whole 2003?

Yes. I can repeat them. The guidance for Q1 was in terms of revenue between 51 and 54 and the guidance on the revenue for the whole year was between 240 and 255. The guidance on EPS was between 0.8 and 0.9.

Okay thank you.

Welcome.

Again to ask a question for both the United States and Israel, please press the star and one on your touchtone phone to register.

Excuse me, can you repeat it.

Yes, again to ask a question, please press the star and one on your touchtone telephone. Our next question from the line of Robert Catz(ph) with Invest(ph) , go ahead please.

Hi, Haim and Lauri great quarter. I have a question on the headcount in the quarter, how many people are from Thales how many from NICE and can you break it out into different services and products, and where will that headcount stand?

The first question was the break down of number of people by the end quarter, right?

Right.

The end of Q4 or the end of Q1?

End of Q4 and more of that would be at the end of Q1, and in the Thales group and I guess also by services and products.

Okay, do you, -- let me try to do this briefly and if you want a little bit more detail, we'll touch base a bit later. Okay?

Yeah.

All right, so for NICE at the end of December, we were 810, of which 247 were in services and stocks as you know are out sourced, so that's sort of numbers you were getting at, right?

Right.

All right and TCS at the end of December was 266, with 49 in services.

And where will that trend at the end of Q1, if you combine the two?

On the combination there of the two, we expect the number to go down by approximately 60 people. The majority of them, I would say all of them are known about this have been informed and some them have actually left us and some them would be leaving us by last quarter or may be more or less throughout the quarter.

Okay.

But I want to repeat again, this is the last conference call that we will be referring to anything about TCS, Thales and so on. As we want right now is that NICE employee having their role, either at the product division or product developed for public safety, overall sales, marketing, operation and so on within our region in Europe, Asia or the United States.

Another question, can you give a little more color exiting 2003, what you think the break out of revenue would be in the different divisions or product areas roughly, or in another way of looking at that would be what the different growth rates you would expect each product area to have?

As I said before, we expect security part of the business to grow a little bit faster than the other part -- so in terms of percentage it could probably be two percentage more as part of our business than it is today.

All right thank you. I'll take other questions off line.

Thank you.

Again to register your line for a question, please press the star and one on your touchtone telephone at this time. It appears we have no further questions registered at this time, I'll go and turn the call back over to management for closing comments.

Okay, I would like to thank everyone for participating in this conference call, and we look forward to talking to you again after announcing our Q1 results. Thank you and have a good day wherever you are.

That does conclude today's teleconference. You may now disconnect your lines and thank you for participating.